Financial Analysis (horizontal and vertical) of Ceylon LionBeer Brewery SriLanka (Guiness and Carlsberg)

Table of Contents 1. Introduction 1 2. Share Market Value 2 3. Trend Analysis 2 3. Horizontal Analysis – Based Year 2010 6 5. Ratio Analysis 11 5.1 Liquidity Analysis 11 5.1.1 Current Ratio 12 5.1.2 Acid Test Ratio or Quick Ratio 12 5.1.3 Debtors Turnover Ratio or Receivable Turnover Ratio 12 5.1.4 Debtors Collection Period 13 5.1.5 Assets Turnover Ratio 13 5.1.6 Stock Turnover Ratio 13 5.1.7 Stock residence Period or Days in Inventory 14 5.2 Profitability Ratios 14 5.2.1 Gross profit margin 14 5.2.2 Net Profit Margin 15 5.2.3 Return on Assets (ROA) 15 5.2.4 Return on Equity (ROE) 16 5.3 Solvency ratios 16 5.3.1 Debt to Total Assets Ratio 16 5.3.2 Debt to Equity Ratio 17 5.3.3 Times Interest Earned 17 5.4 Market Ratios 17 5.4.1 Earnings Per Share 18 5.4.2 Dividend Per Share 18 5.4.3 Price-Earning (P/E) Ratio 18 5.4.4 Dividend Yield (DY) 19 5.4.5 Earnings Yield (EY) 19 6. Z – Score Analysis 19 7. Analysis of Cash Flow 20 8. Lion´s Debt Fitch Rating 20 9. Conclusion 21 10. References 21 Lion Brewery (Ceylon) PLC 1. Introduction The main purpose of preparing the report is to analyze the financial performances of the Lion Brewery a manufacturing company in Sri Lanka, which is registered under Stock Exchange THE LION BREWERY CEYLON PLC (LION.N0000) and the Symbol LION .N0000. The selected manufacturing company is Lion Brewery (Ceylon) PLC born from the traditional brewing recipes and techniques since 1860. Lion Beer has today climbed become Sri Lanka's market leader. By incorporating innovation, world class best practices, large experience, state of the art technology the Lion Beer Brewery reflects a true success story of a Sri Lankan brand built from a global platform of excellence. As industry leaders, it´s ensured that Lion Brewery products are designed, produced and marketed conscientiously and with accountability. By being committed to creating value for their stakeholders and in applying modern and high environmental standards into their manufacturing processes. Lion Beer´s core values are: PRIDE, QUALITY, AFFORDABILITY. Lion Brewery proudly uphold values, ethics and principles in “beyond simply compliance” in fact they are fully aware that their industry is an adult industry and thus, in all aspects of the business, they are completely aware that their actions are set on platform of immense responsibility. They maintain a state of the art technology and best practices portfolio with responsibility and also with pride with products aligned to the desires of their loyal customers and their company´s contemporary needs. Brief Background on the Company´s beginning. Their story goes back to the traditional recipes of 1860 as mentioned, when the British Planter Sir Samuel Baker established a home based brewery in the cold Nuwara Eliya, SriLanka. In 1881 started their commercial brewing, managed by Messrs Bremer and Pa Bavary. In 1884 ownership changed to Murrey Brewery Company Rawalpindi, later it was sold to Ceylon Brewery, led by the practical J B Hampson and later G W Lindsay White, who in 1911 founded The Ceylon Brewery Limited. Company´s Growth Several decades later The Ceylon Brewery became a subsidiary of diversified Sri Lankan conglomerate Carson Cumberbatch. And in 1940s, the company developed more product within their portfolio, with the new: Lion Lager, Pale Ale, Sinha Pilsner and Stout. In 1960´s to mark the Jubilee Annual General Meeting, the award winning Jubilee Ale was launched into the market. Jubilee Ale's secret to success was its added strength. With it the company won a gold medal at the Monde Selection and gained second place at the Brewers and Allied Exhibition in London. In 1982 with the Commemoration of HRH Queen Elizabeth II's visit to Sri Lankan, the company launched their Royal Pilsner, replacing the Lion and Sinha Pilsner. In 1992 with the continuous innovation and improvement as the hallmark of the company, the company was licensed to brew and market British Carlsberg in Sri Lanka, and the in 1995 followed the Guinness, acquiring 8% stake in the former. In Global terms for Guiness and Carlsberg it was favorable the taxation and duties set in SriLanka therefor in the mid 1990s a large expansion began with the construction of Lion Brewery (Ceylon) PLC. Ceylon Brewery has a 15% shareholding in Lion Brewery. The Ceylon Brewery and holding company Carson Cumberbatch are quoted on the Colombo Stock Exchange. 2.- Share Market Value Price of Stock THE LION BREWERY CEYLON PLC (LION.N0000) Symbol. LION .N0000. ISIN LK0291N00001. Last Traded Price (Rs.) 629.90 Start of Financial Analysis The company´s financial analysis was carried out for a six year study period from year 2010 to year 2015, under the following financial analysis categories. Fiscal Year for Lion Brewery ends on 31st of March. 1. Total Assets Trend Analysis Figure 1 - Trend Analysis of Assets 2.010 2.011 2.012 2.013 2.014 2.015 Property, plant & equipment 2.391.921 3.537.392 4.879.912 7.991.094 11.658.310 13.792.402 Intangible assets 24.448 20.590 9.844 8.284 257.133 4.205.582 Total Non-Current Assets 3.863.784 5.745.068 4.889.756 7.999.378 11.915.443 19.027.607 Inventories 860.710 997.298 1.316.880 2.406.715 2.695.021 2.798.064 Total Current Assets 2.259.263 3.473.180 5.236.931 9.131.815 12.149.341 7.311.829 Total Assets 6.123.047 9.218.248 10.126.687 17.131.193 24.064.784 26.339.436 Chart 1 - Assets data The Company is in Clear expansion or Growth, their total Assets (both Current and Fixed) were rising practically every year. We can clearly appreciate a steep growth of total assets after year 2012. For total assets we can see a overall growing trend with a marginally inflection point growing in 2012, which started decreasing marginally in 2014. So although Assets for Lion Beer are still on the rise perhaps since 2014 they have started to slow down asset incorporation. Analysis of Total Assets as a % of 2011. Figure 2 - Assets Trend of % of 2010 2010 2011 2012 2013 2014 2015 Property, plant & equipment 100% 148% 204% 334% 487% 577% Intangible assets 100% 84% 40% 34% 1052% 17202% Total Non-Current Assets 100% 149% 127% 207% 308% 492% Inventories 100% 116% 153% 280% 313% 325% Total Current Assets 100% 154% 232% 404% 538% 324% Total Assets 100% 151% 165% 280% 393% 430% Chart 21 - Assets Data as % of 2010 It´s worth noting the huge increase in Intangible Assets Fixed Assets from year 2014, perhaps as the incorporation of the Brewery recognition and the Backing up of state of the art technologies of breweries such as Guinness or Carlsberg. The trend of the company’s asset changes is shown in figure 1. In considering the figure total assets increased to some extent from 2010 to 2014 and then decrease in 2015 to Trend Analysis of Equity Figure 3 - Trend Analysis of Equity 2010 2011 2012 2013 2014 2015 Stated capital 2.537.801 2.537.801 2.537.801 533.384 2.537.801 2.537.801 Capital reserves 232.628 860.518 719.411 492.331 719.411 719.411 Revenue reserves 1.207.821 1.937.493 1.952.229 2.044.186 3.675.154 4.560.771 Equity attributable to equity holders - - - 3.069.901 - - Total Equity 3.978.250 5.335.812 