ANALYSIS OF FINANCIAL REPORTS KELANI CABLES PLC 2017-2021

 

1.0 Introduction

 

Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment. Financial analysis involves using financial data to assess a company’s performance and make recommendations about how it can improve going forward.

This report has analyzed five years of annul reports of Kelani Cables PLC company. Horizontal analysis, Ratio analysis and Z-score analysis are mentioned. Ratio analysis includes Liquidity, Efficiency, Profitability, Solvency and Market Ratios.

 

1.1 Kelani Cables PLC

 

Kelani Cables was founded in 1969 as a manufacturer and distributor of power and telecommunication cables and enameled winding wires. Initially, components such as drawn wire were imported, but over time, the company commenced the manufacture of this commodity at its factory. Hence, Kelani is the pioneer in Sri Lanka’s wire drawing industry. Having begun operations with just twelve workers, Kelani Cables is a household name today with over 500 – strong workforce and a solid reputation for quality and stability.

Kelani Cables has undergone several changes in ownership over the years; founded by the Wijegoonawardena family, the company became a subsidiary of the Australian multinational Pacific Dunlop Cables Group in 1994 and in late 1999, the major shareholding was transferred to ACL Cables PLC. These alliances have provided opportunities for expansion and knowledge sharing which have enabled the company to enhance its operations.

 

 

 

 

 

2.0 Horizontal Analysis

	2016	2017	2018	2019	2020	2021
Current Assets	4,170,757,250	4,717,543,874	5,003,105,229	5,600,574,870	6,108,622,013	6,893,213,585
Current Liabilities	1,713,176,727	2,023,872,939	2,238,051,679	2,959,977,868	3,193,625,149	3,779,492,511
Inventory & prepaid expences	1,299,620,252	1,648,221,958	1,676,332,970	1,846,445,397	1,749,973,547	2,227,972,407
Quick Aseets	2,871,136,998	3,069,321,916	3,326,772,259	3,754,129,473	4,358,648,466	4,665,241,178
Trade and other Receivable	1,598,975,160	2,107,193,618	2,161,456,122	1,966,745,505	2,924,566,409	2,981,195,149
Revenue	6,619,776,295	7,122,783,962	7,994,364,353	8,492,482,278	8,759,918,341	9,650,437,531
Average Inventory	1393888617	1473921105	1662277464	1761389184	1798209472	1988972977
Cost of sale	5,317,427,456	5,987,288,964	6,987,825,777	7,327,030,326	7,446,511,362	8,366,450,216
Total Asset	5,095,547,628	5,649,808,724	6,157,602,845	6,819,090,538	7,288,069,290	8,614,763,014
Total non current liabilities	188,491,563	150,129,450	230,863,496	179,420,068	135,539,344	207,702,531
Total Current Liabilities	1,713,176,727	2,023,872,939	2,238,051,679	2,959,977,868	3,193,625,149	3,779,492,511
Total Liabilities	1,901,668,290	2,174,002,389	2,468,915,175	3,139,397,936	3,329,164,493	3,987,195,042
Total Equity	3,193,879,338	3,475,806,335	3,688,687,670	3,679,692,602	3,958,904,797	4,627,567,972
Net profit	496,726,991	376,437,913	196,860,277	224,706,141	355,060,160	620,849,864
Profit before tax	678,622,231	495,940,899	263,748,700	321,625,966	428,154,952	744,114,254
finance cost	17,368,937	11,708,376	59,123,601	106,174,363	54,953,354	75,435,634
Revenue	6,619,776,295	7,122,783,962	7,994,364,353	8,492,482,278	8,759,918,341	9,650,437,531
Cost of sale	5,317,427,456	5,987,288,964	6,987,825,777	7,327,030,326	7,446,511,362	8,366,450,216
Net profit	496,726,991	376,437,913	196,860,277	224,706,141	355,060,160	620,849,864
Gross profit	1,302,348,839	1,135,494,998	1,006,538,576	1,165,451,952	1,313,406,979	1,283,987,315
Market price per share	112.5	117.5	93	67.4	52	111.75
Annual Divident per share	3	4.5	3.5	3.5	3.5	4.5
Retained Earnings	2,284,298,808	2,566,225,805	2,686,275,030	2,677,279,962	2,956,492,157	3,455,811,558
Market vakue of Equity	2452500000	2561500000	2027400000	1469320000	1133600000	2436150000

