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Table of Contents
1. Executive summary ............................................................................................................ 4
2. Introduction ........................................................................................................................ 4
3. Analyze the major operational and financial highlights ..................................................... 5
3.1 Common size statement of profit or loss of KWPL (In %) ............................................. 5
3.2 Earnings per share (EPS) ................................................................................................ 7
3.3. GP Margin ....................................................................................................................... 7
3.4 Profit Margin ................................................................................................................... 8
3.5. ROA ................................................................................................................................ 9
3.6. ROE ................................................................................................................................. 9
3.8. Long-term financial stability ratios ............................................................................... 10
3.8.1. Debt ratio ................................................................................................................ 10
3.8.2. Equity Ratio ............................................................................................................ 10
3.8.3. Interest cover ratio .................................................................................................. 11
4. Analyzing Investing and Financing .................................................................................. 11
4.1 Analyzing Finance Activities ........................................................................................ 11
4.2. Analyzing Investment Activities ................................................................................... 12
5. Types of risk and mitigating strategies ............................................................................. 15
5.1. Risk Management Policy .............................................................................................. 15
5.2. Credit risk ...................................................................................................................... 15
5.3. Liquidity Risk................................................................................................................ 16
5.3.1. Short-Term Liquidity Risk ..................................................................................... 16
5.3.2. Long Term liquidity risk......................................................................................... 18
5.4. Market risk .................................................................................................................... 19
5.4.1. Interest rate risk ...................................................................................................... 20
5.4.2. Currency risk .......................................................................................................... 20
6. Business Valuation ........................................................................................................... 20
6.1. Earning Valuation Basis ................................................................................................ 21
6.2. Net Asset method .......................................................................................................... 22
7. Conclusion ........................................................................................................................ 22
8. References ........................................................................................................................ 24
9. Annexures ......................................................................................................................... 26
List of figures

Figure 1 EPS for past three years- Author's Construction ......................................................... 7

Figure 2 GP Margin for last three years- Author's Construction ............................................... 8
Figure 3 Profit Margin for last three years- Author's Construction ........................................... 8
Figure 4 ROA for last three years- Author's Construction ........................................................ 9
Figure 5 ROE for last three years- Author's Construction ....................................................... 10
Figure 6 Maximum exposure to credit risk- (Source- Annual reports of KWPL) ................... 16
Figure 7 Short term liquidity risk- (Source- Annual reports of KWPL).................................. 17
Figure 8 Long term liquidity risk- (Source- Annual reports of KWPL) .................................. 18
Figure 9 Demonstration of credit lines- (Source- Annual reports of KWPL) ......................... 19
Figure 10 Term loans & Bank overdraft- (Source- Annual reports of KWPL) ....................... 20

List of tables

Table 1 Common size statement of profit or loss of KWPL- (Source- Annual reports of
KWPL) ....................................................................................................................................... 5
Table 2 Asset Turnover Ratio- (Source- Annual reports of KWPL) ....................................... 14
Table 3 Increase/ Decrease in current liabilities (Source- Annual reports of KWPL) ............ 14
1. Executive summary

This report focuses on an analysis of the financial statements of Kahawatte Plantations

PLC, one of the country's largest companies with an annual turnover of over Rs 75 billion. The
objective of this report is to obtain an understanding of the financial position, performance to
analyze the operational and financial highlights of the company and its major investment
decisions, analyze the sources and uses of funds of the company, and determine how the
changes impact its performance and finally critically evaluate the various types of risks faced
by the company and its mitigation strategies on the perspective of an investor.

Method of analysis includes common size analysis, accounting analysis, comprehensive

ratio analysis, liquidity, risk analysis, and business valuation. For this purpose, Statement of
Profit or Loss and Other Comprehensive Income, Statement of Financial Position, Statement
of Cash Flows, Statement of Changes in Equity, and Notes to financial statements of Kahawatte
Plantations PLC for the years ending 31st December 2018, 2019 & 2020 have been scrutinized
using published annual reports.