5.209.441 5.892.033 6.932.366 7.817.983 Chart 3 - Trend Analysis of Equity Data Figure 4 - Trend Analysis of Equity as %2010 2010 2011 2012 2013 2014 2015 Stated capital 100,00% 100,00% 100,00% 21,02% 100,00% 100,00% Capital reserves 100,00% 369,91% 309,25% 211,64% 309,25% 309,25% Revenue reserves 100,00% 160,41% 161,63% 169,25% 304,28% 377,60% Total Equity 100,00% 134,12% 130,95% 148,11% 174,26% 196,52% Chart 4 - Trend Analysis of Equity as %2010 data The total equity or the equity attributable to equity holders increased slightly, from 2011 to 2014 then decrease in 2015. However, stated capital has increased to 2012 then continues constantly. The other components of equity have gradually reduced throughout the study period. The trend of the retained earnings shows a positive increase from 2011 to 2014 then drastically reduced in 2015. Trend Analysis of Liabilities Figure 5 - Trend Analysis of Liabilities 2.010 2.011 2.012 2.013 2.014 2.015 Total Non- Current Liabilities 1.083.292 2.442.312 1.745.168 3.592.801 6.403.900 9.583.725 Total Current Liabilities 1.061.505 1.440.124 3.172.078 7.628.159 10.728.518 8.937.728 Total Liabilities 2.144.797 3.882.436 4.917.246 11.220.960 17.132.418 18.521.453 Chart 5 - Trend Analysis of Liabilities Data Figure 6 - Trend Analysis of Liabilities as % 2010 2.010 2.011 2.012 2.013 2.014 2.015 Total Non- Current Liabilities 100,00% 225,45% 161,10% 331,66% 591,15% 884,69% Total Current Liabilities 100,00% 135,67% 298,83% 718,62% 1010,69% 841,99% Total Liabilities 100,00% 181,02% 229,26% 523,17% 798,79% 863,55% Chart 6 - Trend Analysis of Liabilities as % 2011 data The total liabilities of the company shown from 2011 to 2015 have an increasing overall trend. Both the total current liabilities and the non-current liabilities have a similar gradual increase until year 2015. However, total current liabilities have decreased some since year 2014. Overall the increase of the Company´s liabilities might signify a stronger dependence on Leveraging through Credits their expansion and growth of assets. Figure 7 - Trend Analysis of Income Statement 2010 2011 2012 2013 2014 2015 Revenue 7.919.292 11.250.330 17.649.146 22.191.670 25.804.319 32.350.375 Cost of sales -5.324.940 -7.571.658 -12.596.394 -17.213.066 -19.817.748 -24.217.959 Gross profit 2.594.352 3.678.672 5.052.752 4.978.604 5.986.571 8.132.416 Total expenses -1.724.176 -1.937.045 -2.758.790 -3.478.515 -3.649.007 -4.755.026 EBIT Profit before Expenses 872.800 1.756.342 2.318.097 1.526.592 2.352.997 3.337.625 Profit before taxation 632.695 1.600.002 2.108.940 1.581.783 2.200.794 2.279.389 Income tax 7.808 -586.580 -888.680 -535.878 -857.540 -1.065.776 Profit for the year 640.503 1.013.422 1.220.260 1.045.905 1.343.254 1.213.613 Chart 7 - Trend Analysis of Income Statement Data Figure 8 - Trend Analysis of Income Statement as % of 2011 2010 2011 2012 2013 2014 2015 Revenue 100,00% 142,06% 222,86% 280,22% 325,84% 408,50% Cost of sales 100,00% 142,19% 236,55% 323,25% 372,17% 454,80% Gross profit 100,00% 141,80% 194,76% 191,90% 230,75% 313,47% Total expenses 100,00% 112,35% 160,01% 201,75% 211,64% 275,79% EBIT Profit before Expenses 100,00% 201,23% 265,59% 174,91% 269,59% 382,40% Profit before taxation 100,00% 252,89% 333,33% 250,01% 347,84% 360,27% Income tax 100,00% -7512,55% -11381,66% -6863,19% -10982,84% -13649,80% Profit for the year 100,00% 158,22% 190,52% 163,29% 209,72% 189,48% Chart 8 - Trend Analysis of Income Statement Data as % of 2011 The revenue shows a positive trend throughout the study period, from year 2010 situated at 640 Million RS, grew to double itself during those 6 years reaching a 1.200 million RS approximately. It´s worth noting that the biggest increase in Profit was from year 2010 to 2011 where the company almost doubled its profit within a year. And also it´s worth noting that in total profit of 2014 was higher than that of the last year. The cost of sales of the company showed to a steep increase almost fifth-folding itself from the initial 5MM RS to almost 25MM RS on the last year. Gross profit of the company has gradually increased from 2.5MM RS roughly to 8MM RS, which is a three-fold in Company´s gross revenue increase. Expenses have too gone up, from almost 2MM RS to almost 5MM RS, due to growth and larger business performance of the company. Therefore, the income tax expense has grown as much as 3 times or more its initial Profit before taxes and other expenses. And though income tax has raised dramatically high, with 13th-fold, the overall Company´s profit hast had a gradual but steady growth, just as with the Revenues and Gross Profit, where the highest year thus far was 2014 since it 2015 there was a subtle decrease of these three accounts. In general terms, the company might be starting a slow down or may have hit their cycle top in 2014, unless they continue their commercial alliances and modernization it is unlike to accelerate once again their growth as much as they did during 2010 to 2014. Nonetheless they are still on a growth path, just that at a marginally decreasing rate probably since 2014. 2. Horizontal Analysis – Based Year 2010 The horizontal analysis as per the Annexure I, shows that the significant increase of profit for the year from 2010 to 2015 of 189.80% compared to base year of 2010. However, it records a massive increase in 2014 when it reached its highest total profit until now. As stated, the revenue of the company has increased all through the study period. And also has the cost of sales, in fact it has been quite an steady and lineal increase. Thus Cost of sales of the company has had an enormous increase of 5MM RS during the last year 2014 to 2015, perhaps explaining the decrease, or marginal decrease, or un-acceleration of overall total profit for that last year. The cost of sales has risen in 6 years to an incredible 450% when compared to the initial year. The horizontal analysis of the financial position of the company also shows mostly a positive performance, an ever increasing, steady and gradual growth or raise in the Company´s figures. Nonetheless Revenues and Gross Profits were far more attractive in the 408.5% growth or their 313,50% growth, when compared to the Total Profit for the Years after all Expenses Taxes and Other Incomes, which only has grown by 90% these 6 years 2010 to 2011. Still it has been a positive constant expansion of their business and incomes. Regarding a Horizontal Analysis of the Assets it can be seen that Property, plant and equipment and intangible assets have all increase again steeply from 2.3MM RS in 2010 to a high 13.8MM RS in 2015. Intangible assets have been to a large extent taken into consideration in the last year 2014, recognizing over 4MM RS of the brand´s goodwill. When consider current assets, inventories have significantly increased from 2010 to 2015. Though in year 2010 to 2011 inventories shrunk a little, the rest of the time they have recorded almost a 500% increase with the Company´s growth and over performance. The nature of the equity has not changed during these years, only in year 2013 the stated capital was a fifth of the usual amount. Capital Reserves have Gone Up Constantly. And so Revenues reserves from 1.2MM RS in 2010 to 4.5MM RS in 2015. The interest bearing loans and borrowings coming under current liabilities has increased throughout the study period. But the total current liabilities of the company have constantly increased from 2010 to 2015. 