Assignment 01

RATIO ANALYSIS – HAYLEYS FABRIC PLC

Group NO : Group 04

Subject : Entrepreneurial Financial Mgt

Subject Code : ENM 324 - 2

Entrepreneurship & Management Degree Programme

Uva Wellassa University

Sri Lanka
 CONTENT

01. Executive Summary

02. Introduction
03. Ratio Analysis – Profitability Ratios
04. Ratio Analysis – Liquidity Ratios
05. Ratio Analysis – Activity Ratios
06. Ratio Analysis – Financial Ratios
07. Ratio Analysis – Market Ratios
08. Conclusion
09. Calculations

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 01. Executive Summary
The report is specially designed to understand the subject matter of financial statement analysis through
various ratios in a company. Ratio analysis has done as per the financial statements of 5 years from the year
2013 to 2017. Performance of the company has interpreted horizontally and vertically.

ABOUT THE COMPANY – HAYLEYS FABRICS PLC is the pioneer in textiles manufacturing in Sri Lanka.
It has ranked No:01 company in the apparel and footwear sector at the recently concluded CIMA-LMD’s TOP
100 award ceremony.

SCOPE OF STUDY – The main scope of the study was to put into practical the theoretical aspect of the ratio
analysis study. The study of ratio analysis further the study is based on last 5 years annual reports. Focused on
gaining knowledge and experience of that how to analyze the financial performance of the firm.

The ratios have been computed and analyzed based on the figures generated by main financial statements and
reports such as statement of financial position, statement of comprehensive income, statement of changes in
equity and statement of cash flows from the accounting period of “2012-2013” to “2016-2017”.

This report will provide an assessment and analysis of the,

i. Profitability
ii. Liquidity
iii. Performance
iv. Financial position
v. Market value

HIGHLIGHTS

1. They have incurred losses in the first two years and profits in three years.
2. Their total liabilities have exceeded their total assets in the last two years.
3. Their gross profits have shown positive values throughout the 5 years.
4. High administrative expenses has resulted net losses in the company
5. They have a high amount of current liabilities than non-current liabilities throughout the 5 years.
6. Poor working capital could be seen, in some years their current liabilities have exceeded their current
assets.

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As the overall assessment of the ratio analysis, it can be noticed that the future does not look bright, firstly
because of poor liquidity status and secondly because of unhealthy financing structure giving that it relies
heavily on liabilities. But we can see a little progress since their net profit has increased annually. It has been
recommended the company should look into ways of improving sales and increase profitability and also not
to increase the amount of debt more.

Report has started with a brief introduction for the ratio analysis; explaining all the theoretical parts regarding
ratios and also about the company. Report has attached with financial statements of 5 years starting from the
accounting period “2012-2013” to “2016-2017”. In the ratio analysis part, we have done the horizontal analysis
of the financial ratios in all 5 years. Report has interpreted the performance ratio by ratio separately according
to the 5 types of ratios. In the conclusion part we have done the vertical analysis. Financial statements have
been interpreted separately year wise.

The report gives a better idea regarding the company performance by interpreting and analyzing financial
statements by a ratio analysis of 5 years.

BENEFITS

 It simplifies the financial statements,

 Helps in trend analysis
 Highlights important information in simple form
 Helps in management decision making – Budgeting, forecasting, measuring operating efficiency,
controlling

LIMITATIONS
 Comparison of two different companies would be misleading due to different environmental factors.
 Financial accounting information is affected by estimates and assumptions.
 Consists of past performance but investors are more concerned about the future.
 Qualitative factors are ignored.
 Changes in price levels

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 02. Introduction

Accounting ratios

Accounting ratios or financial ratios are considered to be part of financial statement analysis. Accounting ratios
usually relate one financial statement amount to another.

Financial ratios are mathematical comparisons of financial statement accounts or categories. These
relationships between the financial statement accounts help investors, creditors, and internal company
management understand how well a business is performing and of areas needing improvement.

Ratios allow us to compare companies across industries, big and small, to identify their strengths and
weaknesses. Financial ratios are often divided up into five main categories: profitability, liquidity, activity,
financial and market ratios.

Financial ratio analysis

Ratio analysis refers to the analysis and interpretation of the figures appearing in the financial statements. It is
a process of comparison of one figure against another. It enables the users like shareholders, investors,
creditors, Government, and analysts etc. to get better understanding of financial statements.

Financial ratios can be broadly classified into liquidity ratios, profitability ratios and efficiency ratios or
activity ratios, financial ratios and market ratios.

Ratio analysis is a very powerful analytical tool useful for measuring performance of an organization.
Similarly, the financial analyst should also analyze the accounting ratios to diagnose the financial health of an
enterprise.

Generally, ratio analysis involves four steps:

1. Collection of relevant accounting data from financial statements.

2. Constructing ratios of related accounting figures.

3. Comparing the ratios thus constructed with the standard ratios which may be the corresponding past
ratios of the firm or industry average ratios of the firm or ratios of competitors.

4. Interpretation of ratios to arrive at valid conclusions.

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Advantages and limitations of ratio analysis

Advantages of ratio analysis

Ratio analysis is widely used as a powerful tool of financial statement analysis. It establishes the numerical or
quantitative relationship between two figures of a financial statement to ascertain strengths and weaknesses of
a firm as well as its current financial position and historical performance. It helps various interested parties to
make an evaluation of certain aspect of a firm’s performance.

Financial ratio analysis is a useful tool for users of financial statement. It has following advantages:

1. Useful in Assessing the Operational Efficiency:

Accounting ratios helps to have an idea of the working of a concern. The efficiency of the firm becomes
evident when analysis is based on accounting ratio. They diagnose the financial health by evaluating liquidity,
solvency, profitability etc. This helps the management to assess financial requirements and the capabilities of
various business units.

2. Useful in Forecasting Purposes:

If accounting ratios are calculated for a number of years, then a trend is established. This trend helps in setting
up future plans and forecasting. For example, expenses as a percentage of sales can be easily forecasted on the
basis of sales and expenses of the past years.

3. Communication:

Ratios are effective means of communication and play a vital role in informing the position of and progress
made by the business concern to the owners or other parties.

4. Control of Performance and Cost:

Ratios may also be used for control of performances of the different divisions or departments of an undertaking
as well as control of costs.