3.0 Ratio Analysis

 

3.1 Liquidity and Efficiency

 

A liquidity ratio is a type of financial ratio used to determine a company’s ability to pay its short-term debt obligations. The metric helps determine if a company can use its current, or liquid, assets to cover its current liabilities. Liquidity ratio calculation of a company complies with major two sections. Those are Acid test ratio and current ratio.

Efficiency ratios are metrics that are used in analyzing a company’s ability to effectively employ its resources, such as capital and assets, to produce income. The ratios serve as a comparison of expenses made to revenues generated, essentially reflecting what kind of return in revenue or profit a company can make from the amount it spends to operate its business.

The more efficiently a company is managed and operates, the more likely it is to generate maximum profitability for its owners and shareholders over the long term.

 

This is the liquidity and efficiency ratios related to Kelani Cables PLC.

 

Ratio	2016	2017	2018	2019	2020	2021
Working Capital	2457580523	2693670935	2765053550	2640597002	2914996864	3113721074
Current Ratio	2.4345	2.3309	2.2355	1.8921	1.9128	1.8238
Acid Test Ratio	1.6759	1.5166	1.4865	1.2683	1.3648	1.2344
Accounts Receivable Turnover	3.8742	3.8437	3.7456	4.1144	3.5818	3.2681
Total Asset Turnover	1.3282	1.3257	1.3541	1.3089	1.2419	1.2137
Days Sales in Inventory	89.2088	100.4797	87.5611	91.9817	85.7771	97.1989
Day’s sale Uncollected	88.1640	107.9810	98.6860	84.5291	121.8581	112.7551
Merchandise Turnover	3.8148	4.0622	4.2038	4.1598	4.1411	4.2064

 

3.1.1 Working Capital

 

 

Working capital is the difference between the current asset and current liabilities. This is the amount used for day-to-day operations of the company., which mean the current asset may increase, that is, in some cases good for the organization if the organization treat it like a reserve account but in other conditions its unfavorable because of less utilization of the current asset.

 

3.1.2      Current Ratio

 

This measures the short-term solvency of the company using the balance sheet. Also known as the working capital ratio, it tells if a firm has sufficient funds to pay its liabilities over the period of next 12 months. The current ratio can also give a sense of the efficiency of a company’s operating cycle or its ability to turn its product into cash.

 

During the last 5 years, within 2016-2021 it kept around between 1.5 and 2.5. In the last year 2021 it was around 2. It is not a good sign for the company. Company should have work to increase this value.

 

3.1.3      Acid-test Ratio

 

The acid test ratio is similar to the current ratio except that Inventory, Supplies, and Prepaid Expenses are excluded. In other words, the acid test ratio compares the total of the cash, temporary marketable securities, and accounts receivable to the amount of current liabilities. This ratio shows the relationship between the quick asset and the current liabilities and shows the company ability to pay back its current liability within its short period of time.

 

During 2016- 20218 the acid test ratio is around 1.5. But after 2018 it is less than 1.5 and it is not a good sign for the company. There is a slight change in this ratio since last three years. This ratio is slightly unfavorable for the organization, it should be improved.

 

3.1.4      Account Receivable Turnover

 

 

The accounts receivable turnover ratio, also known as the debtor’s turnover ratio, is an efficiency ratio that measures how efficiently a company is collecting revenue – and by extension, how efficiently it is using its assets. The accounts receivable turnover ratio measures the number of times over a given period that a company collects its average accounts receivable.

