Table of Contents

Executive summary...................................................................................................

Introduction to the company in consideration...........................................................

Financial performance...............................................................................................

Ratio Analysis...........................................................................................................

Profitability ratios......................................................................................................

Gross profit margin................................................................................................

Ways to improve the gross profit margin ratio?....................................................

Net profit margin....................................................................................................

How to improve the net profit margin?..................................................................

Liquidity ratios........................................................................................................10

Current ratio.........................................................................................................10

How to improve the current ratio?.......................................................................12

Acid test ratio.......................................................................................................12

How to improve the acid test ratio?.....................................................................15

Working capital management..................................................................................15

How to improve the working capital performance?.............................................17

Which company performs best?..............................................................................18

Conclusion...............................................................................................................18

Bibliography............................................................................................................19

Executive summary

Choose two Colombo Stock Exchange companies that have been long-time competitors in the

same industry for this assignment. Our investigation will focus on the company's financial

1
performance and its position in the industry. With this information, we'll be able to make

more informed decisions in the future. We'll use these ratios and data to highlight the

strengths and weaknesses of each company, and then we'll offer advice on how to fix them

(CSE, 2022). Finally, we'll come to a conclusion about which company has performed the

best, and we'll explain why.

Introduction to the company in consideration

There are a number of strategic partnerships in place between Renuka Holdings PLC and

global partners that will add value to the long-term interests of the company.

Because we are a results-driven organization, we place a high value on creating long-term

shareholder value while also acting as a socially conscious corporation.

We Have a Goal

Entrepreneurial Sri Lankan conglomerate with a global presence and a strong focus on

innovation and technology.

Sense of Identity and Sense of Purpose

The structure is only one aspect of Renuka's culture. In other words, it's a declaration of core

beliefs. We build our relationships with clients and colleagues on honesty and trust because of

our commitment to a responsive, enterprising, nurturing, unrelenting, knowledgeable, and

accountable workplace. As a result, we are able to provide our customers with high-quality

goods and services, while also generating superior long-term financial returns for our

shareholders (renukagroup.com, 2022).

2
Financial performance

The financial health of a company can be assessed using the company's Statement of

Financial Position (SFP) (SOFP). Assets, liabilities, and equity are the three main components

of a company's financial statement. Ratio analysis, which we'll go over in detail below, is

critical for quickly discovering and verifying a company's success. Read on for more. It is

important for investors to analyze a company's finances by analyzing its financial statements

and calculating certain ratios. Though intimidating, financial analysis is not as difficult as it

initially appears to be. The PERT (Program Evaluation Review Technique) project

management tool displays the progress of a project on a timeline. A company's financial

performance is influenced by its equity, costs, revenues, and profitability. Financial

performance is based on assets other than cash. Numerous business-related calculations can

be used to estimate a company's ability to meet its objectives (Team, 2022).

Ratio Analysis

Ratio analysis of financial statements is a standard practice for many companies to ensure the

financial soundness of their businesses. Working capital ratios, debt-to-equity ratios, return on

capital employed (ROCE), and other metrics all play a role in this investigation. One way to

determine the overall health of a company's finances is to use one of these ratios.

When evaluating whether or not to invest in a company, a variety of Ratios can be used to

examine the financial records. Many metrics are available, including profitability ratios,

liquidity ratios, efficiency ratios, and gearing ratios. Various financial data points can be

examined when performing a ratio analysis on a company's financial accounts. Profitability,

liquidity, and solvency can all be assessed using these metrics (BLOOMENTHAL, 2021).

3
Data from balance sheets and income statements can be used in ratio analysis to determine a

company's financial health and profitability. Ratio analysis is a fundamental part of equity

research at the beginning of the process.

Profitability ratios

Profitability ratios are used by analysts and investors to measure and evaluate a company's

ability to generate money (profit) in relation to sales, balance sheet assets, operating costs, and

shareholders' equity during a given time frame. They demonstrate how effectively a company

makes use of its assets in order to generate profit and value for shareholders.

To most businesses, a higher ratio or value signifies that the organization is profitable and

generating cash flow. The ratios really come into their own when compared to other

organizations in the same industry or from previous time periods. Following that, we'll take a

look at some profit margins (HAYES, 2022).. These metrics are used to gauge a company's

profitability and ability to turn a profit on sales, costs of goods sold and expenses, assets, and

shareholders' equity. Three critical profitability ratios are the gross profit margin, net profit

margin, and return on capital employed (ROCE). Profitability ratios are a common metric in

the business world. You can use the data to better your decisions if you do a little digging into

it.