3. Vertical Analysis Vertical analysis of the main categories of a company’s asset by total asset shows by following figure 5. Figure 9 - vertical Analysis of Assets 2.010 2.011 2.012 2.013 2.014 2.015 Property, plant & equipment 39,06% 38,37% 48,19% 46,65% 48,45% 52,36% Intangible assets 0,40% 0,22% 0,10% 0,05% 1,07% 15,97% Total Non-Current Assets 63,10% 62,32% 48,29% 46,69% 49,51% 72,24% Inventories 14,06% 10,82% 13,00% 14,05% 11,20% 10,62% Total Current Assets 36,90% 37,68% 51,71% 53,31% 50,49% 27,76% Chart 9 - vertical Analysis of Assets data The vertical analysis shows the noncurrent assets represent the average of 63.10% of total assets. Meaning perhaps inventories of raw material for the making of the beer were larger those periods. Whereas the Current assets are 36,90% of total Assets, meaning that significant percentage of the property, plant and equipment (PPE) and investment in subsidiaries is included in noncurrent asset throughout the study period. Besides, The Property, Plant and Equipment PPE from total assets has also increased by a fith-fold from 2010 to 2015 and impressive 577% according to the horizontal analysis, and a has algo started taking a larger importance of the total assets, from 40% at the beginning in 2010 to over 52% in 2015. Intangible Assets or the Company´s brand goddwill was incorporated to the book in 2015 significantly, from a 1% of importance in total assets to a 15.97%. As per the vertical analysis company’s total current assets from the total assets, increased from 36.90% in 2010 to peak in 2015 with 50,49% of the Total assets, the year after it creaced to almost half with 27,76%. Figure 10 - Vertical Analysis of Liabilities 2.010 2.011 2.012 2.013 2.014 2.015 Total Non- Current Liabilities 50,51% 62,91% 35,49% 32,02% 37,38% 51,74% Total Current Liabilities 49,49% 37,09% 64,51% 67,98% 62,62% 48,26% Total Liabilities 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% Chart 10 - Vertical Analysis of Liabilities As per the vertical analysis, current liabilities shows averagely 50% of total liabilities for the period of study as per the figure 10. However, in 2011 other non current liabilities went significantly higher to 62.91% to the remain at half of that around 34% for years 2012, 2013 and 2015, ending in 2015 where it began just at half of total liabilities with a 51,74%. On the other hand the current Liabilities, just behaved in the opposite according to the vertical analysis, Their 6 year cycle started and ended at roughly 50% of half of total liabilities, then raised for most of the years, and returned to half. Beware, under total noncurrent liabilities, there´s a high portion of interest bearing loans and liabilities and defined benefit liability. Vertical analysis of the equity for Ceylon Lion Beer Brewery is shown in figure 11. Figure 11- Vertical Analysis of Equity 2010 2011 2012 2013 2014 2015 Stated capital 63,79% 47,56% 48,72% 9,05% 36,61% 32,46% Capital reserves 5,85% 16,13% 13,81% 8,36% 10,38% 9,20% Revenue reserves 30,36% 36,31% 37,47% 34,69% 53,01% 58,34% Chart 11- Vertical Analysis of Equity Data As per the above figure, the stated capital of the company from the total equity has increased each year of the study period. In 2015, the company has converted 285 warranty to ordinary shares at a conversion rate of Rs. 118/- and therefore it record 78.42% in the year from the total equity. However, the company shows a negative decrease of retained earnings from 2011 to 2015. Furthermore, retained earnings have recorded negative figure in 2015 off -5.46% due to the massive loss of the company. Figure 12 - Vertical Analysis of Income Statement 2010 2011 2012 2013 2014 2015 Revenue 1236,42% 1110,13% 1446,34% 2121,77% 1921,03% 2665,63% Cost of sales -831,37% -747,14% -1032,27% -1645,76% -1475,35% -1995,53% Gross profit 405,05% 363,00% 414,07% 476,01% 445,68% 670,10% Total expenses -269,19% -191,14% -226,08% -332,58% -271,65% -391,81% EBIT Profit before Expenses 136,27% 173,31% 189,97% 145,96% 175,17% 275,02% Profit before taxation 98,78% 157,88% 172,83% 151,24% 163,84% 187,82% Income tax 1,22% -57,88% -72,83% -51,24% -63,84% -87,82% Profit for the year 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% Chart 12 - Vertical Analysis of Income Statement Data The figure 12 shows the vertical analysis of income statement for 2010 to 2016. The company’s cost of sales increases from 2010 to 2015 in considerable percentage of the company’s revenue for the years. As a result of increase of cost of sales, the Gross profit from sales decreased from 2010 to 2011 by a 30% approximately, nonetheless after that year it increased continuously from 2012 to 2015 reaching a 400% increase. The total expenses from revenue significantly increased all thourghout but relatively not as much as the Cost of Sales, or raw materials,. Finally, The profit or loss was always positive and increase the first three years 2010 to 2012, then was volative going down, up and down again around the 1.200.000MM RS. Ratio Analysis a. Liquidity Analysis Liquidity Ratios are also called as Short-Term Solvency Ratios. The term liquidity means the extent of quick convertibility of assets into money for paying obligation in the short-term. Accordingly, liquidity ratios are used to obtain an indication of a firm's ability to meet its current liabilities, but it does not reveal how effectively the cash resources can be managed in the short term. The table 1 shows the liquidity ratios of Ceylon Lion Beer Brewery from 2010 to 2015. Liquidity Ratios 2011 2012 2013 2014 2015 Current Ratio 2.41 : 1 1.65 : 1 1.20 : 1 1.13 : 1 0.82 : 1 Acid Test Ratio 1.72 : 1 1.24 : 1 0.88 : 1 0.88 : 1 0.51 : 1 Assets Turnover Ratio 1.47 times 1.82 times 1.63 times 1.25 times 1.28 times Stock Turnover Ratio 8.15 times 10.89 times 9.25 times 7.77 times 8.82 times Stock residence Period 44.78 days 33.53 days 39.48 days 39.48 days 41.39 days Table 1 - Liquidity Ratios from 2011 to 2015 i. Current Ratio Current Ratio explains the relationship between current assets and current liabilities of the company. It measures the ability of a firm to meet its current obligations. However, the ideal current ratio is 2: 1. As per the Table 1, the company shows the favorable current asset ratio of the study period. The current ratio of the company shows higher values of between 1 and 2 and it indicates a liquid though not loose, somehow tight ability of the company´s ability to pay its current obligations. However, from 2011 to 2014 ratio seems to be decreasing further, in fact some of them like working capital and acid test drop to under a 1, signifying that the company might be heading to some liquidity issue on working capital, lest examine the quick ratio. ii. Acid Test Ratio or Quick Ratio The acid test ratio is a more strong and exact test of a firm's ability to pay its short-term obligations as and when they become due. The ideal acid test ratio