Subject: Accounting for Managers

Subject: Accounting for Managers Course code: MBA 5101 Group 01 MBA Weekend programme 2016/2018 Postgraduate and Mid-career Development unit Faculty of Management and Finance University of Colombo Page | 1 Contents 1. Introduction to People’s Leasing & Finance PLC .......................................... 3 2. General Introduction to Ratio analysis ........................................................... 4 3. Financial performance analysis of Peoples Leasing & Finance PLC ............ 6 3.1. Leverage ratios ......................................................................................... 6 3.2. Profitability Ratio ................................................................................... 11 3.3. Market value Ratio ................................................................................. 19 3.4. Credit risk management ratios................................................................ 26 4. Recommendations......................................................................................... 33 5. References ..................................................................................................... 35 Page | 2 1. Introduction to People’s Leasing & Finance PLC People’s Leasing Company PLC was incorporated in 1995 as a private limited liability company with an initial capital of Rs. 10 million. Mr. D. P. Kumarage was appointed as the Chief Executive Officer with the goal of spread heading a transformational mindset and cultural change with the company. The first branch of the company was established in Kandy as the first step of company’s growth plan. The corporate status of the company changed from a Private Limited Liability company to a Public Limited Liability company in 2012. Within a span of just seventeen years in operations, People’s Leasing Company establishes itself as the market leader in the leasing industry in 2002. The company forms two subsidiaries as a step of diversifying into new business ventures in 2008. People’s Leasing Fleet Management Limited and People’s Leasing Property Development Limited became the first two subsidiaries of the company. People’s Leasing Company consolidates itself as a diversified financial services provider by forming People’s Insurance Limited as a wholly owned subsidiary in 2009. People’s Leasing Company listed on the main board of the Colombo Stock Exchange through the second largest IPO in the history of the Bourse in 2011. People’s Leasing Company received two international ratings in 2012 while becoming the first non-Bank Financial Institution (NBFI) in Sri Lanka to receive international ratings. Two international ratings were from Standard & Poor’s and Fitch Ratings International. People’s Leasing Company successfully amalgamates with its subsidiary People’s Finance PLC in 2013. In 2014, the company bags the ‘Silver Award’ for overall excellence in financial reporting after securing the sector Gold Award for seven consecutive years. People’s Leasing Company secured a ‘Silver Award’ at the SLIBFI award ceremony for the ‘Best Uplifting Islamic Finance Entity of the Year’ in 2016. The company set up an epic record of RS. 8.1 billion, monthly disbursement in 2016. People’s Company Leasing was recognized as the ‘Financial Service Provider of the Year’ by SLIM Nielson Peoples Awards in 2016. Page | 3 2. General Introduction to Ratio analysis Ratio Analysis refers to the analysis of the financial statements in conjunction with the interpretations of financial results of a particular period of operations. This is derived with the help of 'ratio'. Financial analysis as a scientific tool is used to carry out the calculations in the area of accounting. It also allows the firms to observe the performance of a business spanning across a long period of time along with the impediments and shortcomings. Financial analysis is an essential mechanism for a clear interpretation of financial statements. It aids the process of discovering, the existence of any cross-sectional and time series linkages between various ratios Ratio analysis determines the performance of a business in a broader scope. One aspect looks at the general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This is done by converting and analyzing numbers from the financial statements. Most commonly used sources of financial figures are Balance Sheet, Income Statement and Cash Flow Statement. The results of the analysis can be used to determine numbers against previous years, other companies, the industry or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and how it might perform in the future. Advantages of Ratio Analysis In order to establish the relationship between two accounting figures, application of Ratio Analysis is necessary. Application of the same provides the significant information to the management or users who can analyze the business situation. It also facilitates meaningful and productive monitoring of the annual performance of the firm. Illustrated below are the advantages of ratio analysis: ➢ It facilitates the accounting information to be summarized and simplified in a concise and concrete form which is comprehensible to the user. ➢ It depicts the inter-relationship between the facts and figures of various segments of business which are instrumental in taking important financial decisions. ➢ Ratio analysis clears all the impediments and inefficiencies related to performance of the firm/individual. ➢ It equips the management with the requisite information enables them to take prompt business -decisions. ➢ It helps the management in effectively discharging its functions/operations such as planning, organizing, controlling, directing and forecasting. ➢ Ratio analysis is used as a benchmark for effective control of performance of business activities. ➢ Ratio analysis is an effective tool which is used for measuring the operating results of the enterprises. Page | 4 Limitations of Ratio Analysis ➢ Various environmental conditions such as regulation, market structures etc. vary for different companies, operating in different industries. Significance of such factors is extremely high. This variation may lead to a difference or an element of discrepancy, while comparing the two companies from diverse industries. ➢ Financial accounting information is impacted and often subject to change, by estimates and assumptions. Accounting standards allow scope for incorporating different accounting policies, which impairs comparability and hence functionality of ratio analysis is less in such situations. ➢ Ratio analysis explicates association between past information while current and future information is of more relevance and application to the users. Page | 5 3. Financial performance analysis of Peoples Leasing & Finance PLC Financial performance of People’s Leasing Company PLC has been analyzed using the below stated financial ratios. Please note that People’s Leasing and Finance PLC refer “PLC” or “The Company” in our interpretation. 