ANALYSIS
TCI's Finest
FinancialReportingCW3GroupProject_KASA_EXPAND.docx
Carreras Limited is the leading marketer and distributor of cigarettes and tobacco related products in Jamaica. The company is a publicly listed company with local and international ownership. Jamaican shareholders own approximately 49.6% of the company with the majority interest being held by British American Tobacco. As the Chief Financial Officer of this institution, you are charged to lead a group of analysts to prepare a report to the Board of Management on the financial health and wealth of the institution. The annual report for Carreras Limited is provided. View and analyze the financial statements for the years 2019 and 2020. Your report must include:
A. A comparative analysis of the years 2019 and 2020 after calculating two (2) ratios from each category listed below:
(i) Profitability and management efficiency ratios
(ii) Short term financial stability ratios
(iii) Long term financial stability ratios
(iv) Investors’ ratios (40 marks)
B. An analysis the wealth and health of the company based on the ratios above
(20 marks)
C. Five recommendations on the prospects of the company as it moves into the year 2022 with many uncertainties within the industry (10 marks).
D. Report on the challenges Carreras Ltd may face when analyzing and interpreting its performance due to changes in its accounting policies for recording transaction/elements in the financial statements. (10 marks)
E. Prepare a Common Size Income Statement and Statement of Financial Positions for the years 2019 and 2020. (20 marks)
|
CRITERIA |
Total Marks |
Students Marks |
COMMENT |
|
A. Two ratios from each category below adequately identified. (2.5 marks each)
· Profitability and management efficiency ratios
· Short term financial stability ratios · Long term financial stability ratios · Investors’ ratios |
5 marks
5 marks
5 marks
5 marks |
|
|
|
Comparative Analysis for 2019/2020 |
20 marks |
|
|
|
B. Written report to the CEO of Carreras Ltd · Summary table showing the ratios
· Analysis of the wealth and health of the company based on the ratios above |
5 marks
15 marks
|
|
|
|
C. Five Recommendations on the prospects of the company. |
10 marks
|
|
|
|
D. Challenges Carreras Ltd may face when analyzing and interpreting its performance due to changes in its accounting policies for recording transaction/elements in the financial statements
|
10 marks |
|
|
|
E. Common Size Income Statement Common Size Balance Sheet |
10 marks 10 marks |
|
|
|
· APA Format for reporting |
5 marks |
|
|
|
TOTAL MARKS |
105 |
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Introduction
Carreras Limited is Jamaica's largest marketer and distributor of cigarettes and tobacco-related items. The corporation is a publicly traded company with both domestic and foreign ownership. Jamaican stockholders control around 49.6 percent of the corporation, with British American Tobacco holding the dominant stake. This institution's Chief Financial Officer has directed four (4) analysts, including myself, to create a report on the financial health and wealth of Carreras Limited. The report will cover the following: a comparison study of 2019 and 2020, the firm's wealth and health, recommendations to the Board of Management on the prospects of the Company. Challenges they may face and a common size Income Statement.
Background
Carreras Ltd has a long history in Jamaica. Carreras UK began marketing several of its cigarette brands in Jamaica as early as the 1930s. Bonitto Brothers sold such cigarettes from the late 1950s to the early 1960s.
Carreras of Jamaica was established in 1962 "to carry on business as tobacco and cigar merchants and importers and dealers in tobacco, cigars, cigarettes, snuff, matchlights, pipes, and any other products required by or helpful to smokers." The firm was the first Jamaican company to build a manufacturing unit in post-independence Jamaica in 1963.
Carreras has earned a reputation for manufacturing high-quality cigarette brands to match the different interests of its consumers since its independence in 1962.
From 1975 to 1994, Carreras diversified its operations to own:
· Agricultural Products of Jamaica
· Carreras Development Limited
· Carreras Exports Limited
· Cigarette Company of Jamaica
· Graphic Arts Limited
· Island Bottlers
· Jamaica Flexographic Limited
· Jamaica Graphic and Printing Supplies Limited
· Rothmans of Pall Mall (Jamaica) Limited
· Sans Souci Hotel
· The Jamaica Biscuit Company
The corporation actively began divesting its non-tobacco business in the 1990s as part of a strategy to return to its core tobacco industry, culminating in 2005 with the sale of Sans Souci Hotel. BAT merged with Rothmans International in June 1999, acquiring a majority stake in Carreras Limited.
