The examination of financial
statements is a systematic process used to amount the profitability, growth and
operational efficiency of the company. There are various methods used to
analyse the financial statements of a company. This study is going to use the
horizontal method to analyse the financial statements. Horizontal analysis helps
in examining in what way a company has grown over the years. Horizontal analysis
is also helpful in comparing the performance of the company with its
competitors. The study has taken Kwailty Limited as the subject to analyse it’s
Kwality limited is involved in
processing, manufacturing, and trading of dairy products, milk products and
milk. It started it’s journey in 1992 as a regressive incorporation unit of
Kwality Ice Creams India Ltd. It is known as one of North India’s fastest
growing dairy company in the private sector. It has six manufacturing units in
India. Over the years, it has derived with ground-breaking dairy products for
their consumers. It largely markets and sells it’s product under the family
brand, “Dairy Best.” Kwality has amplified it’s attention on distribution of
dairy products from India to other continents like Australia and Africa and to
more than 28 countries.
This report is further going to
evaluate and analyse the current situation of Kwality limited. It is also going
to compare it’s performance from the year 2015 to 2017. The three financial
statements that are going to used are: the Balance sheet, Profit and Loss
Account and Cash Flow Statement.
2.1 Capital structure:
The capital structure determines
the commercial well-being of a company. Over the past three years, Kwality
Limited has been increasing the number of shares issued, therefore the equity
share capital has been growing. From
2015 to 2017 there has been an 8% increase in the equity share capital. Equity
capital is considered to be an expensive cost since the cost is the return the
firm must make in order to attract investors. As the same time it has very low
risk because the company may or may not pay back the shareholders if the
earnings of the company decline. Hence, Kwality is trying to lower their risk
by increasing their share capital. The other way of raising capital is by taking
debt. From 2015 to 2016 the company has increased their borrowings by 73%
whereas from 2016 to 2017 it has increased by 98%. Leveraging has a major
advantage that the interest payable is tax-deductible. Therefore, at times it
has been considered a better option than equity since debt also retains the
ownership of a company. The debt to equity ratio of the company in 2017 is
0.5:1. This indicates that the company has a low leverage ratio and is a very
conservative company that does not believe in taking a lot of loans. This could
lead to a slower growth rate of the company. The increase in loans as well as
equity capital is due to expansion plans of Kwality Limited.
2.2 Investing decisions:
Kwality Limited has made quite a
few investments in the year 2017. Compared to the prior year, the company has improved
their use of cash in investing activities by 96%. The investing activities of a
company plays a very significant role in allocating their capital. One incorrect
decision can turn out to be very expensive for the company. One of the major
investments that the company has made is buying equity shares in it’s own Subsidiary
company. The company increased it’s fixed asset acquisition by 93% compared to
last year. There has been an inflow of cash due to the profit made from the
sales of the fixed assets. The company’s received interest obtained from it’s
previous investments has decreased by 8% since the previous year.
2.3 Working capital:
The working capital shows if a
company has adequate current assets to pay off it’s current liabilities. It is
important to run the company’s day to day expenses. If the working capital is
not maintained properly, the company could become insolvent. Analysing the
working capital ratios of the previous years and present in Kwality, it can be
stated that the company has managed to maintain it’s working capital over the
past years and is in a good position. The current ratio also determines the
liquidity of a company. The inventory turnover ratio is high which indicates
that sales of Kwality are strong. The quick ratio is used to analyse the short-term
liquidity of the company. The company’s quick ratio comes under the ideal quick
ratio of a manufacturing unit. This points out that the company has sustained
their operating cash flow of the company. It also portrays the working capital
management of the company is efficient and in control.
2.4 Financing Decisions:
The cash flow from the financing
activities define the financing decisions of a company. The financing decisions
reflect on the payment for the investments and expenses of the company. It is
very crucial to the company to make the right financing decisions, since it has
a direct impact on the capital structure of the company. As already discussed
Kwality limited has raised their equity capital as well as has taken long term
borrowings this year. Their long-term borrowings have increased by 89% compared
to the previous year. They have also paid off their net short-term borrowings.
The company managed to pay 7% more dividend to it’s shareholders compared to
the previous year. Even though the company’s payments increased in the year
2017 compared to 2016, due to the rise in their capital, the net cash used in
the financing activities decreased 22% this year. At the end of their present
financial year, the company was left with 141% more cash and cash equivalents
compared to 2016.
2.5 Cost management:
Cost management is essential for
planning and guiding the budget of the company. The main aim of cost management
is to optimise the performance of the company than to cut the costs. An
effective cost management leads to less wastage of money and gives better
results. In order to reduce the cost as well main it’s performance, it is very
important to understand what drives the cost. There are various types of cost,
but the main ones include fixed, variable, direct and indirect cost. The total
cost of a business contains fixed cost and variable cost. Compared to the
previous year, the total expenses of the company in 2017 have increased by 8%.
Fixed cost includes those items that remain constant throughout the year,
whereas variable cost refers to those cost that keeping changing because they
are affected by sales. 26% of the company’s expenses are fixed whereas 84% of
the expenses are variable cost. This situation indicates shows a more
consistent per-unit cost and therefore a more consistent gross margin,
operating margin and profit margin. The variable cost last year was 68%. An
increase of 16% can be observed. It is possible for the company to reduce it’s
variable cost. If they do so and the fixed costs are more than the variable
cost, then the marginal profitability will increase.
2.6 Break-Even analysis:
Break-Even analysis determines
the margin of safety based on the revenue generated and associated cost.
Companies mainly use this method to analyse price levels at different levels of
demand in order to understand at what level of sales they will be able to
regain their fixed cost. This gives an insight to the companies to comprehend
their target. From the year end 2016 to 2017, the revenue of Kwality limited
should an increase of 8%. The break-even sales revenue for 2017 has decreased
by 0.8%. Which is a positive thing, since even though the costs have increased,
the company was able to be make good amount of profit.
2.7 SWOT Analysis:
SWOT helps analyse where the
company is lacking and gives an idea as to what can be done to improve the
situation. The strength of Kwality
limited lies in it’s distribution and sales network, the barriers of market
entry, and the employment of a skilled workforce. The weaknesses of the company is that the loans taken have high
interest and the market is very competitive. Even then the company has many opportunities like new acquisitions,
the growing demand of consumers, and the increase in the income level. The main
threats faced by the company are
high charges of tax, the interference of government regulations, and other external
understanding of these concepts are very vital to run a financially stable
company. The above analysis helps indicate the financial health of Kwality
Limited. The main goal of any company is to maximize their profit and increase
the shareholder’s wealth. Based on the analysis, the company has increased it’s
equity capital as well as long term borrowing in order to finance it’s growth.
Kwality Limited is planning to capture the global market along with the Indian
market. Since it has already captured the Indian market and is now preparing itself
for the global market. It has initiated it’s expansion growth with continents
like Asia, Africa and Australia. Coming to the profitability of the company, it
has been maintaining it’s position by managing it’s expenses, liabilities and
revenue. At the same time the company has been able to return it’s profits to
the shareholders. The earnings per share has been showing a positive growth
over the past years. Although the return on equity has been falling down over the
years. The company needs to analyse this situation and come up with a solution
in order give better results. Analysing the company’s efficiency ratios, it can
be stated that the company has been doing very well. It has sustained it’s
efficiency. This study has given a clear understanding how the company has
carried out it’s business over the past years and has helped analyse it’s
financial position in this competitive environment.
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