 

During 2016-2021, account receivable turnover is between 3 and 4 expect 2019. In 2019 it has increased to 4.1 times. After 2019 account receivable turnover slightly decrease and lowest value is in last year, among last 5 years.

 

3.1.5      Total Asset Turnover

 

 

Total asset turnover is a financial efficiency ratio that measures the ability of a company to use its assets to generate sales. This ratio shows the utilization of the total asset. The total asset turnover ratio is calculated by dividing the net sales by the average total assets.

 

If we look at the graph, there is gradual slight decrease in this ratio. This shows some degree in- efficiency of the organization. In 2018 there is a increase in terms of Kelani Cables plc. This increase shows the total assets are properly being utilized for the purpose of earning interest. After 2018 that values graphically decreased and last year total asset turnover is 1.2 times. Higher the ratio will be more favorable for the organization.

 

3.1.6      Days’ Sales in Inventory

 

 

The days sales of inventory (DSI) is a financial ratio that indicates the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales.

 

According to the graph Days Sales in Inventory values goes up and down over past 5 years. Highest value shown in 2017 and lowest value shown in 2020. But 2021 that value again increased. It is better if days sales in inventory values are low.

 

3.1.7      Days’ Sales Uncollected

 

 

Days' sales uncollected is a liquidity ratio that is used to estimate the number of days before receivables will be collected. This information is used by creditors and lenders to determine the short-term liquidity of a company. It can also be used by management to estimate the effectiveness of its credit and collection activities.

 

According to the graph Days’ sales uncollected vales are changed between 80 and 120 days, except 2020. In 2020 that value increased in to 122 days. It is also better to have low value in days sales uncollected.

 

3.1.8      Merchandise Turnover

 

 

Inventory turnover, often called merchandise turnover, is an efficiency ratio that calculates the number of times average inventory is sold during a period. In other words, it measures how often a company can sell its average inventory. The inventory turnover ratio is calculated by dividing cost of goods sold by the average inventory for the period.

 

According to the graph 2016 has the lowest value in Merchandise turnover. There is a slight change in this ratio since last four years. Last four years have better merchandise turnover value, it is favourable for Kelani Cables PLC.

 

 

 

 

 

 

 

 

 

3.2 Solvency Ratio

A solvency ratio is a performance metric that helps us examine a company’s financial health. In particular, it enables us to determine whether the company can meet its financial obligations in the long term. Solvency ratio calculation of a company complies with major three sections. Those are Debt ratio, Equity ratio and Times interest earned.

This is the Solvency ratios related to Kelani Cables PLC.

Ratio	2016	2017	2018	2019	2020	2021
Debt Ratio	37.32%	38.48%	40.10%	46.04%	45.68%	46.28%
Equity Ratio	62.68%	61.52%	59.90%	53.96%	54.32%	53.72%
Times Interest Earned	38.0710	41.3578	5.4610	4.0292	8.7912	10.8642

 

 

3.2.1      Debt Ratio

 

The term debt ratio refers to a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company’s assets that are financed by debt. A ratio greater than 1 shows that a considerable portion of a company's debt is funded by assets, which means the company has more liabilities than assets. This ratio shows that how much portion of the assets are covered by the liabilities of the organization.

 

3.2.2      Equity Ratio

 

The equity ratio is a financial metric that measures the amount of leverage used by a company. It uses investments in assets and the amount of equity to determine how well a company manages its debts and funds its asset requirements. A low equity ratio means that the company primarily used debt to acquire assets, which is widely viewed as an indication of greater financial risk. Equity ratios with higher value generally indicate that a company’s effectively funded its asset requirements with a minimal amount of debt.

 

3.2.3      Times Interest Earned

 

 

Times interest earned (TIE) is a measure of a company’s ability to honor its debt payments. It is calculated as a company’s earnings before interest and taxes (EBIT) divided by the total interest payable. The times interest earned ratio is also referred to as the interest coverage ratio. It shows how many times the company can pay its interest with its income of one year, higher the ratio will be more favorable for the organization.

