An Analysis Of Lucky Lanka Milk Processing Company's Performance Essay.

1. Explain the importance of corporate reporting to a business organisation.

2. You are required to produce an individual assignment report (In business report style) that includes an analysis of a listed company on your national Stock Exchange, or alternatively a one that is quoted on the London Stock Exchange, with a view to evaluate its suitability for a major investment by a client.

Corporate Reporting and its Importance

Corporate reporting meaning differs according or depending to the intended audience of the financial statements, (Lee & Maxfield, 2015). Corporate reporting can be defined as the disclosure and presentation features of reporting which are different from accounting and its measurements. Corporate reporting includes narrative reporting, financial reporting, corporate governance reporting, integrated reporting, executive remuneration reporting and corporate responsibility reporting. Corporate reporting comprises of voluntary disclosures which help to add value to financial statements and make it useful to stakeholders of the company and other external users of financial statements like the investors. Corporate reporting provides stakeholders with insights into the activities of a company and therefore ends up to affect the share price, (Corporate reporting,2014). Companies implement audit committees which help them in ensuring corporate reporting and this act requires companies to be accountable and transparent. The corporation act 2001 requires companies to safeguard integrity by corporate reporting.

Corporate reporting is used by companies because it is relevant in that it helps in prioritizing social, economic and environmental issues which are useful for strategic planning purposes. It is relevant in that it helps companies to illustrate and identify highly material issues which help in the long-term success of companies, (Everingham, Kana & Wadee, 2012). Corporate reporting enables companies to build good connection with their stakeholders and investors. Companies produce corporate reports so as to give enough information to specific users of financial statements. Corporate reporting also enables companies to provide information about how they raise funds and how those funds are utilized in the course of business. Corporate reporting also helps companies to access debt, equity and other trade finances. Companies produce corporate reports in order to avail their information concerning the financial position and financial performance and this makes it useful to a wide range of financial statement users in evaluating the stewardship of management and be able to make useful economic decisions.

Accounting standards can be described as authoritative standards that are used in financial reporting, (Sapovadia, 2008). Accounting standards are the basic source of the generally accepted accounting principles, (GAAP). These standards provide specifications of how transactions and other accounting events should be measured, recognized, presented and disclosed in companies’ financial statements, (Rayman 2013). Accounting standards are policies that are imperative to all the accounting activities and they help business to run their activities smoothly. All companies are required to adhere to the accounting standards set by FASB and IASB, failure to comply with this standards will lead companies spending on legal action initiated against it by their governments.

Accounting Standards and their Importance

Accounting standards enable companies to provide external users such as lenders and investor, with information which is useful in decision making, (Sugara & Boland, 2011). Accounting standards help companies to assess their business performance and be able to compare it with the performance of competitors through the use of financial statements. Accounting standards enable companies to be transparent and by so doing they are able to perform efficiently in the industry of operation, ( Al Frijat, 2016).

Accounting standards help in protecting the investors interests this is because if companies adhere to the accounting standards they are able to provide the investors with genuine and accurate reports which in return increases the investors’ confidence while making economic decisions because they will have insights of how their money will be spend. Accounting standards also help to prevent fraud both to the owners of businesses and customers. Accounting standards also promote accountability and in the end making businesses to be efficient in business transactions. Companies that adhere well to accounting standards are able to produce financial statements that enable them to access investor capital. Accounting standards also help in facilitation of reasonable assessment of business presentation and ensures good record keeping by companies. 

Lucky Lanka milk processing company is situated in Sri Lanka and is majorly focused in the field of milk processing in its aim to build a healthy nation. The company has a lot of opportunities to supply its products over Sri Lanka. Its highly skilled and experienced staff uses vast technology and fresh milk in production. Despite the fact that the company has this unique features it has managed to acquire only 18% market share. The company currently manufactures yoghurt and pasteurized milk. The products are of different flavors in yoghurt for example vanilla, chocolate among others.

