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Student name: T.A.D. OSANDA DILUKA RANASINGHE

Course name: MASTER OF BUSINESS ADMINISTRATION

Subject name: STRATEGIC FINANCE ISSUES

Subject facilitator: MR. MEWAN DISSANAYAKE

Teaching Centre: OXFORD COLLEGE OF BUSINESS, SRI LANKA

No. of pages: 23

Word count: 2421

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Analysis of Financial Statement of Lanka Milk Foods
(CWE) PLC for the financial year of 2014

Teaching centre: Oxford College of Business

Strategic Financial Issues

Page 4
Executive summery
Today in any industry competition is highly intensive and all are struggling and finding ways of
cut down the largely cost driven factors where its possible while offering augmented product or
services to serve its customer better than yesterday. In any organization regardless of the what
turbulent business environment its engaged in offering product or service, public sector or
private sector, profit for or not for profit organization, financial statement represent the initial
and ultimate achievements of business transactions. To gain better knowledge of what financial
statement numbers dictate of the financial performance there are several tools and techniques are
closely looked at for understanding of the financial position of the company.

Lanka Milk Foods (CWE) PLC is one of the leading milk food companies in Sri Lanka.
According to the LMD magazine company is ranked in second place of the milk food industry
in2012. When looking at their manufacturing and widespread of supply chain network partners
are the main core operations. Among their range of well preferred milk products Lakspray milk
power, Ambewela fresh milk, Daily milk, Mass Chocolates, Happy Cow cheese are won the
heart of the Sri Lankan and as well as some of the foreign countries.

Throughout this paper, Lanka Milk Foods PLCs 2014 and 2013 financial performances data
gathered from the their published annual reports on Colombo stock exchange website and further
those financial data are deeply analyzed by using ratio analysis in term of profitability,
efficiency, solvency and market ratios by giving more meaningful insight to interested parties to
how well it is performing over the years and as compared to the other firms of the similar nature.

Page 5
Table of Contents
Executive summery ....................................................................................................................................... 5
1.0 Introduction ............................................................................................................................................. 7
1.1 Favorable Market condition in year 2013 to Lanka Milk Food PLC .................................................. 7
2.0 Profitability analysis ............................................................................................................................... 8
2.1 Profitability value analysis table ......................................................................................................... 8
2.1 Gross profit margin (GPM) and Net profit margin (NPM) ............................................................. 8
2.2 return on the other shareholders equity (ROE) .............................................................................. 9
2.3 Asset turnover number of times ...................................................................................................... 9
2.4 Return on Assets (ROA) ................................................................................................................. 9
2.5 Earnings per share ......................................................................................................................... 10
3.0 Efficiency ratios .................................................................................................................................... 10
3.1 Debt turnover ................................................................................................................................ 10
3.2 Average day sales uncollected ...................................................................................................... 10
3.3 inventory turnover and inventory turnover in days ....................................................................... 11
3.4 working capital.............................................................................................................................. 11
4.0 Short term solvency ratio ...................................................................................................................... 11
4.1 Current Ratio ................................................................................................................................. 11
4.2 Quick ratios (Acid test) ................................................................................................................. 12
4.3 Cash flow from operations to current liabilities ............................................................................ 12
5.0 Long term solvency ratios ..................................................................................................................... 12
5.1 Gearing ratio ................................................................................................................................. 12
5.2 Debt to total assets ratio ................................................................................................................ 12
5.3 Leverage ratio ............................................................................................................................... 12
5.4 Cash flow from operations to total liabilities ................................................................................ 13
6.0 Market ratios ......................................................................................................................................... 13
6.1 Price-earnings ratio ....................................................................................................................... 13
6.2 Earnings yield ............................................................................................................................... 13
7.0 Conclusion ............................................................................................................................................ 14
8.0 References ............................................................................................................................................. 15
Appendix 01 ................................................................................................................................................ 17

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1.0 Introduction

Lanka Milk Foods 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. (Lmfgroup.lk 2015)