5. Useful in Comparison of Performance:

Through accounting ratios comparison can be made between one departments of a firm with another of the
same firm in order to evaluate the performance of various departments in the firm. Manager is naturally
interested in such comparison in order to know the proper and smooth functioning of such departments. Ratios
also help him to make any change in the organization structure.

6. Budgeting:

Budget is an estimate of future activities on the basis of past experience. Accounting ratios help to estimate
budgeted figures. For example, sales budget may be prepared with the help of analysis of past sales.
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 7. Indication of Liquidity Position:

Ratio analysis helps to assess the liquidity position i.e., short-term debt paying ability of a firm. Liquidity
ratios indicate the ability of the firm to pay and help in credit analysis by banks, creditors and other suppliers
of short-term loans.

8. Indication of Long-term Solvency Position:

Ratio analysis is also used to assess the long-term debt-paying capacity of a firm. Long-term solvency position
of a borrower is a prime concern to the long-term creditors, security analysts and the present and potential
owners of a business. It is measured by the leverage/capital structure and profitability ratios which indicate
the earning power and operating efficiency. Ratio analysis shows the strength and weakness of a firm in this
respect.

9. Indication of Overall Profitability:

The management is always concerned with the overall profitability of the firm. They want to know whether
the firm has the ability to meet its short-term as well as long-term obligations to its creditors, to ensure a
reasonable return to its owners and secure optimum utilization of the assets of the firm. This is possible if all
the ratios are considered together.

10. Signal of Corporate Sickness:

A company is sick when it fails to generate profit on a continuous basis and suffers a severe liquidity crisis.
Proper ratio analysis can give signal of corporate sickness in advance so that timely measures can be taken to
prevent the occurrence of such sickness.

11. Aid to Decision-making:

Ratio analysis helps to take decisions like whether to supply goods on credit to a firm, whether bank loans will
be made available etc.

12. Simplification of Financial Statements:

Ratio analysis makes it easy to grasp the relationship between various items and helps in understanding the
financial statement.

13. Useful in Financial Position Analysis:

Accounting ratios reveal the financial position of the concern. This helps the banks, insurance companies and
other financial institutions in lending and making investment decisions.

14. Useful in Simplifying Accounting Figures:

They highlight the inter-relationship which exists between various segments of the business as expressed by
accounting statements. Often the figures standing alone cannot help them convey any meaning and ratios help
them to relate with other figures.

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Limitations of Ratio Analysis

The technique of ratio analysis is a very useful device for making a study of the financial health of a firm. But
it has some limitations which must not be lost sight of before undertaking such analysis.

Some of these limitations are:

1. Limitations of Financial Statements:

Ratios are calculated from the information recorded in the financial statements. But financial statements suffer
from a number of limitations and may, therefore, affect the quality of ratio analysis.

2. Historical Information:

Financial statements provide historical information. They do not reflect current conditions. Hence, it is not
useful in predicting the future.

3. Different Accounting Policies:

Different accounting policies regarding valuation of inventories, charging depreciation etc. make the
accounting data and accounting ratios of two firms non-comparable.

4. Lack of Standard of Comparison:

No fixed standards can be laid down for ideal ratios. For example, current ratio is said to be ideal if current
assets are twice the current liabilities. But this conclusion may not be justifiable in case of those concerns
which have adequate arrangements with their bankers for providing funds when they require, it may be
perfectly ideal if current assets are equal to or slightly more than current liabilities.

5. Quantitative Analysis:

Ratios are tools of quantitative analysis only and qualitative factors are ignored while computing the ratios.
For example, a high current ratio may not necessarily mean sound liquid position when current assets
include a large inventory consisting of mostly obsolete items.

6. Window-Dressing:

The term ‘window-dressing’ means presenting the financial statements in such a way to show a better
position than what it actually is. If, for instance, low rate of depreciation is charged, an item of revenue
expense is treated as capital expenditure etc. the position of the concern may be made to appear in the
balance sheet much better than what it is. Ratios computed from such balance sheet cannot be used for
scanning the financial position of the business.

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 7. Changes in Price Level:

Fixed assets show the position statement at cost only. Hence, it does not reflect the changes in price level.
Thus, it makes comparison difficult.

8. Ratios Account for one Variable:

Since ratios account for only one variable, they cannot always give correct picture since several other
variables such Government policy, economic conditions, availability of resources etc. should be kept in mind
while interpreting ratios.

9. Seasonal Factors Affect Financial Data:

Proper care must be taken when interpreting accounting ratios calculated for seasonal business. For example,
an umbrella company maintains high inventory during rainy season and for the rest of year its inventory
level becomes 25% of the seasonal inventory level. Hence, liquidity ratios and inventory turnover ratio will
give biased picture.

Ratio types

1. Profitability Ratios

Profitability ratios measure the ability of a business to earn profit for its owners. While liquidity ratios and
solvency ratios explain the financial position of a business, profitability ratios and efficiency ratios
communicate the financial performance of a business. Important profitability ratios include:

 Net profit margin

 Gross profit margin
 Return on assets (ROA)
 Return on investment (ROI)

2. Liquidity Ratios

Liquidity ratios asses a business’s liquidity, i.e. its ability to convert its assets to cash and pay off its
obligations without any significant difficulty (i.e. delay or loss of value). Liquidity ratios are particularly
useful for suppliers, employees, banks, etc. Important liquidity ratios are:

 Current ratio
 Quick ratio (also called acid-test ratio)
 Working capital
 Cash flow to liabilities

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 3. Activity Ratios

Activity ratios assess the efficiency of operations of a business. For example, these ratios attempt to find out
how effectively the business is converting inventories into sales and sales into cash, or how it is utilizing its
fixed assets and working capital, etc. Key activity ratios are:

 Asset turnover ratio

 Inventory turnover ratio
 Average collection ratio
 Average age of payables
 Asset turnover ratio

4. Financial ratios
 Debt to equity ratio
 Times interest earned
 Total debt ratio

5. Market ratios

Market ratios are used to evaluate the current share price of a publicly-held company’s stock. These ratios are
employed by current and potential investors to determine whether a company’s shares are over-priced or
underpriced.