3.1. Leverage ratios Companies rely on a mixture of owners' equity and debt to finance their operations. A leverage ratio refers to financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations. As per general perception, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations. However, low debt-to-equity ratios may also indicate that a company is not taking advantage of the increased profits that financial leverage may bring. The evaluation of Peoples Leasing and Finance PLC leverage has been done using following most commonly used ratios. 3.1.1 Debt Ratio Debt ratio is a ratio that indicates the proportion of a company's debt to its total assets. It shows how much the company relies on debt to finance company assets. The debt ratio gives users a quick measure of the amount of debt that the company has on its balance sheets compared to its assets. The higher the ratio, the greater the risk associated with the firm's operation. A low debt ratio indicates conservative financing with an opportunity to borrow in the future at no significant risk. The calculation of PLC Debt ratio is as follows. Debt Ratio = Total Liabilities Total Assets Rs. million FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Total Liabilities 77,945.84 82,892.08 98,648.96 95,108.12 106,415.99 Total Assets Debt Ratio 95,162.73 0.81 101,144.46 0.81 118,416.77 0.83 117,160.97 0.81 131,086.26 0.81 Page | 6 As per the calculated figures, it is visible that the leverage of the company has remained at 81% continuously (unless in 2014 year in which leverage has increased up to 0.83). However, by analyzing the percentage change in total assets and total debt, it is visible that both the asset base of the company has increased simultaneously with the liabilities. The deposits from customers (savings and fixed), long term loans from banks and long term debentures issued by the company have become most contributing elements to the continuous increment in total liabilities. However, it should also be noted that the company has redeemed its commercial papers within the period 2013-2015. The company has issued Rs. 11.2 bn commercial papers in 2013 and it has drastically come down to RS. 0.4 bn at the end of 2015 financial year. A portion of Rs. 4.2 bn has redeemed from commercial papers in 2015 resulting in a 3.6% drop in the total liability base of the company. Further, the company has reported a negative growth of 1% in total assets in the same year. However, the company has again raised debt by raising Rs. 1.5bn commercial papers in 2016. At the same time, the company has also obtained short term bank loans worth of Rs. 3.1bn (64% higher than year 2015). It is visible that the company has utilized majority of these funds in granting loans to their customers and the rest as investments in associates and expanding property, plant and equipment. As per our observation, industry standard debt ratio for finance companies is 0.80 times. Therefore, company has continuously maintained the industry standard ratio. Altogether this ratio gives an indication that the investors can earn a higher return for their investment in the near future compared to what was earlier. 3.1.2 Debt Equity Ratio Debt/Equity Ratio is a debt ratio used to measure a company's financial leverage, calculated by dividing a company’s total liabilities by its stockholders' equity. The D/E ratio indicates Page | 7 how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity. The calculation is as follows. Debt Equity Ratio = (Gearing ratio) Debt Share Holder Equity Rs. million FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Totasl Debt 72,494.11 76,255.37 90,985.38 84,901.55 96,559.56 Total Equity Gearing Ratio 17,216.89 4.2 18,252.37 4.18 19,767.80 4.60 22,052.86 3.85 24,670.27 3.91 Debt to equity ratio of PLC has shown a fluctuating pattern with the 5 year period. It has reported relatively high figures from 2012 to 2014 and has slightly decreased during the next few years. Having a relatively higher debt to equity ratio is expected in banking and financial services industry. Current debt equity ratio in Sri Lankan industry is 6.83 times. However, the company has maintained a figure below the industry standards. However, the figures of PLC show minor deviations as per our analysis. It shows a figure of 4.21 in 2012 which is the highest figure within the 5 year period. It is visible that the company heavily relying on finance from banks which represents 63%. These are relatively expensive modes of finance such as short term and long term borrowings and overdrafts. It is highly unlikely that PLC has earned profits out of these transactions. However, from 2013 onwards, PLC has focused on collecting savings from customers in 2012. It was observed Page | 8 that the deposits from customers have increased gradually from 2012 with a significant drop in borrowings from banks. The bank borrowings have come down by nearly 60 in 2013. However, the debt equity ratio has remained in the range of 4 due to the impact from customer deposits during 2013 and 2014. The reason for the significant improvement in customer deposits is, PLC became Central Bank licensed company to accept deposits from customers in 2013 and this has resulted in a new dimension of PLC services. Debt ratio has decreased to 3.85 in 2015 and continued in the range of 3 during 2016 as well. Major contributions for the change were 90% redemption of commercial papers and a decrease in fixed deposits of the customers by RS. 97bn (33%). The analysis in 2016 shows no major difference compared to 2015 since there were no significant changes in the debt or equity structure of the company compared to prior year. 3.1.3 Debt to capital ratio Most companies finance their operations through a mixture of debt and equity. Hence looking at total debt or net debt of a company may not provide the best information. Since a specific amount of debt may be crippling for one company yet barely affect another analyzing the entire company’s financial leverage gives a more accurate perspective of a company’s health. The debt to capital ratio gives analysts and investors a better idea of a company’s financial structure and whether or not the company is a suitable investment. The higher the debt to capitalization, riskier the investing in company. Refer the below analysis, Debt to capital ratio = Debt Debt +Equity Rs. million FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Total Debt 72,494.11 76,255.37 90,985.38 84,901.55 96,559.56 Total Debt+Capital Debt to Capital ratio 89,711.00 0.81 94,507.74 0.81 110,753.18 0.82 106,954.41 0.79 121,229.83 0.80 Page | 9 Debt to capital ratio of PLC has remained in at a similar level with minor fluctuations. No major variations have been reported in the financial structure of the company. The figures shown are extremely favorable from an investors’ perspective. Considering the nature of the business, the figures reported in PLC are slightly lower, but at a less risk compared to industry average. Current industry average is 0.87 times. There has been a major change in debt base in 2013 even though the debt to capital ratio has remained the same. Total debt has increased by 19.31% within 2013. 