1.1 Favorable Market condition in year 2013 to Lanka Milk Food PLC
As all we know Lanka Milk Food PLC is operate in food and beverage industry and whereas
widespread of supply chain network (distribution chain) evident how fast the product is sold and
consume among the industry. The product is directly consumed and major proportion represents
the children. Therefore, there are several rules and regulations are imposed by the Sri Lankan
government in order to give the best quality assurance products to its citizens. Since Lanka Milk
Foods PLCs almost all the products offering are coming through milk, company has step into
new investments such as acquiring the two local farms by creating new and ] existing
employment opportunities to the locals. Those two farms are Sri Lankas biggest Farms namely
Ambewela Farm and Pattipola Farm in order to safe guard the highest quality standards for all
milk range product. (Lmfgroup.lk 2015)

Further company has been succeed to cut down the cost by bringing the UHT tetra packaging
technology to Sri Lankan market in mid 1990s. Recent past company embarked on the other
new products such as Ambewela UHT milk which offer highest quality liquid milk and My
Juicee range of fruit drinks to potential consumers. (Lmfgroup.lk 2015)

There are major giant of dairy industry such as Fonterra whose flagship brand Anchor was
identified as containing DCD aka Dicyandiamide a hazard agro chemical and Sri Lankan
government to actions to prohibited import and sell milk power produced by New Zealand. The
government paid serious attention on all the milk powders to test DCD and four brands were
alleged such as Anchor, Anchor 1+, Maliban non fat and Diamond. (The Nation 2013)

This made Opportunity to enjoy the market alone for a while in 2013.

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2.0 Profitability analysis
Profitability is the main and ultimate goal of any business venture (Except-not for profit
organizations) without profitability we cannot think about the business in long run. Hence
benchmarking current and past profitability and forecasting future profitability is essential.
(Hofstrand 2015)

The profitability related financial values are taken out from Lanka Milk Foods PLCs annual
report to benchmark the performance as follows:

2.1 Profitability value analysis table

Factor 2014(Rs 000) 2013(Rs 000) Percentage
increase/decrease
Revenue 2,446,113 3,711,003 (34.08)
Cost of sales (2,274,881) (3,196,113) (28.82)
Gross profit 171,232 514,890 (66.74)
Taxation 29,957 (32,469) (192.26)
Profit after taxation 44,019 231,238 (80.96)

Source: Lanka Milk Foods PLC Annual report 2014.

Above 2.1 Table illustrate the comparison and the percentage changes with accordance to the
financial year ended 31st march of 2014 and 2013 respectively. It is quite noticeable that the
revenue generated respected years are decreased in 2014 than the 2013 by -34.08% and at the
same time regard of the loss of sales revenue generated by the company chive positive tax relief.
In opposite to that company has made huge shortage in profit change respect to last year which
recorded as -80.96% in 2104.hence profitability ratios are further examined to identify the
financial profitability situation to continue with new financial year ahead.

2.1 Gross profit margin (GPM) and Net profit margin (NPM)
A gross profit Margin is one of the primary indicator of determining that the company in good or
bad financial health. It is the financial ratio of GP in relevant period of revenue and used as a
benchmark to calculate profitability. High gross profit margin always shows that the company is
efficient and effective in production and distribution processes. (Kokemuller 2015)

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In Lanka Milk Foods PLCs GPM decreased change of 66.74% in the 2014 financial year and
its a negative sign due to low sales revenues due to competitors are completely recovered from
the DCD impact on their dairy products.