2. Introduction

Kahawatte Plantation PLC (KWPL) is one of the leading agribusiness companies in Sri
Lanka. The company is guided by the vision of “Enjoy leading the way in creating the best
value agribusiness enterprise”. The company mission is to “Enhance stakeholder value, surpass
customer expectations, and empower people in a learning organization, be an employer of
choice, respect and nurture planet earth.”

KWPLwas incorporated under the Companies Act No.17 of 1982 on 15 June 1992. Afterward,
it was re-registered under the Companies Act, No. 07 of 2007 on 26th December 2007.

The company’s principal activities are cultivation, manufacture, and marketing of tea, rubber,
cinnamon, forestry products, and other crops. However, the company’s core business is the
manufacturing and sale of tea, and this line of business accounts for the entire operation of the
company. Its estates are spread over the Kahawatte region and Nawalapitiya region. The
company plays an important role in the Sri Lankan plantation economy and is amongst 20 key
plantation companies operating within the country
3. Analyze the major operational and financial highlights

3.1 . Common size statement of profit or loss of KWPL (In %)

(Revenue is used as the base for the preparation of common size statement of profit or loss)

Description 2020 (000) 2019 (000) 2018 (000)

Revenue 100 100.00 100.00
Tea 86.02 88.75 89.54
Rubber 12.02 9.60 8.90
Others (5.1a) 1.94 1.65 1.56
Cost of sale (100.76) (109.94) (104.12)
Tea (84.26) (93.62) (88.36)
Rubber (13.71) (13.85) (12.23)
Others (5.1a) (2.78) (2.47) (3.54)
GP (0.76) (9.94) (4.12)
Other income 1.76 2.36 2.96
Amortization of Capital Grants 0.58 0.47 0.78
Sale of Redundant Items - -
Rent Income 0.10 0.12 0.11
Annual Income from Mini Hydro Power
Project 0.13 0.21 0.21
Sundry Income 0.48 1.12 1.25
Write Back of Other Payables 0.37 0.45 0.60
Fair Value Gain on Biological Assets 2.54) 5.23 3.62
Administrative Expenses (3.54) (4.08) (3.74)
PL from Operating activities (0.0092) (6.43) (1.29)
Net Finance Cost (7.98) (10.10) (7.78)
Profit/(Loss) before Taxation (7.98) (16.53) (9.07)
Income Tax (Expense) / Reversal (0.27) (2.13) 1.05
Net Profit/Loss (8.25) (18.66) (8.01)
Other Comprehensive Income 0
- Items that will never be reclassified to
Profit or Loss; 0
Actuarial Gain on Retirement Benefit
Obligation (1.90) 2.21 3.19
Deferred tax charge on Retirement Benefit
Obligation (0.27) (0.31) (0.45)
Surplus on Revaluation of Plant &
Machinery - 11.43 -
Deferred tax charge on Revaluation of
Plant & Machinery - (1.60) -
Other Comprehensive Income for the
year, net of tax (1.63) 11.73 30.83
Total comprehensive income /(expense)
for the year (9.89) (6.93) (59.24)
Table 1 Common size statement of profit or loss of KWPL- (Source- Annual reports of KWPL)
 With the available financial statements, the latest being the financial statement of 2020, it
can be observed that the company is struggling in its performance. One of the main factors that
affect profitability is the top line. In the company, the top line has been deteriorating in the past
years. This is a direct result of the loss of the tea market and other adverse seasonal changes
that affect the industry.

The cost of sales data provides a basic overview of costs incurred for the top line. In KWPL,
the cost of sales has a positive relationship with sales. As a result, the gross profit shows a
steady decrease. This is acceptable since the company cannot make a substantial change in the
sales or cost of sales. However, in actual terms, in 2020, 2019, and 2018 the cost of sales of
tea, rubber, cinnamon, and other products is greater than the sales themselves. This puts high
doubt on companies’ ability to manage their products. The decrease in the cost of sales in 2019
from 2018 is just 7.1%. The cost of sale again increases 0.006% in 2020. Though this
percentage change is minimal, the gross loss of the company has decreased by 92% as revenue
of the company has increased by 9.1%. The major reason for the lower yield during 2019 in
tea plantations was due to a ban imposed by the government on the use of glyphosate, which
was removed later. Another factor that has led to the reduction of revenue from tea is that there
is insufficient replantation of tea bushes. However, the company has taken measures to invest
in bio assets. This is an indication that the company has undertaken efforts in replantation
which will help to increase the profitability in the coming years.

