The examination of financialstatements is a systematic process used to amount the profitability, growth andoperational efficiency of the company. There are various methods used toanalyse the financial statements of a company. This study is going to use thehorizontal method to analyse the financial statements.
Horizontal analysis helpsin examining in what way a company has grown over the years. Horizontal analysisis also helpful in comparing the performance of the company with itscompetitors. The study has taken Kwailty Limited as the subject to analyse it’sfinancial statements.
Kwality limited is involved inprocessing, manufacturing, and trading of dairy products, milk products andmilk. It started it’s journey in 1992 as a regressive incorporation unit ofKwality Ice Creams India Ltd. It is known as one of North India’s fastestgrowing dairy company in the private sector. It has six manufacturing units inIndia. Over the years, it has derived with ground-breaking dairy products fortheir consumers. It largely markets and sells it’s product under the familybrand, “Dairy Best.” Kwality has amplified it’s attention on distribution ofdairy products from India to other continents like Australia and Africa and tomore than 28 countries. This report is further going toevaluate and analyse the current situation of Kwality limited.
It is also goingto compare it’s performance from the year 2015 to 2017. The three financialstatements that are going to used are: the Balance sheet, Profit and LossAccount and Cash Flow Statement. 2. ANALYSIS:2.1 Capital structure:The capital structure determinesthe commercial well-being of a company. Over the past three years, KwalityLimited has been increasing the number of shares issued, therefore the equityshare capital has been growing.
From2015 to 2017 there has been an 8% increase in the equity share capital. Equitycapital is considered to be an expensive cost since the cost is the return thefirm must make in order to attract investors. As the same time it has very lowrisk because the company may or may not pay back the shareholders if theearnings of the company decline. Hence, Kwality is trying to lower their riskby increasing their share capital. The other way of raising capital is by takingdebt. From 2015 to 2016 the company has increased their borrowings by 73%whereas from 2016 to 2017 it has increased by 98%. Leveraging has a majoradvantage that the interest payable is tax-deductible. Therefore, at times ithas been considered a better option than equity since debt also retains theownership of a company.
The debt to equity ratio of the company in 2017 is0.5:1. This indicates that the company has a low leverage ratio and is a veryconservative company that does not believe in taking a lot of loans. This couldlead to a slower growth rate of the company. The increase in loans as well asequity capital is due to expansion plans of Kwality Limited. 2.2 Investing decisions:Kwality Limited has made quite afew investments in the year 2017.
Compared to the prior year, the company has improvedtheir use of cash in investing activities by 96%. The investing activities of acompany plays a very significant role in allocating their capital. One incorrectdecision can turn out to be very expensive for the company. One of the majorinvestments that the company has made is buying equity shares in it’s own Subsidiarycompany.
The company increased it’s fixed asset acquisition by 93% compared tolast year. There has been an inflow of cash due to the profit made from thesales of the fixed assets. The company’s received interest obtained from it’sprevious investments has decreased by 8% since the previous year. 2.
3 Working capital: The working capital shows if acompany has adequate current assets to pay off it’s current liabilities. It isimportant to run the company’s day to day expenses. If the working capital isnot maintained properly, the company could become insolvent. Analysing theworking capital ratios of the previous years and present in Kwality, it can bestated that the company has managed to maintain it’s working capital over thepast years and is in a good position. The current ratio also determines theliquidity of a company. The inventory turnover ratio is high which indicatesthat sales of Kwality are strong. The quick ratio is used to analyse the short-termliquidity of the company. The company’s quick ratio comes under the ideal quickratio of a manufacturing unit.
This points out that the company has sustainedtheir operating cash flow of the company. It also portrays the working capitalmanagement of the company is efficient and in control. 2.4 Financing Decisions:The cash flow from the financingactivities define the financing decisions of a company. The financing decisionsreflect on the payment for the investments and expenses of the company. It isvery crucial to the company to make the right financing decisions, since it hasa direct impact on the capital structure of the company. As already discussedKwality limited has raised their equity capital as well as has taken long termborrowings this year. Their long-term borrowings have increased by 89% comparedto the previous year.
They have also paid off their net short-term borrowings.The company managed to pay 7% more dividend to it’s shareholders compared tothe previous year. Even though the company’s payments increased in the year2017 compared to 2016, due to the rise in their capital, the net cash used inthe financing activities decreased 22% this year.
At the end of their presentfinancial year, the company was left with 141% more cash and cash equivalentscompared to 2016. 2.5 Cost management:Cost management is essential for planning and guiding the budget of thecompany. The main aim of cost management is to optimise the performance of thecompany than to cut the