3.1.4 Interest cover ratio The interest cover ratio is a ratio that measures a company’s ability to make interest payments on its debt in a timely manner. Interest cover ratio interprets the firm’s ability to afford the interest on the debt. Creditors and investors use this computation to understand the profitability and risk of a company. For a creditor on the other hand, uses the interest coverage ratio to identify whether a company is able to support additional debt. This will be evaluated to calculate the risk involved in lending. Calculated following way; Interest cover ratio = EBIT or net income Annual interest expenses Rs. million FY Net Income Annual Interest Expenses Ratio 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 8,375.51 9,807.27 11,551.47 12,557.92 14,282.94 7,411.29 10,308.26 11,395.89 9,350.27 8,006.05 1.13 0.95 1.01 1.34 1.78 Page | 10 Interest cover ratio of PLC has varied continuously within 5 year period. The figures show in 2013 and 2014 indicate negative performance of company. 0.95 In 2013 and 1.01 in 2014 show that PLC has struggled to repay the loan interests. Interest cost of the year 2013 has increased by 39% compared to 2012 as a result of increased debt securities issued. Issuance of debt securities has increased by 162% in 2013. More importantly, company has issued Rs. 20bn worth promissory notes and commercial papers and it has led to 39% increase in interest cost. It is visible that the interest cover ratio has started improving from 2014. The ratio has increased up to 1.01 in 2014 due to an increase in interest income of the company. In addition, company has received cash flows from Islamic finance operations as well. Annual interest expense has continuously decreased in 2015 and 2016 resulting in an improved interest cover. Company has redeemed high costly debt securities such as promissory notes and asset back securities in 2016 and it has resulted in less interest cost. 3.2. Profitability Ratio Profitability ratios measure a company’s ability to generate earnings relative to sales, assets and equity. It highlights how effectively the profitability of a company is being managed. Different profitability ratios provide different useful insights into the financial health and performance of a company. For most of these ratios, a higher value is desirable. A higher value means that the company is doing well and it is good at generating profits, revenues and cash flows. Profitability ratios are of little value in isolation. They give meaningful information only when they are analyzed in comparison to competitors or compared to the ratios in previous periods. Page | 11 3.2.1. Net Interest Margin Net interest margin is a performance metric that examines how successful a firm's investment decisions compared to its debt situations. A negative value denotes that the firm has not made an optimal decision, because interest expenses were greater than the amount of returns generated by investments. The use of net interest margin is helpful in tracking the profitability of a bank’s investing and lending activities over a specific course of time. Besides, a period end balance sheet, average balance sheet published by the banks indicating the breakdown of bank’s loans, deposits, investments, and borrowed funds, and their related interest rates provides more insight to investors seeking for more info on the fluctuation of Net Interest Margin. Calculation is as follows; Net Interest Margin = Net Interest Income Average Total Assets Rs. million FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Net Interest Income 6,471.09 7,177.01 8,657.55 10,244.81 10,295.11 Average Total Assets Ratio 79,508.62 8.14% 98,153.60 7.31% 109,780.61 7.89% 117,788.87 8.70% 124,123.62 8.29% Net interest margin of PLC denotes a positive figure which means the company is earning profits from the debt extended to customers. As per our analysis, it can be seen that the margins earned by PLC is in par with industry average. However, we also observed that the figure reported in the recent year indicates that PLC has not optimized the investment decisions in order to maximize the returns. Considering the year 2016, there has been an Page | 12 improvement of 12% in loans and receivables base of the company but no considerable improvement has occurred in the interest income during the period. 3.2.2. Net Profit Margin Net Profit Margin (Return on sales), often called the operating profit margin, is a financial ratio that computes how efficiently a company is at producing profits from its revenue. Otherwise, it measures a company’s profitability by analyzing what fraction of total company revenues are truly converted into company profits. This ratio is extremely beneficial for investors and other stakeholders because they can analyze the current performance trends of a business and compare them with other companies in the industry without any concerns of the magnitude of the company. In other words, a Sri Lankan company could be compared with a regional firm to see which is able to operate more efficiently and turn revenue into profit without considering direct business activities. Calculation is as follows, Net Profit Margin = Profit for the year Net Sales 2013 2014 Rs. million 2015 13,882.39 17,485.27 20,053.44 19,595.09 18,301.16 Profit for the year 2,886.90 3,110.33 3,463.21 4,101.54 4,741.54 Net Profit Margin 25.91% 20.93% 17.27% 17.97% 20.80% FY Net Sales 2012 2016 Page | 13 The net profit margin of PLC has fluctuated within the 5 year period. However, the analyzed figures are above the industry average. It has reported the highest figure in 2012. The margin has continuously declined during the next 3 years. The key reason for the decline is income from the interest has improved at a lower rate compared to prior years. However, the profit of the company has improved slightly during each year. It is also visible that the operating cost of the company has remained without major fluctuations. The management of PLC has efficiently maintained the operations of the company which has ultimately generated a stabilized profit each year. However, further improved profits can be expected in further years due to an investment which PLC has made in one of its associates. PLC has invested RS. 550mn in People's Merchant Finance PLC during 2016 which has not generated a share of profit for PLC in 2016. The performance of PLC has further declined due to the share of loss attributed from People's Merchant PLC. In FY 2016 the company achieved the 20.80% net profit margin which it is in par with the industry average. It should also be noted that the year of 2016 has been challenging for bank and financial companies. The company has generated 1 billion reversal of the impairment within the year. 3.2.3. Return on Average Assets ratio (ROAA) Return on average assets ratio (ROAA) is Profitability ratio that measures a firm's capability to generate sales from its assets by comparing revenue with average total assets. In other words, this ratio displays how efficiently a firm can use its assets to generate revenue. High Return on average assets ratio is desirable because it indicates that the company is utilizing its assets efficiently in produce revenue. The higher the asset turnover ratios, more the revenue generated by company from its assets. This ratio is especially used by banks and financial institutes