Comparative analysis of the years 2019 and 2020
|
|
|
|
Change |
|
|
|
2020 $'000 |
2019 $'000 |
Value |
% |
|
Operating revenue |
$14,126,523 |
$12,906,497 |
$1,220,026 |
9.45% |
|
Cost for operating revenue |
-$7,132,802 |
-$6,470,125 |
($662,677) |
10.24% |
|
Gross operating profit |
$6,993,721 |
$6,436,372 |
$557,349 |
8.66% |
|
Other operating income |
$195,778 |
$132,411 |
$63,367 |
47.86% |
|
|
$7,189,499 |
$6,568,783 |
$620,716 |
9.45% |
|
Administrative, distribution and marketing expenses |
$2,372,231 |
$2,013,264 |
$358,967 |
17.83% |
|
Lease interest expenses |
$16,786 |
$0 |
$16,786 |
100.00% |
|
Impairment loss on trade receivables |
$1,767 |
$5,774 |
($4,007) |
-69.40% |
|
Employee benefits expense |
$44,700 |
$50,900 |
($6,200) |
-12.18% |
|
Gain on liquidation of subsidiary |
$0 |
$376,928 |
($376,928) |
-100.00% |
|
Total expenses |
$2,435,484 |
$2,446,866 |
($11,382) |
-0.47% |
|
Profit before income tax |
$4,754,015 |
$4,875,772 |
($121,757) |
-2.50% |
|
Income tax |
$1,176,759 |
$1,137,411 |
$39,348 |
3.46% |
|
Profit for the year |
$3,577,256 |
$3,738,362 |
($161,106) |
-4.31% |
Comparative statement of financial position
at the end of the year
|
|
|
|
Change |
|
|
|
2020 |
2019 |
Value |
% |
|
Assets |
|
|
|
|
|
Deferred tax assets |
$59,009 |
$38,544 |
$20,465 |
53.10% |
|
Employee benefit assets |
$86,800 |
$138,300 |
($51,500) |
-37.24% |
|
Property plant and equipment |
$376,471 |
$383,017 |
($6,546) |
-1.71% |
|
Right-of-use assets |
$222,423 |
$0 |
$222,423 |
100.00% |
|
Investments in subsidiaries |
$15,549 |
$15,549 |
$0 |
0.00% |
|
Total Non-current assets |
$760,252 |
$575,410 |
$184,842 |
32.12% |
|
|
|
|
|
|
|
Cash and cash equivalents |
$1,936,024 |
$1,706,487 |
$229,537 |
13.45% |
|
Accounts receivable |
$995,449 |
$779,934 |
$215,515 |
27.63% |
|
Inventories |
$464,456 |
$361,462 |
$102,994 |
28.49% |
|
Total current assets |
$3,395,929 |
$2,847,883 |
$548,046 |
19.24% |
|
Total Assets |
$4,156,181 |
$3,423,293 |
$732,888 |
21.41% |
|
Equity: |
|
|
$0 |
|
|
Share capital |
$121,360 |
$121,360 |
$0 |
0.00% |
|
Unappropriated profits |
$1,575,875 |
$1,144,810 |
$431,065 |
37.65% |
|
Total equity |
$1,697,235 |
$1,266,170 |
$431,065 |
34.04% |
|
Liabilities: |
|
|
|
|
|
Lease liabilities |
$206,646 |
$0 |
$206,646 |
100.00% |
|
Employee benefits obligation |
$257,700 |
$223,000 |
$34,700 |
15.56% |
|
Total non-current liabilities |
$464,346 |
$223,000 |
$241,346 |
108.23% |
|
Accounts payable |
$1,125,104 |
$1,136,491 |
($11,387) |
-1.00% |
|
Current portion of lease liabilities |
$26,738 |
$0 |
$26,738 |
100.00% |
|
Income tax payable |
$832,758 |
$797,632 |
$35,126 |
4.40% |
|
Total Current liabilities |
$1,994,600 |
$1,934,123 |
$60,477 |
3.13% |
|
Total liabilities |
$2,458,946 |
$2,157,123 |
$301,823 |
13.99% |
|
Total equity and liabilities |
$4,156,181 |
$3,423,293 |
$732,888 |
0.214089 |
Accounting Ratios
|
Ratio |
2020 |
2019 |
|
1. Profitability |
|
|
|
Net margin |
25.32% |
28.97% |
|
Return on Total Assets |
94.39% |
99.94% |
|
2. Efficiency |
|
|
|
Days Sales Uncollectible |
26 Days |
22 Days |
|
Days Sales in inventory |
24 Days |
20 Days |
|
3. Short term financial stability |
|
|
|
Current ratio |
2.08 |
1.47 |
|
Quick ratio |
1.47 |
1.29 |
|
4. Long term financial stability |
|
|
|
Debt-to-equity ratio |
1.45 |
1.70 |
|
Debt ratio |
0.59 |
0.63 |
|
5. Investors' ratio |
|
|
|
Price earnings ratio |
11.76 |
9.49 |
|
Dividend yield |
0.07 |
0.13 |
Analysis of wealth and health of the company
Comparative analysis of the year 2019 and 2020 using selected ratios suggest that that company's financial health is satisfactory, as its profitability is really good with profit margin just over 25% during 2020, although there is a slight decline from previous year, it is within acceptable range.
