As the name itself implies Talawakelle Tea Estate PLC is involved with tea industry where it takes the cultivation, manufacture, and sale of tea as its core business operations.In past Talawakelle Tea Estates simply known as Talawakelle Plantations Limited. They incorporate in 22nd of June 1992 and they re-christened as Talawakelle Tea Estates Limited in 2004. They are currently producing and marketing over 10 million kilograms of premium black tea each year. The company is always dedicated towards its motive ‘a taste of tea, a taste of quality' and takes all necessary measures to cater the market with the best tea possible.
Talawakelle Tea Estates Limited maintains high quality tea plantations in seventeen tea gardens. Company has introduced the 5S system in their tea factories and pioneered the first Hazard Analysis at Critical Control Points (HACCP) certification also ranked number one on prices for the eight consecutive years amongst regional plantation companies. Even though 2008 was a record year for the tea prices but in the fourth quarter it declined because of the global crisis. The global market downfall heavily affected Talawakelle Tea Estates as well. Tea production of the year was 6.9 million Kg (increase of 0.65 million Kg). Even the crisis had a major impact on volumes and price levels Talawakelle Tea Estates performance was good enough to get their net profit before tax up to Rs. 110 Million. Also their capital investment was Rs. 349 Million and shareholders' fund was Rs. 1,069 Million during the year 2008.
Talawakelle Tea Estates Plc has a good capitalization. Their major five shareholders are, Hayleys Plantation services (PVT) Limited (74.76%), Merrill Fernando & Sons (PVT) Limited (4.98%), Waldock Mackenzie Limited (0.98%), Mrs. P.N. Bhatt (0.53%) and Sri Lanka Insurance Corporation Limited (0.44%). Out of all major shareholders most of (99.9%) are residence and most owned by institutions. The selected competitor is Bogawantalawa Tea Estates PLC. This company is also a leading company in tea industry. Bogawantalawa has made a net profit before tax of Rs. 82.7 million during the year ended 31st march 2008. (Appendix A)
Earnings per share is an important ratio to measure a company's performance and also this reflects company's growth of earnings in relation to equity injected to the business when compared with previous years or with another company performance. This is a considered as the single most important variable in determining the share price and deriving at the price to earnings ratio. (Appendix B)
Talawakelle tea estates had equity holdings in 23,750,001 shares in last five years and achieved an all time success in 2004 recording the highest EPS for the selected period, the increased production and high auction prices for the improved quality in 2005 further contributed to the company performance but the intense competition and oversupply in the global market had made terms more difficult than the previous year. Trade union work interruption followed by a wages increment, bad weather conditions lowered the accelerated performance in 2006 but it has recovered itself rapidly from the next year and has been able to survive well with the lowered commodity prices and demand conditions due to the global recession because of their strong focus on quality, good agricultural practises and other income generation sources in 2007/2008 years which has kept investor expectations high.
At sight Bogawantalawa Tea Estate has recorded a low rate of earnings per shares when compared with Talawakelle Tea estate. The EPS was below 1.5 throughout the period and the huge lose in year 2007 left with no positive earnings to be apportioned for the equity owners further worsening the situation. It is important fact that having a low EPS does not necessarily mean that the particular company is not performing efficiently because the proportion of equity holdings of that company will have a dilution effect on the amount of earnings on a share, resulting a lower EPS, Which has been the case for Bogawantalawa when compared with Talawakelle, it has around 10 million more shares and the holdings further increases in year 2007 with a new issue of 16.75million shares.
But the comparison between the two companies leaves Talawakelle in a superior position as it has been able to produce more earnings with less equity throughout the respective period that have resulted in a higher EPS increasing investor confidence on company performance which is also reflected through their share prices.
Price/earnings ratio shows the relationship between earnings of a company and the share market price. A high ratio would suggest that the investors are expecting growth with the high ratio company as to the other with a lower ratio. It's the amount of rupees they are willing to pay for one rupee of earnings. (Appendix C)
The P/E ratio for Talawakelle has taken a lower value as against the better performance recorded with EPS. P/E in general term for Talawakelle has been in the range of 2.8-3.8 but shows a sharp increment in the years of 2006 and 2007.