On the other hand, NPM refer to the actual profits that taxes are deducted from gross profit
margins. A lower net profit margin means that a company is less efficient at converting sales into
actual profit. Lanka Milk Foods PLC has been able to increased the NPM in 2013(6.23%) but it
has been rapidly hinder in 2014(1.80%). (refer appendix 01) it was evident that the high sales are
achieved in early 2013 due to during that time still though consumers are yet suspicion that
competitor brand milk powder containing DCD aka Dicyandiamide. (The Nation 2013)

2.2 return on the other shareholders equity (ROE)

This expressed the amount of net income shareholders gained as a return of their equity. Lanka
Milk Foods had unfavorable market conditions in 2014 with respect to 2013. The detrimental
change of percentage was 83.60% with regard to the net profit for the respective years ROE for
shareholders on equity from 0.45% in 2014 and 2.40% in 2013(refer to appendix 01)

2.3 Asset turnover number of times

The asset turnover ratio refers to efficiency ratio that measures a company's capacity to generate
revenue from its assets by comparing net sales with average total assets. In simple this expresses
how efficiently company could be utilize its assets to optimal level to generate sales. (My
Accounting Course, 2015)

When looking at the Lanka Milk Foods figure of 2013 and 2014 respectively asset turnover
accounted as 0.40 times and 0.24 times. This indicates quite noticeable deduction with increased
amount of assets. The loss sales on 2014 had badly hit the asset turnover by reduction of 0.20
times.

2.4 Return on assets (ROA)

This measures how effectively company assets are been utilized to generate profits for their
shareholders. This also reflects on to count two ratios such as Profit margin and assets turnover.
The higher the ratio, the better the company is at using their assets to generate income. (Return
on Total Assets, 2014) In Lanka Milks Foods, ROA for the year 2013 was 2.40% and the 2014
was 0.42%. this shown the huge decrease in the values (refer Appendix 01) main reason behind

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the low ROA represent 2014 due to low profits generation during the year and administrative
expenses shown the dramatic higher amount with respect to previous year.

2.5 Earnings per share

This indicate the companys net income that theoretically available to pay the shareholders stock
of number of shares within the company. A company with high earning per share is capable of
delivering the significant return on investment and or reinvesting the funds back in same
company will open gates more growth in business. Simply this indicates putting money on
company is worthwhile investment or not. (Accountingtools.com 2015) In Lanka milk Foods,
Earning per share for 2013 is accounted as rs.5.78 to rs1.10 for 2014. (Lanka Milk Foods PLC
annual report, 2014)

3.0 Efficiency ratios

All below ratios represent the quality of business activities which carrying out in collecting
money from its potential channel members and how efficiently it monitor and control the assets
such as inventory. These efficiently ratios are essential for any business because profitability
depends on the how effectively the business activities are carried out. If company could collect
the money on time and the monitor and control the inventories and could utilize the assets well
enough to generate revenue then the company will show higher earning and deliver better profits
for its shareholders. (Financialratioss.com, 2015)

3.1 Debt turnover

This ratio refers to the effectiveness of collecting company debtors money. (Bazley & Hancock
2013). Debtors turnover of Lanka Milks Foods shows 10.7 and 9.78 in 2014 and 2013
respectively. This means though reduction in 2014 had allowed the company management to
increase the credit limit of the clients (supply chain partners such as distributors) to keep the
production on going without pushing its partners. That is the prime reason for the small increase
in debt turnover.

3.2 Average day sales uncollected

This reflects on number of days taken to collect the debtors money (Bazley & Hancock 2013).
Referring to the calculations in appendix the ratios indicate that it usually took around 46 days to
collect the account trade and other receivables in 2014 and in 2013 it was accounted for 23 days.

Page 10
This is somewhat unfavorable for the business activities but management might taken this due to
the low sales were recorded during the year.

3.3 Inventory turnover and inventory turnover in days

Inventory turnover demonstrate the effectiveness in holding the investment on inventory. A
figure in appendix shows that value in 2014 is 4.65 is little bit higher compared to value in 2013
of 4.52. Main reason for the increased value of 2014 is the reduction of cost of sales account for
that particular year.
On the other hand, when days are divided from the inventory turnover measure the companys
capabilities of transforming the inventories in to revenue. (Bazley & Hancock 2013).
Lanka Milk Foods inventory turnover days accounted for 78.9 days in 2014 and in 2013it was
80.75 days. There are almost two days gap between respective years to convert the inventory into
sales and it mainly because of low production due to low sales hence it again reflect on holding
low inventory.