Average total assets are usually considered for the calculation. Revenue of a particular FY is calculated from average total assets of the company. Return on Average Assets = ROAA) Revenue Average Assets Rs. million FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Average Total Assets Revenue (Income) ROAA 79,508.62 16,135.05 0.20 98,153.6 20,814.80 0.21 109,780.61 24,177.22 0.22 117,788.87 23,578.87 0.20 124,123.62 22,579.70 0.18 Page | 14 This ratio measures how efficiently a PLC uses its assets to generate interest income; hence a higher ratio is always attractive for investors. Higher turnover ratio denotes that the company has utilized all the assets in a productive manner. As per the CBSL information, the industry has reported an average of 0.20 during past 5 years. PLC has continuously maintained a figure above the industry average except in 2016. It shows that the usage of PLC assets have been very efficient. In 2015/2016, ROAA has declined to 0.18 compared to previous years. It is observed that the main reason for such a decline is there has been an increase in total assets of company while generating no extra revenue. There has been a slight decline in the interest income of the company. A general reduction in interest rates of Sri Lankan economy had a direct impact on the revenue of the company which has resulted in a lower ROAA. 3.2.4. Return on Assets ratio (ROA) Return on assets ratio (ROA), often called the return on total assets, is a profitability ratio that measures the net income created by total assets during a period by comparing net income to the average total assets. In other words, the return on assets ratio or ROA measures how efficiently and effectively a company can manage and control its assets in generating profits during a specific period of time. When calculating ROA, before tax profit is divided by the average total assets. Historical cost of the assets on the balance sheet and the net income from income statement have been used for the calculation. Return on Assets (ROA) Profit before tax Average Total Assets Page | 15 Rs. million FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Average Total Assets 79,508.62 98,153.6 109,780.61 117,788.87 124,123.62 PBT ROA 4,279.99 4,539.50 4,931.05 5,887.42 6,706.90 5.38% 4.62% 4.49% 5.0% 5.40% ROA shows how efficiently PLC has converted the assets into net interest income or profits. Comparing the 2011/2012 and 2015/2016 financial years, the average total asset has increased by 56% and PBT tax by 36.1%. However, no significant impact in ROA and remained at 5.40% in 2016. This indicates throughout the period asset management well organized. As shown in the graph highest ROA got in last year of 2015/2016 5.40%. Comparing the last year ROA company with tighten economic condition this is big achievement for the company. As per analysis on CBSL information, the average ROA in financial institution sector is 3%. PLC has maintained the ROA above the industry average while being more efficient in managing assets in creating revenue. 3.2.5. Return on equity ratio (ROE) The return on equity ratio or ROE is a profitability ratio. This ratio measures the ability of a firm to generate profits from its shareholders investments in the company. The return on equity ratio shows how much profit each rupee of common stockholders' equity generates. This is a vital measurement for potential investors because they need to see how effectively and efficiently a firm’s management will use their money to generate net income. Return on equity is calculated using profit and average shareholder equity for a particular year. However, it strongly depends on multiple factors such as industry, economic Page | 16 environment (inflation, macroeconomic risks, etc.). Higher ROE is always better from an investor’s point of view. Following calculation has been used in our analysis. Return on Equity (ROE) Profit for the year Average Equity Rs. million FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Average Equity 12,745.90 17,734.63 19,010.09 20,910.33 22,860.44 Profit for the Year ROE 2,886.90 22.65% 3,110.34 17.54% 3,463.21 18.22% 4,101.54 19.61% 4,741.54 20.74% ROE of the company for the past 5 years shows minor fluctuations. Performance of FY for 2015/2016 has generated 20.74% return. There has been a growth of 5.76% compared to 2014/2015 figure. The highest figure can be seen in 2011/2012 ROE which was 22.65% and it has remained below 20 over the next 3 years. Company has shown positive performance over the 5 year period compared to industry average. Overall, industry has maintained a ratio of 12% during 2013 to 2016. Hoverer, there has been several reasons for the increase in the equity of the company. A change in the dividend policy in which the company is now paying fixed dividend for their shareholders and retains earnings for more than 50% in company to secure shareholder value was a key highlight. Further, in 2013/2014, company acquired the Peoples finance PLC and issued the new shares for Peoples Finance PLC shareholders. These actions have directly resulted in increasing the equity of the company. Page | 17 3.2.6. Cost to income ratio The cost-to-income ratio is a key financial measure, particularly important in valuing financial institute. It shows a company’s costs in relation to its income. To get the ratio, divide the operating costs (administrative and fixed costs, such as salaries and property expenses, but not bad debts that have been written off) by operating income. The ratio gives investors a clear view of how efficiently the firm is being run – the lower it is, the more profitable the bank will be. Changes in the ratio can also highlight potential problems: if the ratio rises from one period to the next, it means that costs are rising at a higher rate than income, which could suggest that the company has taken its eye off the ball in the drive to attract more business. Cost to income ratio calculated following way; Cost income ratio = Total Cost Total Income Rs. Million FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Interest Income 13,882.39 17,485.27 20,053.44 19,595.09 18,301.16 Operating Expenses 3,692.9 4,980.16 6,318.03 6,298.37 6,979.91 Cost to income ratio 26.60% 28.48% 31.51% 32.14% 38.14% This ratio shows the rising trend of the PLC. Industry standard of cost income ratio is 46% comparing that PLC ratio is well below that. According to our analysis this ratio increases year on year. However, this creates a negative impact on the company P&L. In 2011, FY ratio was 26.6% and it has continuously increased and highest figure has reported in 2015/2016 38.1%. Percentage increase during the five year period is 43.5%. Main reason for the increase in cost income ratio is, interest income growth of PLC has declined over the period. Overall, income has increased on by 31.8% whereas operating expense has increased by 90% over the 5 year period. Page | 18 As part of the company expansion strategy, PLC has heavily invested on expanding branch network. Total number of branches of the company was 34 in 2011 and it has increased up to 92 in 2015. The expansion strategy has resulted in so many other expenditure such as recruitment, personnel cost, operation cost etc. For an example, personnel cost in 2011 was Rs.917 million and it has gone up to Rs.2070.55 million in 2016. However, the question PLC faces currently is, whether the expansion strategy has managed in a cost effective manner by PLC. If not, this will result in increasing the expenditure base of the company unnecessarily. 