Financial Performance Performance Analysis of ROYAL CERAMICS LANKA PLC vs LANKA TILES PLC based on Accounting Ratios
MMS 5301 – 5301 – Financial Financial Management Prof. Y. K. Weerakoon
By Ms. S.P. Aryarathne
5266FM2017001 5266FM2017001
Mr. Chinthaka Gayan
5266FM2017019 5266FM2017019
Ms. R.D. Wickramaaratchi
5266FM2017077 5266FM2017077
Ms. Harsha Piumali
5266FM2017100 5266FM2017100
Ms. U.A.S. Yapa
5266FM2017102 5266FM2017102
MBA / M.Sc.
2017
Executive Summary This report has been prepared with the objective of understanding how theoretical concepts inrespect of the Performance Evaluation of companies can be used in practical context with respect to a companies in Sri Lankan Ceramic Tiles industry. Therefore, we have selected two leading Ceramic Tiles manufacturing companies in Sri Lanka. Accordingly, this report provides an analysis and evaluation of the performance of Royal Ceramic Lanka PLC and Lanka Tiles PLC for the years between 2015-2018 in terms of their profitability, Short term liquidity, Long term financial health, and Management effectiveness and valuation aspects. This analysis was done mainly based on comparison between the two companies on variousratios such as current and quick ratio, ROA, ROE, debt collection period, debt turnover, debt – equity, EPS and PER. The movement between 2015-2018 has been considered when analyzing the ratios. Results of data analyzed show that Lanka Tiles PLC has performed well in their industry when compared to Royal Ceramic Lanka PLC.
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Table of Contents 1.
Company Backgrounds .............................................................................................. 4
2.
Ratio Analysis............................................................................................................ 5 2.1
Short term liquidity Ratios ................................................................................. 5
2.2
Profitability Ratios ............................................................................................. 6
2.3
Management effectiveness Ratios ...................................................................... 7
2.4
Long Term Financial Health Ratios ................................................................... 8
2.5
Market Valuation Ratios .................................................................................... 9
3.
Summary of ratios analysis ...................................................................................... 11
4.
Interpretation ............................................................................................................ 12 4.1.
Profitability and Market Performance .............................................................. 12
4.2.
Long-term and short-term financial strength.................................................... 13
4.3.
Management Effectiveness ............................................................................... 13
4.4.
Investment Decision ......................................................................................... 14
5.
Conclusion ............................................................................................................... 15
6.
Appendix.................................................................................................................. 16
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1.
Company Backgrounds
Royal Ceramic Lanka PLC - RCL The Royal Ceramics Group is the undisputable market leader in Sri Lanka’s tile industry with a presence in over 16 countries. As at FY17, the asset base of c.LKR 53bn has generated c.LKR 29bn income which has been translated into c.LKR 3.9bn profit. The company is listed in the Colombo Stock Exchange (CSE) with the ticker – RCL.N0000.
Lanka Tiles PLC - TILE With the vision of becoming not only a household name but a global one, the distribution and retail network of Lanka Tiles is expanding rapidly to make sure more Sri Lanka consumers have access to world class products to make their homes and office premises reflect their aspirations. C.LKR 9bn worth assets base has generated c.LKR 7bn in revenue and c.LKR 1bn on net profit. Lanka Tiles is listed in the Colombo Stock Exchange (CSE) with the ticker – TILE.N0000.
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2.
Ratio Analysis
2.1
Short term liquidity Ratios
Liquidity ratios are a class of financial metrics used to determine a debtor's ability to pay off current debt obligations without raising external capital. Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio, quick ratio and operating cash flow ratio.Current liabilities are analyzed in relation to liquid assets to evaluate the coverage of short-term debts in an emergency.