Gross profit margin

Formula = (Gross profit/Sales) *100

Renuka foods plc

Year Working GPM

2017 1,787,150,963/ 25.3%

7,051,380,800*100

4
 2018 1,396,198,079/ 18.4%

7,551,205,155*100

2019 1,923,848,324/ 23.5%

8,179,475,679*100

2020 1,838,558,382/ 216%

850,380,041*100

HVA foods plc

Year Working GPM

2017 176,677,351/ 13.8%

1,274,401,467*100

2018 98,891,606/ 9%

1,096,941,641*100

2019 87,042,715/ 10.2%

850,380,041*100

2020 132,092,848/ 11.34%

1,164,440,585*100

We can now compare the gross profit margins of the two companies based on these numbers.

Profit margin is the difference between a company's net income and its gross profit. To

calculate a company's net profit margin, subtract all the costs associated with producing or

delivering its product or service. The company's high gross profit margin can still cover its

operational costs, fixed costs, and dividends, while also earning net profits. There may be

many reasons for this, including low-profit margins, poor purchasing methods, low selling

5
prices, a decrease in sales, strong market competition, and/or poor marketing techniques for

the sale of such goods (Bloomenthal, 2021).

The gross profit margin of Renuka foods plc decreased over the four-year period from 2017 to

2020. A negative 0.48 percent figure was recorded in 2018. The firm's expenses have

increased this fiscal year for some unknown reason. There is no doubt that the company's

interest expense has risen from 3,206,900,561 to 3,244,034,169 in the financial statement.

Revenue, on the other hand, has increased since 2017. A rise in sales costs does not translate

into a positive gross profit, despite the fact that sales have increased.

The gross profit margin (GPM) of Central Finance Plc has remained stable over the last three

years, ranging between 3 percent and 4.5 percent.

From 4.1 percent to 43.5 percent in just one year, the company's gross profit margin has

increased. The fiscal year for HVA foods Plc was solid and promising. A significant drop in

sales costs (Interest expense) in 2020 can be seen as a result of this reduction in costs of sales.

There has been a 9.1 percent drop in costs, but they haven't been able to keep up with this

year's drop in the cost of goods sold.

Ways to improve the gross profit margin ratio?

Selling price increases without increasing the cost of goods sold will increase your gross

profit margin (COGS). Before you make a price change, figure out how much more money

you'll make with the new adjustment to gross profit margin.

You can make more money per unit by raising your selling price rather than decreasing it.

Manufacturing costs per unit decrease as production volume increases, resulting in lower

selling prices for the finished goods. Higher gross profit margins can be achieved by

increasing sales and lowering unit cost.

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You should not lower the selling price of your products in order to lower their cost of

production. Gross profit margin rises when the cost of goods sold falls. Using lower-cost

suppliers, raw materials, labor-saving technology, and an outsourcer are just a few of the

ways to reduce the cost of goods provided. The gross profit margin rises as the difference

between sales and costs widens. This must be remembered at all times.

Net profit margin

Formula = (Net profit/Sales) *100

Renuka Foods plc

Year Working NPM

2017 442,581,240/ 6.27%

7,051,380,800*100

2018 -105,369,940/ -1.39%

7,551,205,155*100

2019 313,760,504/ 3.8%

8,179,475,679*100

2020 238,855,341/ 28%

850,380,041*100

HVA foods plc

Year Working NPM

2017 44,121,754/ 3.46%

1,274,401,467*100

2018 -366,994,103/ -33%

1,096,941,641*100

7
 2019 -125,628,255/ -14%

850,380,041*100

2020 78,590,107/ 6.7%

1,164,440,585*100

Measures the difference between the total revenues received and the net income or profits

earned. Often referred to as "net margin." We're interested in net profit margin as a percentage

of revenue. The net profit margin (NPM) can be expressed in many ways, but the most

common is a percentage. According to the net profit margin of a company, how much profit is

generated for every dollar of revenue generated (MURPHY, 2022).

