Sierra Cables Plc (SCP) is a subsidiary of Sierra Group

Sierra Cables Plc (SCP) is a subsidiary of Sierra Group

Introduction

Accounting is an art of identifying summarizing and analyzing an entity's financial transactions. . Accounting also plays an important role in providing useful information for its users. Effective use of this tool will lead to efficient resource allocation. 

At present Accounting plays a dominant role in the economy. it provides signals to resource allocators and decision makers to use their resources more efficiently. Accounting helps an investor to understand the following,

• The potential of the firm ( Trend analysis)
• Current position of the firm (Statement of Financial Position)
• Current Performance of the firm (Income Statement)
• Opportunity cost of the Investment ( Comparing with other firms)
• The optimum output/sales (Management Account)

Identifying the importance and possibility of manipulation, many economies has developed accounting regulatory bodies and standards. These standards ensures uniformity in reporting and enables its users to generate more information and for efficient resource allocation by weighing the opportunity cost.  

Company

Sierra Cables Plc (SCP) is a subsidiary of Sierra Group -a conglomerate operation in diverse section of Sri Lanka, was established on 1999 as Alcups Cables and was subsequently listed in Colombo Stock Exchange (CSE) in 2005.

SCP has established a strong brand name as the complete and comprehensive wire and cable supplier for Industrial specific power cables with national and international presence.

Being awarded with many awards such as Gold award at CNCI Industrial excellence in 2009, Quality Crown Award in 2010, Best cable Manufacture of the Year in 2011 and NEC Export award for 2017 has expanded its operation rapidly. In 2011 Started its fully owned subsidiary Sierra Industries to produce PVC Pipes and in 2015 started operation in African region under the name Sierra Cables East Africa Ltd. 

The Importance of Financial Statement Analysis.

Financial Statement analysis can be described as a process of using financial statements and other related information, to evaluate whether the is business creating value.    

It is with utmost importance that an investor should analyze these statements to make efficient decisions.  The outcome of these analysis will provide meaningful information as to how the investor should allocate resources. Or in other words financial statement analysis can be referred as a process of understanding the risk and profitability of a company, i.e. to predict the future and the value of the company with the past performance. 

Income statement of Sierra Cables PLC

	Year
	2014	2015	2016	2017	2018
Sales	2,137,572,003	3,276,059,072	2,865,490,013	3,724,981,774	3,839,979,820
Cost of Sales	(1,834,518,102)	(2,540,699,016)	(2,240,987,288)	(2,880,335,542)	(3,260,481,855)
Gross Profit	303,053,901	735,360,056	624,502,725	844,646,232	579,497,965
Other Income	39,705,634	120,175,889	50,991,533	26,902,525	10,725,060
Selling and Distribution	(145,212,139)	(182,745,365)	(167,281,847)	(213,485,628)	(227,006,387)
Administrative Expenses	(141,289,774)	(88,674,193)	(99,869,814)	(155,481,754)	(144,458,472)
Other operating Expenses	(272,616,894)	(91,936,723)	(66,500,000)	(57,500,000)	(100,117,309)
Profit from Operations	(216,359,272)	492,179,664	341,842,597	445,081,375	118,640,857
Net financial cost	(137,248,148)	(90,366,488)	(86,557,006)	(123,600,270)	(154,366,889)
Profit before Tax	(353,607,420)	401,813,176	255,285,591	321,481,105	(35,726,032)
Tax	83,541,215	(98,036,861)	(79,364,029)	(81,809,721)	(17,509,657)
Net Profit	(270,066,205)	303,776,315	175,921,562	239,671,384	(53,235,689)

