Tea Industry

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 Accountancy Department

Course code : BACC 22673

Course Title : Business Reporting, Governance and Ethics

Academic Year : 2020/2021

Semester : II Semester

Year : Second Year

Lecturers : Dr. Amila Munasinghe,

Mr. Pubudu Kaushalya
Mr. Himal Muthunayake
Assignment Topic : Ratio Analysis

Student number & Name BM/2020/244 K.P.K.T Rupasinghe

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 CONTENT

I. Companies Introduction
CONTENT
Ratio Analysis

II. Profitability ratios

i. Operating profit margin
I. Companies Introduction
ii. Net asset turnover

III. Ratio
Liquidity and Analysis
working capital ratios
i. Current ratio
II. Profitability ratios
IV. Efficiency ratios i. Operating profit margin
ii. payable
i. Trade Net asset turnover
turnover
ii. Inventory collection period
III. Liquidity and working capital ratios
V. Investor ratio i. Current ratio
i. Price/Earnings ratio
IV. Efficiency ratios
VI. Gearing ratio i. Trade payable turnover
i. Debtii.to Inventory collection period
Equity ratio

VII. V. Investor
Investors ratio ratio
i. Price/Earnings
i. Price/Earnings ratio ratio
VI. Gearing ratio
i. Debt to Equity ratio

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 COMPANIES INTRODUCTION

Thalawakelle Tea Estates PLC

Talawakelle Tea Estates PLC stands as a symbol of excellence among plantation companies in Sri Lanka,
producing high-quality pure Ceylon Tea from 16 of the finest tea gardens in the
country. With a rich history dating back to the late 19th century, when the first
Scottish Planters established tea estates in Sri Lanka, their legacy of producing
unparalleled Ceylon tea dates back to 1992 when the company was established.

Talawakelle Tea Estates takes pride in its commitment to eco-friendliness,

including its use of hydroelectric power and solar panels for clean energy, innovative and hygienic
technology in tea production, and pioneering initiatives like the Food Factory concept. They have
consistently been recognized as the best among Regional Tea Plantation Companies in Sri Lanka.

The company's dedication to quality and innovation is evident through numerous certifications, including
HACCP, ISO, and Rainforest Alliance certifications, making them leaders in the industry. Talawakelle Tea
Estates' rich history, forward-thinking approach, and unwavering commitment to quality have established
them as synonymous with the highest quality Ceylon tea, creating lasting memories and partnerships.

Bogawantalawe Tea Estates PLC

Bogawantalawa is a name synonymous with a rich history in tea production that dates back to 1869. This
picturesque valley, encircled by mountains and lush forests, initially began as
a coffee plantation but transitioned to tea cultivation after facing the challenges
of coffee blight. Bogawantalawa has rightfully earned its reputation as the
"Golden Valley of Ceylon Tea."

Every leaf is carefully handpicked by skilled tea pickers, with knowledge and
traditions passed down through generations. Notably, Bogawantalawa Tea Estates is the world's first tea
company to offer "Uncompensated Climate Positive Teas," certified for both product and facility. Located
in the prime tea-growing region of Sri Lanka, Bogawantalawa has been producing the finest Ceylon Tea for
over 150 years.

Their commitment to sustainability, environmental preservation, and improving the lives of tea harvesters
is central to their ethos. In summary, Bogawantalawa is a legacy of exceptional tea, deeply rooted in tradition
and characterized by a profound dedication to quality, sustainability, and community welfare.

So, in this report, my objective is to analyze the various ratios mentioned in the content for both companies
and compare those ratios in order to provide recommendation actions.

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 RATIO ANALYZES

Profitability Ratios

Bogawantalawe Thalawakelle
2023 2023
Operating profit margin 29.39% 33.14%

This financial metric measures a company's profitability and efficiency in managing its operating expenses
relative to its revenue. It is a key indicator of a company's operational efficiency and its ability to generate
profits from its core business activities. when considering the operating Profit margin between
Bogawantalawa and Thalawakelle we can see that Thalawakelle has the highest operating profit margin
ratio than Bogawantalawa company. so, this indicates that Thalawakelle company is more efficient in
managing its costs and generating profit from its core operation. Let us examine the reasons for the
changes in the operating profit margin of both companies.