Renuka foods company plc's Net Profit Margin fluctuated in the 10 percent range over the

four years from 2017 to 2020. The gross profit margin was at an all-time low in the financial

year 2019 as a result of a decrease in revenue. We can see that the company's sales costs have

decreased significantly over the past four years. According to the company's total revenues,

they are at a significantly higher level. Because of this, Renuka foods plc appears to be

struggling to maintain its costs of sales or determine the appropriate prices for its products

and services. As a result of this, the profit margin jumped from 2.71 percent to 7.91 percent in

2020. Expenses have decreased, except for the management charge and taxes, which have

increased. This may be the reason. They've also seen an increase in revenue of 120245613

rupees over the past two years compared to 2019. (10% increase over last year's price).

Over the past three years, HVA foods plc's net profit margin ratio has remained stable. It has

been on the high side when compared to HVA foods Company plc. However, over the past

three years, their net profit margins have decreased. There may be no choice but to accept this

outcome if this is the result of the rising and peaking costs of sales for the company. More

8
than half of their businesses are losing money for them. In addition, they spend a tiny fraction

of the revenue they generate. As a result, their Net profit margin has risen from 15.9% in 2019

to 24% in 2020. They were able to achieve this increase thanks to a 3512503 rupee drop in the

cost of sales. However, the company's revenue has decreased over time. However, the fall in

their cost of sales balance has not been matched by this fall.

How to improve the net profit margin?

Businesses can increase their net profit margin by selling more products or services, or by

raising their prices, respectively.

Cutting costs is one way for companies to improve their net margins (e.g., finding cheaper

sources for raw materials).

Here are some tips to help you save money on your utility bill:

Equipment that is left on all night should be turned off to conserve energy.

Make sure your faucets aren't dripping and install low-flow toilets in any offices that could

benefit from them in order to save on water consumption.

Reduce the temperature by 7 to 10 degrees at night, on weekends, and on holidays.

2)Reduce the amount of overtime your employees are required to do. As overtime rates rise,

workers should be scheduled so that no one works more than is necessary.

Before hiring more employees, make sure the ones you already have are capable of handling

the increased workload. Hold a meeting to figure out who can take on any additional

responsibilities, and then discuss it.

9
Contract workers should be utilized if at all possible. Data entry, software development, and

event marketing can all be outsourced to save money and time.

In order to reduce operating costs, it is necessary to find lower-priced suppliers. The best way

to get around this is to bargain for larger discounts on popular products (taluspay.com, n.d.).

If you pay your bills on time, you may be eligible for a discount from the companies you do

business with.

Consider alternatives to more expensive administrative services. Free up labor by automating

and outsourcing repetitive tasks with tools like Oracle or Zapier.

Liquidity ratios

Liquidity ratios are useful in determining a company's ability to pay its short-term loans

quickly if necessary. Liquidity ratios include two basic types of ratios. One is the current

ratio, and the other is the acid test ratio" (CFI, 2022)..

There are various indicators that can help investors evaluate the ability of a company's

financial resources to meet short-term obligations. Companies' liquidity ratios are used by

lenders and creditors to determine if they will lend or lend money to them. There are a

number of different ratios that can be used to compare an organization's current liabilities to a

variety of liquid assets. By meeting their commitments on time, corporations have a higher

ratio.

Current ratio

Formula = Current Assets / Current Liabilities

Renuka Foods plc

Year Working Current Ratio

2017 2,886,740,974/ 1.45:1

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 1,985,779,791

2018 2754,845,838/ 2,542,142,465 1.08:1

2019 2,725,555,035/ 1.02:1

2,672,296,729

2020 2,782,267,855/ 1.148:1

2,422,687,843

HVA foods plc

Year Working Current Ratio

2017 1,065,539,127/ 900,797,860 1.18:1

2018 640,854,786/ 842,455,421 0.76:1

2019 465,711,014/ 660,731,275 0.7:1

2020 613,240,403/ 1,006,969,906 0.61:1

Liquidity is reflected in the current ratio. Different industries have different maximum current

ratios that they are allowed to maintain. When a company's current ratio is higher than its

historical average, creditors are more confident in its ability to repay its debts. Large current

ratios aren't always a good thing for the investor (Wikipedia, 2022). If a company's current

ratio is too high, it may not be maximizing the value of its current assets or short-term

financing options.

The current ratio will be less than 1 if current liabilities exceeds current assets. Current

liabilities may be difficult to pay for a company with an illiquid current ratio of less than 1. A

current ratio of less than one is possible in some business models. For a company to maintain

a current ratio of less than one, it must have an abundance of inventory. The firm expects to

11
recoup its acquisition costs when it sells its inventory, which is valued using the cost of

acquisition. Consequently, the sale will bring in more money than the inventory's value on the

balance sheet. Businesses with the ability to collect payments from customers before paying

suppliers can also justify having low current ratios.