Balance Sheet of Sierra Cables Plc

ASSETS	Year
Non-Current Assets	2014	2015	2016	2017	2018
Property, Plant & Equipment	890,561,492	883,363,592	868,763,794	818,344,603	1,060,155,597
intangible Assets	2,087,725	1,609,497	1,269,421	6,859,050	8,900,757
Investment property	14,784,299	13,962,949	-	-	4,500,000
Investment in subsidiaries	160,680,020	215,280,020	182,060,020	160,522,720	180,255,175
Investments in equity accounted investees	5,800,000	5,800,000	5,800,000	3,300,000	31,610,163
Other Financial Assets - Non current	112,951,573	30,263,993	44,755,691	29,142,315	56,433,863
Long term loans Receivable		-	-	-	119,616,300
Total Non-Current Assets	1,186,865,109	1,150,280,051	1,102,648,926	1,018,168,688	1,461,471,855
Current Assets
Inventories	564,953,048	557,877,848	653,626,097	1,160,345,333	893,039,653
Trade & Other Receivables	786,108,741	829,782,494	863,144,766	1,362,539,188	1,545,555,346
Tax Receivable	15,830,737	-	8,333,948	-	9,089,911
Due from Related Parties	136,999,606	305,072,505	303,227,360	398,554,835	370,676,631
Assets Classified as held for sale	21,000,000	18,000,000	18,000,000	18,000,000	-
Cash and Cash Equivalents	10,257,327	42,405,237	73,005,443	73,481,406	310,476,819
Total Current Assets	1,535,149,459	1,753,138,084	1,919,337,614	3,012,920,762	3,128,838,360
Total Assets	2,722,014,568	2,903,418,135	3,021,986,540	4,031,089,450	4,590,310,215
EQUITY & LIABILITIES
Equity
Stated Capital	894,565,898	894,565,898	894,565,898	894,565,898	894,565,898
Revaluation Reserve	332,938,932	332,938,932	332,938,932	332,938,932	512,732,913
Fair value Reserve	87,812,815	19,014,532	17,722,832	17,892,855	19,262,801
Retained Earnings	93,828,558	289,487,666	359,026,151	465,840,114	388,302,660
Total Equity	1,409,146,203	1,536,007,028	1,604,253,813	1,711,237,799	1,814,864,272
Non-Current Liabilities
Interest Bearing Borrowings	101,531,141	122,874,931	106,604,820	56,613,998	22,371,998
Deferred Tax	68,355,089	108,788,382	160,774,382	148,620,754	225,591,082
Retirement Benefits Obligation	21,624,714	26,282,368	25,929,429	27,528,994	41,133,228
Total Non-Current Liabilities	191,510,944	257,945,681	293,308,631	232,763,746	289,096,308
Current Liabilities
Trade & Other Payables	336,227,201	269,231,296	305,965,657	861,280,484	887,819,888
Amount Due to Related Parties		-	-	91,400	43,913
Maturity of Long-Term Loans	46,481,268	59,620,756	68,818,200	48,646,677	192,242,000
Short trem loans	678,146,734	730,653,350	714,097,468	1,065,874,913	1,229,918,031
Tax payable		49,960,024	-	73,512,534	-
Bank Overdrafts	60,502,218	-	35,542,771	37,681,897	176,325,800
Total Current Liabilities	1,121,357,421	1,109,465,426	1,124,424,096	2,087,087,905	2,486,349,632
Total Equity & Liabilities	2,722,014,568	2,903,418,135	3,021,986,540	4,031,089,450	4,590,310,212

Tools used for Financial Statement analysis

- Horizontal Analysis

- Trend Analysis

- Vertical Analysis

- Ratio Analysis

Horizontal Analysis

Horizontal Analysis can be described as process of comparing past financial statements of a single company. i.e. Calculating relative change in the financial statements based on a past year performance. This provides general indication of the company’s performance. These variation helps an investor to understand the trend of the business’s performance.

Income Statement

	Year
	2014	2015	2016	2017	2018
Sales	2,137,572,003	3,276,059,072	2,865,490,013	3,724,981,774	3,839,979,820
Cost of Sales	(1,834,518,102)	(2,540,699,016)	(2,240,987,288)	(2,880,335,542)	(3,260,481,855)
Gross Profit	303,053,901	735,360,056	624,502,725	844,646,232	579,497,965
Other Income	39,705,634	120,175,889	50,991,533	26,902,525	10,725,060
Selling and Distribution	(145,212,139)	(182,745,365)	(167,281,847)	(213,485,628)	(227,006,387)
Administrative Expenses	(141,289,774)	(88,674,193)	(99,869,814)	(155,481,754)	(144,458,472)
Other operating Expenses	(272,616,894)	(91,936,723)	(66,500,000)	(57,500,000)	(100,117,309)
Profit from Operations	(216,359,272)	492,179,664	341,842,597	445,081,375	118,640,857
Net financial cost	(137,248,148)	(90,366,488)	(86,557,006)	(123,600,270)	(154,366,889)
Profit before Tax	(353,607,420)	401,813,176	255,285,591	321,481,105	(35,726,032)
Tax	83,541,215	(98,036,861)	(79,364,029)	(81,809,721)	(17,509,657)
Net Profit	(270,066,205)	303,776,315	175,921,562	239,671,384	(53,235,689)

           

Base Year 2015	Value change 2016	% change	Value change 2017	% change	Value change 2018	% change
Sales	(410,569,059)	-12.5%	448,922,702	13.7%	563,920,748	17.2%
Cost of Sales	(299,711,728)	11.8%	339,636,526	-13.4%	719,782,839	-28.3%
Gross Profit	(110,857,331)	-15.1%	109,286,176	14.9%	(155,862,091)	-21.2%
Other Income	(69,184,356)	-57.6%	(93,273,364)	-77.6%	(109,450,829)	-91.1%
Selling and Distribution	(15,463,518)	8.5%	30,740,263	-16.8%	44,261,022	-24.2%
Administrative Expenses	11,195,621	-12.6%	66,807,561	-75.3%	55,784,279	-62.9%
Other operating Expenses	(25,436,723)	27.7%	(34,436,723)	37.5%	8,180,586	-8.9%
Profit from Operations	(150,337,067)	-30.5%	(47,098,289)	-9.6%	(373,538,807)	-75.9%
Net financial cost	(3,809,482)	4.2%	33,233,782	-36.8%	64,000,401	-70.8%
Profit before Tax	(146,527,585)	-36.5%	(80,332,071)	-20.0%	(437,539,208)	-108.9%
Tax	(18,672,832)	19.0%	(16,227,140)	16.6%	(80,527,204)	82.1%
Net Profit	(127,854,753)	-42.1%	(64,104,931)	-21.1%	(357,012,004)	-117.5%

Interpretation

When Considering a horizontal analysis for Sierra cables Plc, the company has performed negatively in the year 2014. For Horizontal Analysis if 2014 is considered as the base year, the illustration will mislead the users as it interprets high positive values due to the poor performance in the base year. Therefore considered 2015 as the base year since the company performed substantially well compared to previous years.

