Finance Main Assignment

7/27/2019 Finance Main Assignment

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Accounting for Decision Makers Individual Assignment

MBA-7001 -01-UWIC-MBA-MT-10005717 1

1.0. IntroductionWhen it comes to investing, analyzing financial statements information (also known as

quantitative analysis), is one of, if not the most important element in the fundamental analysis

process. At the same time, the massive amount of numbers in a company's financial

statements can be bewildering and intimidating to many investors. The following two

organizations, Kotmale Holdings PLC & Lanka Milk Foods (CWE) PLC are taken to

consideration in order to prepare the report.

Kotmale Holdings Limited

Kotmale Holdings Limited is engaged in manufacturing and distribution of dairy productsand packing and distribution of milk powder. It was established in 1967 as Lambretta

(Ceylon) Ltd and its beginnings traced back to the cool surroundings of Bogahawatte, Patana

(Upper Kotmale), also known as the beautiful Kotmale valley.

The humble beginning of the adventurous journey of Kotmale which started with production

of cheese, added various dairy products to its product portfolio in fulfillment of its vision to

be a fully-fledged dairy marketing Company in Sri Lanka. By the year 2003, Kotmale was

not only manufacturing and marketing a range of high quality cheese, but also ventured into

manufacturing and marketing ice cream, yoghurt, pasteurized milk, tetra UHT milk, ghee,

fresh cream and fruit drinks.

In order to have a fully-fledged dairy portfolio, in 2005, it commenced its operations of

marketing full cream milk powder under its flagship brand. At present, it has one of the

largest dairy product portfolios of Sri Lanka. This diverse product portfolio of `Kotmale`

serves the Sri Lankan consumers dairy needs. It maintains topmost quality, with techniques

and practices which have been fine-tuned and sharpened over many years of experience

(Kotmale, 2013).


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Lanka Milk Foods (CWE) PLC

Lanka Milk Foods (CWE) PLC is a group of companies which includes five subsidiary

organizations with a combined turnover in excess of Rs. 3 Billion and a stated share capital of

Rs. 300 Million. The company is a fast growing organization which is into importing,

packing, manufacturing, marketing and distributing some of Sri Lankas best known dairy

and beverage brands.

The companys flagship brand Lakspray is a household name in Sri Lanka which has

nourished generations of Sri Lankans for over 40 years. In addition the company markets

many other leading brands including Ambewela, Daily, Lakspray Trim, My Juicee, Dairy

Farm etc. The company has identified many growth categories within the dairy industry

which it will be expanding into and it is currently completing an Rs.One Billion project in

Ambewela.

In addition to its modern manufacturing and packaging facilities the company also owns two

of Sri Lankas largest farms which are Ambewela Farms and Pattipola Farms (Lanka Milk

Foods, 2013)

In order to evaluate these two companies, the writer have prepared common-sized financialstatements and computed key ratios that will be used to show and further analyze the

fundamental differences.

2.0. Net Profit RatioNet Profit ratio is used to measure the overall profitability and hence it is very useful to

proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not be

able to achieve a satisfactory return on its investment.

Net Profit Margin: Net Income

Net Sales (Revenue)


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This ratio also indicates the firm's capacity to face adverse economic conditions such as price

competition, low demand, etc. Obviously, higher the ratio the better is the profitability.

When comparing Lanka Milk Food (CWE) PLC and Kotmale Holding Plc., the both

companies have maintained the same Net Profit Margin of 4% in 2012 financial year, and

when comparing with 2011, there is a significant variance of 4 %, Kotmale Holding which

were abled maintain a percentage of 5%; and Lanka Milk Foods (CWE) Plc., was 1% due to

lower Gross profit margin of 11%.

As in order Lanka Milk Food (CWE) could increase their Net profit margin by increasing

their Gross Profit margin in order by reducing the production costs and maintaining a better

sales mix in which the product has more contribution. This will help Lanka Milk Foods

(CWE) Plc. To increase its Return on capital employed as well.