3.3. Market value Ratio Market value ratios evaluate the economic status of the publicly traded company. In other words, if your company is listed in the capital market, this ratio will evaluate whether it’s the value of the stock is overvalued, undervalued or priced fairly in the investor perspective. In Sri Lankan context all the public quoted companies are traded in Colombo stock exchange and currently 295 companies has registered from 20 different sectors. PLC listed in the Colombo stock exchange main board through an initial public offer in 2011. Last traded price of the company is Rs.15.50 as at 21-03-2017 Common market value ratios are Net asset value per share, Earning per share, Dividend payout ratio, Dividend yield ratio, Dividend cover ratio, Price earnings ratio which we have discussed in our analysis to evaluate the financial performance of PLC. 3.3.1. Net Asset Value per Share (NAVPS) An asset value per share is the total value of a fund's investments divided by its number of shares outstanding. In the other words, company’s total assets minus total liabilities are divided by the outstanding number of share refers to the net asset value per share. This may also be the same as the book value or the equity value of a business, more commonly referred to as book value per share. Calculation of net asset value per share is as follows; Asset value per share (Book Value per share) FY Net assets No of shares 2011/2012 2012/2013 2013/2014 Rs. Million 2014/2015 2015/2016 Net Assets Rs. 17,009.36 18,252.37 19,767.80 22,052.59 23,667.22 No of Shares 1,560.00 1,560.00 1,560.00 1,579.86 1,579.86 10.9 11.7 12.51 13.96 14.98 NAVPS Page | 19 Net Asset Value per Share has continuously increased during the 5 year period. This is a positive indication of business performance because the company has increased their net asset base every year. During the last five years, there is an increase of 37.4% in net asset value per share whereas; the total net assets have increased by 39.1%. Total number of shares in 2011 was 1560 million and after merging with Peoples Finance PLC in 2014, PLC has issued new equity shares for owners of the Peoples Finance PLC. It has resulted in increasing the total number of shares in to 1579.86 million in 2014. Main usage of the share is, outside investors can get an idea of the value of a share if the company liquidates. Market price of PLC as at today is Rs.15.5. Net asset value per share is almost equal to the Market price of PLC share. It indicates that PLC shares will generate in good returns for investors in the future. 3.3.2. Earnings per Share (EPS) Earnings per share is the portion of the company’s distributable profit which is allocated to each outstanding equity share. It is a very good indicator of the profitability of the organization, and it is one of the most widely used measures of profitability. It is useful in measuring profitability and when compared with EPS of other similar companies, it gives a view of the comparative earning power of the companies. Investors are more attractive with the steadily increasing earnings per share in a company. Because companies increasing EPS always generate positive results for the company and provide sufficient returns to investors. Growth in EPS is an important measure of management performance because it shows how much money the company is making for its shareholders. Page | 20 Following is the EPS calculation, EPS = Net Earnings Number of shares EPS of PLC is as follows. FY Net Earning Rs. Million No of Shares Million EPS RS. 2011/2012 2,886.90 1,560.00 1.83 2012/2013 3,110.33 1,560.00 1.97 2013/2014 3,463.21 1,560.00 2.22 Rs. Millions 2014/2015 2015/2016 4,101.54 1,579.86 2.6 4,741.54 1,579.86 2.98 EPS of PLC has continuously increased during 2012-2016. Company has been doing exceptionally well in operations and also net earnings has increased by the 64.2% throughout the period. FY 2011 EPS shows 1.83 and EPS have increased up to the Rs.2.98 by the end of 2016. EPS growth rate per year varies between 8% to 10% during last 5 years. This is an important indicator for a public quoted company. Underlying reason behind such an earning boost in PLC is company expanded their branch network and it has earned from investments in subsidiary companies. By analyzing the EPS trend, investors can make their decision to invest in the PLC without any hesitation. 3.3.3. Dividend Yield Dividend yield is the amount that a company pays to its shareholders annually for their investments. It is expressed as a percentage and indicates attractiveness of investing in a company’s stocks. It is calculated as Dividend per Share divided by Current Market Value per Share. Investors widely use this ratio in trend analysis and consider their past dividend Page | 21 yield ratios to decide whether to invest in the company or not. Dividend yield is mostly important for the investors who are seeking long term investments and a consistent return every year. By calculating the dividend yield, investors can compare the stock return and alternative investment returns. Based on the dividend yield, investors can decide their investment opportunities in the long run. Dividend Yield is calculated as follows; Dividend yield Dividend Per Share (DPS) Market Price per share (MPS) Rs. Millions FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Dividend Per Share Market Price per share Dividend yield 1 1.25 1.25 1.25 1.25 11.6 13.1 14.3 22.1 16 8.62% 9.54% 8.74% 5.66% 7.81% Dividend yield measures the market price of the share. In year 2011, PLC market price was at Rs.11.6. when PLC paid a dividend of Rs1.0 and yield was 8.62%. PLC market price went up to Rs.22.1 the highest in 2014 within last 5 years due to the better performance of the company as well as the performance of the Sri Lankan economy. The latest change in government policies has shown some negative impact on Colombo Stock Exchange and as a result it can be seen that all the share prices are declining including PLC which has reduced to Rs.16 in 2015/2016. It has resulted in a dividend yield of 7.81%. Dividend yield has varied between 5%-9.5% based on this much of DPS. Page | 22 3.3.4. Dividend Payout Ratio & Dividend Cover Dividend payout ratio compares the dividends paid by a company to its earnings. The relationship between dividends and earnings is very important. The part of earnings that is not paid out in dividends is used for reinvestment and growth in future earnings. Investors who are interested in short term earnings prefer to invest in companies with high dividend payout ratio. Dividend payout ratio differs from company to company. Mature, stable and large companies usually have higher dividend payout ratio. Companies which are young and seeking growth have lower or modest dividend payout ratio. Investors usually seek a consistent and/or improving