When considering the performance interms of profitability, it is visible that the company has not made any growth. The company’s sales have grown in year 2017 and 2018 by 13.7% and 17.2% respectively. Despite the growth in sales it is also visible that the cost of sales also increased leading to a decrease in gross profit. In year 2016 sales has decreased by 12.5% and the cost of sales has decreased by 11.8% resulting a net effect of 15.1% decrease in gross profit. In 2017 and 2018 there is an increase in sales and cost of sales. In 2017 sales as increased by 13.7% and the cost of sales has increased by 13.4% but the Gross profit has improved by 14.9%. Due to increase in import levy on plastic and rubber in 2018 the cost of sales has increased by 28.3% leading to a decrease in gross profit by 21.2%.

Other income of the company is mainly derived by security trading and investments. Due to recent past decline in the market the company is not active in trading leading to a rapid decrease in other income (91.1% decrease in 2018 compared to 2015).

Overall operating cost of the organization i.e. Selling and distribution, Administrative expense and other expense has increased over the years in consideration. In year 2016 and 2017 the company has managed to decrease other expenses compared to 2015.

Despite increase in taxation it is visible that the company has underperformed in comparison to 2015 performance.

Balance Sheet

Base Year 2015	Year
Non-Current Assets	2016	Change	2017	Change	2018		Change
Property, Plant & Equipment	(14,599,798)	-1.7%	(65,018,989)	-7.4%	176,792,005		20.0%
intangible Assets	(340,076)	-21.1%	5,249,553	326.2%	7,291,260		453.0%
Investment property	(13,962,949)	-100.0%	(13,962,949)	-100.0%	(9,462,949)		-67.8%
Investment in subsidiaries	(33,220,000)	-15.4%	(54,757,300)	-25.4%	(35,024,845)		-16.3%
Investments in equity accounted investees	0	0.0%	(2,500,000)	-43.1%	25,810,163		445.0%
Other Financial Assets - Non-current	14,491,698	47.9%	(1,121,678)	-3.7%	26,169,870		86.5%
Long term loans Receivable	0				119,616,300
Total Non-Current Assets	(47,631,125)	-4.1%	(132,111,363)	-11.5%		311,191,804		27.1%
Current Assets
Inventories	95,748,249	17.2%	602,467,485	108.0%	335,161,805		60.1%
Trade & Other Receivables	33,362,272	4.0%	532,756,694	64.2%	715,772,852		86.3%
Tax Receivable	8,333,948				9,089,911
Due from Related Parties	(1,845,145)	-0.6%	93,482,330	30.6%	65,604,126		21.5%
Assets Classified as held for sale	0	0.0%	0	0.0%	(18,000,000)		-100.0%
Cash and Cash Equivalents	30,600,206	72.2%	31,076,169	73.3%	268,071,582		632.2%
Total Current Assets	166,199,530	9.5%	1,259,782,678	71.9%	1,375,700,276		78.5%
Total Assets	118,568,405	4.1%	1,127,671,315	38.8%	1,686,892,080		58.1%
EQUITY & LIABILITIES
Equity
Stated Capital	0	0.0%	0	0.0%	0		0.0%
Revaluation Reserve	0	0.0%	0	0.0%	179,793,981		54.0%
Fair value Reserve	(1,291,700)	-6.8%	(1,121,677)	-5.9%	248,269		1.3%
Retained Earnings	69,538,485	24.0%	176,352,448	60.9%	98,814,994		34.1%
Total Equity	68,246,785	4.4%	175,230,771	11.4%	278,857,244		18.2%
Non-Current Liabilities
Interest Bearing Borrowings	(16,270,111)	-13.2%	(66,260,933)	-53.9%	(100,502,933)		-81.8%
Deferred Tax	51,986,000	47.8%	39,832,372	36.6%	116,802,700		107.4%
Retirement Benefits Obligation	(352,939)	-1.3%	1,246,626	4.7%	14,850,860		56.5%
Total Non-Current Liabilities	35,362,950	13.7%	(25,181,935)	-9.8%	31,150,627		12.1%
Current Liabilities
Trade & Other Payables	36,734,361	13.6%	592,049,188	219.9%	618,588,592		229.8%
Amount Due to Related Parties	0		91,400		43,913
Maturity of Long-Term Loans	9,197,444	15.4%	(10,974,079)	-18.4%	132,621,244		222.4%
Short term loans	(16,555,882)	-2.3%	335,221,563	45.9%	499,264,681		68.3%
Tax payable	(49,960,024)	-100.0%	23,552,510	47.1%	(49,960,024)		-100.0%
Bank Overdrafts	35,542,771		37,681,897		176,325,800
Total Current Liabilities	14,958,670	1.3%	977,622,479	88.1%	1,376,884,206		124.1%
Total Equity & Liabilities	118,568,405	4.1%	1,127,671,315	38.8%	1,686,892,077		58.1%