 Dividend per share

 Earnings per share

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Introduction to the Hayleys Fabric PLC

Established in 1993, Hayleys Fabric PLC is the pioneer in textiles manufacturing in Sri Lanka. They provide
end to end solutions from design to manufacturing of fabric made out of natural and synthetic fibers. Company
also has the capability of in-house printing with 16-colour printing machines, fabric brushing machines and
sueding machines. Hayleys PLC, the parent company, is the oldest conglomerate in Sri Lanka with interests
in diverse business operations. Hayleys MGT Knitting Mills shares are listed on the Colombo Stock Exchange.

Hayleys Fabrics PLC (formerly known as Hayleys MGT Knitting Mills PLC), is the pioneer in textiles
manufacturing in Sri Lanka. The company capable of providing a complete portfolio of end to end solutions
from design to manufacturing of fabric made out of natural and synthetic fibers. The company is the first
apparel sector company to be listed on the Colombo stock exchange in 2003. Company was proud to supply
fabric for the official T-shirts of USA and the Netherlands soccer teams in the FIFA World Cup 2010. Hayleys
Fabric was ranked the No.:1 company in the Apparel and Footwear sector at the recently concluded CIMA-
LMD’s TOP 100 award ceremony.

Hayleys Fabric is capable of producing 2.5 million meters of fabric per month. The partners of the company
includes the leading global fashion brands, such as Decathlon, Intimissimi, Victoria’s Secret, NEXT, BHS,
Makes and Spenser, TESCO, George, and DBA.

Product range includes Single Jersey, Interlock, Pique, Rib, Fleece and Polar Fleece, Jacquard and Flat Knits,
which are composed using pure and blend of cotton, polyester, and viscose, modal yarns, in both solid colors
and in printed form.

Hayleys Fabric’s manufacturing facility is capable of Knitting, Dyeing, Printing, Brushing, Sueding and
Finishing pure and blended polyester and cotton fabric. The laboratories are equipped with modern, state of
the art machinery to achieve 100% accuracy in color and are accredited by Decathlon, Next, Limited Brands,
NIKE, George, Tesco, and Marks and Spencer. Printing section is equipped with the latest CAD system from
AVA CAD/CAM, which is specifically designed for textiles and apparel sector. SAP-ERP system is used to
seamlessly integrate all of our business functions and Fast React Production planning tool which is specifically
designed for the textile and apparel industry is used to coordinate all supply chain activities.

They have actively adopted a social accountability policy where we are committed to carrying out business in
an ethical and transparent manner adhering to all applicable clauses of International Human Rights,
International Instruments of Labor and all clauses of the SA 8000 standard.

Hayleys Fabric PLC, a subsidiary of Hayleys, has recorded a profit after tax of Rs. 261 million (US$ 1.84
million) the financial year ending 31st of March 2016, delivering a profit growth of 190%. FY 2014/15 has
marked the first year recovery of the company recording a surplus after consecutive losses during the recent
past.

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The ROE improved, from 4% in the last FY to 11% in the year under review as well as a significant EPS
growth of 168%. The top line had a negative growth of 8% due to rationalization of the product portfolio.

The changes made to the structure of the company including the top management, continued to show results
through improved performance on quality and on-time delivery which in turn attracted new business.

The company’s own brand, “Inno” made a positive impact with customers being drawn to the novelty that was
created by the fabric that was developed according to brand specific requirements. Cost reduction measures,
productivity improvements, system and process improvements were some of the main contributory factors for
the better performance. .

Hayleys Fabrics PLC (formerly known as Hayleys MGT Knitting Mills PLC) was awarded the bronze in the
Manufacturing sector at the 51st Annual Report Awards conducted by the Institute of Chartered Accountants
of Sri Lanka together with their strategic partner, Colombo Stock Exchange, on December 3rd, 2015.

Rewarding excellence in annual reporting, the award places increasing emphasis on transparency, good
governance, sustainability and social responsibility with entrants expected to go beyond mere regulatory
reporting to present a holistic review of their performance.

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 03. Ratio Analysis - Profitability ratios
(Horizontal Analysis)

01. Gross profit margin

This ratio measures the gross profit earned on sales and reports how much of each sales dollar is available to
cover operating expenses and contribute to profits.

The gross profit margin of Hayleys Fabric PLC in five consecutive years are calculated as follows:

Ratio Formula 2012/13 2013/14 2014/15 2015/16 2016/17

Gross profit Gross profit 5.8% 7.36% 10.46% 12.61% 11.69%
/ Revenue

In first three years, the gross profit margin has increased due to the gradual increasing of both gross profit and
sales revenue. The gross profit margin in 2015/16 is higher than 2014/15. But the sales revenue of 2015/16
has decreased than 2014/15 meanwhile the gross profit has increased in 2015/16 than 2014/15. In first four
years ratios getting higher means the company is selling their inventory at a higher profit percentage. In
2016/17 both the sales revenue and gross profit has decreased than previous year. Therefore the gross profit
margin in 2016/17 is lower than 2015/16.

Gross Profit Ratio

2013 2014 2015 2016 2017

Gross profit ratio

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02. Net profit margin

This ratio measures how much profit a company makes on each sales dollar received and how well a company
could potentially deal with higher costs or lower sales in the future.

The net profit margin of Hayleys Fabric PLC in five consecutive years are calculated as follows:

Ratio Formula 2012/13 2013/14 2014/15 2015/16 2016/17

Net profit Net Profit / -7.91% -2.27% 1.05% 3.08% 0.88%
Revenue

In first two years the net profit margin has negative due to net loss of the company. In 2014/15 and 2015/16
the net profit margin of the company has increased than previous years due to the company has gained a net
profit from its operations. In 2016/17 the company has decreased its sales revenue and net profit than the
previous year. Therefore the net profit margin is lower than previous year. When comparing 2015/16 and
2016/17, 2015/16 has a sign of healthy business situation than 2016/17.

03. Return on investment

This ratio expresses the return on investment capital employed and measures the ability of a company’s
management to realize and adequate return on the capital invested by the owners in a company. A higher
number is preferred for this commonly analyzed ratio.