3.4 Working capital

The working capital cycle of Lanka Milk Foods is 104 days (Appendix 01).
It shows that the company could be more manageable and surplus of resources not earning a
return to the company.

4.0 Short term solvency ratio

This short term solvency ratios attempt to measure the ability of company to achieve its short-
term financial obligations. Under these following ratios encourages to determine the companys
ability to avoid financial distress in near future. (Lane 2015)

4.1 Current Ratio

This refers to short-term debt paying ability of the firm (Bazley & Hancock, 2013). Current
assets expected to convert in to the cash in forthcoming period and the current liabilities are
expected to be paid during next year. Current ratio of the Lanka Milk foods has shown the
positive figure in 2014 which is 3.16 time with compared to base year of 2013 which was 2.23
times. The main reason was company had paid off the some current liabilities which are account
for year ended 31st march 2104.

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4.2 Quick ratios (Acid test)
This ratio measure the ability of the company to meet up its obligations relying only its more
liquid Current Asset (CA) such as Trade and other Accounts Receivable. This ratio is calculated
by dividing Current Assets less Inventories by Current Liabilities (CL).
Lanka Milk Foods has increased from 1.62 to 2.52 times in 2014 (Appendix 01). The smaller
portion of the current assets represents the inventory and the huge reduction on current liabilities
during the year is the main reason behind this positive impact.

4.3 Cash flow from operations to current liabilities

This illustrate about companys ability to manage short term liabilities by utilizing the operating
cash flows. In 2014 Lanka Milk Foods has shown the 0.025 with compared to previous year
value of 0.25 which is an extreme negative. Increasing current liabilities and decreasing
operating cash flow is the primary reason of this negative effect.

5.0 Long term solvency ratios

5.1 Gearing ratio
This ratio calculation shows the relationship between the debt and equity financing of the
company. High gearing ratio tends to determine the high debts consist of the company and the
opposite shows the low debts. In Lanka Milk Foods decreased quite noticeable portion of debts
by accounting from 0.11 to 0.05 in year 2014. In high debts situation its mostly leads to
additional interest cost for the company. In this case company marked in low gearing ratio due to
low liabilities encountered with respect to comparatively high shareholders equity.

5.2 Debt to total assets ratio

Under this ratio indicate the proportion of total assets financed by debt (Bazley & Hancock
2013). Lanka Milk Foods has decreased from 0.11 to 0.05in 2014(refer Appendix 01). Huge
portion of the current liabilities which carried forward from the year 2103 was paid off in 2014 is
the main reason for the reduction of this ratio.

5.3 Leverage ratio

This ratio shows the use of leverage of the company (Bazley & Hancock 2013). Lanka Milk
Foods leverage ratio shown slight decrease from 1.13 to 1.06. This dramatic deduction is due to
dramatic growth in the assets at the same time growth in shareholders equity. The meaning of

Page 12
slightly low leverage ratio is that the Lanka Milk Foods reduced using their debts and other
liabilities to finance its assets with compared to previous year.

5.4 Cash flow from operations to total liabilities

This exemplifies the firms ability to settling their debts by using cash flows (Bazely & Hancock
2013). Lanka Milk Foods has shown rapidly decrease from 23.65 to 2.39 in 2014(refer appendix
01). This is extremely unhealthier scenario for the firm and management must take proper
actions to increase the ratio within next period of year 2015.

6.0 Market ratios

6.1 Price-earnings ratio
Lanka Milk foods PLCs earning per share ratio has rapid increased from 18.74 to 97.36 in year
ended 31st march of 2014(refer appendix 01) this is mainly due to market price per ordinary
shares remain slightly changed but the earning per share in 2014 has been comparatively low
with respect to previous year.

6.2 Earnings yield

The earnings yield ratio simply illustrate, If stock were a bond, how much will it earn as
proportion of shareholders investment based on after tax profit for relevant period? (Kennon,
2015)
The company earning yield ratio has decreased 5.34% to 1.02% in 2014 (see appendix). Under
these two scenarios comparison show that the company share price in market was good in 2013
when compared to earnings per share with respect to the last year.

