ANALYZING FINANCIAL REPORTS OF SOFTLOGIC HOLDINGS PLC

 

Company Profile

 

Softlogic Holdings PLC, rated as one of Sri Lanka’s most dynamic and reputed conglomerates, commenced operations in 1991 as a software developer with just 12 employees; now has enlarged its footprint holding leading positions in domestic growth oriented sectors such as ICT, Healthcare, Retail, Financial Services, Automobiles and Leisure.

The Group now provides employment to over 8,000 individuals generating a turnover of more than USD300 mn. The Group’s representations and strategic alliances with reputed global institutions and large multinational corporations confirm its unparalleled local stature.

Softlogic Holdings PLC’s vision is to be “To be the most preferred and trusted product and service provider, delivering high quality solutions to corporates and retail customers so as to set new industry standards and enhance shareholder value.”

Their mission is “Making the right decisions to increase returns on money invested. Employing and rewarding the best, to leverage market potential and become the most admired corporate in Sri Lanka..”

 

1) Horizontal Analysis

Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-year analysis.

Since this entire Statement Analysis is done by analyzing 5 years data including years 2015 to 2019, 2014 has been taken as the base year.

1.1) Horizontal Analysis of the Financial Position

 

According to the above table Softlogic Holdings PLC  had an incremental growth by considering the past five years annual report details. They  have a positive percentage of Total assets. The percent change of total has increased 32.27% to 165.38%. At the same time the current liabilities percent change is increased 6.78% to 124.03%. Then in 2017 the current liabilities have reduced to a low amount. In 2016 it has taken a rapid growth to 21.68% to 115.99%. That depicts that in 2017 current liabilities have dropped down when compared to 2014.

According to the above table almost all the figures have an upward trend. As a leading company it has increased current liabilities drastically.

1.2) Horizontal Analysis of the Income Statement

According to the above table profit for the year has an upward trend along the five years. But in 2019, it shows the decreased revenue percent change when comparing to 2018. Also Softlogic Holding PLC has an upward trend in the profit. According to above table the company has shown quick growth in the past five years..

 

2) Vertical Analysis

Vertical analysis is a method of financial statement analysis in which each line item is listed as a percentage of a base figure within the statement. Thus, line items on an income statement can be stated as a percentage of gross sales, while line items on a balance sheet can be stated as a percentage of total assets or liabilities, and vertical analysis of a cash flow statement shows each cash inflow or outflow as a percentage of the total cash inflows.

2.1) Vertical Analysis of the Financial Position

Softlogic  Holdings PLC is having a figure above 50% for Total Non - Current Assets in all the five years. It is a good condition for a company. That depicts even their production and sales come down, still they have these assets with them to build up the company back.

The total equity is over 20% from the total equity and liabilities. But their stated capital is low than the revenue reserves in the past five years. It is a good condition for the company. It implies that they have paid a low dividend amount and high amount is invested on business growth.

 

2.2) Vertical Analysis of Income Statement

 

 

Softlogic Holdings PLC is having a figure of around 30% for cost of sales compared to the total revenue.

Gross profit is above 60% in the past five years.The other operating incomes have been increased. It is a good thing for a company. Net profit for the year has been increased along the four years. It is a good condition for the company. But in 2019, the net profit has drastically reduced to loss .It may happen due to the ester attacks. But the administrative expenses are not having a much variation along the five years.The company should  try to reduce those expenses and increase the profit for the year.

3) Ratio Analysis

Ratio analysis is the comparison of line items in the financial statements of a business. Ratio analysis is used to evaluate a number of issues with an entity, such as its liquidity and efficiency of operations, profitability, solvency and market. Trend lines can also be used to estimate the direction of future ratio performance.

3.1) Liquidity and Efficiency Ratios

·         Working Capital

Working capital, also known as net working capital (NWC), is the difference between a company’s current assets, such as cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable.

 Softlogic Holdings  PLC has negative  figures for 2015,2016 and 2018. That is not a good condition for the company because they don’t have money to settle the short term liabilities and to run the day to day business. In 2015 and 2016 they have a negative amount of working capital and it has increased to positive amount in 2017.

·         Current Ratio and Acid Test Ratio

The current ratio is a liquidity ratio that measures whether a firm has enough resources to

meet its short-term obligations. It tells, investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables.

The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to

pay its current liabilities when they come due with only quick assets. Quick assets are current

assets that can be converted to cash within 90 days or in the short-term.

Current Ratio and Acid Test Ratio have the same pattern throughout the five years.

·         Accounts Receivable Turnover and Merchandise Turnover

Receivable Turnover Ratio or Debtor's Turnover ratio is the number of times per year that a business collects its average accounts receivable.

The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.

Merchandise turnover indicates how many times a company sells and replaces its stock of

goods during a particular period. The formula for merchandise turnover ratio is the cost of

goods sold divided by the average inventory for the same period.

Accounts Receivable Turnover is around 1 times throughout the four years & in 2019 it has decreased to 0.71. Merchandise turnover is around 3 and 4 times. It is a not a good condition for the company because they are collecting account receivable from their customers around 3 or 4 times compared to their total sales. And also they are selling their inventory more than 3/4 times compared to the cost of sales.

·         Days’ Sales Uncollected and Days’ Sales in Inventory

Days' sales uncollected is a liquidity ratio that is used to estimate the number of days before

receivables will be collected.

The day’s sales of inventory (DSI) is a financial ratio that indicates the average time in days

that a company takes to turn its inventory, including goods that are a work in progress, into

sales.

Both Days ‘sales uncollected and Days ‘sales in inventory is around 200 times. That implies that

the company can collect their trade receivables as well as can sell their inventory within less

than one year. It is a good condition in a business.

·         Total Assets Turnover

The asset turnover ratio  measures the value of a company's sales or revenues relative to the value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue. In other words, this ratio shows how efficiently a company can use its assets to generate sales.

All the five years are having a figure around 0.2 as the Total Assets Turnover. That implies that

the average total assets are higher than the revenue. This is not a much preferred condition

for a company. It is better if the company can have a figure more than 1.

 

3.2) Solvency Ratios

 

Debt Ratio and Equity Ratio

The debt ratio is a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company’s assets that are financed by debt.

Debt Ratio is around 60% and 70 % in all the years except in 2019. It is not a good condition because if the debt ratio is high it shows that a high portion of assets have been contributed by

creditors.

 

The equity ratio is a financial metric that measures the amount of leverage used by a company. It uses investments in assets and the amount of equity to determine how well a company manages its debts and funds its asset requirements. The Equity Ratio is above 130% in all five years. It is also a very bad condition because it implies that higher portion of company’s assets have been contributed by the owners. It gives a bad situation because when this ratio is high the company has to pay a higher amount of dividends to the shareholders.

 3.3) Profitability Ratios

 

Profit Margin and Gross Profit Margin

The net profit margin is equal to how much net income or profit is generated as a percentage

of revenue. Net profit margin is the ratio of net profits to revenues for a company or business

segment. Net profit margin is typically expressed as a percentage but can also be represented

in decimal form. The net profit margin illustrates how much of each dollar in revenue

collected by a company translates into profit.