Current Assets to Current Liabilities
=
Current Assets Current Liabilities
Acid test
=
Cash & Cash Equivalents + Current Receivables + Short Term Investments
Current Liabilities Dividends Cover
= Profit after tax - Dividend paid on Irredeemable Preference Shares Dividend paid to Ordinary Shareholders
RCL
2018
2017
2016
2015
1.30
1.49
1.44
1.30
Acid test
0.47
0.62
0.66
0.53
Dividends Cover
2.89
3.38
4.42
4.82
LANKA TILE
2018
2017
2016
2015
3.81
3.37
3.33
2.78
1.91
2.12
2.45
1.68
1.89
3.13
3.18
2.44
Current Assets Liabilities
to
Current
Current Assets to Current Liabilities Acid test Dividends Cover
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2.2
Profitability Ratios
Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period of time. They show how well a company utilizes its assets to produce profit and value to shareholders.
A higher ratio or value is commonly sought-after by most companies, as this usually means the business is performing well by generating revenues, profits, and cash flow. The ratios are most useful when they are analyzed in comparison to similar companies or compared to previous periods.
ROE
=
Net Income Share Holder Equity
ROA
=
Net Income Average Assets
Net Profit Ratio
=
Net profit after tax Net sales
RCL
2018
2017
2016
2015
ROE
14%
20%
20%
17%
ROA
8%
11%
11%
9%
Net profits ratio
13%
18%
16%
14%
LANKA TILE
2018
2017
2016
2015
ROE
24%
23%
24%
20%
ROA
17%
17%
17%
14%
Net profits ratio
16%
24%
21%
16%
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2.3
Management effectiveness Ratios
Management effectiveness ratios tell you whether company management uses shareholders’ equity and company assets to produce an acceptable r ate of return.
Even with the best products or services, companies have trouble delivering strong longterm efficiently. Management effectiveness ratios compare financial measures from company financial statements to evaluate management performance.
Fixed Asset Turnover =
Inventory period (days) =
Net Sales
Number of days in Period
Fixed Assets - Accumulated Depreciation Inventory Turnover =
Inventory Turnover Debtor’s collection period
(days) =
Cost of goods sold
Number of days in Period
Average Inventory
Debtors Turnover
Debtors Turnover =
Creditors payment period (days) =
Net credit sales
Number of days in Period
Average Accounts Receivables
Creditors Turnover
Creditors Turnover =
Net operating cycle (days) = Days Inventory Outstanding + Days Sales
Total purchase
Outstanding + Days Payables Outstanding
Average Accounts Payable
RCL
2018
2017
2016
2015
Fixed assets turnover
1.13
1.21
1.29
1.32
Inventory Turnover
2.32
1.79
2.13
2.15
Debtors Turnover
8.12
9.26
9.40
8.12
7
Creditors turnover
9.33
7.24
7.37
7.33
Inventory period
157
203
172
169
Debtor’s collection period
45
39
39
45
Creditors payment period
39
50
50
50
net operating cycle
163
192
161
165
LANKA TILE
2018
2017
2016
2015
Fixed assets turnover
1.59
1.43
1.63
2.09
Inventory Turnover
1.93
1.99
3.31
3.01
Debtors Turnover
6.82
5.05
5.87
5.95
Creditors turnover
6.99
5.05
5.53
6.38
Inventory period
190
183
110
121
Debtor’s collection period
54
72
62
61
Creditors payment period
52
72
66
57
net operating cycle
191
183
106
125
2.4
Long Term Financial Health Ratios
Debt and gearing ratios are concerned with a company’s long term stability: how much the company owes in relation to size, whether it is getting into heavier debt or improving its situation, and whether its debt burden seems heavy or light. Long - Term liquidity Ratios are also known as capital structure ratio. These ratios indicate mix of funds provided by owners & lenders. As a general rule these should be appropriate mix
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debt & owners’ equity in financing the firm’s assets. Long - Term Liquidity Ratios are calculated to judge the long long-term financial position of the company.
