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Student Number 2378023 Email R.S.WickramasingheMudiyansel
age@wlv.ac.uk

Assignment Details

Module name Managing Module Code 7AC009/CN1

Financial
Performance
For the attention of Dr. Mudith Sujeewa
Due date 09-01-2024 Dr Osagie Igbinigie

Assignment title Report

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 TABLE OF CONTENTS

NO Content Pg
1 CHAPTER
1 INTRODUCTION 3
2 OBJECTIVES 4
3 ABOUT THE COMPANY 4
4 SOURCES OF DATA 5
5 RATIO ANALYSIS'S FINDINGS 5
5.1 Liquidity Ratio 5
5.2 Current ratio 6
5.3 Current Ratio of Ceylon Cold Stores PLC in 2022 7
5.4 Quick Ratio 8
5.5 Return on Asset of the Ceylon Cold PLC 8
5.6 Gross Profit Margin 9
5.7 Gross Profit Margin of the Ceylon Cold PLC 9
6 NET PROFIT MARGIN 10
6.1 Net Profit Margin of Cyclone cold PLC 10
6.2 Return on Equity (ROE) 11
6.3 Return on Equity (ROE) of Ceylon Cold PLC 11
6.4 Activity Ratio 12
7 PRIOR YEAR COMPOSITION 12
2 CHAPTER 13
1 INTRODUCTION 13
2 CAPITAL INVESTMENT APPRAISAL 14
3 CEYLON COLD PLC’S METHOD OF CAPITAL INVESTMENT APPRAISAL 15
3.1 Payback 16
3.2 Accounting Rate of return,(ARR) 16
3.3 Net Present Value (NPV) 17
3.4 Internal Rate of Return (IRR) 17
4 CONCLUSION 19
5 REFERENCES 20
6 ANNEXURE 21

2
1. INTRODUCTION
Efficient financial management and planning are essential for a business and mission to be sustainable.
A helpful management tool, ratio analysis will help us gain a better understanding of financial results
and trends over time. It can also offer you with important performance indicators for our organization.
Ratio analysis is a tool that managers will use to identify strengths and weaknesses so that initiatives
and plans may be developed. Ratio analysis is a tool that funders may use to assess management
performance and mission impact, as well as to compare your outcomes to those of other organizations.
Ratios must be the following in order to be meaningful and helpful:
 Calculated using accurate and trustworthy financial data (does our financial data
accurately depict our genuine cost picture?)
 Made consistent calculations across time periods.
 Applies in contrast to internal benchmarks and objectives Utilized in contrast to other
businesses in your sector.
 Considered as a snapshot in time as well as a proxy for broader concerns and patterns
across time.
 Meticulously interpreted within appropriate context, keeping in mind the numerous other
significant variables and metrics that are involved in performance evaluation.
There are four main categories into which ratios fall:
• Reliability Influence (Funding – Debt, Equity, Grants) – Sustainability – Operational Efficiency –
Liquidity
The following ratios are given as guides and reflect a few common ratios used in commercial practice.
Certain ratios won't give us the data we require to back up the specific choices and tactics we've made.
Based on what our organization and stakeholders value and find significant, we can also create our own
ratios and indicators.

2. OBJECTIVES
The financial statement will be reviewed, and its financial prospects in relation to debt, liquidity,
efficiency, and market performance will all be analyzed.

3
 3. ABOUT THE COMPANY
Ceylon Cold PLC is taken into consideration in the report that follows. Ceylon Cold Stores (CCS) is a
leading player in the carbonated soft drink (CSD) and frozen confectionery markets in Sri Lanka. It is
one of the country's most reputable and established food and beverage firms. Soaring to prominence
over the course of 153 years as a prominent part of the John Keells Holdings Group, the largest
conglomerate in Sri Lanka, CCS was firmly established on the principles of trust and integrity.

For several years, CCS has impacted the lives of Sri Lankans through Elephant House, the renowned
beverage and ice cream brand. Every item in the Elephant House product line, such as fruit-based
drinks, water, energy drinks, ice creams, popsicles, and flavor-infused milk products

4. SOURCES OF DATA

The primary source of information is the publicly available annual reports of Ceylon Cold Stores PLC,
which offer a comprehensive, fair, and succinct summary of the company's value creation activities for
the fiscal year that ended on March 31, 2023.