The high cost of rubber is due to the high cost to process the rubber in Sri Lanka. This has
made Sri Lankan rubber less competitive in the world market as Sri Lankan rubber is
comparatively expensive (Gunarathne, Tennakoon, Edirisinghe, 2020). This is another factor
that contributes to reducing the yield. As part of its intended strategies, the company is seeking
more cost-effective and automotive ways to process rubber to be competitive in the global
market by increasing profitability through cost-saving and capturing new customers.
Furthermore, the company experiences an operating loss in 2018, 2019, and 2020. A significant
increase in the operating loss in sales can be seen in 2019 compared with 2018. This is mainly
due to the increase in labor costs by 46% from 2018 and due to the increase of defined
contribution plan costs by 30%. Added to this, the company has an inventory write-off worth
Rs. 4 million.
3.2 . Earnings per share (EPS)

Earnings per share (EPS) is an indicator of profitability and it is calculated by dividing a

company's profit by the outstanding shares of its common stock (Nalurita, 2019). KWPL is
having a negative earnings-per-share value of -6.38 for 2019, this is twice the loss in 2018 and
2020 when it had an EPS of -3.11 and -3.07 respectively. The below graph shows the EPS
movement in recent years.

Year
0
-1
-2 -3.11 -3.07
-3 2018
EPS

-4
2019
-5
-6.38 2020
-6
-7
2018 2019 2020
EPS -3.11 -6.38 -3.07

Figure 1 EPS for past three years- Author's Construction

3.3. GP Margin

Gross profit margin indicates the company’s financial health by calculating the
remainder of sales after the cost of goods sold (Higgins, 2019). At KWPL the cost of goods
sold is high than the revenues themselves for the past three years. Therefore, having a negative
gross profit margin throughout the years. It can be observed that the company is failing to make
any returns throughout the recent past.
 Year
0 -0.76

-2

Gross profit margin

-4.12
-4

-6

-8
-9.94
-10

-12
2018 2019 2020
Gross Profit Margin -4.12 -9.94 -0.76

Figure 2 GP Margin for last three years- Author's Construction

3.4 Profit Margin

A company’s profit margin reflects its net profit or loss against the sales. The profit margin
has been considerably declining which shows that the operations of the entity are not
streamlined, and management is failing in their duty to run the business (Mbona, and Yusheng,
2019). The net loss is 246 Mn, Rs. 509 Mn, and Rs 249 Mn for 2020, 2019, and 2018
respectively.

Chart - Net Loss

0
-100
Net Loss

-200
-300
-249 -246
-400
-500
-600 -509
2018 2019 2020
Net Loss -249 -509 -246
Axis Title

2018 2019 2020

Figure 3 Profit Margin for last three years- Author's Construction

3.5. ROA

According to Kishor, (2014) return on assets indicates how profitable the business is
relative to its total assets. This gives the investors an idea of how efficiently the assets are
managed by the managers of the company. With the recent losses at KWPL, it arrives at a
negative ROA indicating the assets are not managed properly and efficiently to attract more
sales.

Chart - ROA

-4.8 -5.4

-10.5

2018 2019 2020

Figure 4 ROA for last three years- Author's Construction

3.6. ROE

Return on equity is another financial performance calculating the return to equity holders.
This can be arrived at as a multiplication of profit margin (PM) and return on assets (ROA).
As of KWPL both PM and ROA are negative, equity holders are losing on their investments.
Negative ROE and failing returns could drastically bring down the stock prices, having
investors lose over their investments. ROE for 2020 is -18% and -56% for 2019.
 ROE
0%
-10%
-20%
Axis Title

-30%
-40%
-50%
-60%
2018 2019 2020
ROE -27% -56% -18%
Axis Title

2018 2019 2020

Figure 5 ROE for last three years- Author's Construction

3.8. Long-term financial stability ratios

3.8.1. Debt ratio

Over 80% of the company’s total assets are financed through debt and thus it can be seen
that the company is highly leveraged. It is identified that the company has recorded a loss of
Rs. 245 Mn during the financial year ended 31st December 2020 and as of that date, contains
accumulated losses amounting to Rs. 295 Mn. Furthermore, the company’s current liabilities
exceeded its current assets by Rs. 2,158 Mn in 2020. The company has loans and borrowings
of Rs. 552 million due within 12 months from 31st December 2019 and the interest-bearing
loans and borrowings of the company have increased over by 140% within 2019. This indicates
the finance costs of the company which makes a substantial portion of expenses in 2020.