The return on investment of Hayleys Fabric PLC in five consecutive years are calculated as follows:

Ratio Formula 2012/13 2013/14 2014/15 2015/16 2016/17

ROI Annual Net Income / Average -0.34 -0.12 0.05 0.11 0.03
Stockholders' Equity

In first two years the return on investment is negative due to the net loss of the company. This indicates that
the company was not using its investors’ funds effectively. Therefore the return earned by investors for the
capital employed by them has decreased. Even though the next three years has positive return on investment,
year 2015/16 has gained the highest rate due to the higher net profit and average owner’s equity than previous
years. This indicates the company has used its investors’ funds effectively.

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04. Return on assets

This ratio measures how effectively a company’s assets are being used to generate profits. It is one of the most
important ratios when evaluating the success of a business. A higher number reflects a well-managed company
with a healthy return on assets. Heavily depreciated assets, a large number of intangible assets, or any unusual
income or expenses can easily distort this calculation.

The return on assets of Hayleys Fabric PLC in five consecutive years are calculated as follows:

Ratio Formula 2012/13 2013/14 2014/15 2015/16 2016/17

ROA Annual Net Income / -0.09 -0.04 0.02 0.04 0.01
average Total Assets

In first two years the return on assets is negative due to the net loss of the company. The negative ratios are
always unfavorable to investors because it shows that the company is not effectively managing its assets to
produce greater amounts of net income. Therefore the return earned for the assets of the company has
decreased. Even though the next three years has positive return on assets, year 2015/16 has gained the highest
rate due to the higher net profit and average total assets than previous years.

ROA
6

0
2013 2014 2015 2016 2017
-2

-4

-6

-8

-10

-12

Return on assets (ROA)

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 04. Ratio Analysis - Liquidity ratios

01. Quick ratio

This ratio, also known as the acid test ratio, measures immediate liquidity- the no. of times cash, accounts
receivables, and marketable securities cover short term obligations. A higher no. is preferred because it
suggests a company has a strong ability to service short term obligations. This ratio is a more reliable variation
of the current ratio because inventory, prepaid expenses, and other less liquid current assets are removed from
the calculations.

The quick ratio of Hayleys Fabric PLC in five consecutive years are calculated as follows:

Ratio Formula 2012/13 2013/14 2014/15 2015/16 2016/17

Quick (Cash + Marketable Securities + 0.19 0.31 0.5 0.46 0.54
ratio Receivables) / (Current Liabilities)

In first three years quick ratio has gradually increased. It indicates that company is experiencing quickly
converting receivables into cash, and easily able to cover its financial obligations. When compared to 2014/15,
2015/16 has dropped by 0.04 which shows that company is over leveraged, struggling to grow sales and
collecting receivables too slowly. But in 2016/17 the quick ratio has increased than 2015/16 due to increase in
liquidity assets and current liabilities.

Quick Ratio
0.6

0.5

0.4

0.3

0.2

0.1

0
2013 2014 2015 2016 2017

Quick Ratio

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02. Current ratio

This ratio measures a company’s ability to pay off its short term liabilities with its current assets. The current
ratio is an important measure of liquidity because short term liabilities are due within the next year. This means
that a company has a limited amount of time in order to raise the funds to pay for these liabilities.

The current ratio of Hayleys Fabric PLC in five consecutive years are calculated as follows:

Ratio Formula 2012/13 2013/14 2014/15 2015/16 2016/17

Current Current Assets / 0.55 0.71 1.01 0.96 1.12
ratio Current Liabilities

In first three years current ratio has been increased gradually due to speed of increasing current assets than
current liabilities. This helps with effective inventory management and collecting receivables. In 2015/16 the
current ratio has dropped due to decrease in current assets and liabilities. In 2016/17 current liabilities has
decreased than 2015/16, but it gained a higher current ratio than 2015/16 due to increase of current assets than
2015/16.

Current Ratio
1.2

0.8

0.6

0.4

0.2

0
2013 2014 2015 2016 2017

Current Ratio

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03. Cash flow to liabilities

This ratio measures the earnings and cash flows are sufficient to cover interest payments and some principle
repayments. It indicates the total debt coverage: general debt- paying ability.

The cash flow to liabilities of Hayleys Fabric PLC in five consecutive years are calculated as follows:

Ratio Formula 2012/13 2013/14 2014/15 2015/16 2016/17

Cash flow to Operating cash flow / 0.02 -0.12 -0.05 0.10 0.07
liabilities Total liabilities

The cash flow to liabilities in 2013/14 and 2014/15 has negative because of negative cash flow from operating
activities. In 2015/16 has positive cash flow to liabilities due to positive operating cash flows. In 2016/17 has
positive cash flow to liabilities. But it is lower than 2015/16. In 2016/17 has more liabilities than 2015/16 and
lower operating cash flows than 2015/16.

04. Working capital

This ratio measures the customer have sufficient cash or other liquid assets to cover its short term obligations.
It indicates short term debt paying ability.

The working capital of Hayleys Fabric PLC in five consecutive years are calculated as follows:

Ratio Formula 2012/13 2013/14 2014/15 2015/16 2016/17

Working Current assets – -9,440,441 -7,793,120 134,128 -774,063 2,356,706

capital Current liabilities

In first two years and 2015/16 current liabilities are higher than current assets. Therefore it is difficult to cover
its short term obligations. In 2014/15 and 2016/17 current assets are higher than current liabilities. When
comparing five years 2014/15 and 2016/17 are the years which has a better capability of cover its short term
liabilities.

Working Capital
4000000
2000000
0
-2000000 2013 2014 2015 2016 2017
-4000000
-6000000
-8000000
-10000000
-12000000 17

Working Capital Ratio

 05. Ratio Analysis - Activity Ratios

01.Inventory turnover ratio

The inventory turnover ratio measures the number of times on average the inventory was sold during the
period, is a major factor to success in any business that holds inventory. It shows how well a company
manages its inventory. In general, a higher inventory turnover is better because inventories are the least
liquid of asset. A Flash report is a useful tool in measuring and managing inventory turns. The ratio is
calculate the cost of goods sold by divide in to average inventory.

Inventory turnover ratios for Hayleys Fabric PLC

Year Formula 2013 2014 2015 2016 2017

Inventory Cost of goods sold / 5.45 5.31 5.31 5.22 4.37
turnover Inventories
ratio
Inventory turnover ratio for Hayleys Fabric PLC is decreased during last five years. A low inventory
turnover ratio shows that a company may be overstocking or deficiencies in the product line or marketing
effort. It indicate weaker sales and declining demand for a company’s product. And also company’s
inventory management system is weak during last five years. It’s not good for company. Also inventory
turnover shows how well the company sells its goods. In this case, company’s sales go down and economy is
underperforming.

