Financial Performance Analysis of

ROYAL CERAMICS LANKA PLC vs LANKA TILES PLC

based on Accounting Ratios

MMS 5301 – Financial Management

Prof. Y. K. Weerakoon

By

Ms. S.P. Aryarathne 5266FM2017001

Mr. Chinthaka Gayan 5266FM2017019

Ms. R.D. Wickramaaratchi 5266FM2017077

Ms. Harsha Piumali 5266FM2017100

Ms. U.A.S. Yapa 5266FM2017102

MBA / M.Sc. 2017

Executive Summary

This report has been prepared with the objective of understanding how theoretical

concepts inrespect of the Performance Evaluation of companies can be used in practical

context with respect to a companies in Sri Lankan Ceramic Tiles industry.

Therefore, we have selected two leading Ceramic Tiles manufacturing companies in Sri

Lanka.

Accordingly, this report provides an analysis and evaluation of the performance of

Royal Ceramic Lanka PLC and Lanka Tiles PLC for the years between 2015-2018 in

terms of their profitability, Short term liquidity, Long term financial health, and

Management effectiveness and valuation aspects.

This analysis was done mainly based on comparison between the two companies on

variousratios such as current and quick ratio, ROA, ROE, debt collection period, debt

turnover, debt – equity, EPS and PER. The movement between 2015-2018 has been

considered when analyzing the ratios.

Results of data analyzed show that Lanka Tiles PLC has performed well in their

industry when compared to Royal Ceramic Lanka PLC.

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Table of Contents

1. Company Backgrounds .............................................................................................. 4

2. Ratio Analysis ............................................................................................................ 5

2.1 Short term liquidity Ratios ................................................................................. 5

2.2 Profitability Ratios ............................................................................................. 6

2.3 Management effectiveness Ratios ...................................................................... 7

2.4 Long Term Financial Health Ratios ................................................................... 8

2.5 Market Valuation Ratios .................................................................................... 9

3. Summary of ratios analysis ...................................................................................... 11

4. Interpretation ............................................................................................................ 12

4.1. Profitability and Market Performance .............................................................. 12

4.2. Long-term and short-term financial strength .................................................... 13

4.3. Management Effectiveness............................................................................... 13

4.4. Investment Decision ......................................................................................... 14

5. Conclusion ............................................................................................................... 15

6. Appendix .................................................................................................................. 16

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1. Company Backgrounds

Royal Ceramic Lanka PLC - RCL

The Royal Ceramics Group is the undisputable market leader in Sri Lanka’s tile

industry with a presence in over 16 countries. As at FY17, the asset base of c.LKR 53bn

has generated c.LKR 29bn income which has been translated into c.LKR 3.9bn profit.

The company is listed in the Colombo Stock Exchange (CSE) with the ticker –

RCL.N0000.

Lanka Tiles PLC - TILE

With the vision of becoming not only a household name but a global one, the

distribution and retail network of Lanka Tiles is expanding rapidly to make sure more

Sri Lanka consumers have access to world class products to make their homes and

office premises reflect their aspirations. C.LKR 9bn worth assets base has generated

c.LKR 7bn in revenue and c.LKR 1bn on net profit. Lanka Tiles is listed in the

Colombo Stock Exchange (CSE) with the ticker – TILE.N0000.

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2. Ratio Analysis

2.1 Short term liquidity Ratios

Liquidity ratios are a class of financial metrics used to determine a debtor's ability to

pay off current debt obligations without raising external capital. Liquidity ratios

measure a company's ability to pay debt obligations and its margin of safety through the

calculation of metrics including the current ratio, quick ratio and operating cash flow

ratio.Current liabilities are analyzed in relation to liquid assets to evaluate the coverage

of short-term debts in an emergency.