Return on assets suggests how the assets are used to generate income which is over 90% in both the analysis years, this can be considered as exceptionally good. Company's Financial stability is analyzed using current and quick ratio's both the ratios are within the acceptable range, but long term stability, analysis suggests that company is slightly over dependent on debts, that may pose difficulties in payment of long- term obligations.
Analysis of company's market prospects too suggest that it has satisfactory market prospects.
3. Carreras Limited's operations has affected by several governments actions which include banning of smoking in public places and increase in excise duty, the prospects of company has also been affected by pandemic, where company noted decline in revenue.
It is expected that the company's profitability will continues to grow at an healthy rate. Company has to focus on following areas
1. The long term has to focus on improvement on long term financial stability, as company's dependence on debt is marginally higher.
2. Although the company has sufficient current assets its Accounts payable are significantly high, Carreras should work on its improvement by quickly paying off accounts payable.
3. Market prospects of the Carreras is satisfactory as company has healthy dividend yield, and good price earnings ratio.
4. There is a slight decline in profitability year on year this may be due to pandemic, and government policies, but it is expected that company's prospects would be positive.
5. Although there are uncertainties in industry the demand for Carreras cigarettes is expected to remain strong, company can explore new market for further boosting it
4. The changes in accounting policies applicable to company is related to leases IFRS 16, for the group company has taken number of practical measures in this regard for example
· It did not recognize right of sue assets and liabilities for leases for which the lease term ends within 12 months, it will have impact on company's balance sheet.
· For measuring lease liability for the leases classified as operating leases the company discounted lease payments using incremental borrowing rate at April 1, 2019. The weighted average rate applied was 7.25%
· The low valued assets are also not recognized as right-to use assets and liabilities.
· There was not significant impact on unappropriated profit at the date of transaction
Common size Income statement
|
|
|
|
Common size |
|
|
|
2020 |
2019 |
2020 |
2019 |
|
Operating revenue |
$14,126,523 |
$12,906,497 |
100.00% |
100.00% |
|
Cost of operating revenue |
-$7,132,802 |
-$6,470,125 |
-50.49% |
-50.13% |
|
Gross operating profit |
$6,993,721 |
$6,436,372 |
49.51% |
49.87% |
|
other operating income |
$195,778 |
$132,411 |
1.39% |
1.03% |
|
|
$7,189,499 |
$6,568,783 |
50.89% |
50.90% |
|
Administrative, distribution and marketing expenses |
$2,372,231 |
$2,013,264 |
16.79% |
15.60% |
|
Lease interest expenses |
$16,786 |
$0 |
0.12% |
0.00% |
|
Impairment loss on trade receivables |
$1,767 |
$5,774 |
0.01% |
0.04% |
|
Employee benefits expense |
$44,700 |
$50,900 |
0.32% |
0.39% |
|
Gain on liquidation of subsidiary |
|
$376,928 |
0.00% |
2.92% |
|
Total expenses |
$2,435,484 |
$2,446,866 |
17.24% |
18.96% |
|
Profit before income tax |
$4,754,015 |
$4,875,772 |
33.65% |
37.78% |
|
Income tax |
$1,176,759 |
$1,137,411 |
8.33% |
8.81% |
|
Profit for the year |
$3,577,256 |
$3,738,362 |
25.32% |
28.96% |
Common size balance sheet
|
|
|
|
Common size |
|
|
|