of 1:1 is considered as a satisfactory. In considered the Table 1, the company shows higher acid test ratio compare to ideal ratio for the study period. Therefore, the company has relatively better position to meet their current obligation on time. iii. Debtors Turnover Ratio or Receivable Turnover Ratio Receivables and Debtors represent the uncollected portion of credit sales and the debtors’ turnover ratio indicates the number of times the receivables are turned over in business during a particular period. In other words, it represents how quickly the debtors are converted into cash. iv. Assets Turnover Ratio The asset turnover ratio measures a company's ability to generate sales of its assets which means how efficiently a company can use its assets to generate sales. The asset turnover ratio of Ceylon Lion Beer Brewery has reduced from 2011 to 2013 then increases in 2014. However, it reduced to 0.29 in 2015. This may not indicating efficiently use of assets of t6he company and a favorable rate since in 2011 they have generated Rs. 89 cents for Rs. 1.00 of assets and 2015 receive only Rs. 29 cents. v. Stock Turnover Ratio Stock Turnover Ratio indicates the number of times the stock has been turned over in business during a particular period. This ratio is used to measure whether the stock is effectively utilized or not. The stock turnover ratio of Ceylon Lion Beer Brewery has reduced from 2011 to 2013 then slight increases in 2014. However it reduced to 1.94 in 2015. This may not indicates efficiently use of stocks of the company and a favorable rate. vi. Stock residence Period or Days in Inventory The stock residence period measures how quickly a company is converting their inventory into sales. A slower turnaround on sales may be a warning sign that there are problems internally, or externally. The stock residence period of the Ceylon Lion Beer Brewery has gradually increased by 42 days to 188 days from 2011 to 2015. This trend is not indicating efficient inventory management of the company and this may warning sign to the company about future problems. b. Profitability Ratios The term profitability means the profit earning capacity of any business activity. Profitability Ratio is used to measure the overall efficiency or performance of a business. In general, a large number of ratios can also be used for determining the profitability at the same is related to sales. 2011 2012 2013 2014 2015 Gross profit margin 32% 28% 19% 18% 15% Net profit margin 10% 11% 13% 6% -70% Return on Assets (ROA) 12% 7% 4% 3% -20% Return on Equity (ROE) 5% 5% 4% 3% -26% Table 2 - Profitability Ratios from 2011 to 2015 i. Gross profit margin Gross Profit Margin indicates the relationship between gross profit and net sales. This ratio shows the effective standard of performance of the firm's business. Usually higher Gross Profit Margin is an indication that the firm has higher profitability and effective performances. However, in Ceylon Lion Beer Brewery the ratio is not at a favorable level. As well as throughout the study period, it decreases 32% to 15% from 2011 to 2015. This may not a better position of the company. ii. Net Profit Margin The net profit margin indicates the firm's overall efficiency in operating the business. The net profit ratio is used to measure the relationship between net profit and sales. The higher net profit ratio indicates the standard performance of the business concern. However, Ceylon Lion Beer Brewery has maintained positive and growing net profit margin of 10%, 11% and 13% from 2011, 2012 and 2013 respectively. In 2014 onward ratio has started to decrease and in 2015, it shows 70% negative margin. iii. Return on Assets (ROA) The return on assets ratio measures how efficiently a company can manage its assets to produce profits during a period by comparing net income to the average total assets. Since the company assets' sole purpose is to generate revenues and produce profits, this ratio helps both management and investors see how well the company can convert its investments in assets into profits. If higher return on assets ratio indicates the effective performance of the business. However, Ceylon Lion Beer Brewery have maintained positive, but the decreasing return on assets ratio of 12%, 7%, 4% and 3 from 2011, 2012, 2013 and 2014 respectively. In 2015, ratio drastically decreases and shows inefficiently use of assets. iv. Return on Equity (ROE) The return on equity ratio or ROE is a profitability ratio that measures the ability of a firm to generate profits from its shareholders' investments in the company. The ratio is an important measurement for potential investors since they want to see how efficiently a company will use their money to generate net income. ROE is also used to indicate how effective management uses equity to finance to fund operations and grow the company. The return on equity ratio of Ceylon Lion Beer Brewery has maintained better and positive way in 2011 and 2012 at a rate of 5%. However, from 2013 onward it has started to reduce and in 2015 return shows inefficiently use of equity by a negative rate of 26%. c. Solvency ratios Generally, term of solvency refers to the capacity of the business to meet its short-term and long-term obligations. However, Solvency Ratios indicate the sound financial position of a concern to carry on its business smoothly and meet its all obligations. 2011 2012 2013 2014 2015 Debt to Total Assets Ratio 0.11% 0.08% 0.09% 0.09% 0.13% Debt to Equity Ratio 3% 1% 4% 3% 6% Times Interest Earned 6.05 times 20.00 times 10.15 times 4.75 times (50.93) times Table 3 - Solvency Ratios from 2011 to 2015 i. Debt to Total Assets Ratio Debt ratio measures a firm's total liabilities as a percentage of its total assets, which means a company's ability to pay off its liabilities with its assets. However, it measures the financial leverage of a company. If a company shows higher levels of liabilities compared with assets are considered highly leveraged and more risky for lenders. As per the table 3, Ceylon Lion Beer Brewery indicates lower debt to total asset ratio of 2011 to 2015. In other words, the company maintains a lower level of liabilities compared with total assets and less risky for lenders. ii. Debt to Equity Ratio The debt to equity ratio indicates the firm's obligations to creditors in relation to funds invested by the owners. The ideal debt equity ratio is 1: 1. This ratio also indicates all external liabilities to owner recorded claims. The debt to equity ratio of Ceylon Lion Beer Brewery has decreased from 2011 to 2012 by 3% to 1 % and indicate the ideal rate. However, in 2013 it increased to 4%, then decrease by 1%. In 2015, return indicates 6% and higher external liabilities of the company in relation to the equity which will be not better to company in the future. iii. Times Interest Earned Times interest earned ratio measures how many times firm can pay its interest periodically in relation to net profit. In other words, indicates the relationship between the amount of net profit before deduction of interest and tax and the fixed interest charges. The Ceylon Lion Beer Brewery show higher rate in 2012 of 20 compare to