3.0. Return on capital employed ratio (ROCE)Return on capital employed ratio is considered to be the best measure of profitability in order

to assess the overall performance of the business. It indicates how well the management has

the company used its investments made by owners and creditors into the business. It is

commonly used as a basis for various managerial decisions. As the primary objective of a

business is to earn profit, higher the return on capital employed, the more efficient the firm is

in using its funds.

Comparing Lanka Milk Food (CWE) Plc. ( 2012 - 11%, 2011 - 3% ) and Kotmale Holdings

Plc., (2012 - 15% - 2011) Kotmale Holdings Plc. has a greater ratio than Lanka Milk Foods

which signifies that Kotmale Holdings Plc. has used their assets profitably and efficiently

than the Lanka Milk Food ( CWE ) Plc.

ROCE: Net Income

Capital Employed


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4.0. Current RatioThe current ratio is mainly used to give an idea of the companys ability to pay back its short-

term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

The higher the current ratio, the more capable the company is off paying its obligations.

A ratio under 1 suggests that the company would be unable to pay off its obligations if they

came due at that point. While this shows that the company is not in good financial health, it

does not necessarily mean that it will go bankrupt, as there are many ways to assess

financing, but it is definitely not a good sign.

Based on the financial statements, Kotmale Holding Plc. has a current ratio of 2.50 - 2012

and 2.422011; while Lanka Milk Foods (CWE) is at 1.46 in 2012 and 1.28 in 2011. The

current ratio can give a sense of the efficiency of a companys operating cycle or its ability to

turn its product into cash. In this particular case, Lanka Milk Foods (CWE) has trouble in

payment of their creditors in time ( Creditors Payment period 70 days in 2012 and 71 days in

2011) or have long inventory turnover ( Inventory Holding Ratio 94 days in 2012 and 88 days

in 2011) which could run into liquidity problems because they are unable to alleviate their

obligations.

5.0. Quick/Acid Test RatioA quick ratio or acid ratio determines the companys ability to meet its short term obligation

by converting current assets into cash at a short period of time of one month. The need of

quick ratio arises in order to measure the liquidity of the company more accurately by

eliminating the inventory from current assets

Current Ratio: Current Assets

Current liabilities

Quick Ratio: Current Assets - Inventory

Current Liabilities


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When comparing the two companies, Kotmale Holdings Plc. (1.79 in 2012 and 1.96 in 2011)

is having sound liquidity position over Lanka Milk Foods (CWE) (0.56 in 2012 and 0.48 in

2011), Lanka Milk Foods (CWE) Plc. is facing liquidity problems as they will not have

sufficient working capital meet their short term commitments. The company is able to pay off

its 56% liabilities through the current assets which clearly show a negative indication. The

current ratio which is greater than 1.0 indicates better liquidity position of the company.

Higher the quick ratio better will be the companys position to meets its obligations and also

attract more investors to plug-in their investment.

6.0. Inventory holding periodThis indicates how quickly a company is turning over its inventory. When deciding the

appropriate level of inventory, a company should strike a balance between the costs of tying

up capital and the demands from the customer. Generally, a high inventory turnover (short

Inventory holding period) is preferred.

When comparing the two companies, there is a significant variance inventory holding period

of Lanka Milk Food (CWE) Plc. (94 days in 2012 and 88 days in 2011) Kotmale Holdings

Plc. (24 Days in 2012, and 18 Days in 2011). However it may be a reason that Lanka Milk

Foods (CWE) Plc. more produced stocks comprise, powdered milk which could be kept for

long time and Kotmale Holdings Plc. had produced more similar to liquid milk product that

could not be kept for long time.

Inventory Turnover Period: Cost of Goods Sold *365

Average Inventory


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7.0. Receivables/Debt collection periodThis ratio measures a companys ability to collect cash from its credit customers. In

comparison of the two companies, the collection period of Lanka Milk Foods (CWE) Plc. (30

days in 2012 and 29 Days in 2011) is more efficient than Kotmale Holdings Plc. (36 Days in

2012 and 50 Days in 2011).

8.0. Payables payment periodThis ratio links the value of accounts payables with the amount of Goods and services that a

company is purchasing on credit. If the payables payment period is short, creditors are being

paid relatively early. If the payables payment period is too long, then the company may have

liquidity problems; this can also be harmful to its relationship with suppliers.