dividends payout ratio. Dividend Coverage Ratio indicates the capacity of an organization to pay dividends out of profit attributable to the shareholders. When calculating dividend coverage for ordinary share capital, it is necessary to deduct any dividend paid on irredeemable preference shares from the net profit earned during the accounting period in order to arrive at the earnings attributable to ordinary shareholders. Generally, companies would aim to sustain a dividend cover of at least 2 times in order to avail adequate financing through retained earnings while providing a reasonable cash return on shareholder's investment. Dividend payout ratio and Dividend cover ratio calculated following way; Dividend payout = DPS EPS Dividend cover = EPS DPS PLC Dividend payout ratio & Dividend Cover ratios as follows FY Dividend per ordinary share (Rs.) Earnings Per Share Rs. Dividend Payout ratio Dividend Cover 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 1 1.25 1.25 1.25 1.25 1.83 1.97 2.22 2.6 2.98 55% 63% 56% 48% 42% 1.83 1.58 1.78 2.08 2.38 Page | 23 PLC dividend policy has been the same except 2011 FY. Company paid Rs.1.00 dividend in 2011 and thereafter Rs.1.25 throughout the next 4 years. Dividend payout ratio shows a declining trend due to the consistent dividend policy followed by the company and this may give a negative impression on the investors. As per our analysis, PLC payout ratio is high compared to the other companies. The main reason is Peoples Bank which is the parent company, closely monitors the dividend policy of PLC. 75% of the PLC equity shares are owned by the Peoples Bank and PLC dividend has a significant impact on the P & L of People’s Bank. It can be seen that during 2011 and 2012, dividend cover ratio has been relatively high compared to other years. The figures are 1.83 and 1.58 respectively. However since 2012, PLC maintained a consistent dividend policy and that has helped to improve the dividend cover ratio and it show a 30% increase at the end of 2016 compared to 2011. The contribution of dividend cover can be clearly seen in the equity of the company. Equity has continuously grown while strengthening the Balance Sheet of PLC. 3.3.5. Price-Earnings Ratio - P/E Ratio Price to earnings ratio (P/E ratio) is the ratio of market price per share to earnings per share. The P/E ratio is a valuation ratio of a company's current price per share compared to its earnings per share. It is also sometimes known as “earnings multiple” or “price multiple”. It is calculated by dividing “Market Value per Share (P)” to “Earnings per Share (EPS)”. Market value of share can be taken from stock market information. P/E ratio is a widely used ratio which helps the investors to decide whether to buy shares of a particular company. Based on the PE valuation, investor can decide whether the share is overvalued, undervalued or fairly valued. Page | 24 Price Earnings ratio calculated following way; PE ratio = MPS Diluted EPS Last five year PLC figures as follows; FY MPS Diluted EPS Price Earnings Ratio 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 11.6 13.1 14.3 22.1 16 1.83 1.97 2.22 2.6 2.98 6.34 6.64 6.44 8.51 5.37 PLC shares were sold at 5.37 times than earnings in 2015. However, there is a decline of 36.8% compared to last financial year of 2014 (PE ratio is 8.51 times in 2014). Such a reduction of PE ratio has occurred due to vulnerabilities in share market. If we look at the last two financial years, company earnings have increased by the 14.6% whereas share prices have decreased by 27.6%. Negative economic conditions have resulted in decreasing the share price of PLC such as increased interest rates. Comparing the other financials 2011 PE ratio is 6.34 times and at that time market price per share closed at the Rs.11.6. 2011 to 2014 price and EPS are increase gradually and that associate to increase the PE ratio. But government changes in 2015 directly impact to the Colombo stock exchange and usability of political system, interest rate hike, and worse financial management impact to the decrease the main stock index. 2015 March ASI is 6820.34 and 2016 March ASI dropped by the point 748.46 and closed at the 6071.88. These changes are direct impacts to decrease the PLC share price. Colombo stock exchange Overall market PE is 11.74. Comparing market PE PLC share is heavily under value. Comparing the future prospects of the company PLC is the good future investment. Page | 25 3.4. Credit risk management ratios Credit risk is an important part of bank and finance sector management. Credit risk is the risk that financial contracts will not be honored according to the original set of terms or expectations. Credit risk occurs whenever a banks or finance companies lends money or invests in securities. If loans are identified the doubtful loans the institute will have to make provisions (impairment) for those loans and further loan are in bad category these loans identify as non-performing loans. Then financial institutes stop accruing interest on the doubtful loans and therefore there is an immediate income loss for P&L 3.4.1. Impairment The impairment requirements in the new standard, IFRS 9 Financial Instruments, are based on an expected credit loss model. Entities are required to recognize an allowance for either 12-month or lifetime expected credit losses (ECLs), depending on whether there has been a significant increase in credit risk since initial recognition. The measurement of ECL’s reflects a probability-weighted outcome, the time value of money and the best available forwardlooking information. PLC identifies the impairment in two methods of Individual impairment and Collective impairment. On an individual impairment is, an appropriate impairment allowance is determined for each significant loan or advance in the event there is evidence as a loss event. Key factors that are considered at an individual level include the sustainability of the counter-party’s business plan; ability to improve performance if it is in a financial difficulty; projected receipts and expected payout should bankruptcy ensue; availability of other financial support; and the realizable value of collateral and the timing of the expected cash flows. From a collective impairment is assessed considering both portfolio factors and macro environmental factors. Portfolio factors relate to information that would indicate adverse changes in the payment status of the borrowers. The portfolio factors include credit utilization; loan to collateral ratio; death of borrower; risk-profile of borrower; and age of loan portfolio. Macro factors are also considered if there is a direct correlation between the conditions and the incidents of defaults in a particular grouping. Key factors considered are unemployment; interest rates; inflation; and significant decrease in the price of a good related to the customer’s revenue source. Impairment calculated following way; Impairment ratio = Impairment loan portfolio Page | 26 2013 company adjust their accounting polices according to new IFRS polices. Therefor 2013 onward they introduces the impairment amount in their accounts.in our analysis to calculate the 2012/2013 impartment