Lucky Lanka operates in a very promising business environment because the country has enhanced political stability which encourages local manufacturers to continue with productivity. Due to this factors, the company has potential of investing in different places and succeed. The economic condition shows that there is a possibility of future economic growth as there is also enough supply of labor, (Proctor, 2007). The company is also affected by inflation, interest rates and disposable income.

The target market expectations are very high due to increased consumer knowledge in consumption of nutritious food. The company majorly deals with the production of nutritious foods and this is an advantage to them due to fulfilling the social needs of customers. Lucky Lanka faces stiff competition from top competitors such as New dale, Highland, Lanka milk food and Kethmale. The customers have high bargaining power because they are aware of other quality milk products. Threats of few quality milk products in the market and there are no barriers of new entrance of milk products in the market. Milk products are purchased from a few selected suppliers which raise the bargaining power of suppliers.

Overview of Lucky Lanka Milk Processing Company

The financial statements of the company for the last five years (2017 -2013) have been prepared using the same accounting standards and same methods of computations which comply with LKAS 34 interim financial reporting. There have not been any material events which have been taking place after the balance sheet date which require some adjustments and disclosures in the financial statements. There have been some little changes in the current classification of items and where appropriate changes were done for example in the year 2016 and 2017. The balance sheets produced by the company represent the true economic position of the company.

Property plant and equipment is measured using the revaluation method. The company reviews the residual values, methods of assets depreciation in each year of reporting. The company derecognizes assets and financial liabilities. The company applies the carrying value while measuring the associates and subsidiaries. The company tests the impairment of goodwill in every financial year. The company prepares financial statements in accordance with Sri Lanka accounting standards. Depreciation is calculated using straight-line method. Revenues, expenses and assets are recognized using the net amount of tax. Property plant and equipment are measured using the fair value. Revenue is measured using the fair value. The company engages valuation specialists in determining the fair value of assets. Assets are valued over their useful lives.

Non-financial information deals with social and environmental aspects, (Maj 2018). Lucky Lanka milk processing company reports on non-financial information. It reports on corporate governance whereby it describes its decision making systems and how the stakeholders directly or indirectly control the company activities. The board of directors are committed to provide and ensuring business integrity and professionalism in all the activities of the business. The board of directors is comprised of six members whereby two are executive members and four are the non-executive members. The board members list the rules that are laid down by Colombo stock exchange and submit the annual dependence declarations. The board members work on an informed basis, due diligence, good faith and in the best interest of the company.

The company reports on the remuneration of the executive members and it has executive committee which recommends the remuneration that is payable to the executive members. The committee sets guidelines for the remuneration of other senior management of the company. The main motive behind this activity is to attract and retain required skilled human resources which makes the company to be successful and sustain its performance and operations.

Critical Analysis of the Company's Performance

The company reports on corporate social responsibility whereby it complies with the rules, regulations, prescribed practices, procedures, internal policies and ethical standards. The company has implemented strong risk control and management mechanisms in order to monitor and make sure that the company complies with rules and laws which are applicable to it. It conducts internal audits to mitigate possible risks of not complying with the accounting standards. The company also ensures that it maintains environmental well-being by using sustainable processing methods.

Critical Analysis of the Company’s Performance

2017 Financial Ratios

Gross profit ratio=Gross profit/revenue *100

435,077,000/1185,145000* 100 =36.71%

Efficiency ratio

Trade receivable days= trade receivables/revenue*365

210,411,000/1185145000*365= 64.80 which is 65days

Liquidity ratio

Current ratio= current assets/current liabilities

448,296,000/453,709,000= 0.988

Gearing ratio= debt/debt + equity

306148,000/1280483,000= 0.239

Investor ratio

Return on shareholders= profit available to equity shareholders * 100%

2.69* 100% = 27%%(www.imfgruop.ik,2017)

  2016 Financial Ratios

Gross profit ratio=Gross profit/revenue *100

373,124,457/995,245,984* 100 = 37.49%

Efficiency ratio

Trade receivable days= trade receivables/revenue*365

184,657,355/995,245,984* 365 =67.7 which is 68 days

Liquidity ratio

Current ratio= current assets/current liabilities

404,661,953/372,137,858 =1.087

Gearing ratio= debt/debt + equity

227,516840/1142567,000 = 0.1991

Investor ratio

Return on shareholders= profit available to equity shareholders * 100%

2.90 * 100% = 29%%(www.imfgruop.ik,2016) 