Equity Multiplier
=
Total Assets Total Stockholder's Equity
Debt to Equity ratio
=
Total Liabilities Total Equity
RCL
2018
2017
2016
2015
Equity Multiplier
1.82
1.70
1.74
1.95
Debt to Equity ratio
0.52
0.47
0.48
0.68
LANKA TILE
2018
2017
2016
2015
Equity Multiplier
1.27
1.27
1.33
1.46
Debt to Equity ratio
0.03
0.08
0.08
0.18
2.5
Market Valuation Ratios
Investor ratios help equity shareholders and other investors to assess the value and quality of an investment in the ordinary shares of a company. Specially, ratios as Earnings per share serve as an indicator of a company's profitability and it is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio.
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PE =
Market Value Price Per Share
Payout (%) = Dividend per share * 100
Earning per share PBV =
Earning per share
Market Price per Share Book Value per share
EV to EBIT =
Dividend Yield (%) =
EV ( market capitalization + preferred shares
Cash Dividends per share
+ minority interest + debt - total cash)
Market Value per Share
Earnings Before Interest, Taxes, Depreciation & Amortization
RCL
2018
2017
2016
2015
PE
4.05
3.91
3.78
5.76
PBV
0.40
0.50
0.49
0.68
EV to EBIT
5.59
5.14
5.16
7.92
Payout (%)
35%
30%
23%
21%
Dividend Yield (%)
9%
8%
6%
4%
LANKA TILE
2018
2017
2016
2015
PE (x)
5.27
4.35
4.52
6.69
PBV (x)
0.77
0.82
0.92
1.37
EV to EBIT (x)
5.00
4.58
4.15
6.49
Payout (%)
53%
32%
31%
41%
Dividend Yield (%)
10%
7%
7%
6%
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3.
Summary of ratios analysis
RCL
2018
2017
2016
2015
ROE %
14%
20%
20%
17%
ROA %
8%
11%
11%
9%
Equity Multiplier
1.82
1.70
1.74
1.95
Debt to Equity Ratio
0.52
0.47
0.48
0.68
Current Asset/Current Liability
1.3
1.49
1.44
1.3
Acid Test
0.47
0.62
0.66
0.53
Inventory Turnover
2.32
1.79
2.13
2.15
Fixed Asset Turnover
1.13
1.21
1.29
1.32
EPE Ratio
4.05
3.91
3.78
5.76
Payout %
35%
30%
23%
21%
LANKA TILE
2018
2017
2016
2015
ROE %
15%
20%
24%
20%
ROA %
12%
16%
17%
14%
Equity Multiplier
1.27
1.27
1.33
1.46
Debt to Equity Ratio
0.03
0.08
0.08
0.18
Current Asset/Current Liability
3.81
3.37
3.33
3.78
Acid Test
1.91
2.12
2.45
1.68
Inventory Turnover
1.93
1.99
3.31
3.01
Fixed Asset Turnover
1.59
1.43
1.63
2.09
EPE Ratio
5.27
4.35
4.52
6.69
Payout Ratio %
53%
32%
31%
41%
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4.
Interpretation
4.1.
Profitability and Market Performance
Profitability and use of Financial Leverage – Lanka Wall Tile is better
Lanka Wall Tile has generated relatively higher Return on Equity (ROE), Return on Assets (ROA) and Net Profit ratio over FY15-18. Lanka Wall Tile’s past four years average annual ROE stood at c.20%, ROA at c.15% and Net Profits ratio at c.19% while RCL recorded c.18% average ROE, an average ROA of c.10% supported by an average Net Profit ratio of c.15%. In terms of Financial Leverage, Lanka Wall Tile is relatively less geared compared to RCL. Lanka Wall Tile recorded an average Equity Multiplier of c.1.33x during FY1518 where RCL’s average Equity Multiplier marked as c.1.80x.