3.8.2. Equity Ratio

The company is highly leveraged thus lowering equity. The stated capital remains
unchanged over the years. The company has recognized a revaluation gain in 2019 as per its
policy on property, plant, and equipment which is to recognize any revaluation gain/loss every
3 years. The reduction in equity is solely due to accumulated losses over the years. Equity ratio
for 2020 is 342% and 696% for 2019.

3.8.3. Interest cover ratio

The company is not generating enough earnings to settle its interest obligations and thus
the ratio is negative. We see that the interest cover ratio is increasing in 2019 and 2020 from
2018 in line with the increase in debt. Thereby, cannot say that the company may go bankrupt
as it has continuous financial backup from the ultimate parent.

4. Analyzing Investing and Financing

According to the 2020 annual report, the company has more than 4.4 Bn non-current assets
and more than 0.6 Bn current assets. As a plantation company, it is normal to have a higher
amount of non-current assets. Such non-current assets mainly include plantation estates,
factories, and machinery. The liquidity of these assets is very low. Most of the land is leased
from the government for 99 years. Currently, the industry is not much profitable to maintain
strong cashflows. According to KWPL’s cash flow statement, net operating cash flow is
negative in 2018 and the positive value in 2019 is not substantial. The company currently have
more than 4.4 Bn liabilities and its equity is only 0.7 Bn, indicating that the company is geared.

4.1 Analyzing Finance Activities

As stated by Yusuf et al, (2019) Finance activities are activities that are either financed
with equity or liability or a combination of both. Therefore, when analyzing the financing
activities of KWPL will be analyzed in terms of both total equity and liability summing to Rs.
5,036 Mn in 2020 and Rs. 5,031 Mn in 2019. This comprises equity attributable to the equity
holders worth Rs. 1,134 Mn, Rs. 629 Mn, and Rs. 8,677 Mn in respectively 2020, 2019, and
2018.
4.1.1 Liability

Total liabilities contribute to 87% of the total financing of KWPL, out of which 60% are
current liabilities and 40% are non-current liabilities. Furthermore, current liabilities have
increased by 7% and non-current liabilities have increased by 41% compared to 2018. Total
liabilities of Rs. 3,901 Mn out of which total non-current liabilities are worth Rs.1,744 Mn and
total current liabilities of Rs.2,157 Mn.

4.1.2. Equity

The company’s equity consists of stated capital, revaluation reserve, and accumulated
losses. The company’s stated capital only consists of ordinary shares. KWPL has accumulated
losses from past years. Thus, the total equity has dropped by 27% in 2019. In 2020, equity
again raised to Rs. 1134 Mn. It’s an 80% increase.

4.2. Analyzing Investment Activities

By analyzing the company’s investment decisions, it can be identified how the company used
the funds collected from various resources.

An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity. There are two types of assets as follows.

• Current Assets (resources that are expected to be converted to cash within a year)
• Non-current assets (resources expected to generate economic benefits to the company
more than one accounting period)

4.2.1. Analyzing current assets

When compared to the end of 2018, current assets decreased by Rs. 13,437,000 at the end
of 2019. It is a 2.45% decrease. The asset turnover ratio decreased due to a breaking down in
sales. In 2020 current assets increased by Rs. 69,003,000. There is no significant difference
among the current assets of the company.