For Bogawantalawa Tea Estates Plc the ratio shows promising performance in the investors mind for the coming years if purely based on the numbers as against Talawakelle. Anyway it is highlighting factor that Bogawantalawa recording a significant decline for the year 2007 being in line with the negative EPS.
In comparison of the two companies based on the P/E ratio Talawakelle seems to have a more stable conditions with the highly volatile ratio for Bogawantalawa. But it is important to identify that no conclusions can be made based solely depending on the numbers as even in this case the results seem to be more contradicting with EPS. When considering the market prices for both companies Talawakelle seem to over ride Bogawantalawa other than in 2007 where the competitor company had an equity issue which pushed up the prices. The simple mathematics have resulted the low number as given as the denominator for Talawakelle was higher than Bogawantalawa as it recorded higher earnings with less number of shares.
This ratio quantifies the relationship between dividend per share and market value per share and income an investor would yield as dividends out of his invested value at the end of a particular period as against the market value of it. (Appendix D)
Starting with the period under consideration Thalawakelle tea estates Plc has made increments in their payout ratio in a year on year basis consecutively from 2004 to 2006 thus resulted in the highest yield in year 2006 of 15.84% as against the average rate which lies below 10% level. But this trend has been changed due to the depressed performance caused by various factor of local and international arena. But with recovering effects of 2007 company has come back in rewarding their investors.
Bogawantalawa tea estates Plc has been below the line throughout the period when compared with Talawakelle and has not been in a position to pay dividends in 2007 as it had not produced sufficient positive earnings to be distributed, reasoning's for the overall result of Bogawantalawa may be due to performance inefficiencies and the high number of equity shares reducing the dividends that can be allocated to a share reducing the numerator of the calculation.
This provides a measure of the scope and the eligibility of a company has in paying dividends from the earnings generated for the period. the higher the cover the better the ability to maintain dividends if profits dropped, a lower ratio can be accepted if the company is producing stable profits but if their profitability is volatile a higher ratio is preferred. (Appendix E)
At sight it is obvious that Talawakelle has been able maintain a higher dividends cover than its competitor throughout the period. This situation can be proved with the performance results of the two companies discussed in above paragraphs that Bogawantalawa has not been able to pay dividends at certain years as to tightening consequences of operations. Even for Talawakelle a smooth ratio cannot be expected as it has been changing it payout policies together with the varying performance within the years. Even though a very high ratio is not evident by Talawakelle the investors can expect their dividends to be maintained at a certain level as the company has been able to perform well even at difficult time periods holding up to their investors potential.
This ratio measures the portion of earnings actually distributed in the form of dividends and also provides an idea about how earnings support the dividend payments. Mature companies tend to have a higher ratio than the start-ups as they would be more interested on investing for expansion than income distribution. (Appendix F)
Both the companies seem not to maintain a stable payout ratio but and varying percentage depending on the current year's performance and other company considerations together with the environmental changes. In the comparison the two trend line initially seems to be moving in opposite directions.
Talawakelle PLC which has had a lower rate in 2004 has increased its payout from 15% to 25% of their earnings respectively in years 2005 and 2006 which recorded an outstanding performance. Even though 2007 was a difficult time for the company with global recession and other local issues declining the performance the company has paid around 50% as dividends even out of their decreased EPS to cope up with the investor expectations and to have a stabilized condition in the share market irrespective of the odds that affected to the performance.
Bogawantalawa which has initially started with an promising payout has reduced its payments towards the latter stage mainly due to the deteriorated performance and the managements plans for future capital investments started from the year 2007.