Gross profit margin is a metric used to assess a company's financial health and business model

by revealing the amount of money left over from sales after deducting the cost of goods sold.

The gross profit margin is often expressed as a percentage of sales and may be called theg ross margin ratio.

Profit Margin shows an upward trend along the four years. It is a good situation for the company which depicts that the company can make a reasonable profit on sales, as long as it is possible to control the overhead costs. But, in 2019, it has negative profit margin.

Gross profit margin shows figures above 100% and it is a very good condition because the company is generating profit even after reducing the production costs. It indicates how efficient and effective they are on controlling the overhead costs.

 

·         Return on Total Assets

 

Return on total assets (ROTA) is a ratio that measures a company's earnings before interest and taxes (EBIT) relative to its total net assets. It is defined as the ratio between net income and total average assets, or the amount of financial and operational income a company receives in a financial year as compared to the average of that company's total assets.

In all five years this ratio takes a figure around 1% for four years. It is a good condition for the company, because the company is able to generate more income out of fewer assets. But in 2019, it has negative value.

 

·         Return on Common Shareholder Equity

This ratio indicates the proportion of the net income that a firm generates by each dollar of

common equity invested.

In all five years this ratio shows a figure more than 5% for four years. In 2019 it has a -4.2% ratio. It is not a good condition for the company because the company is able to make profit out of investors ‘money.

3.4) Market Ratios

 

·         Price Earnings Ratio

The price-earnings ratio, also known as P/E ratio, P/E, or PER, is the ratio of a company's share

price to the company's earnings per share. The ratio is used for valuing companies and to find

out whether they are overvalued or undervalued.

This table depicts upward trend along the five years. It is not a good condition for the

company because it implies that investors need to spend more in order to get more as the

return.

·         Dividend Yield

 

The dividend yield is the amount of money a company pays shareholders for owning a share of its stock divided by its current stock price.

This company has upward dividend yield trend. It may be because of their share price is declining price is declining, or both. It may be seen as a positive or negative sign by investors.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONCLUSION

 

By analyzing the annual reports, we can see that Softlogic Holdings PLC has shown a growth during the past five years. Almost all the ratios have the same behavioral pattern along the five years.

Softlogic Holdings PLC is having a high debt and equity ratios. It can adversely affect the company. This study concludes that Softlogic Holdings PLC should give special attention on company’s existing credit policy and as well as market strategies to develop the profit of the company. The company should give special attention on their business strategies and making policies to increase the profit of the company.

As per the liquidity and efficiency ratios Softlogic Holdings PLC is currently having a good condition as a company.

To continue this the company should give special attention on their business strategies and

making policies to increase these figures of the company.

KOTMALE HOLDINGS PLC.

 Horizontal Analysis of Financial Statements

Using this technology, the changes form one year to the next within each line item in the financial statements are analyzed on either as a currency or as a percentage. It   is a financial statement analysis technique that shows changes in the amounts of corresponding financial statement items over a period of time. It is a useful tool to evaluate the trend situation

Horizontal Analysis of Income Statement

Percentage Change

14/15 15/16 16/17 17/18 18/19

Revenue 6% 22% 16% 9% 10%

Cost of sales 3% 19% 18% 7% 9%

 

Gross profit 18% 32% 9% 14% 12%

Other income 15% 38% 16% 11% -98%

Distribution expenses -16% 45% 3% 13% 9%

Administrative expenses 20% -4% 23% 6% 20%

Result from operating activities 60% 76% 13% 18% 47%

Net finance income 32% 12% 71% -30% -74%

 

Profit before taxation 51% 59% 24% 5% -39%

Tax expense 159% 26% 70% 18% -57%

   

Profit for the year 24% 76% 6% -3% -26%

 

Other comprehensive income / (expense)

Actuarial losses on employee benefits -74% 12% 181% -84% -532%

Tax on other comprehensive income -74% -738% -149% -1677% -100%

 

Other comprehensive income / (expense) for the year, net of tax -74% -5134% -106% -5072% -46%

 

Total comprehensive income for the year 26% 98% -6% 34% -6%

We can clearly see that the gross profit and the operating profit have increased up to 2016 but again decrease in the 2018 and 2019. There is no significant increase in the revenue percentage value over the 5 years’ time. Company does not show significant growth according to percentage change figures. 

Horizontal Analysis of Statement of Financial Position

  14/15 15/16 16/17 17/18 18/19

ASSETS

Non-current assets

Property, plant and equipment -11% 12% 29% 32% 34%

Intangible assets 0% 0% 0% 0% 0%

Investments in subsidiaries  

Total non-current assets -9% 10% 24% 28% 31%

Current assets

Inventories -8% 28% 49% 2% 7%

Trade and other receivables 19% 4% 48% 26% 49%

Amounts due from related companies -57% 14% 41% -76% 90%

Short term investments 39% 21% -44% -56% -41%

Cash and cash equivalents -34% 85% -5% -32% -59%

Total current assets 15% 21% -2% -31% 0%

Total assets 7% 18% -9% -11% 19%

 

EQUITY

Stated capital -75% 0% 0% 0% 0%

Reserves 0% 27% 0% 65% 0%

Retained earnings -82% 793% 24% -51% 56%

Total equity 13% 21% 9% -21% 20%

 

LIABILITIES

Non-current liabilities  

Deferred tax liabilities 19% -7% 0% 32% 5%

Employee benefits 13% 20% 24% 7% 16%

Total non-current liabilities 17% 2% 9% 21% 9%

Current liabilities

Trade and other payables -19% -55% 2492% -9% 2%

Amounts due to related companies -63% -100% 0% -47% 1235%

Current tax liabilities 140% 25% 51% 24% 9%

Bank overdrafts -98% 1655% 3123% 71%

Total current liabilities -11% 6% 17% 11% 18%

Total liabilities -7% 8% 16% 13% 16%

Total equity and liabilities 7% 18% -9% -11% 19%

Though the cash and cash equivalence have decrease over the 5 years’ time which is bad for the company. The total assets percentage also have dropped for past 5 years. The total equity also has dropped for 5 years’ time. Total liability has increase over the period a percentage of while the total equity and liability is a decrease over 5 years’ time from last year. This shows that the company’s financial position is not stable, and it has a lot of debts to be paid in coming years.

06. Trend Analysis of Financial Statements.

This allows investors and analysts to see what has been driving a company’s financial performance over a few years, as well as spotting trends and growth patterns such as seasonality. It enables analysts to assess relative changes in different line items over time and project them. By looking at the income statement, balance sheet and cash flow statement at the same time, one can create a complete picture of operational results and see what has been driving a company’s performance and whether it is operating efficiently and profitably.

It is used to compare historical data, such as ratios, or line items, over a number of accounting periods. Horizontal analysis can either use absolute comparison or percentage comparison, where the number in each succeeding period are expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.