4
5. RATIO ANALYSIS'S FINDINGS
5.1 Liquidity Ratio
All possible liquid resources that the business has at its disposal to fulfill its payment obligations
are combined to form liquidity. Solvency, as defined by professional literature, is the ability of the
business entity to fulfill its financial obligations on time and is thus a necessary prerequisite for the
firm to succeed (Sedláček, 2009, 66).

To put it briefly, a company's liquidity is a key indicator of its financial health because it represents
its capacity to pay short-term obligations. Numerous ratios can be used to assess liquidity.

5.2 Current ratio

A company's ability to pay off short-term debt with its present assets when it matures is indicated
by its liquidity (Syamsuddin, 2011). The current ratio is a crucial indicator of a company's ability to
pay down short-term debt, according to Harahap (2013). The current ratio can be used to estimate
liquidity (current liabilities) by comparing current assets, often referred to as current assets, to
current liabilities. To find the current ratio, apply the formula below:

Current Ratio = (Current Assets) / Current Liabilities

The simplest liquidity test is the current ratio. It shows whether a business can use its short-term assets
to pay down its short-term liabilities. If the current ratio is one or higher, then current assets should be
sufficient to cover short-term liabilities, a current ratio below unity could indicate liquidity problems for
the company.

5
 Source: (annual reports of Ceylon Cold Stores PLC pg:160)

5.3 Current Ratio of Ceylon Cold Stores PLC in 2022

Current Ratio = (Current Assets Rs: 000) / (Current Liabilities Rs:000)

= 16,203,615/24,437,017
= 0.66

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 5.3 Quick Ratio
Compared to the current ratio, the quick ratio is a more stringent test of liquidity. It gets rid of
some present assets, such inventories and pre-paid bills, which could be harder to turn into cash.
Similar to the current ratio, a quick ratio above one indicates that a business shouldn't have many
liquidity issues. A higher ratio indicates greater liquidity and a stronger ability of the corporation to
withstand business downturns.
Quick Ratio = (Cash + Accounts Receivable + Short-Term or Marketable Securities) /
(Current Liabilities)

Source: (annual reports of Ceylon Cold Stores PLC pg: 6)

According to the calculation current ratio of the Cold Store PLC in 2022 is equal to 0.66 there for a current
ratio is less than one it may mean the Cold Store PLC has liquidity issues.

7
 5.4 Profitability/Performance
A company that is profitable is capable of earning money (profits) (Wahyuni & Ardini, 2017). The
profitability ratio can be used to gauge an organization's potential to generate sufficient profits
from both its investment and operational activities, according to Timman et al. (2018:126).
Profitability ratios can be measured using Return on Assets (ROA), according to Hery (2016: 193).
In order to determine the return value on total assets, Brigham & Houston (2018:140) state that the
purpose of ROA is to quantify the amount of Net Profit derived from total assets. The following
formula can be used to determine ROA:

Return on Asset =𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡/ 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒t

Profitability is the primary concern of any business. Profitability ratios, which are used to calculate
the company's bottom line, are among the most widely used instruments in financial ratio analysis.
Both business owners and management place importance on profitability metrics. It is imperative
for the primary owner of a small business to demonstrate profitability to outside investors who
have invested their own funds in the company.
5. 5 Return on Asset of the Ceylon Cold PLC

Source: (annual reports of Ceylon Cold Stores PLC pg: 14)

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 Return on Asset (ROA) of Ceylon Cold PLC =𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 (Rs Mn)/ 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒t (Rs Mn)

= 2,513/71,730

= 0.035 (3.5%)

An institution is making money in relation to its total assets if it has a Return on Assets (ROA) of 3.5%.
This indicates that the institution is making 3.5 cents in return for every rupees in assets. For a
complete picture of the institution's financial health, it is also preferable to examine additional
financial statements and indicators.

5.6 Gross Profit Margin

The gross profit margin looks at cost of goods sold as a percentage of sales. This ratio looks at how
well a company controls the cost of its inventory and the manufacturing of its products and
subsequently passes on the costs to its customers. The larger the gross profit margin, the better for
the company.