we use the 2013/2014 annual report. Last five year figures as follows. Rs. Million FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Loan and Lease 84,494.27 89,536.10 91,859.31 100,166.65 112,243.89 Portfolio Total 559.08 841.72 1362.98 2169.79 1657.72 Impairment Impairment 0.66% 0.94% 1.48% 2.17% 1.48% After adjusting of the impairment FY 2011/2012 shows the lowest impairment ratio of the 0.66%. Throughout the period highest impairment ratio is 2.17% in 2014/2015 FY. But in Last FY company stood the impairment ratio of 1.48%. Last FY PLC recovery is well focuses and due to the massive writ off last FY impairment reduces drastically. Company increases their loan portfolio in 12% but they control their impairment and reduce by the 23%. Last financial year company total impairment would be Rs.1657.77 million. Comparing the last financial year they reduce the individual impairment by the Rs.231.3 million and collective impairment by the Rs.280.8 million. This is the main reason behind this much of lower impairment ratio. Comparing the last five year period 2011 impairment is RS.556.0 million and its increase by the RS. 1657.7 million Its percentage increase of 196.5%. But loan portfolio also increased by the 32.8%. It is visible that the company has continuously maintained a ratio below the industry standards irrespective of economic conditions and company nature. Page | 27 3.4.2. Non-performing loan Ratio To manage the credit risk of the financial institutes they made the impairment provision for loan portfolio. If the customers are continuously default to pay their monthly rentals those loans can categorized as a non performing loan. This can be described as potential loss arising from the failure of counter party to perform according to contractual arrangement with the financial institutes. The failure may arise due to unwillingness of the counter party or decline in economic condition etc. Finance sector risk management has been designed to address all these issues. While it is expected that institutes would bear some bad loans and losses in their lending activities, one of the key objectives of the institutes is to minimize such losses. Non-performing loan ratio indicates the proportion of the total loans that has been set aside but not written off from the company accounts. It is percentage of total loan and lease portfolio of the company. Once a loan is nonperforming, the odds that it will be repaid in full are considered to be substantially lower. If the debtor starts making payments again on a non performing loan, it becomes a re-performing loan, even if the debtor has not caught up on all the missed payments. If company unable to recovery these loans from the debtors they acquired the debtors assets and dispose those. If disposable amount also not sufficient to recover the default loan company can written off the balance and that amount charge from the company P&L. Sales of non-performing loans must be carefully considered since they can have numerous financial implications, including affecting the company's profit and loss, and tax situations. Non-performing loan ratio calculated following way; Non-performing loan Ratio = Non-performing Loans Total Loans PLC Last five year non-performing loan ratio as follows. Rs. million FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Gross Portfolio Non-Performing Loan NP ratio 83,908.10 88,404.48 90,218.36 118,828.95 129,060.62 587.35 1,273.02 1,966.76 3,237.25 1,977.44 0.70% 1.23% 2.14% 2.72% 1.55% Page | 28 PLC can reduce the risk of loan related factor because they can able consequently improvement in the ratio of nonperforming loan to total return. Which reduced at 0.7% was in 2011 and highest point was 2.72% in 2014. But Last FY 2015 NP ratio close at the 1.55%. Notably, last financial year company targeted NP ratio is 3.48 % and industry average NP ratio of 5.7 .comparing both company performance are exceptionally well. They maintain the ratio well below the both. Main reason for this is PLC collection ratio is very high last year it is 95.5%, it is a good sign for the company they have the well perform recovery team. Comparing the FY 2014 its shows the highest NP ratio of the company of 2.72% they need to immediate recovery this position and to overcome this issue they established the Disposal loss recovery unit and special recovery unit addition they more relax the legal recoveries. This helps to increase the customer relationship and the confidences about the company. Through this they recover Rs.329.6 million Non-preforming loan. 3.4.3. Loans to Deposit Ratio (LDR) Loan to deposit is the most important ratio to measure the liquidity condition of the financial institute. Here, loan means the advances granted by the institute and deposit mean funds received from the depositors’. Institute with Low LDR is considered to have excessive liquidity, potentially lower profits, and hence less risk as compared to the bank with high LDR. However, high LDR indicates that an institute has taken more financial stress by making excessive loans and also shows risk that to meet depositors’ claims institute may have to find the alternative solutions. A high figure denotes lower liquidity. If the ratio is too low, the bank may not be earning as much as it could be. Loan to Deposit Ratio calculated following way; Loan to Deposit Ratio = Loan Receivables Total Deposits Page | 29 Rs. Million FY 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 Total Loans 84,494.27 89,536.10 91,859.31 100,166.65 112,243.89 Total Deposits 11,307.88 18,709.86 40,839.27 33,930.22 34,216.26 Times 7.47 4.79 2.25 2.95 3.28 Analyze the liquidity position of the PLC this LDR is very important. It measures the PLC liquidity in terms of the deposits. In terms of the PLC 2011 FY LDR is 7.47 times but when it comes 2015 FY they have to reduce this ratio in to 3.28 times. Throughout the five year period 2013FY Company shows the lowest DLR ratio of 2.25 times. In the finance sector in Sri Lankan this ratio will be 1.7 times. Therefor further PLC need to reduce this ratio to maintain the industry standards. If this ratio is high mean company needs to depend on more outside borrowing to match their lending requirement. Case of the PLC year to year they increase their lending portfolio and to match with that lending requirements PLC needs to find the funds. If internal deposits are not sufficient then alternative solution is the outside borrowings. Always outside borrowing are high cost comparing the deposits. Therefor that may directly impact to the increase the interest expenses of the company and reduce the profit of the company. Last five year period Company takes the considerable effort to increase their deposit portfolio. But in common practice in the Sri Lankan depositors is they normally more prefers go to the banking sector for their deposit requirement.it is very harder to getting deposits in finance sector. But when comparing the situation of the PLC they have the strong backup in the people’s bank and they can market this to find the more deposits. To reduce the LDR ratio to below two times PLC need to improve their deposits portfolio further Rs.22.0 billion deposits. To achieve