Assume that base year is 2015/16

2014/15 2015/16 2016/17 2017/18 2018/19

 

Revenue 100% 122% 141% 154% 169%

Cost of sales 100% 94% 165% 177% 186%

   

Gross profit 100% 100% 175% 179% 189%

Other income 100% 138% 160% 178% 4%

Distribution expenses 100% 145% 150% 169% 185%

Administrative expenses 100% 96% 117% 124% 149%

   

Result from operating activities 100% 176% 199% 235% 160%

Net finance income 100% 112% 191% 133% 35%

   

Profit before taxation 100% 159% 197% 207% 126%

Tax expense 100% 126% 215% 253% 108%

   

Profit for the year 100% 176% 187% 182% 135%

 

There is an overall increase in the trends of all the above sections. But in 2019 all sections have decreasing trend.  Profit before taxation shows a higher increase compared to the others while the net revenue has a decreasing trend.

07. Vertical Analysis of Financial Statements

Here each line item is listed as a percentage of a base figure within the statement. Thus, line item on an income statement can be stated as a percentage of gross sales, while line items on a balance sheet can be stated as a percentage of total assets or liabilities and vertical analysis of a cash flow statement shows each cash inflow or outflow as a percentage of the total cash inflow.

Vertical analysis makes it much easier to compare the financial statement of one company with another as across industries because one can see the relative proportions of account balance. It also makes it easier to compare previous periods for time series analysis, in which quarterly and annual figures are compared over a number of years- in order to gain a picture of whether performance metrics improving or deteriorating.

Vertical Analysis for Statement of Profit or Loss and Other Comprehensive Income

2019 2018 2017 2016 2015

Revenue 100% 100% 100% 100% 100%

Cost of sales -74% -75% -76% -74% -79%

Gross profit 26% 25% 24% 26% 21%

 

Other income 0% 5% 5% 5% 4%

Distribution expenses -12% -12% -12% -13% -14%

Administrative expenses -6% -5% -5% -5% -6%

 

Result from operating activities 8% 13% 12% 12% 6%

 

Net finance income 1% 3% 4% 3% 3%

Profit before taxation 9% 16% 16% 15% 8%

Tax expense -3% -7% -6% -4% -2%

Profit for the year 6% 9% 10% 11% 7%

 

Other comprehensive income / (expense) 0% 0% - 1% -

Revaluation of land and building 0% 0% 0% 0% 0%

Actuarial losses on employee benefits 0% 0% 0% 0% 0%

Tax on other comprehensive income 6% 12% 0% 1% 0%

Other comprehensive income / (expense) for the year, net of tax 8% 10% 10% 12% 6%

Based on the revenue earned there is an increase of profit for the year, total comprehensive income for the year and gross profit when considered data over a 5 years’ span.

Vertical Analysis for Statement of Financial Position

  2019 2018 2017 2016 2015

ASSETS  

Non-current assets  

Property, plant and equipment 42% 29% 21% 26% 36%

Intangible assets 6% 4% 4% 5% 5%

Total non-current assets 47% 33% 24% 31% 41%

Current assets  

Inventories 13% 11% 7% 7% 9%

Trade and other receivables 15% 13% 8% 8% 12%

Amounts due from related companies 9% 6% 4% 10% 5%

Short term investments 46% 34% 54% 41% 30%

Cash and cash equivalents 4% 3% 3% 3% 2%

Total current assets 68% 67% 76% 69% 59%

Total assets 100% 100% 100% 100% 100%

 

EQUITY  

Stated capital 34% 22% 20% 25% 29%

Reserves 12% 8% 8% 8% 9%

Retained earnings 52% 40% 50% 38% 35%

Total equity 86% 71% 77% 71% 73%

 

LIABILITIES  

Non-current liabilities  

Deferred tax liabilities 2% 2% 2% 3% 2%

Employee benefits 2% 2% 1% 1% 1%

Total non-current liabilities 4% 4% 4% 4% 3%

Current liabilities 1% 0% 13% 0% 0%

Trade and other payables 17% 15% 1% 19% 20%

Amounts due to related companies 0% 0% 0% 4% 0%

Current tax liabilities 6% 9% 6% 2% 3%

Bank overdrafts 0% 0% 0% 0% 0%

Total current liabilities 27% 25% 19% 25% 24%

Total liabilities 27% 29% 23% 29% 27%

 

Total equity and liabilities 100% 100% 100% 100% 100%

Over the years the total non-current assets have fluctuated between 30-40% but does not show a drastic change. The total current assets round up to a 60% of total assets. Over the years the total equity and the total liability is steady without drastic fluctuations. And equity takes the majority % of total equity and liabilities which is favorable for the company.

08. Ratio Analysis for financial statements

Liquidity Ratios:

They usually focus on current assets and current liabilities. This measures the company’s ability to pay debt obligations and its margin of safety and repay its debts in the short-term.

Liquidity Ratios 2015 2016 2017 2018 2019

Current ratio (times) 2.8 4.0 2.7 2.4 2.9

Acid ratio (times) 2.5 3.6 2.3 2.4 2.1

Days sales uncollected 69.1 69.7 88.9 77.3 92.1

accounts receivables 1.3 1.6 1.3 1.7 2.1

total asset turnover 13.1 10.5 11.4 10.2 10.7

inventory turnover 9.5 13.3 12.9 13.1 13.7

days sales inventory 26.8 33.9 27.0 33.8 42.1

 

The current ratio indicates the ability of a company to repay the current liabilities out of the current assets. Over the past 4 years, this ratio has decreased which is not favorable. The acid ratio is a modified current ratio that takes into account the fact that inventory may be relatively difficult current asset to convert into cash. This ratio therefore reflects a more conservative view of the ability to repay the current liabilities within a short period. Here the acid ratio also has drastically dropped. The company should pay more attention to this.

Accounts receivable turnover, this ratio indicates the entity’s credit and collection efficiency. And it has fluctuated over the period.

Inventory turnover this indicated how fast inventory is turned to cash. Over time this has increased. A low turnover indicates over stocking and a high turnover indicates under stocking. In comparison to this days sales inventory brings us an indication as how long the stock will be held. As the company has a no

 

of days around 1 month it is acceptable. This can help to understand how investments should be done on inventory. Day’s sales uncollected has reduced over time which is favorable as it shows how fast we can collect the credit sales. Asset turnover ratio measures the value of a company’s sales or revenue generated relative to the value of its assets. This ratio shows only a slight fluctuation over the years.

Solvency Ratios:

These ratios measure the ability of the entity to repay its debts in the long-term. They usually deal with total assets and total liabilities. This shows the whether the company’s cash flow is sufficient to meet its long-term and short-term liabilities.