The calculation is:

Gross Profit Margin = Gross Profit/Net Sales

Both terms of the equation come from the company's income statement.

5.7 Gross Profit Margin of the Ceylon Cold PLC

Gross Profit Margin = Gross Profit (Rs Mn)/Net Sales( Rs Mn)

= Rs Mn. 9,135,854 / Rs Mn 4,744,258

= 1.9 ( 19%)
When the cost of goods sold is taken into consideration, Ceylon Cold PLC's gross profit margin of 0.1%
suggests that the company has very little profitability on its sales. In other words, the corporation can only
keep 0.1 cents of gross profit for every rupees of revenue. A low gross profit margin may indicate a
number of issues, including intense competition in the market, high production costs, or operational
inefficiencies inside the organisation. For a more thorough knowledge of the company's financial
performance, it is crucial to examine additional financial data and take industry benchmarks into account.

9
Source: (annual reports of Ceylon Cold Stores PLC Pg: 141)

10
6. Net Profit Margin
The margin ratio that is most frequently employed when performing a basic profitability ratio study
is net profit margin. After all costs are covered, the net profit margin indicates the percentage of
each dollar of sales that is shown as net income. A 5% net profit margin, for instance, indicates that
five pennies of every dollar represents profit. After deducting all costs, such as taxes, interest, and
depreciation, the net profit margin calculates profitability.

The calculation is:

Net Profit Margin = Net Income/Net Sales

Both terms of the equation come from the income statement.

6.1 Net Profit Margin of Cyclone cold PLC

Source: (annual reports of Ceylon Cold Stores PLC Pg: 53)

Net Profit Margin of Cyclone cold PLC = 6.15%

As a result, the company's profit margin appears to be reasonably strong, indicating that it is
effectively controlling costs and turning a profit on its activities. Since it shows the company's
profitability and financial performance, it is typically regarded as a favorable indicator for
stakeholders and investors.

11
6.2 Return on Equity (ROE)
For investors in the company, the Return on Equity ratio may be the most significant of all the
financial figures. It calculates the yield on the capital that investors have invested in the business.
When choosing whether or not to invest in the company, prospective investors consider this ratio.

The calculation is:

Return on Equity (ROE) = Net Income/Stockholder's Equity

The income statement provides net income, while the balance sheet provides stockholders' equity.

6.3 Return on Equity (ROE) of Ceylon Cold PLC

Source: (annual reports of Ceylon Cold Stores PLC Pg: 242)

With a return on equity (ROE) of 11.7%, Ceylon Cold PLC appears to be making a fair profit on the money
its investors have invested. It shows that the business is turning a profit by using its equity appropriately.
To get a clearer picture of the company's financial performance and health, it is crucial to compare this
ROE number to industry benchmarks and past results.

ROE is a metric that stakeholders and investors frequently use to assess a company's profitability and
management's capacity to provide returns for shareholders. Higher ROEs are often regarded as positive
indicators of increased profitability and efficiency. To obtain a complete picture of a company's financial
performance, several financial measures and aspects must be taken into account in addition to ROE.

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6.4 Activity Ratio
Accounts receivable, inventories, and total assets are the most often utilized asset accounts. Activity ratios
calculate a company's sales per another asset account. Activity ratios evaluate the business's resource
utilization effectiveness. The denominator of the most widely used activity ratios is accounts receivable or
inventory because these are the accounts in which most businesses make significant investments.

7. Prior Year Composition

Source: (annual reports of Ceylon Cold Stores PLC Pg: 242)

Source: (annual reports of Ceylon Cold Stores PLC Pg: 242)

Consolidated revenue for the Group increased by 49% to Rs. 126.15 billion over the course of the year,
demonstrating management's ability to adjust strategy in response to operating environment constraints.
During the first half of 2022–2023 the Manufacturing Sector's Beverages and Frozen Confectionery
categories both had significant volume growth of 37% and 18%, respectively. However, consumer
spending decreased as disposable incomes were hit by rising inflation, which led to a slowdown in volume
growth during the second part of the year.