 

According to the above graph times interest earned value was drastically decreased after 2017 and continue the low value for last four years.

 

3.3 Profitability Ratio

Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period of time. They show how well a company utilizes its assets to produce profit and value to shareholders.

Profitability ratio calculation of a company complies with major six sections. Those are Profit Margin, Gross Margin, Return on Total Assets, Returns on Common Share Holders’ Equity, Book Value per Common Share and Basic Earnings per Share.

 

Ratio	2016	2017	2018	2019	2020	2021
Profit Margin	7.50%	5.28%	2.46%	2.65%	4.05%	6.43%
Gross Margin	19.67%	15.94%	12.59%	13.72%	14.99%	13.30%
Return on total Assets	9.97%	7.01%	3.33%	3.46%	5.03%	7.81%
Return on Common shareholders’ Equity	16.69%	11.29%	5.50%	6.10%	9.30%	14.46%
Book value per common share	146.5082	159.4407	169.2059	168.7932	181.6011	212.2738
Earnings Per Share (EPS)	22.7856	17.2678	9.0303	10.3076	16.2872	28.4794

 

The chart below shows the four Profitability ratios of Kelani Cables PLC from 2016 to 2021.

 

3.3.1      Profit Margin

 

This ratio interprets the net profit as a percentage of net sales Profit Margin explains the ability of a company to earn net income from the sale revenue.

In 2016, the ratio was pretty good but in 2018, there was enormous decline. From 2018 this ratio gradually increased. Higher the ratio results higher market position of the organization. As Profit Margin ratio increased, Kelani cables PLC Company shows the success of the operation in the business.

 

3.3.2      Gross Margin

 

Gross profit margin ratio the shows the gross profit as a percentage of the net sale. Gross Margin ratio explain the sales that covering the operating expenses and profit after considering cost of sales.

Gross Margin ratio has been reduced in 2018 and 2021, in the rest of years, the gross profit margin has increased in slowly.

 

3.3.3      Return on Total Assets

 

 

Return on total assets (ROTA) is a ratio that measures a company's earnings before interest and taxes (EBIT) relative to its total net assets. It is defined as the ratio between net income and total average assets, or the amount of financial and operational income a company receives in a financial year as compared to the average of that company's total assets. The ratio is considered to be an indicator of how effectively a company is using its assets to generate earnings. This ratio generally considers the best overall measure of the company profitability.

Return on Total asset ratio decrease from 2016 to 2018 and then this ratio increased.

 

3.3.4      Return on Common Shareholders’ Equity

 

 

This ratio measures the how well the company employed the owners’ investment to earn income.

Return on Common Shareholders’ Equity ratio decrease from 2016 to 2018 and then this ratio increased. The increasing of the ratio explains the wealth of the owners in investment in the Kelani Cables PLC Company.

 

3.3.5      Book Value per Common Share

 

 

Book Value per Common Share measures liquidation at reported amount. Higher value of Book Value per Common Share is good sign to the organization performance.

 

 

Book Value per Common share in Kelani Cables PLC Company increased gradually.

 

3.3.6      Basic Earnings per Share

 

 

Basic Earnings per Share measures how much income was earned for each share of common stock outstanding in the organization.

 

 

Based on the performance of the Kelani Cables PLC Company they have increased their EPS gradually since 2018. But from 2016 to 2018 the ratio has been declined.

 

 

 

 

 

 

 

 

 

 

 

 

 

3.4 Market Ratio

Ratio	2016	2017	2018	2019	2020	2021
Book value per common share	146.5082	159.4407	169.2059	168.7932	181.6011	212.2738
Earnings Per Share (EPS)	22.7856	17.2678	9.0303	10.3076	16.2872	28.4794
Price Earning Share	4.9373	6.8046	10.2987	6.5389	3.1927	3.9239
Dividend Yield	0.0267	0.0383	0.0376	0.0519	0.0673	0.0403

 

Market value ratios help evaluate the economic status of publicly traded companies and can play a role in identifying stocks that may be overvalued, undervalued, or priced fairly. In addition, market value ratios give management an idea of what a firm's investors think of its performance and future prospects.