Solvency Ratios 2015 2016 2017 2018 2019

Debt ratio (%) 28.6 22.7 29.0 26.9 27.1

Equity ratio (%) 71.4 77.3 71.0 73.1 72.2

Time interest earned 3.2 5.1 3.7 9.7 9.4

 

Debt to asset ratio is the inverse of the debt ratio. It indicates how much of the liabilities are covered by assets- in essence the capacity of the company to repay its debts in a long run.it can be interpreted as the potion of a company’s assets that are financed by debts. It measures the extent of a company’s leverage. This ratio does not take in to account the timing of repayments and therefore the company appear to be solve and at the same time be liquid. Over the 5 years the ratio does not show any significant change meaning the ratio remains constant over five years.

Time interest earned ratio has decreased drastically over 5 years. This ratio indicated the company’s ability to meet the interest payment on its debts.

Profitability Ratios:

These are a class of financial metrics that are used to assess a business’s ability to generate earnings relative to its associated expenses. For most of these ratios having higher value relative to a competitor’s ratio or relative to the same ratio from a previous year indicate that the company is doing well.

Profitability Ratios 2105 2016 2017 2018 2019

profit margin 81.6 61.9 110.5 101.4 112.2

gross profit margin 295.6 199.2 245.1 236.5 247.6

Net margin/Net profit 0.28 0.31 0.43 0.42 0.47

return on total asset 7.3 8.1 14.6 14.6 15.7

return on common shareholders’

equity 0.11 0.11 0.20 0.20 0.20

Book value per common shares 25.1 28.0 38.4 31.9 41.1

Profit margin ratio calculated as net income divided by revenue. This ratio compares the earnings reported by a business to its sales. It is a key indicator of financial health of an organization. Over the 4 years profit margin is increased. This is a good indication.

Gross profit margin is a profitability ratio that calculates the percentage of sales that exceeds the cost of goods sold. In other words, it measures how efficiently a company uses its materials and labor to produce and sell products profitably. Over the 4 years it had decreased. But by a small amount.

Return on assets ratio shows how efficiently the company utilizes its assets. Here in Kothmale Company, this ratio has increased over time which is favorable for the company.

Return on common shareholder’s equity measure the success of a company in generating income for the benefit of common stakeholders. This ratio has increased over 3 years but by a small amount and the ratio value is not a large value as well. Based on its equity available to common shareholders. Book value per share is a market value financial ratio and the purpose of calculating it is to relate shareholder’s equity to the number of shares of common stock outstanding. This ratio has increased from 2015 to 2019 but reduced in 2019 by 6.8 percent.

Market Ratios:

This ratio asses the performance of the company’s shares.

Market Ratios 2015 2016 2017 2018 2019

earnings per share 3.7 3.0 6.5 6.9 7.2

dividend yield - - - 14.7 13.2

price earnings ratio 17.5 16.3 - 13.1 14.3

Earnings per share is the portion of a company’s profit allocated to each outstanding share of a common stock. Earnings per share serves as an indicator of a company’s profitability. The earnings per share had doubled from 2015/2016 to 2016/2017. Which is beneficial for the company. And it will attract more customers and investors to the company.

The company does not give dividend from 2015 to 2016 and provide 14.3 to shareholders in 2019. This indicate how much a company pays out in dividends each year relative to its share price. Dividend yield is represented as a percentage and can be calculated by dividing the dollar value of dividends paid in a given year per share of stock held by the dollar value of one share of stock.

 

Price earnings ratio indicates the amount an investor can expect to invest in a company in order to receive one dollar of that company’ earnings. This is why the P/E is sometimes referred to as the price multiple because it shows how much investors are willing to pay per dollar of earnings. The amount has reduced during 4 years which is good because more investors will invest because they can gain one dollar by investing less money that pervious years.

Conclusion

This examination investigates the impact of financial ratio of Kotmale Holdings PLC on corporate capital structure since 2015 to 2019, have secured that almost 72.2% of changes in capital structure could be depicted by selected independent variables.

The study also presents that the GDP growth rate has a significant and positive association with the capital structure which indicates that when the economy is at a growth phase, companies may tend to portray high profits so that it creates less demand for debt. As well as, interest rate has presents the negative relationships with capital structure decision (equity and debts financing ratio). Further, the inflation has demonstrated a negative but statistically significant association with the capital structure measures of the Kothmale Holding PLC in the manufacturing sector.

Since capital structure is one of the most questionable issues in corporate account there is a space for concentrate from various viewpoints. Accordingly, the creator further proposes that further examination on the impacts of financial ratio on the expense of capital should be executed to get a comprehensive view on how financial conditions influence firms' financing choices and in this way the estimations of the firms.

In organization perspective parties such as Mangers/Accountants of listed manufacturing firms are able to determine what type of accounting information that they should disclose in their annual reports or other publications. It can be suggest using these research findings to construct an industry bench mark for listed manufacturing firms in Sri Lanka. Furthermore, the disclosure of accounting ratios also can do in an informative manner by identifying which ratios are important and which are not important for determine capital structure. 

The ratio analysis laid out is a scheme for using ratios in an efficient and orderly manner in valuation analysis. It has a normative flavor to it but it is not offered as the definitive analysis. It does not suggest that a ratio not identified as an element of the decomposition here - the current ratio, for example - is not useful in forecasting future residual earnings.

Financial Statement Analysis DANKOTUWA PORCELAIN PLC

 

Executive summary

The companies face a high competitiveness in modern economy. Therefore, the accounting and reporting has become increasingly relevant to enterprises. Moreover, how the environmental performance of an enterprise affects its financial health is of growing concern to investors, creditors, governments, and the public at large. The Annual/Financial Report of a company is the principal way in which stakeholders keep themselves informed of the activities, progress, and future of a company.

This report provides an analysis and evaluation of the current and prospective profitability, liquidity, and financial stability of Dankotuwa Porcelain PLC. Horizontal, vertical and ratio analyses are the methods which are used to analyze the financial statements results. Further, the liquidity and efficiency, solvency, market, and profitability ratios are considered under ratio analysis.  

Results of data analyzed according to the percent change of the horizontal analysis of total assets show the growth rate of the company, Dankotuwa Porcelain. The year 2019 shows a growth rate of 24.54% which have been increased in the recent years. Trend analysis reflects the trends of turnover, gross profit and cost of sales for the recent ten years which display an incensement. The results for vertical analysis reflect that the company has managed a proper distribution of assets, liabilities and the equity throughout the company. Working capital, Current ratio, acid – test ratio, accounts receivables ratio, merchandise turnover ratio results show good results. Even though, the ratios; accounts receivables turnover, merchandise turnover, days of sales uncollected, days of sales uncollected, total assets turnover including all the solvency, profitability and market ratios do not reflect much good results.

The analyzed results show that most of the ratios are below the industry averages. Hence, the company reflects a comparative poor performance within the areas of liquidity, profit margins, solvency, credit control and inventory management. Therefore, the current position of the company is not positive. The company must implement immediate remedies such as improving the average collection period for accounts receivables and improving inventory turnover to overcome the current situation.