2015 Financial Ratios

Gross profit ratio=Gross profit/revenue *100

368,249,352/962,911,905*100 =38.24%

Efficiency ratio

Trade receivable days= trade receivables/revenue*365

182,635,602/962,911,905* 365 = 6.9 which is 7 days

Liquidity ratio

Current ratio= current assets/current liabilities

307,311,982/273,717,660 =1.1227

Gearing ratio= debt/debt + equity

150,332,568/1,002,290,395= 0.15 

Investor ratio

Return on shareholders= profit available to equity shareholders * 100%

             2.6 * 100 = 26%(www.imfgruop.ik,2015)

 2014 Financial Ratios

Gross profit ratio=Gross profit/revenue *100

365,290,290/893,123,959* 100= 40.9%

Efficiency ratio

Trade receivable days= trade receivables/revenue*365

131,487,736/893,123,959 * 365 =53.49 which is 54 days

Liquidity ratio

Current ratio= current assets/current liabilities

236,561,344/297,667,245 = 0.0008

Gearing ratio= debt/debt + equity

237,201,039/763,101,198 = 0.3108

Investor ratio

Return on shareholders= profit available to equity shareholders * 100%

2.8 * 100 = 28%%(www.imfgruop.ik,2014)

2013 Financial Ratios

Gross profit ratio=Gross profit/revenue *100

331,603,101/837,580,595* 100 =39.59%

Efficiency ratios

Trade receivable days= trade receivables/revenue*365

261,475,963/837,580,595* 365 = 113.94 which is 114 days 

Liquidity ratio

Current ratio= current assets/current liabilities

123,925,116/172,950,759 = 0.7165

Gearing ratio= debt/debt + equity

                                        207,738,887/587,519,465 = 0.3535

Investor ratio

Return on shareholders= profit available to equity shareholders * 100%

2.7 * 100 = 27% (www.imfgruop.ik,2013) 

Comparison of the Financial Ratios with Lanka Milk Food

2017 Financial Ratios

Gross profit ratio = 15.04%

2017 Financial Ratios

Efficiency ratio = 117 days

Liquidity ratio = 1.60

Gearing ratio = 9.72

Investor ratio = 14%(www.imfgruop.ik,2017) 

2016 Financial Ratios

Gross profit ratio =14.53%

Efficiency ratio= 114 days

Liquidity ratio = 1.02

Gearing ratio = 13.76

Investor ratio = 31% (www.imfgruop.ik,2016) 

2015 Financial Ratios

Gross profit ratio = 10.34%

Efficiency ratio = 79 days

Liquidity ratio = 0.71

Gearing ratio = 3.96%

Investor ratio = 20%(www.imfgruop.ik,2015) 

2014 Financial Ratios

Gross profit ratio = 10.34%

Efficiency ratio = 70 days

Liquidity ratio = 0.84

Gearing ratio = 5.20

Investor ratio = 15%(www.imfgruop.ik,2014)

2013 Financial Ratios

Gross profit ratio = 16.81%

Efficiency ratio= 12 days

Liquidity ratio =0.77

Gearing ratio = 3.67%

Investor ratio =9.3%  

Looking at the liquidity ratios of these two companies, Lucky Lanka liquidity ratio shows that its ability to pay short-term liabilities is faster than Lanka milk food. Looking at the gearing ratio of this two companies for example in the year 2017 Lucky Lanka had a gearing ratio of 0.29 which implies that it uses less debt than equity and that shareholders have more claims than creditors. On the other hand, Lanka milk food company had a gearing ratio of 9.7 which indicate that it uses more debt than equity and this leaves the shareholders with no claims in the business assets.