other years. However company indicates a decreasing scenario of the ratio from 2013 onward. However, in 2015 the company not in a position to pay its interest and shows a negative rate of 50.93. d. Market Ratios 2011 2012 2013 2014 2015 Earnings Per Share 5.51 4.93 3.80 2.36 (18.92) Dividend Per Share - 0.82 - 1.00 1.00 Price-Earning (P/E) Ratio 16.32 18.64 16.38 24.25 (4.52) Dividend Yield (DY) - 0.01 - 0.02 0.01 Earnings Yield (EY) 0.06 0.05 0.06 0.04 (0.22) Table 4 - Market Ratios from 2011 to 2015 i. Earnings Per Share The Earnings per Share Ratio (EPS) measure the earning capacity of the interest from the investor's point of view. The ratio is helpful in determining the price of the equity share in the market place. In considering the above Table 3 the EPS of the Ceylon Lion Beer Brewery is decreasing in 2011 to 2014. In 2015, company shows loss for the period and therefore EPS is negative 18.92. However, this will be affect to company's market price. ii. Dividend Per Share The dividend pay share ratio measures the amount of net income per share that is distributed to shareholders in the form of dividends during the year. In other words, the ratio shows the portion of profits that the company decided to give to its shareholders. In considering the Ceylon Leather Products, 2012, 2014 and 2015 company decided to pay the dividend to its shareholders. iii. Price-Earning (P/E) Ratio Price Earnings Ratio measures the relationship between the market price of an equity share and the earnings per equity share. The ratio helps to find out whether the equity shares of a company are undervalued or overvalued. In considering Ceylon Leather Products, P/E ratio has shown 16.32, 18.64, 16.34 and 24.25 for 2011, 2012, 2013 and 2014 respectively. Since the company maintains considerable market price in the Stock market. However, in 2015 the company has a higher market price Rs. 85.50 compare to other years, but P/E ratio shows negative due to negative EPS ratio. iv. Dividend Yield (DY) Dividend Yield Ratio indicates the relationship between dividend per share and market value per share. This ratio is a major factor that determines the dividend income from the shareholders point of view. In considering the Ceylon Leather company, 2012, 2014 and 2015 show the dividend yield, but significantly lower rate. In other words, shareholders not favorable with the Dividend Yield rate of the company. v. Earnings Yield (EY) Earnings yield is the ratio of earnings per share divided by the share price. The earnings yield is quoted as a percentage, allowing an easy comparison to going bond rates. In considering the Ceylon Leather Products, company shows an average of 0.05 earning yield from 2011 to 2014. However, it shows negative ratio in 2015 due to negative dividend per share. 4. Z – Score Analysis The Altman Z-Score is a statistical tool used to measure the probability that a company will go bankrupt. The formula for Z-Score is as follows. Z-Score = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5 Where: x1= Working Capital/Total Assets x2 = Retained Earnings/Total Assets x3 = Earnings Before Interest & Tax/Total Assets x4 = Market Value of Equity/Total Liabilities x5 = Sales/Total Assets In considering above the formula Z-score for the Ceylon Lion Beer Brewery can be calculated as follows. 2015 2014 2013 2012 2011 X1 0.23 0.32 0.29 0.26 0.21 X2 (0.05) 0.15 0.14 0.11 0.10 X3 (0.23) 0.03 0.04 0.07 0.06 X4 7.94 5.95 7.05 9.91 6.20 X5 0.32 0.40 0.30 0.39 0.41 Z- Score 4.55 4.66 5.21 7.02 4.72 As per the calculation company in a “safe” zone since the Z-score is more than 2.99 in 2011 to 2015. 5. Analysis of Cash Flow The analysis of cash flow for any company is important since both successful and unsuccessful companies can experience problems with cash flow from operations. The main calculation use to analyze cash flow in a firm called free cash flow. The free cash flow calculation for the Ceylon Lion Beer Brewery as follows. 2015 2014 2013 2012 2011 Cash flow from Operations (1,197.54) 51,632.46 (198,553.78) 180,076.36 107,080.00 (-) Net noncurrent assets (318,602.07) (18,292.89) (28,512.61) (343,362.27) (649,790.64) (-) Dividend paid (34,234.06) (34,233.77) - (25,000.00) - Free Cash Flow (354,033.68) (894.21) (227,066.39) (188,285.91) (542,710.64) In considering above calculation, company’s free cash flow shows negative for 2011 to 2015. In other words, it reflects the non-availability of cash for business activities after pay for financing and investing requirements to maintain productive capacity at current level. 8.- Fitch Assigns Lion's Debt Fitch Assigns Lion's Debt Final 'AA-(lka)'; Affirms Ratings Fitch Ratings-Colombo-28 May 2013: Fitch Ratings has assigned Sri Lanka-based Lion Brewery (Ceylon) PLC's (Lion) listed unsecured redeemable debentures of LKR3bn a final 'AA-(lka)' rating. The LKR3bn includes an additional LKR500m which will be raised in the event of an oversubscription. The agency has also affirmed Lion's National Long-Term rating at 'AA-(lka)' with a Stable Outlook, and affirmed the company's senior unsecured rating at 'AA-(lka)'. Rating Action Rationale The assignment of the final rating to Lion's listed unsecured debentures follows the receipt of final documents which conform to information previously received. The final rating is at the same level as the expected rating assigned on 25 March 2013 (see "Fitch Publishes Sri Lanka's Lion Brewery's 'AA-(lka)' Rating; Rates Proposed Debt 'AA-(lka)(EXP)'" at www.fitchratings.com) The debentures are rated in line with Lion's National Long-Term Rating of 'AA-(lka)', as they rank equally with the company's unsecured creditors. Lion expects to use the debenture proceeds to fund the upgrade and modernisation of its plant over FY13-FY14 (financial year ends March). The affirmation of Lion's ratings reflects Fitch's view that the increase in leverage (leaseadjusted debt net of cash/EBITDAR) to 1.85x in FY13 from an annualized 1.09x in 9MFY13, is a temporary feature, and that it does not signify a structural weakening in the company's risk profile. Fitch currently expects Lion's leverage to increase further in 2013 due to continued high capex for its plant upgrade and modernisation project, before falling below the 1.5x trigger by FYE15. Key Rating Drivers Strong market position: Lion's ratings reflect its leading market share of the domestic beer industry and its strong operating cash flow generation. Lion's market position and in turn its credit profile is supported by its entrenched domestic brands, and limited substitution of products given the high technical competence required for brewing beer. High regulatory risk: The company's credit strengths are partly offset by the high regulatory risk affecting domestic alcohol beverage manufacturers, in the form of high excise duties and taxes which are frequently increased. These levies put legitimate alcoholic beverages outside the reach of a large portion of the population, promote illicit alcohol and stifle growth of licit products. High entry barriers: At the same time however regulatory restrictions on advertising and the limited issuance of new retail licenses creates high entry-barriers and