 

Analysis overview

The Dankotuwa Group consists of Dankotuwa Porcelain PLC and Royal Fernwood Ltd and its subsidiaries. Both Dankotuwa Porcelain and Royal Fernwood are engaged in the manufacture of porcelain tableware for the local and export markets. The Dankotuwa Group is the largest porcelain producers in the country. The company produces world class tableware and export over 30 countries: UK, USA, Germany, France, Japan, Italy, Poland, UAE, India, Australia, Brazil, Czech Republic, Moldova, Maldives, Switzerland, Mexico, Pakistan, Egypt, Greece, Kuwait, South Africa, Norway, Russia, Ukraine, and many others. The group has a rich heritage of craftsmanship with a total combined production capacity of over 12 million pieces per year. Therefore, company dominates the industry over 30 years. The group obtains 60% of its revenues from exports, ensuring the premium quality of products which compete with traditional producers such as Japan and European countries.

The primary product range of the two companies is Porcelain Tableware and manufacture Porcelain gift items, jewelry, and souvenir items. The vastly improved imprinting techniques of decals and the elegance, sophistication, and superiority of Dankotuwa Porcelain, especially in its gold and platinum range, have earned the company a reputation for being one of the best in Asia and Europe.

The company was established in 1984, the name Dankotuwa Porcelain is synonymous with upscale dining culture and is a household name in Sri Lanka. Dankotuwa Porcelain continues to create timeless and modern collections of tableware from superior glazing technologies, personalized designs, and endless options. Dankotuwa Porcelain items are distinguished by its high whiteness levels, intricate hand painting and luxurious gold and platinum applications. As a result of that Dankotuwa Porcelain has become a preferred choice for gifts, both as extravagant indulgences and as tokens of appreciation.

Dankotuwa has won many national and international awards such as the Presidential Export Awards and awarded Most Outstanding Exporter (NCE).

 

Dankotuwa Porcelain is safe for all aspects of dining as raw materials used for white products are lead and cadmium safe [based on international standards such as ISO 6486 – 1:1999, ISO 6486 – 2:1999, ASTM C 738 – 94(Re-approved 2016) and California Proposition 65 Compliance]. The company has the unparalleled distinction of being the first tableware manufacturer in Sri Lanka to obtain ISO 9001/2008 certification through maintaining high quality standards where products can be used in a microwave or a dishwasher.

 

Evidential Matter

Horizontal Analysis

The horizontal analysis results can compare and contrast among the previous year horizontal analysis results of the company. Further, results can compare with an equivalent company in the same period.  The dollar change and the percent change values are equal for both total assets and total equity and liabilities. The percent change of the horizontal analysis of total assets show the growth rate of the company, Dankotuwa Porcelain. The years 2019, 2018, 2017, 2016, 2015 years show growth rates of 24.54%, 7.93%, 6.66%, 23.23%, and 4.10% respectively.

The percent change of the non – current assets and the current assets of year 2019/ 18 are 30.66% and 13.56% respectively. The percent change for total equity, current liabilities and non – current liabilities are 25.92%, 77.24% and -34.97% respectively for the year, 2019/ 18. The percent change of the non – current assets and the current assets of year 2018/ 17 are 21.51% and 7.53% respectively. The percent change for total equity, current liabilities and non – current liabilities are – 0.04%, 23.99% and 25.81% respectively for the year, 2018/ 17. The percent change of the non – current assets and the current assets of year 2017/ 16 are 0.43% and 6.66% respectively. The percent change for total equity, current liabilities and non – current liabilities are – 0.59%, 67.27% and 0.31% respectively for the year, 2017/ 16. The percent change of the non – current assets and the current assets of year 2016/ 15 are 22.46% and 24.62% respectively. The percent change for total equity, current liabilities and non – current liabilities are 95.98%, 23.23% and 46.63% respectively for the year, 2016/ 15. The percent change of the non – current assets and the current assets of year 2015/ 14 are 8.66% and 4.10% respectively. The percent change for total equity, current liabilities and non – current liabilities are 0.85%, 4.10% and 11.15% respectively for the year, 2015/ 14. The percent change for equity and liabilities of the previous periods seem to be lower values compared to the current and non – current assets.

 

Trend analysis

The base period amounts are taken as 100%. The base period amount is compared with the other period values. Trend analysis reflects the trends of turnover, gross profit and cost of sales, of Dankotuwa Porcelain PLC for several years according to the calculation. The trend values for the year 2019 of turnover, cost of sales and gross profit are 1.85, 1.60 and 2.93 times larger respectively, compared to the base period amount of year 2009.  The trend values for the year 2018 are 1.77, 1.68 and 2.18 times higher for turnover, cost of sales and gross profit respectively, compared to the base period amount of year 2009. When year 2008 is taken as the base period amount, the trend values for turnover, cost of sales and gross profit are obtained as 1.40, 1.42 and 1.36 times higher for the year 2018 and 1.59, 1.60 and 1.58 for the year 2017. The trend values for the year 2017 for turnover, cost of sales and gross profit are 1.74, 1.81 and 1.54 times larger respectively, compared to the base period amount of year 2007 while turnover, cost of sales and gross profit values for year 2016 are 1.75, 1.88 and 1.38 respectively. Then the trend values for the year 2016 of turnover, cost of sales and gross profit are 2.21, 2.31 and 1.90 times larger respectively, compared to the base period amount of year 2005. The trend values for the year 2015 of turnover, cost of sales and gross profit are 2.15, 2.43 and 1.33 times larger respectively, compared to the base period amount of year 2005. Finally, the trend values for the year 2015 for turnover, cost of sales and gross profit are 2.15, 2.43 and 1.33 times larger respectively and trend values for the year 2014 for turnover, cost of sales and gross profit are 1.67, 1.83 and 1.20 times larger respectively when the base period is taken as 2005.  

As an overview of the results obtained for trend analysis, it shows that there is a growth of all the three variables considered; turnover, cost of sales and gross profit from year 2005 to 2019. It shows the company has both good and bad effects.

 

Graph 01 – Trend Analysis for the year 2015

 

Graph 02 – Trend Analysis for the year 2016

 

The calculated values of Horizontal analysis for five years of Dankotuwa Porcelain PLC can be found out from the attachments below.

 

Vertical Analysis

Vertical analysis results support to compare the financial statement results from one year to the next year of the company. Further, common – size percent analysis involve comparison – either of the same company in different periods or different companies in the same period. The common base figure selected from the balance sheet is total assets or the total equity and liabilities value. The common base figure selected from the income statement is the value for net sales/ net income / revenue. Then the amounts are expressed as a percentage of the selected base amount.  These percentages are compared. The percentages for the base periods are taken as 100%. According to the results obtained from the annual reports of Dankotuwa Porcelain Plc, the below conclusions can be filtered out.

The common – size percentages for the balance sheet values for the year 2014 shows that out of the total assets, 24.27% for property plant and equipment and 20.74% for inventory. Out of the total equity and liability values for year 2014, 48.94% is for equity, 32.59% for non – current liabilities and 18.46% for current liabilities. The income statement for 2014 shows the highest accumulation of common – size percentage value of 81.50% for cost of sales and 18.50% value for gross profit.