Reasons

• TTE (Thalawakelle) has increased sales due to several factors, such as strong demand for its teas,
successful marketing campaigns, and new product launches. As a result, the company has been
able to generate more revenue, which led to an increase in operating profit.

• TTE company has a more efficient cost structure and decreases its costs, such as improved
efficiency, reduced waste, and negotiated lower prices from suppliers. As a result, the company
has been able to keep more of its revenue as profit.

• BTE(Bogawantalawe) has experienced increased costs, such as rising input costs, higher wages,
and increased taxes. As a result, the company has been able to generate less profit from each sale,
which led to a decrease in operating profit margin.

• BTE has invested in new projects, expansion, research, and development, which led to increased
costs in the short term. While these investments lead to higher profits in the future, they can
temporarily reduce the profit margin.

Recommendation Actions

• The entity should develop a new price mechanism

• Should consider expanding product lines or exploring new markets while maintaining the core
business profitability.
• Explore opportunities to expand the customer base and increase sales, invest in marketing efforts
to attract new customers, or retain existing ones.
• Consider diversifying the product or service portfolio to reduce reliance on a single product or
market segment.

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 Bogawantalawe Thalawakelle
2023 2023

Net asset turnover 1.882 1.356

This ratio indicates how efficiently a company utilizes its assets to generate sales. A higher net asset
turnover ratio generally suggests better asset utilization. So, we can see that the company Bogawantalawe
operates more efficiently in using its net assets to generate sales than the company Thalawakelle. The
difference is 0.5 and this may indicate company Thalawakelle is experiencing poor sales than company
Bogawantalawe. Let us examine the reasons for the changes in the net asset turnover of both companies

Reasons

• BTE has implemented better asset management practices, such as disposing of underutilized
assets, investing in more productive assets, improving the efficiency of its existing assets, reducing
idle capacity, and optimizing asset use. so BTE generates more revenue from its assets.

• BTE has Streamlined its operations, cost reduction measures, and improved production processes
which lead to higher revenue from existing assets.

• TTE has an increase in the cost of inputs, such as labor and fertilizer. This has led to decreased
profitability for TTE, leading to a decrease in the net asset turnover ratio.

• TTE has experienced various factors such as decreased demand for tea, increased competition, and
changes in consumer tastes. As a result, TTE has generated less revenue from its assets, leading to
a decrease in the net asset turnover ratio.

Recommendation actions

• Streamlining operations and reducing unnecessary costs can help improve the ratio.
• Companies should work on increasing their sales through effective marketing and sales strategies.
• Continue to focus on increasing sales improving asset management, monitoring changes in the
industry and taking advantage of any opportunities that arise.
• Explore opportunities to expand into new markets or diversify products if feasible.
• Should review companies' asset portfolio and consider upgrading or selling underperforming
assets.

Management response

Response officer Comment Implement date

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Liquidity and working capital ratios

Bogawantalawe Thalawakelle
2023 2023
Current ratio 2.64 4.10

This financial metric measures a company's ability to cover its short-term liabilities with its short-term
assets. A current ratio of 1 or greater is generally considered to be acceptable. here both companies have
more current assets than current liabilities, which is generally considered a healthy financial position. But
when comparing both companies we can see company Thalawakelle operates more efficiently than
company Bogawantalawe. Let us examine the reasons for the changes in the current ratios of both
companies.

Reasons

• TTE has increased its cash holdings, improving the current ratio. This is because of better cash
management and successful working capital management.

• TTE paid off its current liabilities, such as the repayment of debt, the deferral of payables, and the
conversion of short-term debt to long-term debt. thereby increasing the current ratio.

• BTE has decreased its cash and cash equivalents balance. This is because of increased expenses,
and the acquisition of assets.

Recommendation Actions

• Keep an eye on debt levels to ensure they remain manageable.