An adverse and unacceptable current ratio of 0.07:1 was recorded by the Renuka foods

company in the most recent fiscal year, and the previous two fiscal years were essentially

identical. In this case, the company does not have enough current assets to cover its current

liabilities. To put it another way, they run the risk of not being able to pay their creditors and

other financial institutions that lend money to them on favorable terms.

It has been worse for HVA foods companies in previous years, such as 2017 and 2018, but

they managed to increase their current ratio in 2019 from 2.86:1 to 2.86:1. A company's

ability to meet its short-term debt obligations indicates that it has sufficient Liquid assets on

hand. There is a current ratio of 0.76:1 despite the improvement. This shows that the

company's current ratio is on the decline again. In order to improve current ratios, the

following guidelines must be followed by both companies.

How to improve the current ratio?

Any capital expenditures that require cash payments should be postponed; term loans should

be examined to see if they can be repaid, and personal demands on the company should be

kept to a minimum.

Reduce current debt by selling off any assets that aren't bringing in revenue (porkgateway.org,

n.d.).

Acid test ratio

Formula = Current Assets – Closing inventory/ Current Liabilities

12
Renuka Foods plc

Year Working Acid test Ratio

2017 2,886,740,974- 0.845:1

1,207,169,521/

1,985,779,791

2018 2754,845,838- 0.68:1

1,017,400,134/

2,542,142,465

2019 2,725,555,035- 0.53:1

1,319,668,589/

2,672,296,729

2020 2,782,267,855- 0.62:1

1,282,661,465/

2,422,687,843

HVA foods plc

Year Working Acid test Ratio

2017 1,065,539,127-88,168,442/ 1.08:1

900,797,860

2018 640,854,786-95,718,528/ 0.65:1

842,455,421

2019 465,711,014-112,854,431/ 0.53:1

660,731,275

2020 613,240,403-154,793,112/ 0.5:1

13
 1,006,969,906

When the inventory was a more liquid asset, the Acid Test ratio was born. Quick ratios were

devised to help shareholders and other stakeholders of businesses make informed decisions

based on reliable information because it is difficult to convert inventory into cashflows

quickly. The acid-test ratio (ATR), also known as the fast ratio, is used to measure a

company's liquidity by comparing its current assets to its current liabilities (ROSS, 2022)..

Only current assets that can be converted to cash in less than 90 days are used to calculate the

quick ratio.

The acid test ratio, on the other hand, must be at least 1:1. In the last four years, Renuka foods

plc has had a negative Acid test ratio, which has been the case since 2017. According to their

closing inventory balance, they've been on time with their short-term loan payments. In light

of this, investors may be misled by the current ratio, which appears to account for inventory

balance. When it comes to short-term loans, there is a 0.05:1 chance that the company will go

out of business because it can't keep up with repayment. Trade creditors and other financial

institutions can usually apply for these loans. This is primarily due to an increase in current

liabilities of 10.1% from the previous fiscal year. This year's financial year has seen a 1.2

percent decrease in the current asset balance (Net of closing stock) compared to 2017. An

increase in reliance on closing inventory balance may be to blame for this.

After having a negative ratio of 0.12 and 0.5:1 in the financial period 107 to 2018, HVA foods

company's acid test opposition increased it to 2:1 in 2019, which can be considered an

impressive recovery. Furthermore, they shouldn't be having any problems covering their day-

to-day cash obligations to keep the business running normally at this point. It's also worth

pointing out that during the current time period, we can see that the firm's current ratio has

14
returned to the lower end of 0.45:1. (2020). This indicates that they are in a downward trend

and that it is highly likely that it will get worse in the years to come. In addition, the company

should think about disclosing in the notes of the financial statement any going concern

uncertainties. Additionally, the acid test ratio of the company can be improved by following

the tips listed below.

How to improve the acid test ratio?

The corporation should get rid of any non-productive assets it is holding on to. A company's

only goal is to make money by purchasing assets like buildings, machines, and vehicles.

Accounts receivable to the business: Check your receivables to make sure you're charging

your customers correctly and getting paid on time.

Negotiate longer payment terms with your vendors if you want to keep your money for a

longer period of time.

Calculate each product's or service's return on investment. Be on the lookout for ways to raise

your prices on a regular basis so that you can maintain or increase your profit margin. Price

changes may be necessary when costs rise and the market shifts.