The gross profit ratio of Lucky Lanka for the five years indicate that the company is able to earn adequate return compared to Lanka milk food company for example in the year 2017 Lucky Lanka had a gross profit of 36.71% and Lanka milk food had a gross profit of 15.04%. Looking at the efficiency ratios it shows that lucky Lanka manages its assets effectively in fewer days (65) compared to Lanka milk food (117 days). The investor ratios show that Lucky Lanka is able to pay its shareholders more dividends compared to Lanka milk food.

This deals with how the company ventures in influencing customers’ perception about it, (Busenbark, Lange & Certo 2017). The company puts strategies to achieve customer loyalty by offering diversified products and services. It focuses on ensuring healthy life of the nation by offering products which are of nutritional value to their customers. Lucky Lanka provides its employees with a better working place and utilizes their capabilities well. It also provides security for its shareholders.

Lucky Lanka tries to impress the stakeholders by continuously improving their products, processes, ideas and be able to come up with a more efficient way that enables them to give more satisfaction to their stakeholders. The company is passionate about customer care in that it is dedicated to serving customers better than its competitors. The company tries to impress the employees by establishing teamwork so as to achieve its strategic objective. The company manages to meet deadlines in terms of work accomplished and this is impressive to stakeholders.

Lucky Lanka upholds democracy from senior management to minor workers as they adhere to the same rules and regulations. This attracts more highly skilled employees and makes the company sustain its good performance. It is result driven and this is impressive to the investors and stakeholders. Good corporate governance and effective internal control helps the financial statements to be faithful and show the performance of the business in the market.

Lucky Lanka milk processing company manages the image it creates to its customers by being a market leader in terms of technology, development of products and enhancing its reputation by producing healthy foods. It creates a good perception in the maximization of shareholders’ wealth through increased profits. Reporting on non-financial information enables it to create good perception by the users of financial statements and its customers. The activities of the company portray a true and fair image to its customers.

The client should invest in this company. This is because of the company reports of sustainability and financial information which has shown the true picture of the company performance. The client can use this information in making an important decision about the company. There are strong and effective internal controls which ensures that the company works hard to maximize the shareholders’ wealth.

The company operates in a stable economy with a good possibility of growth in future, investing in the company implies that an investor will be able to get good earnings per share. A stable economy with favorable conditions show that the business may not become bankrupt putting shareholders' wealth at stake. In a stable economy like Sri Lanka, the company has many opportunities to expand and grow due to its diversified milk products and this is a good indicator to the client that investing in this company will be useful.

Lucky Lanka milk processing company has a high gross profit ratio which is a good indicator to an investor of getting high returns. Investing in a company with increased profits means that the investors will be able to grow because as profits increase the dividends and earnings per share increases.

The company has high profit compared to its competitors like Lanka Milk food. This means that it is able to generate income faster than its competitors hence it would be appropriate to invest in it. The liquidity of the company shows that it can easily convert assets to cash in order to meet its short-term obligations and so the company may not become bankrupt. This shows the client or an investor that the company operates efficiently.

Conclusion

To sum up we can say that corporate reporting by companies deals with sustainability reporting on non- financial information, (Slehat, Alnimer & Abbadi,2013). Companies should report conduct corporate reporting so as to add value to their financial statements. Companies which implements corporate reporting make their financial statements to be relevant, authentic and engaging.

Lucky Lanka Milk processing company deals with the provision of nutritious food to people. It has a lot of opportunities to spread its market of operation throughout Sri Lanka due to a stable economy, wide customer base, vast development in technology and due to good economic policies of the country. Lucky Lanka operates as a market leader in the milk food industry and this is achieved by timely introduction of new products, identifying competitors such as Lanka Milk food and developing new diversified milk products.

Lucky Lanka is a company which has managed to impress its customers by providing them with diversified nutritious foods (www.luckylanka.ik). It maximizes on shareholders’ wealth by meeting deadlines. The company is focused on innovation and builds teamwork so as to retain their qualified staff to enhance its production. Looking at the gross profit ratio the company has been able to utilize every shareholders’ rupees and generate income. The company prepares its annual reports in accordance with the Sri Lanka accounting policies which indicates that there are strong and effective internal controls.

References

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