• Explore opportunities to increase short-term assets, such as by increasing sales, improving
accounts receivables collection, and managing accounts payable.
• Consider raising additional equity capital to bolster current assets.
• Negotiate more favorable payment terms with suppliers.

Management response

Response officer Comment Implement date

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Efficiency ratios

Bogawantalawe Thalawakelle
2023 2023
Inventory turnover period 45.46 Days 44.89 Days

This is a financial metric that measures the average amount of days it takes for a company to sell its
inventory. It is used to assess how sufficiently a company manages its inventory and how quickly it can
convert its inventory into sales. here we can see that Thalawakelle company has a lower inventory period
than Bogawantalawe. so Thalawakelle company is considered more efficient because it suggests that
inventory is being sold quickly and not sitting on the shelves for an extended period. Let us examine the
reasons for the changes in the inventory turnover period of both companies.

Reasons

• BTE has inefficient inventory management practices. This includes poor forecasting and a lack of
visibility into inventory levels. so, this leads to a higher inventory turnover period.

• BTE does not sell its tea quickly, it become obsolete and has to be sold at a discount. This leads to
lower sales and a higher turnover period.

• TTE has increased its market share by gaining customers from competitors. This is because of
superior product quality, better customer service, and more effective marketing. As a result, TTE
has experienced increased sales, which has led to a lower inventory turnover period.

• TTE has a stronger brand reputation than BTE. This means that customers are willing to pay a
premium for its products. As a result, TTE sells its products at a higher price, which leads to a
lower inventory turnover period.

Recommendation actions

• Improving inventory visibility. It helps to better track its inventory levels and identify potential
problems.
• Improving forecasting to better predict demand and avoid overstocking.
• Implementing effective inventory control procedures to properly store, manage, and track the
inventory.
• Continue to invest in demand forecasting techniques to align inventory levels with customer
demand
• Develop strong relationships with suppliers to ensure a steady supply of raw materials and reduce
lead times.

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 Bogawantalawe Thalawakelle
2023 2023
Trade payable turnover 40.99 64.71

This financial ratio measures how efficiently a company pays its suppliers for the goods and services it has
purchased on credit. Company Thalawakelle has a higher trade payable ratio than company
Bogawantalawe. This indicates that the company Thalawakelle is paying its suppliers more quickly than
the company Bogawantalawe. This is a sign of strong financial health and good relationships with
suppliers. A lower trade payable turnover ratio is a sign of financial stress or poor relationships with
suppliers. Let us examine the reasons for the changes in the trade payable turnover of both companies.

Reasons

• TTE has optimized its inventory management, such as reducing the need for immediate payments
to suppliers, leading to an increase in trade payables as supplier’s invoices are held for longer
periods.

• TTE has a better relationship with suppliers. It leads to more flexible payment without incurring
penalties. It leads to a higher trade payable turnover.

• BTE has increased its credit purchases, which led to a higher accounts payable balance and a lower
turnover ratio.

• BTE has negotiated longer credit terms with its suppliers to maintain cash flow, which leads to a
lower turnover ratio.

Recommendation actions

• Optimize supplier relationship.

• Efficiently manage inventory levels to avoid overstocking, which can lead to extended payment
terms.
• Improve the efficiency between purchasing departments.
• Identify and eliminate inefficiencies in the cash conversion cycle.
• Implement efficient accounts payable processes to speed up invoice verification and payment
processing.

Management response

Response officer Comment Implement date

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Investors ratio

Bogawantalawe Thalawakelle
2023 2023
Price /Earnings ratio 3.07 1.63

This is a valuation metric that measures the current share price relative to the company's per-share
earnings. When comparing this ratio between both companies, Bogawantalawe has a high P/E ratio that
indicates that investors are willing to pay a premium for the company's earnings. while a low P/E ratio
suggests that the stock may be undervalued or that investors have lower expectations for future growth.
Let us examine the reasons for the changes in the P/E ratio of both companies.

Reasons

• BTE has performed well financially in recent years. The company has reported strong earnings
growth and has a healthy balance sheet. This has led investors to become more confident in the
future prospects.

• BTE has committed to sustainability. The company has implemented several initiatives to reduce
its environmental impact. This has made the company more attractive to investors who are
concerned about environmental, social, and governance issues.