4.2.2. Analyzing Non-Current Assets

Property Plant and Equipment

Property plant and equipment is 21.5% and 23% of the total non-current assets of the
company in 2020 and 2019 respectively. The amount of addition to property plant and
equipment throughout the year is Rs. 84Mn. Items of property, plant, and equipment are
measured at cost less accumulated depreciation and accumulated impairment losses. Cost
includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-
constructed assets includes the cost of materials and direct labor and any other cost directly
attributable to bringing the assets to a working condition for their intended use. The company
has revalued the Plant and machinery during the period with and has recognized a revaluation
reserve worth Rs. 312 Mn. The company owns biological assets of Rs. 3,285 Mn in 2020, and
Rs. 3,254 Mn in 2019. It caused a fair value gain of Rs. 75,208,000 in 2020 and Rs. 142,865,000
to the profit in 2020 and 2019 respectively.

4.2.3. Asset Utilization Ratios

Asset turnover ratios

The asset turnover ratio indicates how efficiently assets are being used to generate sales.
All turnover ratios are decreasing over the years. One of the reasons for the drop in asset
turnover ratio is 2019 is due to the increase in PPE by 4.9% and a decrease in sales by 12%. In
2020 Asset turnover ratio increased to 0.59, because the increase in sales is greater than the
increase in assets. It is typical for a plantation as major investments should be made in
machinery. In 2019, the company has purchased a plant and machinery worth 61Mn.
 Ratio 2019 2018
Asset turnover 0.59 0.57 0.68
ratio
Fixed asset 0.67 0.64 0.78
turnover ratio
Current assets 5.23 5.04 5.33
turnover ratio
Sales (000) 2,979,643 2,730,645 3,105,691
Average total 5,040,557 4,808,810 4,581,856
assets (000)
Average fixed 4,464,629 4,267,247 3,999,150
assets (000)
Average current 569,346 541,563 582,707
assets (000)
Table 2 Asset Turnover Ratio- (Source- Annual reports of KWPL)

4.2.4. Decrease In Current liabilities

2020 2019
Non-Current 1,744,405,000 1,744,465,000
Liabilities
Current Liabilities 2,157,555,000 2,657,600,000
Total 3,901,960,000 4,402,065,000
Table 3 Increase/ Decrease in current liabilities (Source- Annual reports of KWPL)

One of the uses of funds is paying liabilities. End of the year 2019 total liabilities were Rs.
4,402 Mn but at the end of 20020 total liabilities decreased to Rs. 4,4402 Mn.
5. Types of risk and mitigating strategies

5.1. Risk Management Policy

Overall responsibility for managing company risk is vested with the board of directors. The
Company’s risk management policies are established to identify and analyze the risks faced by
the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to
limits are the risk management policies of the company. The company has exposure to the
following risks in its financial statements. The Audit Committee oversees how management
compliance with the Company’s risk management policies and procedures and evaluates the
adequacy of the actions about the risks faced by the Company.

5.2. Credit risk

The risk that the counterparty will not meet its obligation under a financial instrument or
customer contract leading to a financial loss is considered as credit risk (Capiński et al, 2017).
The company is exposed to credit risk from its operating activities (primarily from trade
receivables) and its financing activities, including deposits with banks and amounts due from
related companies.

The minimum exposure to credit risk for trade and other receivables at 31st March 2019 is
12.8bn. The business restricts the exposure of the trade receivables to credit risk due to the
establishment of the maximum payment 7-day duration from the tea brokers. To risk
monitoring, customers were categorized based on their credit characteristics. Such as individual
entity or legal entity, wholes sale, retail, and end-user customer. In addition, receivable
balances were monitored on an ongoing basis. The company held cash in hand and at bank
equivalents to 24.6 Mn as at 31st March 2019 which represents its maximum credit exposure
to these assets.
KWPL pre-identify the credit risk. The maximum exposure to credit risk at the reporting date
was as follows;

Figure 6 Maximum exposure to credit risk- (Source- Annual reports of KWPL)

Individual characteristics of each customer are a major influencer of the credit risk of the
company. The Company limits the exposure of credit risk regard to the trade receivables by
establishing a maximum payment period of 7 days from the tea brokers. More than 90% of the
Company’s customers have been transacting with the related party company for over the years,
and none of these customers’ balances have been written off or are credit impaired at the
reporting date. Receivable balances are analyzed on an ongoing basis with the results and
customers have been grouped according to their credit characteristics, including whether they
are a wholesale, whether they are an individual or a legal entity, the retail or end-user customer,
industry, their geographic location, the existence of previous financial difficulties, and the
trading history with the company to monitor credit risk.