According to the common – size percentage values of the balance sheet for the year 2015, out of the total assets, 21.74% for property, plant and equipment and 19.13% for inventories. Out of the total equity and liability values for year 2015, 47.41% is for equity, 34.80% for non – current liabilities and 17.78% for current liabilities. The income statement for 2015 shows the highest accumulation of common – size percentage value of 82.24% for cost of sales and 17.76% value for gross profit.

The common – size percentage values of the balance sheet for the year 2016, shows 28.79% for property, plant and equipment and 14.99% for inventories out of total assets. Out of the total equity and liability values for year 2016, 72.96% is for equity, 16.58% for non – current liabilities and 10.47% for current liabilities. The income statement for 2016 shows the highest accumulation of common – size percentage value of 74% for cost of sales and 26% value for gross profit.

 

The common – size percentage values of the balance sheet for the year 2017, shows 28.79% for property, plant and equipment and 14.99% for inventories out of total assets. Out of the total equity and liability values for year 2017, 68% is for equity, 15.59% for non – current liabilities and 16.41% for current liabilities. The income statement for 2017 shows the highest accumulation of common – size percentage value of 76% for cost of sales and 24% value for gross profit.

The common – size percentage values of the balance sheet for the year 2018, shows 30.34% for property, plant and equipment and 11.16% for inventories out of total assets. Out of the total equity and liability values for year 2018, 62.98% is for equity, 18.17% for non – current liabilities and 18.86% for current liabilities. The income statement for 2018 shows the highest accumulation of common – size percentage value of 83.83% for cost of sales and 16.16% value for gross profit.The common – size percentage values of the balance sheet for the year 2019, shows 33.19% for property, plant and equipment and 12.02% for inventories out of total assets. Out of the total equity and liability values for year 2019, 63.68% is for equity, 9.49% for non – current liabilities and 26.83% for current liabilities. The income statement for 2019 shows the highest accumulation of common – size percentage value of 72.85% for cost of sales and 27.15% value for gross profit.

The results for the years 2014, 2015, 2016, 2017, 2018 and 2019 reflect that a proper distribution of assets, liabilities and the equity within the company, Dankotuwa Porcelain PLC through the vertical analysis data. The calculation is attached to the attachement below.

                   

Graph 03 – Common – size percent for assets for the year 2019

Ratio Analysis

i)                   Liquidity and efficiency ratios

Liquidity is the amount of cash a company can put its hands on quickly to settle its debt. The liquid funds are consists of cash, short – term investments for which there is a ready market, fixed deposits with a bank, trade receivables and bills of exchange receivables.

a.       Working capital

The short – term assets can be quickly converted into cash and the short - term liabilities should be paid soon. This ratio reflects whether there are adequate amount of cash to play day – to – day activities. The working capital ratio values for the years 2019, 2018, 2017, 2016, 2015, and 2014 of Dankotuwa Porcelain PLC are 212,969,452, 497,999,469, 722,902,969, 739,334,747, 402,784,073 and 431,338,071 rupees respectively. The working capital values show the debt paying ability of the company is in a good position.

b.      Current ratio

This ratio gives an idea that the company must have enough current assets to pay off its current liabilities in future. The current ratio values for the years 2019, 2018, 2017, 2016, 2015, and 2014 of Dankotuwa Porcelain PLC are (1.22:1), (1.89:1), (2.62:1), (3.77:1), (1.99:1) and (2.07:1). All of the current ratio values are greater than one. It shows that the company has an ability to pay its debt on time. If the ratio become lower than one it says that the company has more debts and if the ratio become very higher than one it says that the company has too much of assets.

c.       Acid – test ratio

All the current assets cannot quickly turn into cash. This ratio shows an indication of the company’s liquidity position. It is better to have at least one as the value of the acid – test ratio for the companies with a slow inventory turnover. If the value of the ratio becomes lower than one, the company could be in a cash flow trouble. The company may depend on its inventory.

 

The acid - test ratio values for the years 2019, 2018, 2017, 2016, 2015, and 2014 of Dankotuwa Porcelain PLC are (0.77:1), (1.31:1), (1.65:1), (2.33:1), (0.92:1) and (0.95:1) respectively. This shows that the company is not in a good position in 2014, 2015 and 2019 years. The company depends on the inventory. If the inventory could not be sold, the company will be in danger. The company was in a good position in 2018, 2017 and 2016 years which can survive even without inventory.

d.      Accounts receivables turnover

This ratio expresses how many times company can convert its receivables into cash each year. If the value of this ratio becomes equal to one, the company has not credited any. The accounts receivables turnover ratio values for the years 2019, 2018, 2017, 2016 and 2015 of Dankotuwa Porcelain PLC are 3.328199, 3.56952, 4.402661, 4.97197 and 4.831134 times respectively. The ratio values are not much higher in this company. It reflects that the company does not collect money faster from the receivables. Company is less efficient in collecting money from receivables.

e.       Merchandise turnover

This ratio gives an idea that how many times a company sell and replace its inventory during a year. If the value for this ratio becomes higher, it shows that all inventory of the company is sold quickly and the inventory level is very lower. The merchandise turnover ratio values for the years 2019, 2018, 2017, 2016 and 2015 of Dankotuwa Porcelain PLC are 2.343359, 2.815765, 3.066198, 2.94083 and 2.888414 times respectively. The merchandise turnover ratio values are not much higher according to the results. It shows that high amount of inventory is left and not sold much.

f.        Days of sales uncollected

This ratio indicates the number of days a company requires to collect its money back. The days of sales uncollected for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 129, 88, 91, 78, 73 and 74 days respectively. The results of the calculation reveal that the company has a very higher value for this ratio. Company does not collect money faster. The company has not managed to decrease the collection period year to year. This indicates the poorly managed credit control function. This is an indication of a poorly managed company.

 

If this ratio becomes lower it shows that the company can collect money within few days. The company can provide several discounts, and tricks such as buy one and get one free to motivate receivables to give money back.

g.      Days of sales in inventory

The ratio indicates the liquidity of inventory. The time period that inventory is kept before selling. It is better if value of the ratio become lower. The days of sales in in inventory for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 179, 112, 127, 117, 124 and 122 days respectively. The results for this ratio of the company are much higher. The values have increased from year by year shows that there is a slowdown in trading or a build – up in inventory levels or the investment in inventories has become excessive. Several aspects of inventory holding policy must be balanced to lower the ratio values such as lead times, seasonal fluctuations in orders, alternative use of warehouse space, bulk buying discounts, likelihood of inventory perishing or becoming obsolete.

