Analysis of Reporting Consecutive Losses in ABC Finance Plc Since Financial Year 2009/2010: A Case Study

Abstract

The study mainly focuses on the ABC Finance PLC, a company listed in the Colombo Stock Exchange (CSE) under the diversified financial sector according to the Global Industry Classification Standards (GICS). The company is registered as a licensed finance company and registered finance leasing establishment as well. During the FY 2008/2010 the company has acquired ABC credit card company, a financially weak company that was engaged in local credit card operations, through debt funding, which is a significant event of the company. The main focus of this study is to identify the reasons for reporting consecutive losses in ABC Finance PLC since financial year 2009/2010, and provide recommendations. The study employed ratio analysis and graphical analysis to find out the reasons behind reporting consecutive losses. Accordingly, the study finds that company's interest expense on is higher during the period between FY 2008/2009 to 2017/2018 compared to other financial years because of the acquisition funded by debt. Another observation is loans and advances interest income are decreasing while there is a loan and advances growth in the company, mainly because of more loans being non-Performing as a result of high credit risk of borrowers. The hire purchase interest incomes show a decreasing trend during the period of company making losses mainly because of decrease in the demand for hire purchase service of ABC Finance Plc. Further, the company's fee-based income is decreasing, establishment expenses are increasing, director's emoluments of the company are increased bylarge percentage (395.6%) from FY 2008/2009 to 2009/2010 and it is maintained in the same level after that year which is as a result of a decision made with the intention to motivate the directors to increase the performance. In order to be away from the consecutive loss-making situation, it is recommended that the company should settle the debt obtained for the acquisition to reduce the interest expense on borrowing, reduce the credit risk, engage with promotion for its services, use a performance-based payment method for directors, and have a better expense management system for this company