benefit entrenched operators such as Lion. The continued increase in excise duties and levies on alcoholic beverage producers could become a rating risk if profitability is materially impacted over the longterm. Better profits from 2014: Lion's EBITDAR margin fell to 18.7% at FYE13 from 27.9% at FYE12 - due largely to higher taxes paid on imported sales, and partly also due to two excise duty increases imposed in FY13. Fitch expects EBITDAR margins to improve substantially in 2014 as the company will no longer have to import finished goods to meet local sales demand once its plant-upgrade is completed by end-2013. Stronger balance-sheet from 2014: Fitch expects Lion's capex to reduce - at most - to the midsingle digits as a percentage of projected revenue from 2014 (FY13: over 40%). The agency notes that the company's leverage should improve in 2014 on sharply lower capex, and better profit margins. Rating Sensitivities Negative: Future Developments that may individually, or collectively, lead to negative rating action include -The inability to reverse the rising trajectory for leverage from 2014 as per Fitch's expectations, or the company's inability to bring leverage below 1.5x by FYE15. Positive: Future developments that may individually, or collectively, lead to a positive rating action include -Lion's rating is constrained at the current level over the medium-term due to the limited breadth and depth of the domestic beer industry. However, this may change over the longer term if the growth in the domestic beer industry outpaces the growth in spirits. Further details on Lion are available on www.fitchratings.com and www.fitchratings.lk Contacts: Primary Analyst Hasira De Silva, CFA Vice President +941 1254 1900 Fitch Ratings Lanka Limited 15-04, East Tower, World Trade Center Colombo 01, Sri Lanka Secondary Analyst Shyamila Serasinghe Analyst +94 1 1254 1900 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(lka)' for National ratings in Sri Lanka. Specific letter grades are not therefore internationally comparable. Applicable criteria, 'Corporate Rating Methodology, dated 8 August 2012, and 'National Ratings Criteria', dated 19 January 2011, are available on www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology National Ratings Criteria Additional Disclosure Solicitation Status ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. 9. Conclusion 10. References http://lionbeer.com/InvestorRelations.aspx http://www.investopedia.com/terms/a/altman.asp Financial Analysis Interpretation Altman´s Z-score The Altman Z-score is the output of a credit-strength test that gauges a publicly traded manufacturing company's likelihood of bankruptcy. The Altman Z-score, is based on five financial ratios that can be calculated from data found on a company's annual 10K report. The Altman Z-score is calculated as follows: Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E. Where: A = Working Capital/Total Assets, B = Retained Earnings/Total Assets, C = Earnings Before Interest & Tax/Total Assets, D = Market Value of Equity/Total Liabilities and E = Sales/Total Assets). Investors can use Altman Z-scores to help determine whether they should buy or sell a particular stock if they're concerned about the underlying company's financial strength Year Z-score 2015 3,35 2014 2,78 2013 3,58 2012 4,92 2011 4,52 The Company seemed to be heading towards a tighter financial situation, but in year 2014 when it hit the lowest was still with a very high Z-score of 2.78, actually one full point over the 1.8 which can start to mean that the Company is can probably be heading for bankruptcy. This company was the healthier in their Credit strength in year 2012 with a 4.92 z-score. Where does Z-Score come from? The NYU Stern Finance Professor, Edward Altman, developed the Altman Z-score formula in 1967. In 2012, he released an updated version called the Altman Z-score Plus, that can be used to evaluate both public and private companies, both manufacturing and nonmanufacturing companies and both U.S. and non-U.S. companies.. Note that now the more recent Altman Z-score Plus can be used to evaluate corporate credit risk. 2015 2014 2013 2012 2011 Working Capital -1.625.899,00 1.420.823,00 1.503.656,00 2.064.853,00 2.033.056,00 Total Assets 26.339.436,00 24.064.784,00 17.131.193,00 10.126.687,00 9.218.248,00 Retained earnings 5.280.182,00 4.394.565,00 5.358.649,00 2.671.640,00 2.798.011,00 EBIT 1.681.341,00 2.048.591,00 1.636.974,00 1.899.783,00 392.590,00 Market Value 48.000.000,00 31.280.000,00 26.640.000,00 15.960.000,00 16.000.000,00 Sales(Revenue) 32.350.375,00 25.804.319,00 22.191.670,00 17.649.146,00 11.250.330,00 Total Liabilities 18.521.453,00 17.132.418,00 11.220.960,00 4.917.246,00 3.882.436,00 What is Working Capital Working capital is a financial measurement of the operating liquidity available to a business. It is also known as net working capital or working capital ratio. The Working capital formula is: Working capital formula: Working Capital = Current Analysis – Current Liabilities. 2015 2014 2013 2012 2011 Working Capital -1.625.899,00 1.420.823,00 1.503.656,00 2.064.853,00 2.033.056,00 Working Capital Ratio -1.625.899,00 1.420.823,00 1.503.656,00 2.064.853,00 2.033.056,00 Working capital Results. As seen the figure drops dramatically from the initial 2 million (mm) back in 2011 and 2012 to lower by half a million to 1.5 million approximately during the following two years 2013 and 2014, when working capital plunged within a year to a negative -1.5 million, meaning that Working Capital Analysis Interpretation. The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient. Also known as "net working capital". Working capital also gives an idea of company's efficiency. Money tied up in inventory or accounts receivable cannot pay off any of the company's short term financial obligations. The first 4 years of the 5 years study period reflected have a positive working capital which meant that the business was able to pay off its short-term liabilities with an excess of 2MM in the first 2 years, and 1.5MM on the second 2 years, unluckily during 2015 the working capital reflewcted was minus 1.5MM meaning that an immediate increase in sales or additional capital was needed into the company to continue its operations. Only then recovering higher Working Capital may the company start to expand the growth of operations. At this moment it seems to be unable to meet its short-term liabilities with its current assets. We must watch out for alternate reasons for this decrease other than a simple decrease in sales, perhaps there have been a slow sales recollection or an excess in inventory growth, so to correctly interepret the importan working capital index variable we must watch for other areas of the company´s operations as well. Working Capital management. Working capital management refers to the decisions relating to working capital and short-term financing. The goal of working capital management is to ensure that the company is able to continue its operations and that it has sufficient cash flow to satisfy the short-term debt and operating expenses. These involve managing the current assets and the current