Interpretation

When considering the balance sheet of SCP, it is visible that the company has not invested much on noncurrent assets during 2016 and 2017, but in 2018 the company has invested on a new plant with new machineries, which has attributed for the increase in PPE in the balance sheet.  The company has also purchased 28.0Mn worth of Shares of Cable PTE ltd which is displayed under the increase in investments by 445% in 2018 compared to 2015.

When considering Current assets of the company it displays that the company has increased investment in stocks and trade and other receivable relative to the year 2014. It signals positive tread since the company is needs to expands its working capital gradually in order to expand its business. 

SCP equity composition has not changed which provides a signal that the company is more towards debt financing for expansion of the business. The above discussed statement is justified with the increase in current liabilities of the company. The company has increased its position on trade and other receivable during 2017 and 2018 to assist its working capital gap created due to increase in stocks and trade receivables.  

Summary

When analyzing horizontal analysis for SCP considering 2015 as the base year, it is visible that the company has underperformed compared to 2015. The company has increase in sales in 2017 and 2018 but has been offset by increase in cost of sales and other operating expenses.

Horizontal Analysis does not give a clear picture unless a proper base is identified. It is utmost difficult to determine a base year for the analysis. As discussed, if 2014 is considered as the base year for Horizontal analysis the company would have indicated high positive variance since the company has underperformed in year 2014. And over the period of time the accounting practice and policies has also changed, which will have significant impact over the outcome. As such, the company has changed its policy on treatment of receivable from its Subsidiary, the board has decided to convert Rs.119.6Mn as of Sierra industry’s current account as long term receivable and displayed as a non-current asset.

When considering positive treads, it is ambiguous to understand the true reason for the trend. For the years under consideration it is visible that the company has increased its stocks and trade and other receivables, which displays a growth in the business in general. But the increase may have been caused to increase in inflation, exchange rates or management practice. Therefore, true reason has to be justified.

Trend Analysis

             

When analyzing the Income statement of SCP it is visible that the gross profit as a percentage of 2015 has decreased when compared to increase in sales. This is due the rise in cost of sales for the period under consideration. The company has to look into alternatives to bring down the cost of production (i.e. finding alterative markets or segments, finding cheaper raw martials).

Due to the decrease in gross profit, the bottom line profits have come down drastically. The company need to address this situation since their overall profitability is at stake. In other words, unless the SCP address this situation the company will run be utilizing its retaining earnings.

 When considering the balance sheet, it is evident that the company has expanded its overall position. i.e. increase in assets. The company as expanded its assets interms of current assets by increasing its stocks and receivable position.

When considering the equity and liability position of the company it is visible that the company is increasing its leverage, that is the company has financed the growth mainly my debt financing. The increase in current liability is mainly due to increase in short term bank loan and increase in payables. The total equity attributed to the owners has not grown since the company has not made any significant profit from the expansion.

 

 

Vertical Analysis

Vertical Analysis is also known as the common size analysis is renown method of financial statement analysis as it shows all the items of the financial statement as percentage of the base item (i.e. Sale in income statement and Total assets in balance sheet)

INCOME STATEMENT

	2014	2015	2016	2017	2018
Sales	100.0%	100.0%	100.0%	100.0%	100.0%
Cost of Sales	85.8%	77.6%	78.2%	77.3%	84.9%
Gross Profit	14.2%	22.4%	21.8%	22.7%	15.1%
Other Income	1.9%	3.7%	1.8%	0.7%	0.3%
Selling and Distribution	6.8%	5.6%	5.8%	5.7%	5.9%
Administrative Expenses	6.6%	2.7%	3.5%	4.2%	3.8%
Other operating Expenses	12.8%	2.8%	2.3%	1.5%	2.6%
Profit from Operations	-10.1%	15.0%	11.9%	11.9%	3.1%
Net financial cost	6.4%	2.8%	3.0%	3.3%	4.0%
Profit before Tax	-16.5%	12.3%	8.9%	8.6%	-0.9%
Tax	3.9%	3.0%	2.8%	2.2%	0.5%
Net Profit	-12.6%	9.3%	6.1%	6.4%	-1.4%

 

 

Interpretation

When considering vertical analysis, it is visible the composition of the financial statement and displays the efficiency level of the company. As such it is visible that SCP relatively high cost of sales which represent above 75% for all five years, which has resulted in very narrow gross profits. The company is gradually decreasing it expenses over the period of time and maintains below 12% of the sales but due to increase in borrowing the company has increased its spending on interest despite in the year 2014 where the company has not performed.