Current Assets to Current Liabilities = Current Assets

Current Liabilities

Acid test = Cash & Cash Equivalents + Current Receivables + Short Term Investments

Current Liabilities

Dividends Cover = Profit after tax - Dividend paid on Irredeemable Preference Shares
Dividend paid to Ordinary Shareholders

RCL 2018 2017 2016 2015

Current Assets to Current 1.30 1.49 1.44 1.30
Liabilities
Acid test 0.47 0.62 0.66 0.53
Dividends Cover 2.89 3.38 4.42 4.82

LANKA TILE 2018 2017 2016 2015

Current Assets to Current
3.81 3.37 3.33 2.78
Liabilities
Acid test 1.91 2.12 2.45 1.68
Dividends Cover 1.89 3.13 3.18 2.44

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2.2 Profitability Ratios

Profitability ratios are financial metrics used by analysts and investors to measure and

evaluate the ability of a company to generate income (profit) relative to

revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific

period of time. They show how well a company utilizes its assets to produce profit and

value to shareholders.

A higher ratio or value is commonly sought-after by most companies, as this usually

means the business is performing well by generating revenues, profits, and cash flow.

The ratios are most useful when they are analyzed in comparison to similar companies

or compared to previous periods.

ROE = Net Income

Share Holder Equity
ROA = Net Income
Average Assets

Net Profit Ratio = Net profit after tax

Net sales

RCL 2018 2017 2016 2015

ROE 14% 20% 20% 17%
ROA 8% 11% 11% 9%
Net profits ratio 13% 18% 16% 14%

LANKA TILE 2018 2017 2016 2015

ROE 24% 23% 24% 20%
ROA 17% 17% 17% 14%
Net profits ratio 16% 24% 21% 16%

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2.3 Management effectiveness Ratios

Management effectiveness ratios tell you whether company management uses

shareholders’ equity and company assets to produce an acceptable rate of return.

Even with the best products or services, companies have trouble delivering strong long-

term efficiently. Management effectiveness ratios compare financial measures from

company financial statements to evaluate management performance.

Fixed Asset Turnover = Inventory period (days) =

Net Sales Number of days in Period
Fixed Assets - Accumulated Depreciation Inventory Turnover

Inventory Turnover = Debtor’s collection period (days) =

Cost of goods sold Number of days in Period
Average Inventory Debtors Turnover

Debtors Turnover = Creditors payment period (days) =

Net credit sales
Average Accounts Receivables
Creditors Turnover =
Total purchase
Average Accounts Payable
Number of days in Period
Creditors Turnover
Net operating cycle (days) =
Days Inventory Outstanding + Days Sales
Outstanding + Days Payables Outstanding

RCL 2018 2017 2016 2015

Fixed assets turnover 1.13 1.21 1.29 1.32

Inventory Turnover 2.32 1.79 2.13 2.15

Debtors Turnover 8.12 9.26 9.40 8.12

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Creditors turnover 9.33 7.24 7.37 7.33

Inventory period 157 203 172 169

Debtor’s collection period 45 39 39 45

Creditors payment period 39 50 50 50

net operating cycle 163 192 161 165

LANKA TILE 2018 2017 2016 2015

Fixed assets turnover 1.59 1.43 1.63 2.09

Inventory Turnover 1.93 1.99 3.31 3.01

Debtors Turnover 6.82 5.05 5.87 5.95

Creditors turnover 6.99 5.05 5.53 6.38

Inventory period 190 183 110 121

Debtor’s collection period 54 72 62 61

Creditors payment period 52 72 66 57

net operating cycle 191 183 106 125

2.4 Long Term Financial Health Ratios

Debt and gearing ratios are concerned with a company’s long term stability: how much

the company owes in relation to size, whether it is getting into heavier debt or

improving its situation, and whether its debt burden seems heavy or light. Long - Term

liquidity Ratios are also known as capital structure ratio. These ratios indicate mix of

funds provided by owners & lenders. As a general rule these should be appropriate mix

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debt & owners’ equity in financing the firm’s assets. Long - Term Liquidity Ratios are

calculated to judge the long long-term financial position of the company.