this objective company can use their strong workforce and island-wide branch network. Page | 30 3.4.4. Net loan to Asset ratio (NLTA) NLTA measures the percentage of assets that is tied up in loans. Net loan to total assets ratio (NLTA) is also another important ratio that measures the liquidity condition of the financial institute. Whereas Loan to Deposits is a ratio in which liquidity of the financial institute is measured in terms of its deposits, NLTA measures liquidity of the financial institute in terms of its total assets. That is, it gauges the percentage of total assets the financial institute has invested in loans (or financings). The higher is the ratio the less the liquidity is of the financial institute. Similar to LDR, the financial institute with low NLTA is also considered to be more liquid as compared to the financial institute with higher NLTA. However, high NLTA is an indication of potentially higher profitability and hence more risk. The higher the ratio, the less liquid the financial institute is. Net Loan to asset ratio calculated following way; Net Loans to total asset ratio = Loan Receivables Total assets FY 2011/2012 Total Loan 84,494.27 Receivables Total Assets 95,162.73 2012/2013 2013/2014 Rs. million 2014/2015 2015/2016 89,536.10 91,859.31 100,166.65 112,243.89 101,144.46 118,416.78 117,160.98 131,086.27 NLTA 88.52% 77.57% 85.49% 85.63% 88.79% In the scenario of the PLC NLTA ratio shows the liquidity position of the company in total assets wise. Company core business activity is the lending money for the various types of customers. Most of the granting is limited to 1 year to 5 year period. In exceptional cases Page | 31 tenure will be exceed the five year period.in the product wise their portfolio consist the Lease, Hire purchase, Islamic facilities, Term Loan, Margin Trading and Factoring loan. Comparing this ratio last five year trend is they try to control the NLTA ratio in very marginally. In FY of 2011 NLTA ratio will be 88.79% and it comes to 2015 FY shows the 85.63%. This indicates so far company try to control this ratio still company in the high liquidity position. Main reason for this is five year period company increases their loan receivables portfolio as well as the total assets in same percentage. Comparing the FY 2011 to 2015 loan receivables portfolio increase by 32.6% and total assets increase by the 37.7%. This highlight company not invest significant amount to increase their asset base always assets are increase on impact on the loan receivables. In the finance industry NLTA ratio would be 78% there for company need to change their strategies to increase the total assets base without changing of the loan receivable portfolio. Page | 32 4. Recommendations Enhancing operational stability In our observation always company maintain the all credit risk ratios in above the industry standards. That is a good sign for them doing their operation well in a company. But in last year, impairment and Nonperforming ratios have dropped due to write-offs the all bad cases there for this FY we are unable to expect the same result for the company. It is recommended for PLC to more focus in their recovery as well as the credit approvals in order to maintain the same momentum. In current context Sri Lankan economy also not performing well and that directly impacts in the next FY performance. To overcome all company needs to improve the credit quality of the company. Restrict to import new vehicles in to Sri Lanka central bank introduce the new LTV ratio for the Bank and Finance industry currently company portfolio more depends on the Lease and HP facilities. Therefore, new LTV ratio directly impacted to reduce their business portfolio. To overcome this PLC needs to introduce the new products to their business portfolio such as pawning services, project financing, long term Housing loans etc. However, since leasing and hire purchase has been the core business of the company, it is recommended to enter into strategic partnerships with automobile export agents in Sri Lanka. PLC should mainly focus on car agents who deal with vehicles with lower engine capacity since this segment of the market is growing after the implementation of new tax policies. YOY Company increases their loan to deposits ratio but current deposits does not match the lending requirement of the company. Therefore company has always depended on the outside borrowing to match the company lending. Comparing the deposits outside borrowing is high cost for the company. This will increase the interest expenses of the company. Get the branding benefits of the Peoples bank they can do massive marketing campaign to canvas the fixed deposits and savings deposits. To find the savings deposits they can promote the palm top daily collection. Enhancing shareholder value In our observation YOY Company increases the EPS and Net asset value per share. This is the good sign for the local as well as the foreign investors. Keep this in the future company, needs to control their expenses. Because company current expansion strategy is very aggressive this may lead to increase the staff cost and operating expenses. Now they need to manage the expansions in a cost effective manner to get the maximum output from their resources. Current company dividend policy is to pay same rate of Rs1.5 dividend. This may leads to reduce the retain earnings for the company and current payout ratio is average the 50%. Therefore, a flexible dividend policy should be introduced in order to adapt with the market conditions while maintaining the interest of the investors in company strategy. Page | 33 Considering the current challenging economic conditions in Sri Lanka, PE ratios have reported a much lower value. However, company performance has continuously increased which gives a positive signal for both local and foreign investors when considering PLC as a company to invest. Technological advancement Currently, the approval process of documentation is conducted manually. As per the current process, the branch sends all the documentation via courier to head office for approval whenever granting a loan or a leasing facility. This has been increasing continuously over the last 5 years at a rate of 75% and it can be expected to increase further with the expansion of branches. Therefore, it is our recommendation for PLC to introduce a computer application within the branches to deliver the documents in via a digital format for approval. This action will involve a major initial cost however; there will be cost savings in relation to courier charges and other expenses. Page | 34 5. References K.R.Subramaniyam, Financial Statement Analysis, 8th Edition. M.F.F.Alvarez, Financial Statement Analysis, Practitioner’s Guide, 3rd Edition. PLC Annual Reports 2012, 2013,2014,2015,2016 CSE Daily Report Journal of Behavioral Economics, Finance, Entrepreneurship, Accounting and Transport, 2014, Vol. 2, No. 5, 121-129 https://www.readyratios.com/reference/market/#ref163 http://www.investopedia.com/ https://en.wikipedia.org/wiki http://accounting-simplified.com/financial/ratio-analysis www.cse.lk www.PLC.lk http://www.cbsl.gov.lk/htm/english/08_stat/s_6.html Page | 35