Source: (annual reports of Ceylon Cold Stores PLC Pg: 242)

Supermarket sector growth of 68% supported a 30% increase in CCS consolidated operating profit to Rs.
6.19 billion throughout the year. In spite of the decline in basket size, foot traffic remained robust, and the
Supermarket Sector's performance was maintained by broadening its geographic reach, streamlining its
logistics, emphasizing price, and launching data-driven personalized customer interactions. In the
Manufacturing Sector, on the other hand, operational profit decreased to Rs. 1.7 billion from Rs. 2.1 billion
the previous year due to notable cost increases and the inability to fully pass on the burden to customers.
The Manufacturing Sector saw a greater fall, of 6.42% from 11.82%, compared to the Group's operating
profit margin of 5.6% from 5.9% the year before. The Manufacturing Sector experienced a more
significant decline, falling to 6.42% from 11.82%, while the Group's operating profit margin decreased to
4.9% from 5.6% the year before. Remarkably, the operating profit margin for the supermarket sector
increased from 4.0% to 4.5% in the prior year.
Effective planning and allocation of Ceylon Cold PLC's financial resources is made possible by an annual
budget. It can also be used to track and manage spending more effectively. It aids in the establishment of
financial goals, the estimation of revenues and expenses, and the development of the company's overall
financial plan. It offers a structure for tracking expenses, spotting areas of excessive expenditure, and
putting cost-cutting measures into action. An annual budget is used as a standard by which to measure the
success of the business. In addition to analyzing numerous variables and making defensible decisions,
Ceylon Cold PLC can evaluate its financial performance, spot deviations, and take remedial action as
needed by comparing actual financial results with the budgeted figures. According to the strategic goals of
the business, it aids in resource allocation, project evaluation, and investment prioritization. A budget may
not be flexible enough, particularly in a fast-paced work setting. It might not take into consideration
unforeseen events or shifts in the market, which makes it difficult to adjust swiftly to changing conditions.
 Chapter-02

Investment appraisal techniques for long-term large-scale investments

1. INTRODUCTION

Critical investment appraisal is a crucial step in every corporate organization before deciding to proceed
with a particular capital investment. Strategic decisions are made in part through this kind of evaluation,
which is carried out by senior management. Middle and junior managers are accountable for determining
how to accomplish tasks and making sure they are completed correctly, respectively. They may be the
ones making tactical and operational decisions. Nonetheless, senior managers continue to be in charge of
the initial decision-making process.

The company's senior managers or other key stakeholders must critically assess any planned capital
investment before moving forward with it in order to determine the long-term benefits the business will
receive from it. Hence, careful planning and quantifiable benchmarks that can be utilized to judge the
success or failure of the suggested endeavors should be established. Any capital investment that
necessitates the acquisition of fixed assets must undergo this type of examination. This kind of evaluation
aids the middle financial managers in addition to advising the top management team on whether to
proceed with an investment plan.
.
The goal of this study is to investigate how companies assess potential investments and choose which
fixed assets to buy by looking at their decision-making processes. We will investigate the widely used
techniques for valuing investments, including Internal Rate of Return (IRR), Payback, Net Present Value
(NPV), and Accounting Rate of Return (ARR). We'll provide examples to support the points made.

2. CAPITAL INVESTMENT APPRAISAL

A subset of capital budgeting is capital investments appraisal. This consists of methods historically used to
apply economic principles to decisions about asset replacement and expansion. In actuality, the two
names might refer to the same thing at times when used interchangeably.
"Making off long term planning decisions for investments in projects and programmers" is how Horngren,
Foster, and Data (2000, p748) define capital budgeting. It is described as a “process of evaluating and
selecting long term investments that are Consistent with the business goal of maximizing owner wealth”
by Gitman (2008, p. 380).
However, El-Masri, M. and Harris, E.P. (2011, p. 345) attempt to distinguish between the two ideas. They
claim that while the primary criterion for assessing every project proposal is financial, capital budgeting
primarily addresses quantitative difficulties. Given this, funding for any project with a high cash flow
forecast would be easily obtained. In contrast, while making decisions on investment appraisal, decision-
makers are supposed to weigh all relevant factors, both financial and non-financial, before accepting or
rejecting any investment. This leads them to the conclusion that investment assessment methods, or
"multi-factor models," should account for a greater number of variables, less-predictable outcomes, and
non-financial elements (Magdy G.A. 2011).
As previously said, there is no way to overstate the importance of capital investment appraisal and its
crucial role in financial management. It is important to remember that before approving any capital
project, sufficient prudence must be exercised. This is due to the fact that most strategic decisions are
capital-intensive and frequently have a long-term outlook, including investments of millions of pounds. In
addition, because the project is long-term in nature, it is frequently challenging to alter course or end it
after it has begun. It is crucial to do it right from the start because doing otherwise could have disastrous
effects on the organization.
Furthermore, it is important to acknowledge the high present in capital projects. Regarding capital project
ideas, the estimated future benefits and costs are uncertain. It is incredibly difficult to foresee or forecast
the future. Particularly in the modern, globalized environment, a quick shift in the market is not
surprising. For this reason, making long-term investments might carry a very significant risk.
Therefore, the senior management team in any particular business must carefully consider the potential
impact of this strategic decision before moving forward with the planning and implementation before
making any financial investments.