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7.0 Conclusion

In collecting data from the annual reports and analyzing the financial performance of the Lanka
Milk Foods (CWE) PLC by using subsequent series of ratios to indicate that the company
performance in well one area not performing well in another. Management discussion is based
on the balance those imbalance ratios company survival in long run. Further during this paper
analysis only the relevant ratios are taken as sub topics to give more meaning to the numbers and
facilitate better understanding and recommendations throughout the paper. Apart from the ratio
Calculations Company should come up with some serious strategies to increase the revenue for
the company and strengthen the cash flow operations.

Page 14
8.0 References
Accountingtools.com, (2015). Earnings per Share Ratio - AccountingTools. [online]
Available at: http://www.accountingtools.com/earnings-per-share-ratio [Accessed
20 Jan. 2015].
Bazley, M & Hancock, P 2013, Contemporary Accounting, 8th edn, Victoria Cengage
Learning Australia, South Melbourne

Financialratioss.com, (2015). Efficiency ratios | Financial ratios. [online] Available at:

http://financialratioss.com/efficiency-ratios [Accessed 21 Jan. 2015].

Hofstrand, D. (2015). Understanding Profitability. [online] Extension.iastate.edu.

Available at: http://www.extension.iastate.edu/agdm/wholefarm/html/c3-24.html
[Accessed 20 Jan. 2015].

Kennon, J. (2015). Earnings Yield as a Value Investing Strategy. [online]

Joshuakennon.com. Available at: http://www.joshuakennon.com/earnings-yield-
as-a-value-investing-strategy/ [Accessed 21 Jan. 2015].

Kokemuller, N. (2015). What Happens When the Gross Profit Margin Is High?. [online]
Small Business - Chron.com. Available at: http://smallbusiness. chron.com
/happens-gross-profit-margin-high-59594.html [Accessed 20 Jan. 2015].

Lane, M. (2015). Short-term Solvency Ratios. [online] Zenwealth.com. Available at:

http://www.zenwealth.com/businessfinanceonline/RA/LiquidityRatios.html
[Accessed 21 Jan. 2015].

Lanka Milk Foods PLC Annual Report 2012/13. (2013). [online] Available at:
https://www.cse.lk/cmt/upload_report_file/486_1377864164856.pdf [Accessed 20
Jan. 2015].

Lanka Milk Foods PLC Annual Report 2013/14. (2014). [online] Available at:
https://www.cse.lk/cmt/upload_report_file/486_1377864164856.pdf [Accessed 20
Jan. 2015].

Lmfgroup.lk, (2015). Home. [online] Available at: http://www.lmfgroup.lk/ [Accessed 20

Jan. 2015].

My Accounting Course, (2015). Asset Turnover Ratio | Analysis | Formula | Example.

[online] Available at: http://www.myaccountingcourse.com/financial-ratios/asset-
turnover-ratio [Accessed 20 Jan. 2015].

Return on Total Assets. (2014). Boundless, [online] version 09. Available at:
https://www.boundless.com/finance/textbooks/boundless-finance-

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 textbook/analyzing-financial-statements-3/profitability-ratios-39/return-on-total-
assets-207-601/ [Accessed 20 Jan. 2015].

The Nation, (2013). Hazardous milk powder sneaks into SL market. [online] Available
at: http://www.nation.lk/edition/latest-top-stories/item/16839-hazardous-milk-
powder-sneaks-into-sl-market.html [Accessed 20 Jan. 2015].