There are trends in the market because financial market moves into particular direction over time to time. The terms of Bull market and Bear market describe an upward and a downward market trend respectively. A Bull market is where the market prices are aggressively increasing due to information available with the investors in the market. Bull market associate with rising investor confidence either due to the holding company's potential performance or favourable market conditions. It has a long term upward trend and also characterized in the high trading volume. Bear market is the opposite of the Bull market. This happens when the stock prices have gone down during a period of time and it has a long term down word trend. This means a particular company or industry is going to go down. The occurrence of bull/bear markets on available information would also depend on the prevailing type of market efficiency.
Talawakelle tea estates Plc has both bull and bear market characteristics. Company's share price in year 2000 is Rs.15.75 and it increased up to Rs.16 at the end of year 2001. This is also reflects in the PE ratio where the ratio increases from 2.06 times in 2000 to 3.50 times in 2001. However the share price is then decreased to Rs.13 at the end of year 2003. The year 2003 shows a decrease in revenue and since the depreciation of rupee has increased the cost of input to the company the overall earnings has dropped to reflect the declining trend of the share price. So Talawakelle Estates had observed a bull market during 2000 and 2001 while a bear market trend is seen in year 2002 and 2003. (Appendix G)
A remarkable increase in performance is shown in year 2004 where the earnings are driven by high tea prices due to the depreciation of rupee and hence EPS also increased to Rs. 5.50 with a 116% from 2003. All these led to the increase in share price to Rs. 16.25 at the end of 2004 showing bull market symptoms. The trend continues in 2005 showing an increase in revenue but due to increase in cost the profits have reduced reflecting only a slight increase of share price to Rs. 17.00 at the end of the year. In year 2006 also Thalawakelle showed excellent performance which helped the bull market trends to keep its momentum going.
The share price reached its high during this year to Rs.30.00 and to Rs. 25.25 at the end of the year. This was due to high revenue and the company ranking at the highest in average sales Averages and increase in investor confidence as shown by the PE ratio of 7.46 times despite the reduction in profits due to increase in costs. Share prices continue to increase to Rs.35.75 until year 2007 as the company's reputation builds up, company's performance getting better and investors having good confidence towards the company. So from year 2004 to 2007 they had a bull market trend.
Investors can get information from past data and current financial and other available information and also how the company paid dividends in past years. So investors continue to demand for shares. But again market price went down up to Rs.13 at the end of year 2008. Even the revenue and profits shows an increase from year 2007 the overall market sentiment as seen in the declining of ASP index and hence in the plantation sector Index has result in the declining of share price. Also trend line has rapid changes during these years as averagely they had a Rs.18.5 as the market price which is a bull market trend from year 2000 onwards.
When comparing the data tables and the trend lines we can see that Thalawakelle Tea Estates Plc. has always been in stable lines which have fewer moves between positive ends and negative ends. But in Bogawantalawa Tea Estates Plc; the trend lines are always shows an unstable and frequently changing position.
Bogawantalawa Tea Estates Plc. was not operated efficiently in the stock market throughout the selected five years. Trend lines for the ratios were not constant always. They always laid between positive values and negative values. In 2007 the Company made a huge loss as well. For investors, those reasons were reasonably supplemented to move to another company for investment purposes.
Thalawakelle TEA Estates Plc. shows constant trend lines for some extent for all the ratios. The company was operated in a good efficiency rate throughout these selected five years. The continuing increase of tea prices and good demand for high grown tea sector, highest rank in Sales Averages, increasing quality and adding variations helped to stabilise company's position during this period. Even the Tsunami didn't affect the tea industry much the global crisis influenced the company's performance to decrease as the overall market Indices (ASPI) also showed a decline in the final quarter of 2008. It was affected to the whole investment sector in the world. For investors, Thalawakelle Tea Estates Plc. shows an image of secure investment than Bogawantalawa Tea Estates Plc. throughout these five years.
By analyzing these ratios, an investor can take a decision to invest in which company. The ratios shows the financial position of the company, how the company performed in the stock market and it provide sufficient values to forecast the trend lines and get an insight about the company's future performance and behaviour. By analyzing the past information of the companies, potential investors can also make their decisions as to invest in a company or not.
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