3. CEYLON COLD PLC’S METHOD OF CAPITAL INVESTMENT APPRAISAL

Ceylon Cold PLC is not an exception to the rule that various organizations employ various techniques
while conducting their capital investment appraisals. The methodologies used for capital investment
appraisal are mostly known to the decision makers or members of the senior management team who are
in charge of making strategic decisions, in contrast to the annual report, which is always made public.
Business organizations often use four distinct investment assessment techniques to assess any request
for capital investments and determine which fixed assets to buy. These widely applied techniques are
Internal Rate of Return (IRR), Net Present Value (NPV), Accounting Rate of Return (ARR), and Payback.
 3.1 Payback

The most widely used technique used by organizations to assess prior to pursuing their capital investment
plans, particularly in instances when future cash flows become very difficult to predict. The approach is
predicated on the idea that risk is time-related; hence, the longer one takes a risk, the higher the likelihood
of failure. Under the name Drury, C. (2012) p.306) defines it, the payback period can be used as a rough
measure of risk, based on the notion that the longer it takes for a project to pay for itself; the higher the
risk, the higher the reward.
Because of its ability to provide result within a given time frame, managers often prefer to consider the
payback method over the others. Besides, managers can use the strategy to display their success
especially where the manager’s success is judged using short-term criteria. This accounts for its
popularity among managers.
If the management wants to utilize the payback technique to evaluate any of these projects for long term
investment, they need to decide the maximum period they would like to commit until the invested capital
is recouped.
3.2 Accounting Rate of return (ARR)

When evaluating capital investments, one of the most used methods is the accounting rate of return. As
Don R. (et al., 2002) predict, this approach calculates a project's return on investment using income as
opposed to with the cash flow of the project. The calculation of the accounting rate of return is briefly
explained in the formula below.
Accounting rate of return = Average income/Original investment
or

Accounting rate of return = Average income/Average investment

It should be highlighted that income and cash flows are not the same things in terms of the
aforementioned calculation. By adding up the revenue for each year of a project and dividing the amount
by the number of years, we can find the average income for that project. (Page 718, Ibid.)
While small organisations prefer to just use the Payback approach due to their tight budgets and
incapacity to hire highly skilled specialists, large corporations shouldn't be concerned about these kinds of
situations. Large companies like Sainsbury's are able to hire highly qualified and experienced managers
who are adept at using complex techniques, in addition to having sufficient cash flows to allow them to
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commit massive working capital without compromising equity.
Although the popularity of payback, the system has been faulty mainly because of its failure to reflect the
time worth of money. The Accounting Rate of Return, on the other hand, does not work like way. This
methord is not suitable for long-term large-scale investments.

3.3 Net Present Value (NPV)

Another approach that's frequently utilised in capital investment appraisal is net present value. This
formula is used to calculate the present value of an investment using the discounted total of all cash flows
from a certain project. It does this efficiently.
The computation of net present value involves approximating the profitability of a project prior to its
initiation. Put another way, an investor estimates the potential profit a project would likely bring in before
agreeing to undertake it. It's critical to determine an investment's expected profitability before
committing to a project or venture for a business or investor. The initial investment, or -C0 in this manner,
represents a negative cash flow that indicates more money is leaving the system than entering it.