2020 |
2019 |
2020 |
2019 |
|
Assets |
|
|
|
|
|
Deferred tax assets |
$59,009 |
$38,544 |
1.42% |
1.13% |
|
Employee benefit assets |
$86,800 |
$138,300 |
2.09% |
4.04% |
|
Property plant and equipment |
$376,471 |
$383,017 |
9.06% |
11.19% |
|
Right-of-use assets |
$222,423 |
$0 |
5.35% |
0.00% |
|
Investments in subsidiaries |
$15,549 |
$15,549 |
0.37% |
0.45% |
|
Total Non-current assets |
$760,252 |
$575,410 |
18.29% |
16.81% |
|
|
|
|
|
|
|
Cash and cash equivalents |
$1,936,024 |
$1,706,487 |
46.58% |
49.85% |
|
Accounts receivable |
$995,449 |
$779,934 |
23.95% |
22.78% |
|
Inventories |
$464,456 |
$361,462 |
11.18% |
10.56% |
|
Total current assets |
$3,395,929 |
$2,847,883 |
81.71% |
83.19% |
|
Total Assets |
$4,156,181 |
$3,423,293 |
100.00% |
100.00% |
|
Equity |
|
|
|
|
|
Share capital |
$121,360 |
$121,360 |
2.92% |
3.55% |
|
Unappropriated profits |
$1,575,875 |
$1,144,810 |
37.92% |
33.44% |
|
Total equity |
$1,697,235 |
$1,266,170 |
40.84% |
36.99% |
|
Liabilities |
|
|
|
|
|
Lease liabilities |
$206,646 |
$0 |
4.97% |
0.00% |
|
Employee benefits obligation |
$257,700 |
$223,000 |
6.20% |
6.51% |
|
Total non-current liabilities |
$464,346 |
$223,000 |
11.17% |
6.51% |
|
Accounts payable |
$1,125,104 |
$1,136,491 |
27.07% |
33.20% |
|
Current portion of lease liabilities |
$26,738 |
$0 |
0.64% |
0.00% |
|
Income tax payable |
$832,758 |
$797,632 |
20.04% |
23.30% |
|
Total Current liabilities |
$1,994,600 |
$1,934,123 |
47.99% |
56.50% |
|
Total liabilities |
$2,458,946 |
$2,157,123 |
59.16% |
63.01% |
|
Total equity and liabilities |
$4,156,181 |
$3,423,293 |
100.00% |
100.00% |
Explanation:
1. Comparative analysis is carried out by analyzing dollar change and percentage change in the line items of a financial statement.
Dollar change=Analysis period amount−Base period amount
Percentage change=Base period amountAnalysis period amount−Base period amount
|
Ratio |
Formula |
2020 |
2019 |
|
1. Profitability |
|
|
|
|
Net margin |
Net income /Sales revenue x 100 |
$3,577,256/$14,126,523 x 100 = 25.32% |
$3,738,362/$12,906,497=28.97% |
|
Return on Total Assets |
Net income / Average total assets
|
($4,156,181+$3,423,923)/2$3,577,256=94.39% |
($3,492,653+$3,988,170)3,738,362=99.94% |
|
2. Efficiency |
|
|
|
|
Days Sales Uncollectible |
Accounts receivable/Net sales x 365 |
$995,449/$14,126,523×365 = 26 days |
$779,934/$12,906,497×365 = 22 days |
|
Days Sales in inventory |
Ending inventory /Cost of goods sold ×365 |
$464,456/$7,132,802×365 = 24 days |
$361,462/$6,470,125$361,462×365=20 days |
|
3. Short term financial stability |
|
|
|
|
Current ratio |
Current Assets /Current liabilities |
$4,156,181/$1,994,600 = 2.08 |
$2,847,883/1.934,123 = 1.47 |
|
Quick ratio |
(Current Assets-Inventories –Prepaid Expenses)/ Current liabilities |
(4156181-464456) /$1,994,600 = 1.85 |
(2847883-361462) /$1,934,123 = 1.29 |
|
4. Long term financial stability |
|
|
|
|
Debt-to-equity ratio |
Total liability /Total equity |
$2,458,946/$1,697,235= 1.45 |
$2,157,123/$1,266,170=1.70 |
|
Debt ratio |
Total liability /Total Assets |
$2,458,946/$4,156,181=0.59 |
$2,157,123/$3,423,293=0.63 |
|
5. Investors' ratio |
|
|
|
|
Price earnings ratio |
Price of share/Market price per share |
$8.68/$0.738 = 11.76 |
$6.66/$0.702 = 9.49 |
|
Dividend yield |
Annual cash dividend per share/ Market price per share |
$0.64/$8.68=0.07 |
$0.85/$6.66=0.13 |
Link below
https://www.batcaribbean.com/group/sites/BAT_AAPMDE.nsf/vwPagesWebLive/DOBTNR5U/$FILE/CARRERAS-%20AR%202020%20FINAL.pdf?openelemen