Market Performance – High PER but Lower PEG – Lanka Wall Tile is attractive
Both the companies resulted in negative returns in terms of share price performance over FY15-18. (RCL from LKR 111 to 105 and Lanka Wall Tile from LKR 106 to 100 over FY15-18) We believe Price – Earnings ratio would be a better valuation methodology for RCL and Lanka Wall Tile considering the nature of the industry. RCL traded at c.4.05x PE as at FY18 where TILE was trading at a higher rate of c.5.27x. However, RCL income grew at c.10% YoY in FY18 where Lanka Wall Tile grew at c.18% YoY rate. Hence, the Growth Adjusted PE (PEG) for RCL would be c.0.4 and Lanka Wall Tile would result in an attractive lower PEG of c.0.29. This reflects Lanka Wall Tile’s higher PE is justified by its topline growth
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4.2.
Long-term and short-term financial strength
Long term solvency – Lanka Wall Tile is better with relatively low Financial Leverage and better interest cover
Lanka Wall Tile has been consuming substantially lower levels of debt capital over FY15-18 compared to RCL. The average Debt to Equity ratio stood at c.54% for RCL where it stood at c.9% for Lanka Wall Tile. Further, Lanka Wall Tile reported relatively higher interest cover compared to RCL reflecting better long term solvency as well as financial flexibility.
Short term financial strength – Lanka Wall Tile leads in terms of Current assets and Acid test
Lanka Wall Tile reported current assets to current liabilities ratio of c.3.81x over FY1518 where RCL’s ratio was c.1.30x. Further in terms of Liquid assets, TILE’s acid test ratio marked c.1.91x where RCL’s acid test stood at c.0.47x. Hence, Lanka Wall Tile reported more current and liquid assets relative to their current liabilities reflecting better short term liquidity.
4.3.
Management Effectiveness
RCL leads in terms of Activity Ratios
RCL reported Inventory turnover, Debtors turnover and Creditors turnover ratios of 2.32x, 8.12x, 9.33x in FY18. Lanka Wall Tile ’s activity ratios were substantially weaker with 1.93x, 4.53x and 5.49x of Inventor y, Debtors and Creditors turnover ratios. Hence, we believe RCL have the potential to improve their margins and fully utilize this management effectiveness.
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4.4.
Investment Decision
In our opinion, Lanka Wall Tile would be the better investment opportunity
We support our recommendation with following grounds:
Lanka Wall Tile’s growth adjusted PER ratio is substantially lower than that of RCL - This allows investor to buy a growing company at a lower price multiple .
Lanka Wall Tile relatively lower Debt to Equity ratio – This would provide Lanka Wall Tile more financial flexibility when it comes to new investment opportunities.
Better short term liquidity – Higher current assets and quick assets ratio provide evidences that necessary funds are available on time.
Better profit margins reflect good pricing power – Lanka Wall Tile can improve their activity ratios by motivating the managers. This would have a rippling effect on ROE to improve.
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5.
Conclusion
The objective of this study was to Analyze Royal Ceramics Lanka PLC and Lanka Tiles PLC using important financial ratios such as Profitability ratios, Short and Long term liquidity ratios, Management Effectiveness ratios and Market related ratios. We have selected a panel data set over FY15-18 of RCL and Lanka Tiles in order to better analyze the trends with time and relative performance of companies. Lanka Tiles recorded leading performance in terms of profitability with higher ROE, ROA as well as higher net profit margin. However, RCL has overtaken Lanka Tiles in efficiency ratios implying their strategy of lower margins with sales increases where Lanka Tiles’s strategy has been to charge higher relatively higher prices to maintain higher margins. Market aspect clearly supported Lanka Tiles with a substantially lower PEG ratio. Relatively less financial leverage of Lanka Tiles further supports our investment recommendation. However, we strongly notice that the investors/potential investors should consider other non – financial factors which can create substantial differences to our investment recommendation.
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6.
Appendix
Royal Ceramics Lanka PLC – Annual Reports (FY15-18) https://www.cse.lk/home/company-info/RCL.N0000/financial
Lanka Tiles PLC – Annual Reports (FY15-18) https://www.cse.lk/home/company-info/TILE.N0000/financial
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