Interms of profitability as a main performance indicator, the company has to improve its gross profit. A thin gross profit margin will weigh more burden on the overall operating cost of the organization. The major reason for thin Gross profit margin is due to the market cluster SCP is catering to. SCP is highly concentrating on big projects rather than the consumer market, which leads to thin margin.

Balance Sheet

ASSETS	Year
Non-Current Assets	2014	2015	2016	2017	2018
Property, Plant & Equipment	32.7%	30.4%	28.7%	20.3%	23.1%
intangible Assets	0.1%	0.1%	0.0%	0.2%	0.2%
Investment property	0.5%	0.5%	0.0%	0.0%	0.1%
Investment in subsidiaries	5.9%	7.4%	6.0%	4.0%	3.9%
Investments in equity accounted investees	0.2%	0.2%	0.2%	0.1%	0.7%
Other Financial Assets - Non-current	4.1%	1.0%	1.5%	0.7%	1.2%
Long term loans Receivable	0.0%	0.0%	0.0%	0.0%	2.6%
Total Non-Current Assets	43.6%	39.6%	36.5%	25.3%	31.8%
Current Assets
Inventories	20.8%	19.2%	21.6%	28.8%	19.5%
Trade & Other Receivables	28.9%	28.6%	28.6%	33.8%	33.7%
Tax Receivable	0.6%	0.0%	0.3%	0.0%	0.2%
Due from Related Parties	5.0%	10.5%	10.0%	9.9%	8.1%
Assets Classified as held for sale	0.8%	0.6%	0.6%	0.4%	0.0%
Cash and Cash Equivalents	0.4%	1.5%	2.4%	1.8%	6.8%
Total Current Assets	56.4%	60.4%	63.5%	74.7%	68.2%
Total Assets	100.0%	100.0%	100.0%	100.0%	100.0%
Equity
Stated Capital	32.9%	30.8%	29.6%	22.2%	19.5%
Revaluation Reserve	12.2%	11.5%	11.0%	8.3%	11.2%
Fair value Reserve	3.2%	0.7%	0.6%	0.4%	0.4%
Retained Earnings	3.4%	10.0%	11.9%	11.6%	8.5%
Total Equity	51.8%	52.9%	53.1%	42.5%	39.5%
Non-Current Liabilities
Interest Bearing Borrowings	3.7%	4.2%	3.5%	1.4%	0.5%
Deferred Tax	2.5%	3.7%	5.3%	3.7%	4.9%
Retirement Benefits Obligation	0.8%	0.9%	0.9%	0.7%	0.9%
Total Non-Current Liabilities	7.0%	8.9%	9.7%	5.8%	6.3%
Current Liabilities
Trade & Other Payables	12.4%	9.3%	10.1%	21.4%	19.3%
Amount Due to Related Parties	0.0%	0.0%	0.0%	0.0%	0.0%
Maturity of Long-Term Loans	1.7%	2.1%	2.3%	1.2%	4.2%
Short term loans	24.9%	25.2%	23.6%	26.4%	26.8%
Tax payable	0.0%	1.7%	0.0%	1.8%	0.0%
Bank Overdrafts	2.2%	0.0%	1.2%	0.9%	3.8%
Total Current Liabilities	41.2%	38.2%	37.2%	51.8%	54.2%
Total Equity & Liabilities	100.0%	100.0%	100.0%	100.0%	100.0%

 

Interpretation

The total assets of the company are distributed in an optimized level. The composition of 30% Non-current assets to 70% of Current assets is optimum. Because the company has place has place large amount of its assets as current which enables it have positive working capital.

Due from related parties displays a decreasing trend over the five-year period and the company as maintained well below 10% of its assets as cash, which could emphasis the efficient use of resources.  

When considering equity, it is clearly visible the composition is reducing which shows an indication debt financing. Which is displayed in trade and other receivable and short-term loans which represents approx. 45% of the total assets in average. And decrease in overall equity position of the company is observed which makes the company high leveraged.

 

Summary

When considering the Vertical Analysis for financial statement analysis we can understand that the composition of the company’s assets and its performance. As such, SCP has grown its business substantially interms of sales. But the company finds difficulties in financing operating cost even with substantial decrease in cost over the period as a percentage of sales, due to low margins derived from their target market. SCP has to look into more diversified markets with average high returns to sustain.

And it was observed that the company uses its assets efficiently, thus it finances its expansion through debt financing and retained earnings which is cautious to some extent. The company may become highly leveraged and might increase its borrowing cost. Which will find difficulties with the thin margins.

 

 

 

Ratio Analysis

Liquidity and Efficiency Ratios

Liquidity ratios measures the company’s ability to meets its short-term debt, that is the relationship of the current assets and current liability. From these ratios an investor can get an insight of the company’s solvency level at an eventuality or during an economic shock.

Efficiency ratios measures the company’s efficiency of resource allocation, basically working capital management of the company. Inorder to be efficient an organization as to maintain its liquidity position. 