liabilities of the company. Working Capital Ratio: working capital -0,061728695 0,059041585 0,087772988 0,203902125 0,220546898 total assets None of the Working Capital to Total Assets ratios was very high during neither of the 5 years, showing that the company is working on a tight scheme, and they don´t have too much inventory excess or perhaps they are investing their excess cash opportunely. Also watch for ratios less than one then they have negative working capital. And remember that a high working capital ratio isn't always a good thing; it could indicate that other areas of the treasury and or administration are not tune up completely with finances. If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations. Retained Earnings 0,200466783 0,182613939 0,312800691 0,263821722 0,303529586 total assets Retained Earnings/Total Assets (RE/TA) This ratio measures the amount of reinvested earnings or losses, which reflects the extent of the company's leverage. Companies with low RE/TA are financing capital expenditure through borrowings rather than through retained earnings. Companies with high RE/TA suggest a history of profitability and the ability to stand up to a bad year of losses. EBIT 0,063833599 0,085128169 0,095555167 0,187601631 0,042588353 Total assets This is a version of return on assets (ROA), an effective way of assessing a firm's ability to squeeze profits from its assets before factors like interest and tax are deducted. Market value of equity 2,591589332 1,825778474 2,374128417 3,24571925 4,121123954 Total liabilities This is a ratio that shows - if a firm were to become insolvent - how much the company's market value would decline before liabilities exceed assets on the financial statements. This ratio adds a market value dimension to the model that isn't based on pure fundamentals. In other words, a durable market capitalization can be interpreted as the market's confidence in the company's solid financial position. Sales 1,228210619 1,072285502 1,295395481 1,742835144 1,220441238 Total assets This tells investors how well management handles competition and how efficiently the firm uses assets to generate sales. Failure to grow market share translates into a low or falling S/TA. 2015 2014 2013 2012 2011 Total Assets 26.339.436,00 24.064.784,00 17.131.193,00 10.126.687,00 9.218.248,00 ROTA Return On Total Assets (earning before EBIT) 26.339.436,00 24.064.784,00 17.131.193,00 10.126.687,00 9.218.248,00 Total Debt To Total Assets 26.339.436,00 24.064.784,00 17.131.193,00 10.126.687,00 9.218.248,00 Total Assets Interpretation: Know that in a Company Assets are bought to raise the value of a firm or benefit the firm's operations. In some way think of total assets as their business equipment, center, whether manufacturing equipment or an individual's rental apartment, and the amount of total assets somehow represents the ability to generate cash flow. Remember Total Assets is equal to one of the sides of the basic accounting equiation, meaning that it´s equal to Total Liabilites plus Total Equity. On the other side of the General Balance we have the different clasifications of Assets, from those named current or fixed (non-current) which are the assets that will be consumed within one year or in the short term, as cash, money in bank, accounts receivable and inventory. While the Fixed assets are those which last longer, and are expected to providing benefit for more than one year, such as equipment, houses, plants, offices and or buildings and land or real estate. Also in total assets are considered the Other Current Assets OCA, which are those that do not include cash and permanent assets or sometimes named intangible assets as the goodwill or the brand´s name. What is 'Return On Total Assets - ROTA' Return on total assets (ROTA) is a ratio that measures a company's earnings before interest and taxes (EBIT) against its total net assets. The ratio is considered an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid. To calculate ROTA: BREAKING DOWN 'Return On Total Assets - ROTA' The greater a company's earnings in proportion to its assets (and the greater the coefficient from this calculation), the more effectively that company is said to be using its assets. To calculate ROTA, you must obtain the net income figure from a company's income statement, and then add back interest and/or taxes that were paid during the year. The resulting number will reveal the company's EBIT. The EBIT number should then be divided by the company's total net assets (total assets less depreciation and any allowances for bad debts) to reveal the earnings that company has generated for each dollar of assets on its books. 'Total Debt To Total Assets' Total debt to total assets is a leverage ratio that defines the total amount of debt relative to assets. This enables comparisons of leverage to be made across different companies. The higher the ratio, the higher the degree of leverage, and consequently, financial risk. This is a broad ratio that includes long-term and short-term debt (borrowings maturing within one year), as well as all assets – tangible and intangible. Total Debt To Total Assets Next Up Debt Ratio Long Term Debt To Total Assets ... Capitalization Ratios Leverage Ratio BREAKING DOWN 'Total Debt To Total Assets' For example, assume hypothetical company Levered Co. has $40 million in long-term debt, $10 million in short-term debt, and $100 million in total assets. Levered Co. would therefore have a total debt to total assets ratio of 0.5. On the other hand, if rival LowLevered Co. has $5 million in long-term debt, $5 million in short-term debt, and $50 million in total assets, its total debt to total assets ratio would be 0.2. From the above example, 50% of Levered Co.’s assets have been financed by debt, while only 20% of LowLevered Co.’s assets were. Levered Co. has a much higher degree of leverage than LowLevered Co., and therefore a lower degree of financial flexibility. This is because debt servicing payments have to be made under all circumstances, otherwise the company would breach debt covenants and run the risk of being forced into bankruptcy by creditors. While other liabilities such as accounts payable and long-term leases can be negotiated to some extent, there is very little “wiggle room” with debt covenants. Therefore, a company with a high degree of leverage may find it more difficult during a recession than one with low leverage. It should be noted that total debt measure does not include short-term liabilities like accounts payable and long-term liabilities such as capital lease and pension plan obligations. One shortcoming of the total debt to total assets ratio is that it does not provide any indication of asset quality, since it lumps all tangible and intangible assets together. Continuing from the above example, assume Levered Co. took on the $40 million of long-term debt to acquire a competitor, and booked $20 million as goodwill for this acquisition. Let’s say the acquisition does not perform as expected and results in all the goodwill being written off. In this case, the ratio of total debt to total assets (which amounts to $80 million) would be 