When comparing Lanka Milk foods (CWE) Plc. the company takes more time to (70 days, in

2012 and 71 days in 2011) settle their creditors while Kotmale Holding Plc. settle their

creditors within 30-45 days. It Cleary indicates that Lanka Milk Foods (CWE) is having

liquidity problems.

9.0. Interest Coverage RatioThe interest coverage ratio (ICR) is a measure of a company's ability to meet its interest

payments. Interest coverage ratio is equal to earnings before interest and taxes (EBIT) for a

time period, often one year, divided by interest expenses for the same time period. The

interest coverage ratio is a measure of the number of times a company could make the interest

payments on its debt with its EBIT. It determines how easily a company can pay interest

Trade Receivables Period: Average Accounts Receivable *365

Sales

Trade Payables Period: Average Accounts Payable *365

Cost of Goods Sold


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expenses on outstanding debt.

Comparing the two companies, Kotmale Holdings has better interest cover (34.79 times, in

2012 and 8.50 times in 2011) than Lanka milk Foods (CWE) Plc. (7.5 times in 2012 and 2.12

times in 2011) however, both companies had better than the norm. Lanka Milk Foods (CWE)

had a 2.12 in 2011 due to their less net profit margin.

10.0. Gearing RatioThe gearing ratio is the proportion of a company's debt to its equity, where a high gearing

ratio represents a high proportion of debt to equity, and a low gearing ratio represents a low

proportion of debt to equity.

Coming to the comparison of the two companies, Kotmale holdings is having better ratio

(0.34 in 2012 and 0.35 in 2011) than Lanka Milk Foods (CWE) (0.67 in 2012 and 0.78 in

2011).

11.0. Dividend payout ratioDividend payout ratio compares the dividends paid by a company to its earnings. The

relationship between dividends and earnings is important. The part of earnings that is not paid

out in dividends is used for reinvestment and growth in future earnings.

Lanka Milk Food (CWE) has proposed dividend of 1 Rs. Per share and Kotmale Holding has

not proposed any dividend in 2011 or 2012.

Interest Coverage Ratio: EBIT

Interest Expenses

Gearing Ratio: Long Term Liabilities

Capital Employed


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Kotmale Holding Plc. has sound position than Lanka Milk Foods (CWE) Plc. in their

profitably and insolence. Due to GP margin and Inventory holding period; Lanka Milk Foods

(CWE) Plc. show the poor performance of their profitably and insolvency. When comparing

the two companies, Lanka Milk Foods (CWE) Plc. takes nearly three months to convert their

stock to sales. If Lanka Milk Foods could able to convert their stocks in a lesser period,

increase their contribution by having better sales mix and reduce their production cost , they

would been achieved better result.

Dividend Payout Ratio: Dividend per Share *100%

Earnings per Share (EPS)


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12.0. Calculation of RatiosNet Profit Ratio

Lanka Milk Foods PLC Kotmale Holdings PLC

2012 2011 2012 2011

192,727 *100%

5,054,241

= 4%

4,284,927 *100%

43,378

= 1%

2,085,211 *100%

83,422

= 4%

1,543,379 *100%

75,284

= 5%

Return on capital employed ratio (ROCE)


2012 2011 2012 2011

243,219 *100%

(3,510,259-1,281,881)

= 11%

55,356 *100%

(3,334,423-1,310,596)

= 3%

97,716 *100%

(844,906-193,989)

= 15%

77,071 *100%

(737,518-163,249)

= 13%

Net Profit Margin: Net Income

Net Sales (Revenue)

ROCE: Net Income

Capital employed


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Current Ratio


2012 2011 2012 2011

1,874,883

1,281,881

= 1.46

1,673,460

1,310,596

= 1.28

485,151

193,989

= 2.50

395,696

163,249

=2.42

Quick/Acid Test Ratio


2012 2011 2012 2011

(1,874,883-1,154,284)

1,281,881

= 0.56

(1,673,460-1,043,406)

1,310,596

= 0.48

(485,151-138,796)