Current Ratio

Current ratio measures the that ability of the company to meet its current liability with its current assets. This measures the solvency level of the company.

	2014	2015	2016	2017	2018
Total Current Assets	1,535,149,459	1,753,138,084	1,919,337,614	3,012,920,762	3,128,838,360
Total Current Liabilities	1,121,357,421	1,109,465,426	1,124,424,096	2,087,087,905	2,486,349,632
	1.4	1.6	1.7	1.4	1.3
Current Ratio:	1.4 : 1	1.6 : 1	1.7 : 1	1.4 : 1	1.3 : 1

In general practice the company has to maintain a current ratio of 2:1. But SCP has maintained an average current ratio of 1.5:1, that is 1.5 current liabilities to meet its current liabilities. If an organization doesn’t maintain its current liability it could either be insolvent or might be inefficient. In other words, if a company maintains a current asset ratio above the required level, it loses the opportunity of generating more profits (less efficient). Therefore, when considering the current ratio, it best to look into the industry. Since SCP is in manufacturing industry with large part of raw martials imported with higher credit period (180 days), a current ratio of 1.5:1 is acceptable. But in the year 2018 the company has maintained a current ratio of 1.3:1 which is below the average. It because to increase in trade creditors due to government projects.

 

 

Net working capital

Calculates the assets used in the day to day operation of the business. Or in other words measures amount of working capital financed by the company to with stand any external shock.

	2014	2015	2016	2017	2018
Total Current Assets	1,535,149,459	1,753,138,084	1,919,337,614	3,012,920,762	3,128,838,360
Total Current Liabilities	1,121,357,421	1,109,465,426	1,124,424,096	2,087,087,905	2,486,349,632
Net Working Capital	413,792,038	643,672,658	794,913,518	925,832,857	642,488,728

Acid test Ratio (Quick ratio)

Acid test ratio also known as the quick ratio is a tool used to access the immediate liquidity position of the company. This ratio is calculated considering all the current assets and Current liability without stocks. It is assumed that stocks in general has the least liquidity current asset. Therefore, at the time of solvency it will take time for the company to realize from stocks. 

	2014	2015	2016	2017	2018
Total Current Assets	1,535,149,459	1,753,138,084	1,919,337,614	3,012,920,762	3,128,838,360
Inventories	564,953,048	557,877,848	653,626,097	1,160,345,333	893,039,653
Total Current Liabilities	1,121,357,421	1,109,465,426	1,124,424,096	2,087,087,905	2,486,349,632
	0.9	1.1	1.1	0.9	0.9
Quick Ratio:	0.09 : 1	1.1 : 1	1.1 : 1	0.09 : 1	0.9 : 1

When considering the general practice, it is always advisable to maintain 1:1 Quick ratio. That is one current asset for one current liability excluding stocks. SCP has maintained optimum level of quick ratio to meet any market schock. 

Debtors turnover Period (Accounts Receivable Turnover)

Debtors turnover period is a tool to evaluate the company’s efficiency and its credit policy. Lowe the account turnover ratio it is better for the company. If the company has standards to grant and collect credit in a small duration the company will experience a high debtors’ turnover ratio. Which means that the company will have enough liquidity in its business

	2014	2015	2016	2017	2018
Net Sales	2,137,572,003	3,276,059,072	2,865,490,013	3,724,981,774	3,839,979,820
Avg. Account Receivable	675,984,099	854,643,402	989,396,913	1,149,285,047	1,466,927,303
Account Receivable Ratio (times)	3.2	3.8	2.9	3.2	2.6

SCP has maintained its debtors very low debtor turnover ratio. It is because SCP is targeting at construction industry and government sector, where there is a high credit period in general.   

Average Collection Period

	2014	2015	2016	2017	2018
"Account Receivable Ratio (times)"	3.2	3.8	2.9	3.2	2.6
Accounts Receivable Turnover in Days	115	95	126	113	139
No of Days	115 days	95 days	126 days	113 days	139 days

           

This displays debtor turnover ratio as number of days for better understanding. In average SCP provides 3-4 months of credit to its clients. 

 

 

 

 

 

 

 

 

Assets Turnover Ratio

Total asset turnover ratio describes how firm efficiently using both long term and short term assets. We can say that each rupee of your firm’s assets generating sale. High assets turnover always preferable. High turnover asset means firm uses its assets efficiently. This ratio gives creditor and investor idea for managing assets.

	2014	2015	2016	2017	2018
Net sales	2,137,572,003	3,276,059,072	2,865,490,013	3,724,981,774	3,839,979,820
Avg. Total Assets	2,872,000,554	2,812,716,352	2,962,702,338	3,526,537,995	4,310,699,833
Total Assets Turnover	74.4%	116.47%	96.72%	105.63%	89.08%

SCP has maintained asset turnover ratio efficiently but the ratio has reduced in 2014 and 2018 compared to other years. In 2018 the company has expanded its assets which has resulted in a decrease in the ratio.

