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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)
Lanka Milk Foods PLC Kotmale Holdings PLC
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
Lanka Milk Foods PLC Kotmale Holdings PLC
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
Lanka Milk Foods PLC Kotmale Holdings PLC
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
Lanka Milk Foods PLC Kotmale Holdings PLC
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
Lanka Milk Foods PLC Kotmale Holdings PLC
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
Lanka Milk Foods PLC Kotmale Holdings PLC
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
Lanka Milk Foods PLC Kotmale Holdings PLC
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
Lanka Milk Foods PLC Kotmale Holdings PLC
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
Lanka Milk Foods PLC Kotmale Holdings PLC
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