Accounting for Decision Makers

Individual Assignment

1.0.

Introduction

When 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 products and 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).

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

Accounting for Decision Makers Lanka Milk Foods (CWE) PLC

Individual Assignment

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 financial statements and computed key ratios that will be used to show and further analyze the fundamental differences.

2.0.

Net Profit Ratio

Net 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)

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

Accounting for Decision Makers

Individual Assignment

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.

ROCE:

Net Income Capital Employed

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.

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

Accounting for Decision Makers

Individual Assignment

4.0.

Current Ratio

The 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.

Current Ratio:

Current Assets Current liabilities

Based on the financial statements, Kotmale Holding Plc. has a current ratio of 2.50 - 2012 and 2.42 2011; 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 Ratio

A 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

Quick Ratio:

Current Assets - Inventory Current Liabilities

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

Accounting for Decision Makers

Individual Assignment

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 period

This 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.

Inventory Turnover Period:

Cost of Goods Sold *365 Average Inventory

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.

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

Accounting for Decision Makers

Individual Assignment

7.0.

Receivables/Debt collection period

This 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).

Trade Receivables Period:

Average Accounts Receivable *365 Sales

8.0.

Payables payment period

This 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.

Trade Payables Period: Average Accounts Payable *365 Cost of Goods Sold
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 Ratio

The 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

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

Accounting for Decision Makers expenses on outstanding debt.

Individual Assignment

Interest Coverage Ratio:

EBIT Interest Expenses

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 Ratio

The 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.

Gearing Ratio:

Long Term Liabilities Capital Employed

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 ratio

Dividend 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.

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

Accounting for Decision Makers

Individual Assignment

Dividend Payout Ratio: Dividend per Share *100% Earnings per Share (EPS)

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.

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

Accounting for Decision Makers

Individual Assignment

12.0. Calculation of Ratios

Net Profit Ratio

Net Profit Margin:

Net Income Net Sales (Revenue)

Lanka Milk Foods PLC 2012 2011

Kotmale Holdings PLC 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)

ROCE:

Net Income Capital employed

Lanka Milk Foods PLC 2012 2011

Kotmale Holdings PLC 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%

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

Accounting for Decision Makers Current Ratio

Individual Assignment

Current Ratio:

Current Assets Current Liabilities

Lanka Milk Foods PLC 2012 2011

Kotmale Holdings PLC 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

Quick Ratio:

Current Assets - Inventory Current Liabilities

Lanka Milk Foods PLC 2012 2011

Kotmale Holdings PLC 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

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

10

Accounting for Decision Makers Inventory holding period

Individual Assignment

Inventory Turnover Period:

Cost of Goods Sold *365 Average Inventory

Lanka Milk Foods PLC 2012 2011

Kotmale Holdings PLC 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

Trade Receivables Period:

Average Accounts Receivable *365 Sales

Lanka Milk Foods PLC 2012 2011

Kotmale Holdings PLC 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

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

11

Accounting for Decision Makers Payables payment(Creditors) period

Individual Assignment

Trade Payables Period: Average Accounts Payable *365 Cost of Goods Sold Lanka Milk Foods PLC 2012 2011 Kotmale Holdings PLC 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

Interest Coverage Ratio:

EBIT Interest Expenses Kotmale Holdings PLC 2012 2011

Lanka Milk Foods PLC 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

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

12

Accounting for Decision Makers Gearing Ratio

Individual Assignment

Gearing Ratio: Long Term Liabilities Capital Employed

Lanka Milk Foods PLC 2012 2011

Kotmale Holdings PLC 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

Dividend Payout Ratio: Dividend per Share *100% Earnings per Share (EPS) Lanka Milk Foods PLC 2012 2011 Kotmale Holdings PLC 2012 2011

1 *100% 4.68 = 21%

0 *100% 1.25 = 0%

0 *100% 3 = 0%

0 *100% 2.40 = 0%

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

13

Accounting for Decision Makers

Individual Assignment

13.0. Summary of Financial Ratios for Lanka Milk Foods PLC. & Kotmale Holdings PLC.
Ratio Summery Lanka Milk Food (CWE ) PLC 2012 Net Profit Ratio Return on Capital Employed Current Ratio Acid Test Ratio Interest Cover Gearing Ratio Dividend Ratio Inventory Holding Ratio Debt Collection Period Creditors payment period 4% 11% 1.46 0.56 7.50 0.67 21% 94 Days 30 Days 70 Days 2011 1% 3% 1.28 0.48 2.12 0.78 0% 88 Days 29 Days 71 Days Kotmale Holdings PLC 2012 4% 15% 2.50 1.79 34.79 0.34 0% 24 Days 36 Days 34 Days 2011 5% 13% 2.42 1.96 8.50 0.35 0% 18 Days 50 Days 45 Days

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

14

Accounting for Decision Makers

Individual Assignment

14.0. References
Kotmale Holdings PLC, 2013. Annual report 2011-2012. [online] Available at: <http://www.kotmale.lk/images/Kotmale%202011.pdf> [Accessed 06 January 2013]. Lanka Milk foods PLC, 2013. Annual report 2011-2012. [online] Available at: < http://www.cse.lk/cmt/upload_report_file/486_1346058635374.pdf> [Accessed 06 January 2013]. Kotmale Holdings PLC, 2013. About Kotmale Holdings PLC. [online] Available at: <http://www.kotmale.lk/htmls/about%20us.htm > [Accessed 07 January 2013]. Lanka Milk foods PLC, 2013. About Lanka Milk foods PLC. [online] Available at: < http://www.lmfgroup.lk> [Accessed 08 January 2013].

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

15

Accounting for Decision Makers

Individual Assignment

15.0. Appendixes

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

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

16

Accounting for Decision Makers

Individual Assignment

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

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

17

Accounting for Decision Makers

Individual Assignment

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

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

18

Accounting for Decision Makers

Individual Assignment

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

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

19