Inventory turnover

This ratio displays the number of times a stock is sold per year. In other words number of full batches, a company produces over a period of one year. The higher the ratio displays that the company is more efficient interms of production.

	2014	2015	2016	2017	2018
Cost of Sales	1,834,518,102	2,540,699,016	2,240,987,288	2,880,335,542	3,260,481,855
Avg. Invertor	564,953,048	561,415,448	605,751,973	906,985,715	1,026,692,493
Inventory Turnover (times)	3.2	4.5	3.7	3.2	3.2

SCP has maintained well above 3 times of inventory turnover ratio. This displays that the company has sold the fresh product 3 times per year.

Sales turnover period

	2014	2015	2016	2017	2018
Inventory Turnover (times)	3.2	4.5	3.7	3.2	3.2
Inventory Turnover days 365/times	155	81	99	115	115
No of  Days	114 days	81 days	99 days	115 days	115 days

In average number of days, the company takes to make a sale is calculated as Sales turnover period. SCP in aver has taken nearly 3 months for a sale. Since the company is catering to high end customers where the purchase are made on bulk.

           

Profitability Ratios

Net Profit Margin

Calculates net profit as a percentage of sales. In other words, percentage of sales that is added to the bottom line profits of the company. It is utmost important for an organization to understand the ratio since it may lead to operating loss.

	2014	2015	2016	2017	2018
Net Profit	-270,066,205	303,776,315	175,921,562	239,671,384	-53,235,689
Net sales	2,137,572,003	3,276,059,072	2,865,490,013	3,724,981,774	3,839,979,820
Net Profit Margin	-12.63%	9.27%	6.14%	6.43%	-1.39%

SCP has experienced over all loss during 2014 and 2018 which is displayed as the negative Net profit ratio. As per the industry the net profit ratio of a cable manufacture is above to 10% (Kelaniya Cables – 12.3%). SCP has to look into new avenues to restructure their products to generate profitability

Gross Profit Margin

Gross profit ratio is an indicative ratio which displays the relationship of gross profit and sales. In other words, gross profit generated for each rupee of sales. Gross profit ratio can be maintained with the costing strategy. The company could use mark up costing strategy to maintain high gross profit margin.

	2014	2015	2016	2017	2018
Gross Profit	303,053,901	735,360,056	624,502,725	844,646,232	579,497,965
Net sales	2,137,572,003	3,276,059,072	2,865,490,013	3,724,981,774	3,839,979,820
Gross Profit Margin	14.18%	22.45%	21.79%	22.68%	15.09%

SCP has maintained very narrow gross profit margin throughout the years in consideration. The company had to look into more retail business where it can keep high markups and thereby increase its profitability. Gross profit margin is a critical factor the company has to address since it has direct impact over the overall profitability of the business

Assets turnover

Assets turnover ratio denotes the contribution of total assets for sales. In other words, displays the efficiency of the assets of the company to generate sales.

	2014	2015	2016	2017	2018
Net sales	2,137,572,003	3,276,059,072	2,865,490,013	3,724,981,774	3,839,979,820
Avg. Total Assets	2,872,000,554	2,812,716,352	2,962,702,338	3,526,537,995	4,310,699,833
Total Assets Turnover	74.4%	116.5%	96.7%	105.6%	89.1%

SCP has maintained high asset turnover ratio throughout the five years with highest in 2015 and 2017 where the company has performed well. In year 2018 the asset turnover ratio as decreased due to purchase on new PPE to start a new plant, whereas that growth is still not reflected in the sales. Therefore, with the increase in production in the future with the new plant should be considered to compensate the increase in total assets.  

Return on investment

Return on investment calculates the contribution of the assets to generate profits for the company. The company invest on its assets, therefore when calculation return on investment we consider total assets compared to net profit of the organization. The higher the ratio the efficient the organization is with its asset management and profitability.

	2014	2015	2016	2017	2018
Net Profit	-270,066,205	303,776,315	175,921,562	239,671,384	-53,235,689
Avg. Total Assets	2,872,000,554	2,812,716,352	2,962,702,338	3,526,537,995	4,310,699,833
Return on Investment	-9.4%	10.80%	5.94%	6.80%	-1.23%

SCP has experienced loss in both 2014 and 2018 leading to negative ratio. But the company has been efficient in year 2015. In 2018 the company has increased its assets by 22% and has made a loss, which has contributed to a negative ratio.

Return on equity

Return on equity is one of the key indicators that investors look into. It describes how efficient the organization is interms of profitability in return to their investment.  Or in other words shows how much profit each rupee of common stockholders' equity generates. This is an important measurement for potential investors because they want to see how efficiently a company will use their money to generate net income. ROE is also an indicator of how effective management is at using equity financing to fund operations and grow the company.

	2014	2015	2016	2017	2018
Net Profit	-270,066,205	303,776,315	175,921,562	239,671,384	-53,235,689
Stated Capital /Avg stcck	894,565,898	894,565,898	894,565,898	894,565,898	894,565,898
Return on Equity	-30.19	33.96%	19.67%	26.79%	-5.95%

SCP has made negative returns in 2014 and 2018 resulting negative ratios. Other three years 2015,2016 and 2017 the company has generated attractive returns. Since the company has not expanded its stated capital, the trends in return has not made any significant impact (i.e. decrease in net profit in 2017 has not made significance impact to the ratio.