Higher inventory turnover ratios are considered a positive indicator a effective

inventory management. However, a higher inventory turnover ratio does not always mean better
performance. It sometimes may indicate inadequate inventory level, which may results in decrease in sales.

iNVENTORY TURNOVER RATIO

0
2013 2014 2015 2016 2017

Inventory turnover Ratio

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02. Average collection period

The average collection period indicates the average number of days elapsed between a credit sales and the
date the company receives the payment from the credit sales. Simply means the time it takes to receive
money from customers who purchase goods and services on account. The measure is used to determine the
effectiveness of a company’s credit granting policies and collection efforts.

Average collection period for Hayleys Fabric PLC

Formula 2013 2014 2015 2016 2017

Average Account recievable / 20.14 40.35 35.63 42.61 45.53
collection Net sales * 365
period
The interpretations and uses of the average collection period vary between business and industries. Suppose
this company an average 36.85 days to turn receivables into cash. Whether this is good or bad depends on
the credit terms, cash flow, relative industry standards and a host of other factors. As a result we can
recognize the average collection period had increased from 2013 to 2017. A longer collection period may
negatively affect the short term debt paying ability of the business in the eyes of analysts. Looser credit
policy, worsening economy, reduced collection efforts may be affect for increased average collection period.

AVERAGE COLLECTION PERIOD

50
45
40
35
30
25
20
15
10
5
0
2013 2014 2015 2016 2017

Average Collection Period

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03. Total asset turnover

The asset turnover ratio measures the value of a company’s sales or revenues generated relative to the value
of its assets. Not just fixed assets. This include cash, receivables, inventory, property, plant and equipment as
well as other long term assets. It is an indicator of the efficiency with which a company is deploying its
assets to produce the revenue. The asset turnover ratio is calculated by dividing net sales by total assets.

Total asset turnover ratios for Hayleys Fabric PLC

Year Formula 2013 2014 2015 2016 2017

Total asset Net sales / 1.22 1.45 1.44 1.40 1.18
turnover Total Assets

Total asset turnover for Hayleys Fabric PLC is changed during last five years. It is not increased or
decreased, it’s shifted. In 2014 total asset turnover ratio higher than other years. It is more favorable for
company. In 2014 company is using its assets more efficiently. So, performance also high. In 2017 total
asset turnover ratio diminished very fast. In 2017 company isn’t using its assets efficiently and most likely
have management or production problems. And also in 2017, company loose inventors and creditors,
because they think company inefficiently uses all of its assets.

Like with most ratios, the assets turnover ratio is based on industry standards. Some
industries use assets more efficiently than others. To get a true sense of how well company’s assets are being
used, it must be compared to other companies in its industry.

TOTAL ASSET TURNOVER

1.6

1.4

1.2

0.8

0.6

0.4

0.2

0
2013 2014 2015 2016 2017

Column1 Total Assets turnover Column2

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04. Average age of payables/ Average payment period

Average payment period is a solvency ratio that measures the average number of days it takes a business to
pay its vendors for purchases made on credit. Average payment period is the average amount of time it takes
a company to pay off credit accounts payable. Many times, when a business makes a purchase at wholesale
or for basic materials, credit arrangements are used for payment. These are simple payment arrangements
that give the buyer a certain number of days to pay for the purchase.

Average payment period for Hayleys Fabric PLC

Year Formula 2013 2014 2015 2016 2017

Average Accounts payable / 42.50 43.76 39.06 32.96 37.13
payment Net purchases * 365
period

Hayleys Fabric PLC‘s average payment period has reduce to 33days in 2016 which was 39 days in 2015.
This reduction in average payment period shows that how efficiently company is paying back their creditors
and also assuring that payments are being made in a prompt manner by Hayleys to its creditors. In 2017
increased average payment period, it indicates that the company is paying its suppliers more slowly, and
may be indicator of worsening financial condition.

All of decisions are relative to the industry and company’s needs, but it is apparent that the
average payment period is a key measurement in evaluating the company’s cash flow management.

AVERAGE PAYMENT PERIOD

50
45
40
35
30
25
20
15
10
5
0
2013 2014 2015 2016 2017

Average Payment period

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 06. Ratio Analysis – Financial Ratios
Financial ratios or the solvency ratios measure a company’s ability to meet its longer term obligations.
Analysis of solvency ratios provides insight on a company’s capital structure as well as the level of financial
leverage a firm is using.

01. Debt to Equity ratio

It measures the amount of debt capital a firm uses compared to the amount of equity capital it uses. A ratio
of 1.00 indicates that the firm uses the same amount of debt as equity and means that creditors have claim to
all assets, leaving nothing for shareholders in the event of theoretical liquidation.

Formula 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Debt to
Total debt
Equity Ratio 0.23 0.38 0.46 0.30 0.54
/ Total equity

We could see that the ratio has increased gradually in the first 3 years. A higher ratio means using a larger
amount of debts compared to the equity, which increases its financial risk. Debt load has increased in the
first 3 years. Due to the decrease of debts in the 4th year the ratio has declined to 0.30 which was a favorable
situation to the company than earlier. But in the 5th year their debts has increased in a higher amount while
their equity remains same. So the ratio has increased to 0.54 which was not favorable to the company. Their
amount of debt was more than 50% of their equity in this years.

DEBT TO EQUITY
0.6

0.5

0.4

0.3

0.2

0.1

0
2013 2014 2015 2016 2017

Debt equity Ratio

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 02. Total debt ratio

This is the most basic solvency ratio, measuring the percentage of a company’s total assets that is financed
by debt.
Formula 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
Total debt Total
ratio liabilities 0.66 0.74 0.65 1.12 1.21
/ Total assets

A high ratio means that the firm is using a large amount of financial leverage, which increases its financial
risk in the form of fixed interest payments. In the first 3 years their total assets has exceeded their total
liabilities which results ratios lesser than 1.00. Total liabilities have increased in the 2nd year than the 1st year
but again it has reduced in the 3rd year. Their most unfavorable situation has begun in the 4th year which has
resulted a ratio which was greater than 1.00. Their total liabilities have exceeded their total assets in the last
2 years. It has further increased in the 5th year than the 4th year.