0.63. Like all other ratios, the trend of the total debt to total assets should also be evaluated over time. This will help assess whether the company’s financial risk profile is improving or deteriorating. YEAR 2015 2014 2013 2012 2011 Retained earnings 5.280.182,00 4.394.565,00 5.358.649,00 2.671.640,00 2.798.011,00 2015 2014 2013 2012 2011 EBIT 1.681.341,00 2.048.591,00 1.636.974,00 1.899.783,00 392.590,00 2015 2014 2013 2012 2011 Market Value 48.000.000,00 31.280.000,00 26.640.000,00 15.960.000,00 16.000.000,00 2015 2014 2013 2012 2011 Sales(Revenue) 32.350.375,00 25.804.319,00 22.191.670,00 17.649.146,00 11.250.330,00 2015 2014 2013 2012 2011 Total Liabilities 18.521.453,00 17.132.418,00 11.220.960,00 4.917.246,00 3.882.436,00 __ In a bid to resolve this conundrum, NYU Professor Edward Altman introduced the Z-score formula in the late 1960s. Rather than search for a single best ratio, Altman built a model that distills five key performance ratios into a single score. As it turns out, the Z-score gives investors a pretty good snapshot of corporate financial health. Here we look at how to calculate the Z-score and how investors can use it to help make buy and sell decisions. The Z-score Formula Here is the formula (for manufacturing firms), which is built out of the five weighted financial ratios: Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where: A = Working Capital/Total Assets B = Retained Earnings/Total Assets C = Earnings Before Interest & Tax/Total Assets D = Market Value of Equity/Total Liabilities E = Sales/Total Assets Strictly speaking, the lower the score, the higher the odds are that a company is headed for bankruptcy. A Z-score of lower than 1.8, in particular, indicates that the company is heading for bankruptcy. Companies with scores above 3 are unlikely to enter bankruptcy. Scores in between 1.8 and 3 lie in a gray area. Breaking Down the Z Now that we know the formula, it's helpful to examine why these particular ratios are included. Let's take a look at the significance of each one: Working Capital/Total Assets (WC/TA) This ratio is a good test for corporate distress. A firm with negative working capital is likely to experience problems meeting its short-term obligations because there simply is not enough current assets to cover those obligations. By contrast, a firm with significantly positive working capital rarely has trouble paying its bills. (For background reading, see Working Capital Works.) Retained Earnings/Total Assets (RE/TA) This ratio measures the amount of reinvested earnings or losses, which reflects the extent of the company's leverage. Companies with low RE/TA are financing capital expenditure through borrowings rather than through retained earnings. Companies with high RE/TA suggest a history of profitability and the ability to stand up to a bad year of losses. Earnings Before Interest and Tax/Total Assets (EBIT/TA ) This is a version of return on assets (ROA), an effective way of assessing a firm's ability to squeeze profits from its assets before factors like interest and tax are deducted. Market Value of Equity/Total Liabilities (ME/TL) This is a ratio that shows - if a firm were to become insolvent - how much the company's market value would decline before liabilities exceed assets on the financial statements. This ratio adds a market value dimension to the model that isn't based on pure fundamentals. In other words, a durable market capitalization can be interpreted as the market's confidence in the company's solid financial position. Sales/Total Assets (S/TA) This tells investors how well management handles competition and how efficiently the firm uses assets to generate sales. Failure to grow market share translates into a low or falling S/TA. WorldCom Test To demonstrate the power of the Z-score, let's look at how it holds up with a tricky test case. Consider the infamous collapse of telecommunications giant WorldCom in 2002. WorldCom's bankruptcy created $100 billion in losses for its investors after management falsely recorded billions of dollars as capital expenditures rather than operating costs. Here we calculate Z-scores for WorldCom using annual 10-K financial reports for years ending December 31, 1999, 2000 and 2001. Indeed, WorldCom's Z-score suffered a sharp fall. Also note that the Z-score moved from the gray area into the danger zone in 2000 and 2001, before declaring bankruptcy in 2002. Input Financial Ratio 1999 2000 2001 X1 Working capital/ Total Assets -0.09 -0.08 0 X2 Retained earnings/Total Assets -0.02 0.03 0.04 X3 EBIT/Total Assets .09 .08 .02 X4 Market Value/Total Liabilities 3.7 1.2 .50 X5 Sales/Total Assets 0.51 0.42 0.3 Z-score 2.5 1.4 .85 But WorldCom management cooked the books, inflating the company's earnings and assets in the financial statements. What impact do these shenanigans have on the Z-score? Overstated earnings likely increase the EBIT/total assets ratio in the Z-score model, but overstated assets would actually shrink three of the other ratios with total assets in the denominator. So the overall impact of the false accounting on the company's Z-score is likely to be downward. (For more on corporate accounting gone wrong, see Cooking The Books 101.) Where Z-Score Falls Short Alas, the Z-score is not perfect and needs to be calculated and interpreted with care. For starters, the Z-score is not immune to false accounting practices. As WorldCom demonstrates, companies in trouble may be tempted to misrepresent financials. The Z-score is only as accurate as the data that goes into it. The Z-score also isn't much use for new companies with little or no earnings. These companies, regardless of their financial health, will score low. Moreover, the Z-score doesn't address the issue of cash flows directly, only hinting at it through the use of the net working capital-to-asset ratio. After all, it takes cash to pay the bills. Finally, Z-scores can swing from quarter to quarter when a company records one-time write-offs. These can change the final score, suggesting that a company that's really not at risk is on the brink of bankruptcy. Conclusion To keep an eye on their investments, investors should consider checking their companies' Z-score on a regular basis. A deteriorating Z-score can signal trouble ahead and provide a simpler conclusion than the mass of ratios. Given its shortcomings, the Z-score is probably better used as a gauge of relative financial health rather than as a predictor. Arguably, it's best to use the model as a quick check of financial health, but if the score indicates a problem, it's a good idea to conduct a more detailed analysis. The company is happy overall. Infusing the inherent traits of the King of the jungle, we are a company that has become a true industry leader. We are proud of our heritage and our achievements in over 160 years, having continually walked the path of innovation and visionary pragmatism, to ensure that our products remain on a high platform of quality, while being affordable to our target market. Read more: How To Calculate A Z-Score | Investopedia http://www.investopedia.com/articles/fundamental/04/021104.asp#ixzz47kx0wweV Follow us: Investopedia on Facebook