5.3. Liquidity Risk

5.3.1. Short-Term Liquidity Risk

Short-term liquidity risk is the risk that a company may be unable to meet its short-term
financial demand (Adegoke et al, 2018). In other words, it measures the firm's ability to
generate sufficient cash to meet working capital needs and service debts. Short-term liquidity
risk can be analyzed by using financial statement ratios.
 Ratio 2020 2019 2018
0.28
Current ratio 0.22
0.20
Quick ratio 0.07 0.06
Operating cash 0.11
-0.013 -0.012
flow ratio
Days Revenue 2.7 days 1.94
3.30 Days
held In Cash Days
Figure 7 Short term liquidity risk- (Source- Annual reports of KWPL)

A drop can be identified in current ratios from 2018 to 2019. The company tends to use
bank overdraft facilities. It indicates the amount of cash available and other current assets of
the firm is low, relative to obligations coming due. In 2020 it increases up to 0.28.

Short-Term Liquidity risk is more sharply measured by Acid Test ratio (Quick Ratio). The
ratio is below one as over 60% of the current assets are composed of inventories and quick
assets such as trade receivables, short-term investments, cash, and cash equivalent balances
represent a small portion of current assets.

The operating cash flow ratio measures how well the current liabilities are covered by the
cash flows generated by the company. This measure is seen as a more accurate measure as
earnings-related measures can be manipulated. In 2018 and 2019 this ratio is below one and
sometimes negative, we can conclude that the company was in deep liquidity problems as its
current liabilities exceed the cash flows generated through operating activities, and thus,
additional funding from investing and finance activities needed to settle the current liabilities.
However, in 2020 it is a positive figure as cash flow generated from operating activities.

The contractual maturity of liabilities in the upcoming 12 months in 2020 amounts to 2

billion approximately. However, this is no different from the same which was recorded in 2018.
Further, the Company applied and secured several relief packages under ‘Saubagya Covid – 19
Renaissance Facility initiated by Central Bank of Sri Lanka which eased the short and mid-
term cash requirements.
5.3.2. Long Term liquidity risk

Ratio 2020 2019 2018

Debt ratios
-Liabilities to Assets Ratio 77.5% 87.5% 81%
-Liabilities to Equity Ratio 229.7% 490% 414%
Figure 8 Long term liquidity risk- (Source- Annual reports of KWPL)

The debt-to-equity ratio shows the composition of the firm's capital structure. The company
has maintained a high geared capital structure from 2018 to 2019. Consequently, a higher
percentage of the total assets have been financed by using debts. The company’s total debts are
more than 3 times its equity. The high gearing ratio is unhealthy since it increases future interest
and capital repayments. The contractual maturities of the company as of 31st December 2019
which extend more than a year amount to Rs. 806 million. This is a 126% increase from such
amounts appearing in 2018 financials under contractual maturities extending over one year.
But in 2020 the debt-to-equity ratio has decreased considerably.

One of the main drawbacks of having excessive interest payments is that the shareholders
are at risk of getting an inconsiderable return as profits are spent on settling debts. The company
has not declared any dividends for the past couple of years due to operating losses.
Furthermore, the EBIT of the company is negative meaning that the operating profits are not
sufficient even to cover the interest payments. The company tries to always have enough
liquidity to meet liabilities when due, without incurring losses or risking damage to the
Company’s reputation.

The Company maintains the following lines of credit,

Rs 110 Mn, 600 Mn & 100Mn Overdraft facilities that are secured by a letter of negative pledge
over the Company’s unencumbered assets. Interest would be payable at the rate of
AWPLR+1.75%, HSBC COF+2%, and AWPLR+.75%
 Figure 9 Demonstration of credit lines- (Source- Annual reports of KWPL)

With floating interest rates, the company is exposed to the risk of changes in the interest
rate. The company tries to manage interest rate risk by having a balanced portfolio of fixed and
variable rate loans and borrowings.