Keep tabs on how much money is being taken out of the business for the benefit of the owners

and their families. A company's cash flow can suffer if too much money is taken out of it.

Working capital management

Formula = Current Assets - Current Liabilities

Renuka Foods plc

Year Working Working capital

2017 2,886,740,974- 900961183

15
 1,985,779,791

2018 2754,845,838- 212703373

2,542,142,465

2019 2,725,555,035- 53258306

2,672,296,729

2020 2,782,267,855- 359580012

2,422,687,843

HVA foods plc

Year Working Working capital

2017 1,065,539,127- 900,797,860 164741267

2018 640,854,786- 842,455,421 -201600635

2019 465,711,014- 660,731,275 -195020261

2020 613,240,403- 1,006,969,906 -393729503

It is the difference between a company's current assets (such as cash, accounts

receivable/unpaid bills from customers, stockpiles of raw materials, and finished goods) and

its current liabilities (such as debts and accounts payable) that is known as working capital

(NWC). Using it to assess a company's current state is common practice.

The amount of working capital a company has will largely depend on the industry in which it

operates. When there is a lack of rapid inventory turnover, some industries may require more

working capital. As a result, retail businesses that deal with a large number of customers each

day are able to raise short-term credit much more quickly than those that deal with fewer

customers.

16
"Working capital" refers to the money you have set aside to cover short-term expenses. Fixed

assets and R&D are long-term investments, but working capital is focused on the short term.

Working capital is the difference between current assets and current liabilities. These

constituents' short-term fluctuations are referred to as "current" again. Assets such as

inventory and accounts receivable that can be turned into cash in the next year or operating

cycle are examples of this type of asset Current assets include cash, short-term investments,

receivables, and inventories (bdc.ca, n.d.).

Current liabilities include operational lines of credit from a bank, accounts payable, the

percentage of long-term debt that is expected to be repaid within the next 12 months, and

accrued liabilities such as taxes owed. All of these items are subject to constant turnover and

value changes.

Over a four-year period, Renuka foods plc's working capital performance was negative

24998166090 rupees. If a company cannot afford to pay back short-term loans, such as Bank

ODs and another short-term borrowing, within the timeframe specified, it will be more likely

to go bankrupt. In the notes to the financial statements, it would be best if they included

information about the company's ability to continue as a going concern.

While this may be true, For the past four years, the negative 24998166090 rupees working

capital balance has worsened, according to HVA foods PLC. Failure to repay short-term loans

like Bank ODs and other such borrowings within the agreed timeframe increases the

likelihood of bankruptcy because they will have difficulty supporting their daily business

operations and thus their creditors' obligations to do so. This should be made clear to investors

in the notes to the financial statements so that they are aware of the challenges they are facing.

17
How to improve the working capital performance?

Use the following methods to keep your spending in check:

Make any necessary adjustments to your inventory after reviewing your stock to determine

how much-finished goods or raw materials you have on hand. What if you were able to lower

your monthly expenses?

Consider switching service providers to see if you can get a better deal. Get the best deal

possible by shopping around. You can use the information you've provided to negotiate a

better deal on your current rates and payment terms.

Shorter payment terms from creditors and clients can help you get the money you owe more

quickly. To get people to pay their bills on time in the first place, this may be an incentive

scheme.

It is important to keep track of your own payments to avoid further debt. If you pay your own

bills on time, you'll be able to more accurately forecast your financial situation.

Providing customers with add-ons or other options can help you generate more revenue.

Your cash flow will improve if your payments are received more quickly than you are able to

make them.

Which company performs best?

If we look at ROCE and Earnings per share, we can see that HVA foods have taken the lead,

but liquidity ratios are quite acceptable for Renuka foods plc, as we can see both firms

performing head-on in the ratios calculated above. They also have a believable working

capital balance to go along with that. We can conclude that Renuka foods plc has the best

financial performance based on the ratios we calculated.

18
Conclusion

Nonfinancial factors should be considered before making a decision to invest in a company.

There are many non-financial factors to consider when making an investment decision, not

just the numbers. Non-financial elements include finance, technology, culture, environmental

concerns, education, and expertise. Learning objectives and enhancing outcomes are often

overlooked when it comes to non-financial factors.

Things like the company's goodwill are also important to look into so that the company

appears to be a good one before the purchase and is well-regarded by the public. Investing in

a company's long-term viability requires careful consideration of its location, customer base,

market share, and employee satisfaction.

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