The above two ratios, days of sales in inventory and days sales uncollected give an indication of how soon inventory is converted into cash/ companies liquidity. According to the company theses values of these ratios are not in a good position.

h.      Total assets turnover

This ratio measures the efficiency of the assets in producing sales. If the value of this ratio is greater than one, it is god for the company and the company is more efficient. The ratio value become very much higher is also not good for the company. The total assets turnover for the years 2019, 2018, 2017, 2016 and 2015 of Dankotuwa Porcelain PLC are 0.374225, 0.451335, 0.627116, 0.635946622 and 0.699617 respectively. The calculation reflects the revenue of the company is not much higher compared to average total assets.

ii)                 Solvency ratios

The solvency ratios reflect the long – term debt paying ability of a company.

 

a.       Debt ratio

This shows what potions of company’s assets are contributed by creditors. Assets of a company consist of non – current and current assets. Debts consist of current and non – current liabilities. There is no absolute guide to the maximum safe debt ratio. In practice, may companies operate successfully with a higher debt ratio than 50%. Therefore, the debt ratio has to be fallen in between 50% - 60%. If the ratio shows beyond these limits, the debt position of the company should pay high attention. The total debt ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 36.32%, 37.02%, 32.00%, 27.04%, 52.59% and 51.06% respectively. The values indicate that the debt percentage of the company’s assets have a lower percentage when concerned the recent years.

b.      Equity ratio

This ratio indicates that what potions of company’s assets are contributed by owners. These assets must be financed by long – term capital of the company, which is one of two things; issued share capital (ordinary shares plus other equity, non – redeemable preference shares) and long – term debt. The total debt ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 63.68%, 62.98%, 68.00%, 72.96%, 47.41% and 48.94% respectively. These values show a higher percentage when compared with the debt ratio.

According to the debt and equity ratios the contribution for the total assets from debt is about 40% and from equity is about 60%.

c.       Times interest earned

This ratio reflects the ability of firm’s operations to provide protection to long – term creditors. It simply expresses how much the company is strong enough to pay the interest. The times interest earned ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 5.730066191, -6.0374499, 7.7929333, 3.55131425, 0.765755765 and 1.8684776 times respectively.

 

According to the results obtained, the ratio values are lower in years 2018 and 2015 that the company was not strong to pay the interest. Therefore, the company may not be able to get a loan in those years. Even though, the company has a higher value in the other years. Therefore, the company is strong enough to pay the loan and the interest in those years.

iii)               Profitability ratios

These ratios give an idea about the profit of the company related to another variable.

a.       Profit margin

The ability of a company to earn a net income from sales is shown here. Therefore the company needs to know the efficiency and profitability of the company before and after taxes. This further reflects how much net profit the company earns out of total sales. The profit margin ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 19.35%, -6.35%, 7.63%, 6.90%, -1.05% and 1.65% respectively. According to the calculations, the 2008 and 2015 ratio values are lower than one which reflects a loss of the company. Anyhow, they have managed to earn more profit in the recent years (2019) according to the higher values obtained for the ratio values.

b.      Gross margin

This ratio indicates the amount remaining from one rupee that is left to cover operating expenses and a profit after considering cost of sales.  The gross margin ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 27.15%, 16.16%, 24.40%, 25.55%, 182.24% and 181.50% respectively. The values for this ratio are higher which is good for the company. Even though, the value has become lower year by year.

c.       Return on total assets

This is an overall measure of the company’s profitability which is the return on total assets or the amount company has earned out of its total assets. The return on total assets ratio values for the years 2019, 2018, 2017, 2016 and 2015 of Dankotuwa Porcelain PLC are 4.66%, -2.86%, 3.59%, 1.98% and -0.50% respectively. The ratio values of the company are lower which is not good for the company.

d.      Return on common shareholders’ equity

The ratio reflects how well the company employed the owners’ investments to earn income. The return on common shareholders’ equity ratio values for the years 2019, 2018, 2017, 2016 and 2015 of Dankotuwa Porcelain PLC are 7.34%, -4.38%, 5.10%, 3.15% and -1.04%  respectively. The values for the years 2018 and 2015 are lower which is not good for the company and the values for the years 2019, 2017 and 2016 are higher which is good for the company.  

e.      Book value per common share

Liquidation at reported amounts. If the company is bankrupted the amount get for one shareholder is reflected through this ratio values. The book value per common share ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 211699.0217, 168116.8734, 168183.70, 169186.50, 98097.99 and 97275.96 rupees per share respectively. The values are higher according to the calculation which is good for the company.

f.        Basic earnings per share (BES)

This ratio is very important in stock exchange in stock market when buying and selling stock market shares. The value provides an idea about how much income is earned for each share of common stock. It is the amount of net profit for the period that is attributable to each ordinary share which is outstanding during all or part of the period. The basic earnings per share ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 21700.06, -7363.62, 8604.69, 6494.09, -1016.31 and 2169.396 rupees per share respectively. According to the calculation, the ratio values obtained for the years 2018 and 2015 are a very lower value because the company was on a loss in these years. Therefore, buying shares may also make a loss. Anyhow, in the other years, there is a higher value per share. It is good to buy shares in 2019, 2017, 2016 and 2014.

 

iv)               Market ratios

The value of an investment in ordinary shares in a company listed on a stock exchange is its market value, and so investment ratios must have regard not only to information in the company’s published accounts, but also to the current price, and the PE ratio and the dividend ratios involve using the share price.

a.      Price – Earnings ratio (PE ratio)

The PE ratio indicates strong shareholder confidence in the company and its future, in profit growth and a lower PE ratio indicates lower confidence. The PE ratio of one company can be compared with the PE ratios of other companies in the same business sector and other companies generally. It is often used in stock exchange reporting where prices are readily available. Therefore, this ratio is often used by investors as a general guideline in gaining stock values. It is important in buying and selling shares. The price – earnings ratio values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 24.4239, -93.7039, 0.697294, 1.047105, -11.02028224 and 5.301014 times respectively. There are very lower values in years 2018, 2017, 2016, 2015 and 2014, according to the calculation. It reflects that the shares of this company were not in a suitable condition to buy. Anyhow, the company has managed to increase the PE ratio in the recent years (2019).

b.      Dividend yield

Divided yield is the return a shareholder is currently expecting on the shares of a company. The dividend per share is taken as the divided for the previous year. Dividend yield is an important aspect of a share’s performance. Further, this ratio identifies the return, in terms of cash dividends on the current market price of the stock. The dividend yield values for the years 2019, 2018, 2017, 2016, 2015 and 2014 of Dankotuwa Porcelain PLC are 0%, 0%, 10.83%, 0%, 0% and 3.48% respectively. The values for this ratio indicate that buying shares of this company is not much good for the investor.   

The calculations required for this analysis are attached at the bottom of this this document.