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Appendix 01
Lanka Milk Foods PLC (CWE) ratios calculations

2.0 Profitability ratios

2.1 Net profit margin = Net profit (profit for the year) x 100%
Sales (Revenue)

2013
2014

44,019,000 x 100% 231,238,000 x 100%

2,446,113,000 3,711,003,000

=1.80% =6.23%

2.2 Return of ordinary share holders equity= Net profit-preference dividend x 100%
Average ordinary shares holders equity

2014 2013

44,019,000x 100% 231,238,000x 100%

(9,882,818,000+8,516,730,000)/2 (8,516,730,000+7,509,196,0000)/2

=0.45% =2.72%

2.3 Asset turn over number of times = Revenue

Average total of assets

2014 2013

2,446,113,000 3,711,003,000
(10,471,571,000 +9,631,641,000)/2 (8,537,898,000+9,631,641,000)/2

=0.24 times =0.40 times

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2.4 Return on Assets (ROA) = (Profit for the year + interest#) x 100%
Average total Assets

2014 2013

( 44,019,000+2,481,000) x 100% (231,238,000+ 2,397,000) x 100%

(10,471,571,000 +9,631,641,000)/2 ( 8,537,898,000+9,631,641,000)/2

=0.42% =2.40%

# Interest on short term borrowings and O/D are taken from financial notes 68

3.0 Efficiency Ratios

3.1 Debt turnover = Net sales (Revenue)

Average debtors (Trade and other receivables)

2014 2013

2,446,113,000 3,711,003,000
(209,065+33,787+364009+15300)*1000/2 (364,009+15,300+200722+10362)*1000/2

=7.86 =12.57

3.2 Average days sales uncollected = Days in the year

Debtors turn over

2014 2013

365 365
7.86 15.57

=46.44 =23.44

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3.3 Inventory turnover = Cost of sales
Average inventory

2014 2013

2,274,881,000 3,196,113,000
(351,631,000+627,150,000)/2 (627,150,000+787,282,000)/2

=4.65 =4.52

3.4 Inventory turnover in days = Days in the year

Inventory turnover

2014 2013

365 365
4.65 4.52
=78.49 =80.75

3.5 Working capital

Debtors turnover period = 46 days

Add-Inventory turnover period = 78 days

Total number of days = 128 days

Less-Creditors turnover period = (24 days)

Working capital cycle = 104 days

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4.0 Short term solvency Ratios

4.1 Current Ratios = Current Assets

Current Liabilities

2014 2013

1,762,864,000 2,292,285,000
558,725,000 1,029,135,000

=3.16 times =2.23 times

4.2 Quick ratios (Acid Test) = Current Assets Inventory

Current liabilities

2014 2013

1,762,864,000- 351,631,000 2,292,285,000-627,150,000

558,725,000 1,029,135,000

=2.52 times =1.62 times

4.3 Cash flow from operations to current liabilities = Operating cash flows (resulting from
operating activities)
Current liabilities

2014 2013

14,062,000 263,707,000
558,725,000 1,029,135,000

=0.025 =0.256

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5.0 Long term solvency ratios

5.1 Debt to equity/ Gearing ratios = Total liabilities .

Total shareholders equity

2014 2013

588,753,000 x 1,114,911,000
10,471,571,000 9,631,641,000

=0.05 =0.11

5.2 Debt total Assets ratio = Total liabilities

Total Assets

2014 2013

588,753,000 1,114,911,000
10,471,571,000 9,631,641,000

=0.05 =0.11

5.3 Leverage Ratios = Total assets .

Total shareholder equity

2014 2013

10,471,571,000 9,631,641,000
(10,471,571,000- 588,753,000) (9,631,641,000- 1,114,911,000)
9,882,818000 8,516,730000
=1.06 =-1.13

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5.4 Cash flow from operations to total liabilities = Resulting from operating activities
Total liabilities

2014 2013

14,062,000 263,707,000
588,753,000 1,114,911,000

=2.39 =23.65

6.0 Market based ratios

6.1 Price/Earnings ratios = Market price per ordinary shares*

Earning per share

2014 2013

107.10 108.30
1.10 5.78

=97.36 =18.74

6.2 Earning yield = Earning per share x 100%

Market price per ordinary share*

2014 2013

1.10 x 100% 5.78x 100%

107.10 108.30

=1.02% =5.34%

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6.3 Dividend Yield = Dividend per ordinary shares x 100%
Market Price per ordinary share*

2014 2013

NA x 100% 1.50 x 100%

107.10 108.30

=nil =1.38%

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