In the 4th year they have increased their liabilities than assets only by 12% than their total assets. But in the
5th year their amount of liabilities is 21% than their total assets. Their liabilities has increased in a higher
amount in that year.

TOTAL DEBT RATIO

1.4

1.2

0.8

0.6

0.4

0.2

0
2013 2014 2015 2016

Total debt Ratio

23
03. Times Interest Earned

Measures company’s cash flows generated compared to its interest payments. It uses to determine how
easily a company can pay their interest expenses on outstanding debt. The lower the ratio, the more the
company is burdened by debt expense.

Times Formula 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Interest Net income/interest
-1.69 -0.03 1.79 3.48 1.75
Earned expense
In the first 2 years the company cannot pay interest any number of times since they incurred losses. So the
ratio is negative in the first 2 years. In the 3rd year they are capable of paying their interest in 1.79 times
since their net income has increased and they have earned profits. Due to the higher profit in the 4th year they
have increased the ratio to 3.48 numbers of times. The profit has declined again in the 5th year and their ratio
is also has reduced due to that. This ratio can be a margin of safety for the company’s creditors. This is an
important solvency ratio for the shareholders and prospective investors. If the company is struggling to make
their interest payments on their current debt obligations, it doesn’t make any sense for a prospective credit to
extend them additional credit.

TIMES INTEREST EARNED

4

0
2013 2014 2015 2016 2017
-2

Time interest earned

07. Ratio Analysis – Market Ratios

Market ratios could not be calculated since the firm has not declared dividends in some years. The
firm has incurred losses during the first 3 years. Their share issue was also not mentioned in their financial
statements.

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 8.Conclusion

(Vertical Analysis)
01. Accounting period 2012/2013
According to the vertical analysis, the conclusion of financial ratios of each financial year is analyzed as
follows.

In financial year 2012/13, the profitability ratios are, gross profit margin is 5.8%, net profit margin is -7.91%,
return on investment is -0.34 and return on assets -0.09. It implies that gross profit earned on sales revenue of
2012/13 was in moderate level and net profit earned on sales revenue was in lower level as it is a negative
value. Return on investment implies that there is no adequate return on the capital invested by the owners in
the company. Return on assets implies that company has ineffectively used its assets to generate profits.

The liquidity ratios of 2012/13 are calculated as quick ratio is 0.19, current ratio is 0.55, cash flow to liability
is -0.02 and working capital is -9,440,441. Quick ratio implies that company is experiencing moderate level
of converting receivables in to cash and able to cover its financial obligations. Current ratio implies that
company has a moderate level of increasing current assets than current liabilities. Cash flow to liabilities shows
that there was insufficient cash flows to cover interest payments and principle repayments in the company.
Working capital represents that there is insufficient cash or other liquid assets to cover its short term
obligations.

Financial ratios of 2012/13 are, debt to equity ratio is 0.23, times interest earned is -1.68 and total debt equity
is 0.66. Debt to equity ratio represents that the company has a lower amount of assets creditors provide for
each dollar of assets the owner provides. Times interest earned implies that company has lower ability to pay
fixed charges for interest from operating profits. Total debt ratio implies that company has a lower level of
leverage. The activity ratios of 2012/13 are inventory turnover ratio is 5.45, average collection period is 20.14,
asset turnover is 1.22 and average age of payables is 42.5. Inventory turnover ratio implies that company is
managing its inventories at a moderate level. Average collection period explains that company collects its
receivables too quickly. Asset turnover ratio implies that the company has used its assets in a good level to
generate sales revenue. Average age of payables explains that company collects its receivables too quickly.

25
02.Accounting Period 2013/2014
In financial year 2013/2014, the profitability ratios of Hayleys Fabric PLC are, gross profit margin is 7.36%,
net profit margin is -2.27%, return on investment is -0.12 and return on assets -0.04. It shows that gross profit
earned on sales revenue of 2012/13 was a positive value but it’s much less when compared to other years. And
net profit earned on sales revenue was a negative value. But the net profit margin they earn they gained is
lower than 2013/14 According to the return on investment, there is no return on the capital invested by the
owners in the company. Return on assets express that, assets of the company has not been used effectively to
earn more profits.

The liquidity ratios of Hayleys Fabric PLC in 2013/14 are, quick ratio is 0.31, current ratio is 0.71, cash flow
to liability is -0.12 and working capital is -7,793,120. Quick ratio express that company is having higher level
of converting receivables in to cash and when compared to the previous year. Current ratio express that the
company has the ability to pay off its short term liabilities with its current assets. According to the data
operating cash flow was negative and because of that, they face difficulties to cover interest payments and
principle repayments in the company. This explain through cash flow to liabilities. In 2013/14 there is
insufficient cash or other liquid assets to cover its short term obligations. Therefore the working capital is a
negative one.

The activity ratios of 2013/14 are inventory turnover ratio is 5.31, average collection period is 40.35, asset
turnover is 1.45 and average age of payables is 43.76. Inventory turnover ratio implies that company is
managing its inventories at a moderate level. The value is little bit lower than the previous year. Company
collects its receivables too quickly. That shows through average collection period .Asset turnover ratio implies
that the company has used its assets in a good level to generate sales revenue. Average age of payables explains
that company collects its receivables too quickly.

Financial ratios of 2013/14 are, debt to equity ratio is 0.38, times interest earned is -0.01 and total debt equity
is 0.74. According to the debt to equity ratio, total debt is higher than total capital owners invested. According
to the times interest earned implies that company has lower ability to pay fixed charges for interest from
operating profits. Total debt ratio implies that company has a lower level of leverage. But it is not less than
the previous year.

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03. Accounting period 2014/2015
According to the vertical analysis, the conclusion of financial ratios of each financial year is analyzed as
follows.

In financial year 2014/15, the profitability ratios are, gross profit margin is 10.46%, net profit margin is 1.05%,
and return on investment is 0.05 and return on assets 0.02. It implies that gross profit earned on sales revenue
of 2014/15 was in good level and also net profit earned on sales revenue was in moderate level as it is positive
value. Return on investment implies that there is low return on the capital invested by the owners in the
company. Return on assets implies that company has not much effectively used its assets to generate profits.