Equity Multiplier = Total Assets

Total Stockholder's Equity

Debt to Equity ratio = Total Liabilities

Total Equity

RCL 2018 2017 2016 2015

Equity Multiplier 1.82 1.70 1.74 1.95

Debt to Equity ratio 0.52 0.47 0.48 0.68

LANKA TILE 2018 2017 2016 2015

Equity Multiplier 1.27 1.27 1.33 1.46

Debt to Equity ratio 0.03 0.08 0.08 0.18

2.5 Market Valuation Ratios

Investor ratios help equity shareholders and other investors to assess the value and

quality of an investment in the ordinary shares of a company. Specially, ratios as

Earnings per share serve as an indicator of a company's profitability and it is generally

considered to be the single most important variable in determining a share's price. It is

also a major component used to calculate the price-to-earnings valuation ratio.

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PE = Market Value Price Per Share Payout (%) = Dividend per share * 100
Earning per share Earning per share
PBV = Market Price per Share
Book Value per share
EV to EBIT = Dividend Yield (%) =
EV ( market capitalization + preferred shares Cash Dividends per share
+ minority interest + debt - total cash) Market Value per Share
Earnings Before Interest,
Taxes, Depreciation & Amortization

RCL 2018 2017 2016 2015

PE 4.05 3.91 3.78 5.76
PBV 0.40 0.50 0.49 0.68
EV to EBIT 5.59 5.14 5.16 7.92
Payout (%) 35% 30% 23% 21%
Dividend Yield (%) 9% 8% 6% 4%

LANKA TILE 2018 2017 2016 2015

PE (x) 5.27 4.35 4.52 6.69
PBV (x) 0.77 0.82 0.92 1.37
EV to EBIT (x) 5.00 4.58 4.15 6.49
Payout (%) 53% 32% 31% 41%
Dividend Yield (%) 10% 7% 7% 6%

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3. Summary of ratios analysis

RCL 2018 2017 2016 2015

ROE % 14% 20% 20% 17%

ROA % 8% 11% 11% 9%

Equity Multiplier 1.82 1.70 1.74 1.95

Debt to Equity Ratio 0.52 0.47 0.48 0.68

Current Asset/Current Liability 1.3 1.49 1.44 1.3

Acid Test 0.47 0.62 0.66 0.53

Inventory Turnover 2.32 1.79 2.13 2.15

Fixed Asset Turnover 1.13 1.21 1.29 1.32

EPE Ratio 4.05 3.91 3.78 5.76

Payout % 35% 30% 23% 21%

LANKA TILE 2018 2017 2016 2015

ROE % 15% 20% 24% 20%

ROA % 12% 16% 17% 14%

Equity Multiplier 1.27 1.27 1.33 1.46

Debt to Equity Ratio 0.03 0.08 0.08 0.18

Current Asset/Current Liability 3.81 3.37 3.33 3.78

Acid Test 1.91 2.12 2.45 1.68

Inventory Turnover 1.93 1.99 3.31 3.01

Fixed Asset Turnover 1.59 1.43 1.63 2.09

EPE Ratio 5.27 4.35 4.52 6.69

Payout Ratio % 53% 32% 31% 41%

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4. Interpretation

4.1. Profitability and Market Performance

Profitability and use of Financial Leverage – Lanka Wall Tile is better

Lanka Wall Tile has generated relatively higher Return on Equity (ROE), Return on

Assets (ROA) and Net Profit ratio over FY15-18. Lanka Wall Tile’s past four years

average annual ROE stood at c.20%, ROA at c.15% and Net Profits ratio at c.19% while

RCL recorded c.18% average ROE, an average ROA of c.10% supported by an average

Net Profit ratio of c.15%.

In terms of Financial Leverage, Lanka Wall Tile is relatively less geared compared to

RCL. Lanka Wall Tile recorded an average Equity Multiplier of c.1.33x during FY15-

18 where RCL’s average Equity Multiplier marked as c.1.80x.

Market Performance – High PER but Lower PEG – Lanka Wall Tile is attractive

Both the companies resulted in negative returns in terms of share price performance

over FY15-18. (RCL from LKR 111 to 105 and Lanka Wall Tile from LKR 106 to 100

over FY15-18)

We believe Price – Earnings ratio would be a better valuation methodology for RCL

and Lanka Wall Tile considering the nature of the industry. RCL traded at c.4.05x PE as

at FY18 where TILE was trading at a higher rate of c.5.27x.