• TTE has faced events on a global scale, such as economic crises and geopolitical tensions, which
have led to a significant impact on stock prices and P/E ratios.

Recommendation actions

• should focus on improving company profitability and growing its earnings. This can be achieved
through cost-cutting, increasing sales, and efficiency improvements.

• The company should communicate its growth strategy and address any concerns or issues that may
have caused the decrease in investor confidence.

• Ensure the company is well-prepared to withstand economic downturns through proper financial
planning and risk management

Management response

Response officer Comment Implement date

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Gearing ratio

Bogawantalawe Thalawakelle
2023 2023
Debt to equity 4.5 5.16

This financial ratio indicates the relative proportion of debt and equity used to finance a company's assets.
It is used to assess a company's financial leverage and its ability to meet its financial obligations. A higher
debt-to-equity ratio indicates that a company is more reliant on debt financing. A lower debt-to-equity
ratio indicates that a company is more reliant on equity financing. here Thalawakelle has a higher debt-to-
equity ratio than Bogawantalawe company. So, a higher D/E ratio suggests more risk, while a particularly
low one may indicate that a business is not taking advantage of debt financing to expand. Let us examine
the reasons for the changes in the debt-to-equity ratio of both companies.

Reasons

• TTE has invested in new projects, such as expanding its tea plantations and building new
processing facilities. This required the company to take on debt.

• BTE has repaid some of its debt. This has been done by using cash from operations and by issuing
new equity.

• TTE has raised additional equity capital through investments, retained earnings, and other
methods, increasing the equity portion of the ratio.

Recommendation actions

• should continue to monitor and manage the company's debt levels to ensure they remain
sustainable.
• Consider diversifying the capital structure by raising funds through equity and other financing
methods, depending on the company's capital needs.
• Ensure that any funds raised through debt are invested in projects or initiatives that have a high
likelihood of generating positive returns.
• Assess whether the increased debt is sustainable and if it can generate a return that exceeds the cost
of debt.

Management response

Response officer Comment Implement date

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 EXECUTIVE SUMMARY

In this analysis, I have compared various financial ratios of two prominent Sri Lankan tea plantation
companies, Thalawakelle Tea Estates PLC, and Bogawantalawa Tea Estates PLC, for the year 2023. The
analysis encompasses profitability ratios, liquidity and working capital ratios, efficiency ratios, investors'
ratios, and gearing ratios, providing valuable insights into the financial health and performance of these
companies.

Thalawakelle Tea Estates PLC demonstrated superior profitability, with a higher operating profit margin
compared to Bogawantalawa. Thalawakelle's efficient cost management and revenue generation abilities
played a crucial role in this advantage. Recommendations include diversifying product lines and
expanding customer bases while maintaining core profitability to further strengthen their financial
position.

Furthermore, Thalawakelle exhibited a strong current ratio, reflecting efficient management of short-term
liabilities and assets. On the other hand, Bogawantalawa had a higher net asset turnover, suggesting better
asset utilization. Recommendations for both companies involve optimizing asset management,
streamlining operations, and maintaining good supplier relationships to enhance their financial positions.

In terms of investor ratios, Bogawantalawa had a higher Price/Earnings (P/E) ratio, indicating investor
confidence due to strong financial performance and sustainability initiatives. however, Thalawakelle faced
challenges from global economic events, leading to a lower P/E ratio. Recommendations include
improving profitability, addressing investor concerns, and preparing for economic downturns. Lastly, in
gearing ratios, Thalawakelle had a higher debt-to-equity ratio, mainly due to investments in expansion.
Recommendations revolve around prudent debt management and ensuring debt is invested in high-yield
initiatives.

This analysis provides a comprehensive overview of the financial health and performance of Thalawakelle
Tea Estates and Bogawantalawa Tea Estates, offering insights and recommendations for both companies
to continue their legacy of excellence in the Sri Lankan tea industry.

References

Annual Report 2022/23

online at http://www.bogawantalawa.com

online at https://www.talawakelleteas.com

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