193,989

= 1.79

(395,696-75,977)

163,249

=1.96

Current Ratio: Current Assets

Current Liabilities

Quick Ratio: Current Assets - Inventory

Current Liabilities


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Inventory holding period


2012 2011 2012 2011

4,272,072 *365

1,098,845

= 94 Days

3,822,253 *365

917,411

= 88 Days

1,664,083 *365

107,387

= 24 Days

1,214,794 *365

61,343

= 18 Days

Receivables/Debt collection period


2012 2011 2012 2011

413,610 *365

5,054,241

= 29.87

=30 Days

338,844 *365

4,284,927

= 28.86

=29 Days

205,336 *365

2,085,211

= 35.94

=36 Days

213,083 *365

1,543,379

= 50.39

=50 Days

Inventory Turnover Period: Cost of Goods Sold *365

Average Inventory

Trade Receivables Period: Average Accounts Receivable *365

Sales


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Payables payment(Creditors) period


2012 2011 2012 2011

818,259 *365

4,272,072

= 69.91

=70 Days

738,943 *365

3,822,253

= 70.56

=71 Days

155,169 *365

1,664,083

= 34.03

=34 Days

150,227 *365

1,214,794

= 45.14

=45 Days

Interest Coverage Ratio


2012 2011 2012 2011

237,570

31,693

= 0.67

142,089

66,928

= 0.78

94,987

2,730

= 0.34

68,957

8,114

=0.35

Trade Payables Period: Average Accounts Payable *365

Cost of Goods Sold

Interest Coverage Ratio: EBIT

Interest Expenses


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Gearing Ratio


2012 2011 2012 2011

(124,759+1,281,881)

2,103,619

= 0.67

(150,435+1,310,596)

1,873,392

= 0.78

(20,854+193,989)

630,063

= 0.34

(27,626+163,249)

546,642

=0.35

Dividend Payout Ratio


2012 2011 2012 2011

1 *100%

4.68

= 21%

0 *100%

1.25

= 0%

0 *100%

3

= 0%

0 *100%

2.40

= 0%

Gearing Ratio: Long Term Liabilities

Capital Employed

Dividend Payout Ratio: Dividend per Share *100%

Earnings per Share (EPS)


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13.0. Summary of Financial Ratios for Lanka Milk Foods PLC. &Kotmale Holdings PLC.

Ratio Summery Lanka Milk Food (CWE ) PLC Kotmale Holdings PLC

2012 2011 2012 2011

Net Profit Ratio 4% 1% 4% 5%

Return on Capital Employed 11% 3% 15% 13%

Current Ratio 1.46 1.28 2.50 2.42

Acid Test Ratio 0.56 0.48 1.79 1.96

Interest Cover 7.50 2.12 34.79 8.50

Gearing Ratio 0.67 0.78 0.34 0.35

Dividend Ratio 21% 0% 0% 0%

Inventory Holding Ratio 94 Days 88 Days 24 Days 18 Days

Debt Collection Period 30 Days 29 Days 36 Days 50 Days

Creditors payment period 70 Days 71 Days 34 Days 45 Days


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14.0. References Kotmale Holdings PLC, 2013. Annual report 2011-2012. [online]

Available at:

[Accessed 06 January 2013].

Lanka Milk foods PLC, 2013. Annual report 2011-2012. [online]Available at: [Accessed 06 January 2013].

Kotmale Holdings PLC, 2013. AboutKotmale Holdings PLC. [online] Available at: [Accessed 07 January 2013].

Lanka Milk foods PLC, 2013. AboutLanka Milk foods PLC. [online] Available at: [Accessed 08 January 2013].


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15.0. Appendixes

Income Statements 2012-2012 cited in Kotmale Holdings PLC Annual Report, 2012, p.28


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Balance Sheets 2012-2012 cited in Kotmale Holdings PLC Annual Report, 2012, p.29


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Income Statements 2012-2012 cited in Lanka Milk foods PLC Annual Report, 2012, p.48


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Balance Sheets 2012-2012 cited in Lanka Milk foods PLC Annual Report, 2012, p.49

Finance Main Assignment

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