5.4. Market risk

Market risk is the risk that changes in market prices, such as interest rates and foreign
exchange rates will affect the Company’s revenue or the value of holdings of financial
instruments (Qureshi et al, 2018). Managing and controlling market risk exposures within
acceptable parameters without downsizing the return is the objective of market risk
management. Market risk includes.
5.4.1. Interest rate risk

Interest risk rate is the risk the fair value or future cash flows of a financial instrument will
fluctuate because of changes in market interest rates (Mars, and Weir, 2019). Its means changes
in the interest rate related to the company’s long-term debt and obligation. The company
manages interest rate risk through a mixed portfolio of long-term debt and bank overdraft. In
2019, the company has obtained a 400 Mn short-term loan which has led to a remarkable
increase in loans.

For the last three years, the company’s interest-bearing term loans and overdrafts are as
follows.

Debt Portfolio 2020 2019 2018

Bank Overdraft 803,329
(000) 820,730 843,710
Term Loan 1,298,955
(000) 1,230,282 1,022,569
Figure 10 Term loans & Bank overdraft- (Source- Annual reports of KWPL)

5.4.2. Currency risk

Most export transactions are denominated in United States Dollars (USD) which is a less
volatile currency. The company is exposed to currency risk on sales that are denominated in a
currency other than Sri Lankan Rupees (LKR). The company mainly exports tea products to
US, Thailand, India, and Iran. The company may have less currency risk as a small proportion
of activities happen related to foreign currency.

6. Business Valuation

For valuation following commonly used techniques were identified as suitable for the
company and calculations were performed according to those methods (Stockdale, 2003).

1. Earning valuation basis

2. Net asset value method
6.1 . Earning Valuation Basis

The highest business valuation is usually calculated by valuing the earnings under new
ownership. This method uses the Price-earnings ratio (P/E ratio) which shows the stock
market’s view of the growth prospects of a company

The P/E ratio (Earnings) method of Valuation

P/E Ratio = Market Value
Earnings Per share

Earnings Yield Valuation method

Earnings Yield = EPS

Market Price per share

Year (ending 2020 2019 2018

31st December)

Market value 31 36.5 39.9

per share as of
31st December

EPS (3.07) (6.38) (3.12)

P/E ratio (10.1) (5.72) (12.79)

Earnings yield -9.9% -17% -8%

Entity’s P/E ratio has decreased over the period (2018 to 2019) and it records a negative value.
A negative P/E ratio means the company has negative earnings or is losing money.
6.2. Net Asset method

The asset basis can be used to provide a minimum value which can be useful if a business
is difficult to sell. Net assets consist of the total equity of the entity. Net asset value per share
is derived by dividing total equity by the number of shares

Year (ending 2020 2019 2018

31st December)

Total equity 1,134,761 629,162 867,330

(‘000)

No. of shares 79,943 79,889 79,889

(‘000)

Net assets per 11.42 7.88 10.86

share

The company’s net assets have been decreasing from 2018 to 2019years due to the decrease in
total equity and again increased in 2020.

7. Conclusion

The entity is loss-making over the last three years where the possibility of assuming that
the entity has planned strategic plans to overcome from the current position of the entity is
hard. Therefore, based on the above calculation method it can be concluded as follows.

1. Earning valuation basis

Negative P/E may not be reported publicly instead, the EPS might be reported as "not
applicable" for quarters in which a company reported a loss. As an investor, buying stock in a
company with a negative P/E should be aware that these are shares of an unprofitable company
and be mindful of the associated risks. Further a consistent negative P/E ratio runs the risk of
bankruptcy. Therefore, this company is not worthy of buying or investing and this method is
not suitable for valuation.

2. Net asset-based valuation

This method provides a measure of the security in a share value. The asset backing for
shares provides a measure of the possible loss if the company fails to make the expected
earnings or dividend payments. Valuable tangible assets may be a good reason for acquiring a
company, especially a freehold property which might be expected to increase in value over
time. Further, the entity has reported the net asset per share in their annual report where it
confirms that the entity has identified to value their business based on a net asset basis.
Considering all the above factors suitable method to calculate the entity’s value is the net asset-
based method.
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Annual Reports of Kahawatte Plantations PLC (years 2015,2016,2017,2018 & 2019

9. Annexures