 

Assumptions

Accounting assumptions state how a business is organized and operates. They provide structure to record business transactions. If any of these assumptions are not true, the financial information produced by a business and reported in its financial statements should make a bit change. These key assumptions are:

• Accrual assumption. Transactions are recorded using the accrual basis of accounting. The recognition of revenues and expenses arises when earned or used, respectively. If this assumption is not true, a business should use the cash basis of accounting to develop financial statements that are based on cash flows instead of the above. The latter approach will not result in financial statements that can be audited.
• Consistency assumption. The same method of accounting will be used from period to period unless it can be replaced by a more relevant method. If this assumption is not true, the financial statements produced over multiple periods are probably not comparable.
• Economic entity assumption. The transactions of a business and those of its owners are not intermingled. If this assumption is not true, it is impossible to develop accurate financial statements. This assumption is a particular problem for small, family-owned businesses.
• Reliability assumption. The transactions that can be adequately proven should only be recorded. If this assumption is not true, a business is probably artificially accelerating the recognition of revenue to bolster its short-term results.
• Going concern assumption. A business will continue to operate for the foreseeable future. If this assumption is not true (such as when bankruptcy appears probable), deferred expenses should be recognized at once.
• Conservatism assumption. Revenues and expenses should be recognized when earned, but there is a bias toward earlier recognition of expenses. If this assumption is not true, a business may be issuing overly optimistic financial results.
• Time period assumption. The financial results reported by a business should cover a uniform and consistent period. If this is not the case, financial statements will not be comparable across reporting periods.

Even though, these preceding assumptions appear obvious to be obeyed, they are easily violated, and produce the financial statements that are fundamentally unsound. The auditors will be looking for violations of these accounting assumptions when a company's financial statements are audited.  They will refuse to give a favorable opinion on the statements until any issues found are corrected. The new financial statements must be produced that reflect the corrected assumptions.

 

Important Factors

The calculations reflect the current situation of the company is not much positive because most of the ratio values are below the required standard industry averages. Therefore, company should pay more attention towards the major areas of weaknesses and apply remedial actions in order to overcome the current situation. Improving the average collection period for accounts receivables, increasing inventory turnover and reducing prepayments, provide discounts or other benefits to gather money back on time and increasing inventory levels only up to requirement are several remedies that can be implemented.

The analysis conducted may also have some limitations. The analysis does not consider and included enough information and details related to the current economic situation and the type, nature and the size of the organization. Therefore, the analysis is mostly based on past documented data not on the present data. Further, the calculations are based on several assumptions of accounting.  Hence, several limitations of this analysis can be identified.

 

Inferences

Financial Statement analysis is a process to select, evaluate and interpret financial data in order to assess a company’s past, present and future financial performance. Common size analysis of horizontal analysis is restating the financial information in a standardized format. This could be done by horizontal analysis which compares two or more years of financial data in both Rupee and percentage form and vertical where each category of accounts on the balance sheet is shown as a percentage of the total accounts. This can be complimented with the DuPont model and also ratio analysis. Furthermore, we then use relationships among financial statement accounts, forecasting the company’s future income statements and balance sheets, to see how the company’s performance is likely to evolve. This step is normally based on the guidance given by the company management.

 

Discussion

The financial statement analysis is conducted mainly according to horizontal, vertical and ratio analysis. The results help to get an idea about the current financial status of the company according to its annual reports.

The percent change analysis within horizontal analysis of total assets show the growth rate of the company, Dankotuwa Porcelain. The years 2019, 2018, 2017, 2016, 2015 years show growth rates of 24.54%, 7.93%, 6.66%, 23.23%, and 4.10% respectively. It reflects that the growth rate of the company has gradually increased when considering the recent years. Trend analysis of horizontal analysis reflects the trends of turnover, gross profit and cost of sales, of Dankotuwa Porcelain PLC which reflects a growth of all the three variables considered from year 2005 to 2019. The vertical analysis results for the years 2014, 2015, 2016, 2017, 2018 and 2019 reflect that a proper distribution of assets, liabilities and the equity within the company, Dankotuwa Porcelain PLC.

In line with the working capital values, the debt paying ability of the company is in a good position. All of the current ratio values are greater than one that shows the company has an ability to pay its debt on time. The acid – test ratio shows that the company is not in a good position in 2014, 2015 and 2019 years. The company depends on the inventory. If the inventory could not be sold, the company will be in danger. The company was in a good position in 2018, 2017 and 2016 years which can survive even without inventory. The accounts receivables turnover values are not much higher in this company. It reflects that the company does not collect money faster from the receivables. Company is less efficient in collecting money from receivables. The merchandise turnover ratio values are not much higher according to the results. It shows that high amount of inventory is left and not sold much. The results of the days of sales uncollected reveal that the company has a very higher value for this ratio. Company does not collect money faster. The company has not managed to decrease the collection period year to year. This indicates the poorly managed credit control function. This is an indication of a poorly managed company.

 

The results for days of sales in inventory ratio of the company are much higher. The values have increased from year by year shows that there is a slowdown in trading or a build – up in inventory levels or the investment in inventories has become excessive. The two ratios, days of sales in inventory and days sales uncollected give an indication of how soon inventory is converted into cash/ companies liquidity. According to the company theses values of these ratios are not in a good position. The total assets turnover reflects the revenue of the company is not much higher compared to average total assets.

The debt ratio values indicate that the debt percentage of the company’s assets have a lower percentage when concerned the recent years. These equity ratio values show a higher percentage when compared with the debt ratio. According to the debt and equity ratios the contribution for the total assets from debt is about 40% and from equity is about 60%. The times interest earned results are lower in years 2018 and 2015 that the company was not strong to pay the interest. Therefore, the company may not be able to get a loan in those years. Even though, the company has a higher value in the other years. Therefore, the company is strong enough to pay the loan and the interest in those years.

The profit margin calculations for the 2008 and 2015 ratio values are lower than one which reflects a loss of the company. Anyhow, they have managed to earn more profit in the recent years (2019) according to the higher values obtained for the ratio values. The values for gross margin ratio are higher which is good for the company. Even though, the value has become lower year by year. The returns on total assets values of the company are lower which is not good for the company. The return on common shareholders equity values for the years 2018 and 2015 are lower which is not good for the company and the values for the years 2019, 2017 and 2016 are higher which is good for the company.  The book values per common share values are higher according to the calculation which is good for the company.

The basic earnings per share values obtained for the years 2018 and 2015 are very lower values because the company was on a loss in these years. Therefore, buying shares may also make a loss. Anyhow, in the other years, there was a higher value per share. It is good to buy shares in 2019, 2017, 2016 and 2014.

 

The PE ratio reflects that the shares of this company were not in a suitable condition to buy. Anyhow, the company has managed to increase the PE ratio in the recent years (2019). The values for dividend yield ratio indicate that buying shares of this company is not much good for the investor.  

 

Conclusion

The calculations reflect the current situation of the company is not much positive because most of the ratio values are below the required standard industry averages. The comparative performance is poor in the areas of profit margins, solvency, liquidity, credit control, and inventory management. Therefore, company mush concern highly on the week areas of the company and implement remedies to overcome the hard situation of the company, Dankotuwa Porcelain (Pvt) ltd. 
Improving the average collection period for accounts receivables, increasing inventory turnover and reducing prepayments, provide discounts or other benefits to gather money back on time, implementation of proper management practices as a whole and increasing inventory levels only up to requirement are several remedies that can be implemented.