The liquidity ratios of 2014/15 are calculated as quick ratio is 0.50, current ratio is 1.01, cash flow to liability
is -0.05 and working capital is 134128. Quick ratio implies that company is moderate level of converting
receivables in to cash and able to cover its financial obligations. Current ratio implies that company has a
moderate level of increasing current assets than current liabilities. Cash flow to liabilities shows that there was
in negative value. Because high level of operating cash flows. Working capital represents that there is
sufficient cash or other liquid assets to cover its short term obligations.

Financial ratios of 2014/15 are, debt to equity ratio is 0.46, times interest earned is 1.98 and total debt equity
is 0.65. Debt to equity ratio represents that the company has a lower amount of assets creditors provide for
each dollar of assets the owner provides. Times interest earned implies that company has moderate level. Total
debt ratio implies that company has a lower level of leverage.

The activity ratios of 2014/15 are inventory turnover ratio is 5.31, average collection period is 35.63, total
asset turnover is 1.44 and average age of payables is 39.06. Inventory turnover ratio implies that company is
managing its inventories at a moderate level. Average collection period explains that company collects its
receivables too quickly. Asset turnover ratio implies that the company has used its assets in a good level to
generate sales revenue. Average age of payables explains that company collects its receivables too quickly.

27
04. Accounting period 2015/2016
According to the vertical analysis, the conclusion of financial ratios of each financial year is analyzed as
follows.

In financial year 2015/16, the profitability ratios are, gross profit margin is 12.61%, net profit margin is
3.08%, and return on investment is 0.11 and return on assets 0.04. It implies that gross profit earned on sales
revenue of 2015/16 was in good level and net profit earned on sales revenue was in moderate level as it is a
positive value. Return on investment implies that there is low return on the capital invested by the owners in
the company. Return on assets implies that company has not much effectively used its assets to generate
profits.

The liquidity ratios of 2015/16are calculated as quick ratio is 0.46, current ratio is 0.96, cash flow to liability
is 0.1 and working capital is -774,063. Quick ratio implies that company is experiencing moderate level of
converting receivables in to cash and able to cover its financial obligations. Current ratio implies that
company has a high level of increasing current assets than current liabilities. Cash flow to liabilities shows
that there was insufficient cash flows to cover interest payments and principle repayments in the company.
Working capital represents that there is insufficient cash or other liquid assets to cover its short term
obligations.

Financial ratios of 2015/16 are, debt to equity ratio is 0.3, times interest earned is 3.1 and total debt equity is
1.12. Debt to equity ratio represents that the company has a lower amount of assets creditors provide for
each dollar of assets the owner provides. Times interest earned implies that company has moderate ability to
pay fixed charges for interest from operating profits. Total debt ratio implies that company has a moderate
level of leverage.

The activity ratios of 2015/16 are inventory turnover ratio is 5.22, average collection period is 42.61, asset
turnover is 1.40 and average age of payables is 32.96. Inventory turnover ratio implies that company is
managing its inventories at a moderate level. Average collection period explains that company collects its
receivables too quickly. Asset turnover ratio implies that the company has used its assets in a good level to
generate sales revenue. Average age of payables explains that company collects its receivables too quickly.

28
05. Accounting period 2016/2017
In financial year 2016/17, the profitability ratios are, gross profit margin is 11.69%, net profit margin is 0.88%,
return on investment is 0.03 and return on assets 0.01. It implies that gross profit earned on sales revenue was
in good level and net profit earned on sales revenue was in moderate level. Return on investment implies that
there is low return on the capital invested by the owners in the company. Return on assets implies that company
has not much effectively used its assets to generate profits.

The liquidity ratios are calculated as quick ratio is 0.54, current ratio is 1.12, cash flow to liability is 0.07 and
working capital is 2,356,706. Quick ratio implies that company is experiencing moderate level of converting
receivables in to cash and able to cover its financial obligations. Current ratio implies that company has a
moderate level of increasing current assets than current liabilities. Cash flow to liabilities shows that there is
lower level of sufficient cash flows to cover interest payments and principle repayments in the company.
Working capital represents that there is sufficient cash or other liquid assets to cover its short term obligations.

Financial ratios of 2016/17 are, debt to equity ratio is 0.54, times interest earned is 1.71 and total debt equity
is 1.21. Debt to equity ratio represents that the company has a lower amount of assets creditors provide for
each dollar of assets the owner provides. Times interest earned implies that company has moderate level of
ability to pay fixed charges for interest from operating profits. Total debt ratio implies that company has a
lower level of leverage. The activity ratios of 2016/17 are inventory turnover ratio is 4.37, average collection
period is 42.61, asset turnover is 1.18 and average age of payables is 37.13. Inventory turnover ratio implies
that company is managing its inventories at a moderate level. Average collection period explains that company
collects its receivables too quickly. Asset turnover ratio implies that the company has used its assets in a good
level to generate sales revenue. Average age of payables explains that company collects its receivables too
quickly.

29
 09. Calculations
01. Profitability Ratios

1.1 Gross profit margin Ratio

Gross Profit
Gross Margin =
Revenue

Years Gross profit Sales Revenue Gross profit ratio

2012/13 2,565,218 44,193,490 5.80

2013/14 4,509,884 61,252,088 7.36

2014/15 6,803,246 65,031,509 10.46

2015/16 7,553,654 59,924,103 12.61

2016/17 6,493,229 55,537,401 11.69

1.2 Net profit Margin ratio

Net Income
Net Profit Margin =
Net Sales

Years Net income Sales Revenue Net profit margin

2012/13 (3,494,542) 44,193,490 -7.91

2013/14 (1,388,400) 61,252,088 -2.27

2014/15 679,920 65,031,509 1.05

2015/16 1,845,409 59,924,103 3.08

2016/17 490,267 55,537,401 0.88

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1.3 Return on investment ratio