However, RCL income grew at c.10% YoY in FY18 where Lanka Wall Tile grew at

c.18% YoY rate. Hence, the Growth Adjusted PE (PEG) for RCL would be c.0.4 and

Lanka Wall Tile would result in an attractive lower PEG of c.0.29. This reflects Lanka

Wall Tile’s higher PE is justified by its topline growth

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4.2. Long-term and short-term financial strength

Long term solvency – Lanka Wall Tile is better with relatively low Financial

Leverage and better interest cover

Lanka Wall Tile has been consuming substantially lower levels of debt capital over

FY15-18 compared to RCL. The average Debt to Equity ratio stood at c.54% for RCL

where it stood at c.9% for Lanka Wall Tile. Further, Lanka Wall Tile reported relatively

higher interest cover compared to RCL reflecting better long term solvency as well as

financial flexibility.

Short term financial strength – Lanka Wall Tile leads in terms of Current assets

and Acid test

Lanka Wall Tile reported current assets to current liabilities ratio of c.3.81x over FY15-

18 where RCL’s ratio was c.1.30x. Further in terms of Liquid assets, TILE’s acid test

ratio marked c.1.91x where RCL’s acid test stood at c.0.47x. Hence, Lanka Wall Tile

reported more current and liquid assets relative to their current liabilities reflecting

better short term liquidity.

4.3. Management Effectiveness

RCL leads in terms of Activity Ratios

RCL reported Inventory turnover, Debtors turnover and Creditors turnover ratios of

2.32x, 8.12x, 9.33x in FY18. Lanka Wall Tile’s activity ratios were substantially

weaker with 1.93x, 4.53x and 5.49x of Inventory, Debtors and Creditors turnover ratios.

Hence, we believe RCL have the potential to improve their margins and fully utilize this

management effectiveness.

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4.4. Investment Decision

In our opinion, Lanka Wall Tile would be the better investment opportunity

We support our recommendation with following grounds:

 Lanka Wall Tile’s growth adjusted PER ratio is substantially lower than that of

RCL - This allows investor to buy a growing company at a lower price multiple.

 Lanka Wall Tile relatively lower Debt to Equity ratio – This would provide

Lanka Wall Tile more financial flexibility when it comes to new investment

opportunities.

 Better short term liquidity – Higher current assets and quick assets ratio provide

evidences that necessary funds are available on time.

 Better profit margins reflect good pricing power – Lanka Wall Tile can improve

their activity ratios by motivating the managers. This would have a rippling

effect on ROE to improve.

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5. Conclusion

The objective of this study was to Analyze Royal Ceramics Lanka PLC and Lanka Tiles

PLC using important financial ratios such as Profitability ratios, Short and Long term

liquidity ratios, Management Effectiveness ratios and Market related ratios. We have

selected a panel data set over FY15-18 of RCL and Lanka Tiles in order to better

analyze the trends with time and relative performance of companies.

Lanka Tiles recorded leading performance in terms of profitability with higher ROE,

ROA as well as higher net profit margin. However, RCL has overtaken Lanka Tiles in

efficiency ratios implying their strategy of lower margins with sales increases where

Lanka Tiles’s strategy has been to charge higher relatively higher prices to maintain

higher margins.

Market aspect clearly supported Lanka Tiles with a substantially lower PEG ratio.

Relatively less financial leverage of Lanka Tiles further supports our investment

recommendation.

However, we strongly notice that the investors/potential investors should consider other

non – financial factors which can create substantial differences to our investment

recommendation.

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6. Appendix

Royal Ceramics Lanka PLC – Annual Reports (FY15-18)

https://www.cse.lk/home/company-info/RCL.N0000/financial

Lanka Tiles PLC – Annual Reports (FY15-18)

https://www.cse.lk/home/company-info/TILE.N0000/financial

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