Since the amount leaving is deducted from the discounted total of the cash flows that come in, a positive
net present value is required for an investment to be deemed worthwhile. It is crucial to determine the
projected profitability of any project or investment before committing to it, whether the company or the
investor.
The initial investment, or -C0 in the formula, represents a negative cash flow that indicates more money is
leaving the system than is entering it.
Since the amount leaving is deducted from the discounted total of the cash flows that come in, a positive
net present value is required for an investment to be deemed worthwhile.
The first investment in the formula above, which has a negative cashflow, represents the money leaving.
The cash outflows are subtracted from the cash inflows that have been discounted. A positive net present
value is required for an investment to be deemed valuable. To make things easy to understand, the
approach is very simply described by the following formula:

NPV = (Cash inflows from investment) – (cash outflows or costs of investment)

To exemplify this, Prior to making this choice, management needed to assess the company's trending
position in this area and take into account the sector's performance throughout time in order to project
the return on investment.

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3.4 Internal Rate of Return (IRR)

This is just another way that the capital investment appraisal is completed. When making investment
decisions, managers and practitioners frequently use it. The net present value of all cash flows from a
certain investment, whether positive and negative, equals zero when the "annualised effective
compounded return rate" or discount rate is applied.
The primary criteria for authorising an investment based on IRR is to accept a project if its IRR exceeds
the cost of the capital invested. Competing projects are ranked according to their IRRs; the higher a
project's IRR, the higher its rank. Magni, C.A. (2010)
Various names for the technique include the effective interest rate, rate of return (ROR), and discounted
cash flow rate of return (DCFROR). When we refer to external environmental factors like inflation and
interest rates as "internal," we mean to include them. IRRs are essentially determined by finding the
interest rate at which the net present value of an investment's costs (negative cash flows) equals the
investment's benefits (positive cash flows).
It is imperative that a new project's internal rate of return (IRR) not surpass the required rate of return
set out by the organisation. Where this occurs, the proposal will be rejected since it is deemed
undesirable. The way that IRR operates is summed up in the formula below:

0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n

where :
P0 , P1, . . . Pn equals the cash flows in periods 1, 2, . . . n,
respectively; and IRR equals the project's internal rate of return.

To illustrate this, CCS’s is making a large investment, and that investment is expected to yield a large
annual profit in the X period. The management would decide to proceed with the large investment if it
could be determined that it could generate more profit in the long term.
Nonetheless, there have been complaints that the IRR has led to significant conceptual and technical
issues. Magni, C.A. (2010) lists eight issues related to IRR.
IRR has significant shortcomings that can result in bad investment decisions, according to Kelleher, J.
(2005). He believes that because of the method's great intuitive appeal, it will probably continue to be
frequently employed during capital-investment appraisal.

20
On the other hand, Martin, R. (1995) concurs that the broad critique of IRR is mostly insufficient and that
the warnings made about it in corporate finance and financial management textbooks are unjustified and
superfluous. In an attempt to contextualise the critiques directed at the IRR, he made the argument that
the IRR's benefits are frequently undervalued and its drawbacks are frequently overstated.

4. CONCLUSION
Making a capital investment decision requires careful evaluation first. This procedure, sometimes referred
to as strategic planning, entails assessing any project beforehand using specific methodologies. Given how
important the procedure is, it can have a significant impact on whether a particular capital investment
succeeds or fails.
Throughout this study, I have learned that no single method is flawless or without defects, despite
arguments for or against some of them. Small businesses and those with extremely tight cash flow may
favour the Payback method due to its ease of use, lower capital requirements, and lack of expertise, but
larger organisations are prepared to employ more sophisticated techniques like the Accounting Rate of
Return (ARR), Net Present Value (NPV), and Internal Rate of Return (IRR). Furthermore, despite its
continued use by numerous big businesses today, the Internal Rate of Return (IRR) has been
misrepresented in many textbooks as being less successful. Martin, R. (1995) asserts that IRR is not less
effective than NPV or any other approach, and I fully agree with it.
I have come to the conclusion that the company uses most, if not all, of these strategies. This is in line with
the experiences of many other similar organisations. That is, the business can combine several approaches
as the managers see fit in order to achieve the best outcome.

21
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