Annual Net Income

ROI =
Average Stockholders' Equity

Years Net income Average owners’ equity Return on investment

(ROI)
2012/13 (3,494,542) 10,300,822 -0.34

2013/14 (1,388,400) 11,371,511 -0.12

2014/15 679,920 13,098,921 0.05

2015/16 1,845,409 16,318,614 0.11

2016/17 490,267 173,564,873 0.03

1.4 Return on Assets (ROA)

Annual Net Income

ROA =
Average Total Assets

Years Net income Average total Assets Return on assets (ROA)

2012/13 (3,494,542) 37,407,507.0 -0.09

2013/14 (1,388,400) 39,085,917.0

- 0.04
2014/15 679,920 43,615,289.0 0.02

2015/16 1,845,409 43,931,833.0 0.04

2016/17 490,267 44,760,880.5 0.01

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02. Liquidity Ratio

2.1 Quick Ratio

Cash + Marketable Securities + Receivables

Quick Ratio =
Current Liabilities

Years Current Inventory Advance & Current Quick

assets Prepayment Liabilities Ratio
2012/13 11,753,515 7,630,359 188,852 21,193,956 0.19

2013/14 19,490,701 10,673,598 352,224 27,283,821 0.31

2014/15 22,507,145 10,957,866 437,954 22,373,017 0.50

2015/16 19,649,659 10,029,150 325,148 20,423,722 0.46

2016/17 21,942,322 11,207,843 1,222,770 19,585,616 0.49

2.2 Current Ratio

Current Assets
Current Ratio =
Current Liabilities

Years Current Assets Current Liability Current Ratio

2012/13 11,753,515 21,193,956 0.55
2013/14 19,490,701 27,283,821 0.71
2014/15 22,507,145 22,373,017 1.01

2015/16 19,649,659 20,423,722 0.96

2016/17 21,942,322 19,585,616 1.12

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 2.3 Cash flow to liabilities ratio

Operating cash flow

Cash flow to liabilities =
Total liabilities

Years Operating cash Total liabilities Cash flow to

flow liabilities
2012/13 589,410 24,003,590 0.02

2013/14 (3,763,827) 31,425,222 (0.12)

2014/15 (1,392,457) 29,607,514 (0.05)

2015/16 2,606,119 25,618,924 0.10

2016/17 1,916,116 29,189,871 0.07

2.4 Working Capital Ratio

Working capital = Current assets – Current liabilities

Years Current Assets Current Liability Working Capital Ratio

2012/13 11,753,515 21,193,956 (9,440,441)

2013/14 19,490,701 27,283,821 (7,793,120)

2014/15 22,507,145 22,373,017 134,128

2015/16 19,649,659 20,423,722 (774,063)

2016/17 21,942,322 19,585,616 2,356,706

33
02. Activity Ratio

3.1 Inventory turnover ratio

Cost of Goods Sold

Inventory Turnover =
Average Inventories

Years Cost of goods sold Inventories Inventory turnover

Ratio
2012/13 41,628,272 7,630,359 5.46

2013/14 56,742,204 10,673,598 5.32

2014/15 58,228,263 10,957,886 5.31

2015/16 52,370,449 10,029,150 5.22

2016/17 49,044,170 11,207,843 4.38

3.2 Total assets turnover Ratio

Sales
Asset Turnover =
Average total assets

Net Sales Total Assets Total Assets turnover

Years
2012/13 44,193,490 36,058,499 1.23

2013/14 61,252,088 42 113,335 1.45

2014/15 65,031,509 45,117,243 1.44

2015/16 59,924,103 42,746,423 1.40

2016/17 55,537,401 46,775,338 1.19

34
3.3 Average payment period

Average accounts payables

Average payment period = 365*
Net purchases

Years Accounts Ending Beginning Cost of

Payable Inventories Inventories goods sold Average
Payment
period
2012/13 4,638,581 7,630,359 9,421,837 41,628,272 42.50
2013/14 7,168,058 10,673,598 7,630,359 56,742,204 43.76
2014/15 6,262,170 10,957,886 10,673,598 58,228,263 39.06
2015/16 4,645,921 10,029,150 10,957,886 52,370,449 32.96
2016/17 5,109,221 11,207,843 10,029,150 49,044,172 37.13

3.4 Average collection Period

Average accounts receivables

Average collection period = 365*
Annual credit sales

Years Account net sales Average Collection

receivable Period
2012/13 2,438,827 44,193,490 20.14

2013/14 6,772,268 61,252,088 40.36

2014/15 6,348,374 65,031,509 35.63

2015/16 6,996,694 59,924,103 42.62

2016/17 6,928,230 55,537,401 45.53

35
03. Financial ratio

4.1 Time interest earned ratio

Earnings before interest and tax

Times interest earned =
Interest expense

Income Interest Time interest

Years Expense earned
2012/13 (2,154,338) 1,280,161 (1.68)

2013/14 (4,447) 1,269,908 0.03

2014/15 1,717,966 957,890 1.79

2015/16 2,634,736 756,882 3.48

2016/17 1,320,468 753,257 1.75

4.2 Debt Equity Ratio

Total debt
Debt to equity =
Total equity

Years Total debt Total equity Debt equity Ratio

2012/13 2,809,634 12,054,909 0.23

2013/14 4,141,401 10,688,113 0.39

2014/15 7,234,497 15,509,729 0.47

2015/16 5,195,202 17,127,499 0.30

2016/17 9,604,255 17,585,467 0.55

36
4.3 Total Debt Ratio

Total debt
Total debt =
Total assets

Total Total Assets Total debt Ratio

Years liabilities
2012/13 24,003,590 36,058,499 0.67

2013/14 31,425,222 42 113,335 0.75

2014/15 29,607,514 45,117,243 0.66

2015/16 47 941 625 42,746,423 1.12

2016/17 56 379 593 46,775,338 1.21

37
 Group Members

1. B.R.W. Bolangho UWU/ENM/15/006

2. D.M.S.M. Dissanayake UWU/ENM/15/013
3. P.S. Senadeera UWU/ENM/15/019
4. W.G.T. Lakmal UWU/ENM/15/025
5. M.I.H. Muhammadh UWU/ENM/15/031
6. B.G.K. Perera UWU/ENM/15/037
7. U.K.U.S. Samaraweera UWU/ENM/15/043
8. G.D.T. Vimarsha UWU/ENM/15/050
9. J.A.D. Lakmal UWU/ENM/15/056
10. K.K. Erandika UWU/ENM/15/063

38