Solvency Ratios

Debt to Asset Ratio

Debt to asset ratio calculates the total liability in relation to total assets. At the time of an eventuality the company’s ability to meet its debt is considered under this ratio.

 

	2014	2015	2016	2017	2018
Total Liabilities	1,312,868,365	1,367,411,107	1,417,732,727	2,319,851,651	2,775,445,940
Total Assets	2,722,014,568	2,903,418,135	3,021,986,540	4,031,089,450	4,590,310,215
Debt Ratio	48.23%	47.10%	46.91%	57.55%	60.46%

SCP has maintained an average of 50% ratio, but in 2018 and 2017 the company has increased gradually. The lower the ratio it’s better for the company.

Debt to Equity Ratio

This ratio compares total debt against equity. The debt to equity ratio shows the percentage of company financing that comes from creditors and investors. A higher debt to equity ratio indicates that more creditor financing (loans) is used than investor financing (shareholders).

	2014	2015	2016	2017	2018
Total Liabilities	1,312,868,365	1,367,411,107	1,417,732,727	2,319,851,651	2,775,445,940
Total Equity	1,409,146,203	1,536,007,028	1,604,253,813	1,711,237,799	1,814,864,272
Debt/Equity Ratio	93.17%	89.02%	88.37%	135.57%	152.93%

SCP has maintained the below 100% for three year ending 2014, 2015 and 2016 but in 2017 and 2018 the company has exceeded its equity position. The sign of having liability exceeding its equity displays that the company is highly leveraged. The company has financed its business mostly from external funds rather than shareholders funds.

Times Interest Earned

Times interest earned calculates company’s operating profit in times with its interest expense. Or in other words the number of times profits covers its interest expense.

	2014	2015	2016	2017	2018
EBIT	(216,359,272)	492,179,664	341,842,597	445,081,375	118,640,857
Interest expense	137,248,148	90,366,488	86,557,006	123,600,270	154,366,889
Interest cover Times	(2)	5	4	4	1

SCP has covered its interest expense for the years under consideration except for 2014. In year 2018 the company has made a net loss after interest and tax due to low interest cover ratio.

Plant Assets to Long term liabilities

Fixed assets ratio show how much fixed assets are available against to equity. But one thing we need to keep in mind total equity not invested in fixed assets means that part of equity also invested in working capital.

	2014	2015	2016	2017	2018
Property, Plant & Equipment	890,561,492	883,363,592	868,763,794	818,344,603	1,060,155,597
Total Equity	1,409,146,203	1,536,007,028	1,604,253,813	1,711,237,799	1,814,864,272
Fixed Assets Ratio	63.20%	57.51%	54.15%	47.82%	58.42%

It is visible that the company has its equity marginally between PPE and working capital.

Market Ratios

Earnings per share

Earnings per share same as any profitability or market prospect measurement ratio. High earning per share always prefer then lower earnings per share because high ratio means firm high profitability or amount available to distribute to its shareholders. High earning per share often make the price rise.

	2014	2015	2016	2017	2018
EPS	-0.54	0.49	0.36	0.50	-0.05

SCP has issued 537.5Mn shares. The company has made very narrow EPS due to low profitability.

Book value per share

This calculates the actual value of a share or ownership of the company interms of the equity. 

	2014	2015	2016	2017	2018
Shares holders equity	1,409,146,203	1,536,007,028	1,604,253,813	1,711,237,799	1,814,864,272
No. of shares	537,512,430	537,512,430	537,512,430	537,512,430	537,512,430
Book Value per share	2.62	2.86	2.98	3.18	3.38

Price earning per share

Price earnings ratio describe that the investor is willing to pay firm share based on its current earnings. Investor used this ratio for evaluation stock market value should be predicating future earnings per share. Higher future earning usually expecting to issue on higher dividend giving by firm. This ratio help investor to how much pay for the stock at the current price earning. Low price ratio means company has low future growth.

	2014	2015	2016	2017	2018
Price earning per share	-3.14	8.19	8.16	6.23	-43.10

Summary

When analyzing the financial statement of Sierra Cables PLC (SCP) it was visible that the company has done exceptional well other than the below mentioned areas.

·         The company is maintaining very thin gross profit margins, due to its customer cluster. This narrow margin has been proven with lower gross profit ratio.

·         The company has expanded it business purely through debt financing. That is the company as increased in assets (e.g. stocks , debtors and PPE) through debt financing rather than equity financing. This will result the company an increase in interest cost and thereby impacting on the bottom line profits.

Over all considering the facts of increasing in working capital with relatively low increase in sales, the company may be in a position of overtrading. Where the company increases its working capital without any significance increase in sales or revenue to the company. And these expansions are taken place with debt financing, where inturn the company has to bear interest expense. Which is not possible with thin margins.