Market value ratios are also used to analyze stock trends. For example, a company's low price-earnings ratio may indicate the stock is an undervalued bargain in a stable industry, but it also could indicate the company's earnings prospects are relatively uncertain, and the stock may be a risky bet.

 

3.4.1   Price Earnings Ratio

 

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

 

 

3.4.2   Dividend Yield

 

The dividend yield, expressed as a percentage, is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.0 Z – Score Analysis

Z- Score analyse describe the level of solvency in the organization activities by yearly. Equation of the Z- Score in Kelani Cables PLC company can be calculated as follows;

 

 

 

Column1	2016	2017	2018	2019	2020	2021
Working Capital	2,457,580,523	2,693,670,935	2,765,053,550	2,640,597,002	2,914,996,864	3,113,721,074
Total assets	5,095,547,628	5,649,808,724	6,157,602,845	6,819,090,538	7,288,069,290	8,614,763,014
T₁	0.4823	0.4768	0.4490	0.3872	0.4000	0.3614
Retained Earning	2,284,298,808	2,566,225,805	2,686,275,030	2,677,279,962	2,956,492,157	3,455,811,558
Total assets	5,095,547,628	5,649,808,724	6,157,602,845	6,819,090,538	7,288,069,290	8,614,763,014
T₂	0.4483	0.4542	0.4363	0.3926	0.4057	0.4011
Earning before Tax	695,991,168	507,649,275	322,872,301	427,800,329	483,108,306	819,549,888
Total assets	5,095,547,628	5,649,808,724	6,157,602,845	6,819,090,538	7,288,069,290	8,614,763,014
T₃	0.1366	0.0899	0.0524	0.0627	0.0663	0.0951
Market value of Equity	2,452,500,000	2,561,500,000	2,027,400,000	1,469,320,000	1,133,600,000	2,436,150,000
Total liabilities	1,901,668,290	2,174,002,389	2,468,915,175	3,139,397,936	3,329,164,493	3,987,195,042
T₄	1.2897	1.1782	0.8212	0.4680	0.3405	0.6110
Sales	6,619,776,295	7,122,783,962	7,994,364,353	8,492,482,278	8,759,918,341	9,650,437,531
Total assets	5,095,547,628	5,649,808,724	6,157,602,845	6,819,090,538	7,288,069,290	8,614,763,014
T₅	1.2991	1.2607	1.2983	1.2454	1.2020	1.1202
Z	3.6560	3.4598	3.0572	2.5560	2.4144	2.5889

 

	2016	2017	2018	2019	2020	2021
Current Assets	4,170,757,250	4,717,543,874	5,003,105,229	5,600,574,870	6,108,622,013	6,893,213,585
Current Liabilities	1,713,176,727	2,023,872,939	2,238,051,679	2,959,977,868	3,193,625,149	3,779,492,511
Working capital	2,457,580,523	2,693,670,935	2,765,053,550	2,640,597,002	2,914,996,864	3,113,721,074
No of shares	21,800,000	21,800,000	21,800,000	21,800,000	21,800,000	21,800,000
Market price per share	112.5	117.5	93	67.4	52	111.75
Market vakue of Equity	2,452,500,000	2,561,500,000	2,027,400,000	1,469,320,000	1,133,600,000	2,436,150,000

 

 

 Based on the above calculations Z-Score for the Kelani Cables PLC Company as follows,

 

Years	2016	2017	2018	2019	2020	2021
Z Score	3.6560	3.4598	3.0572	2.5560	2.4144	2.5889

 

Model for the Z- Score for the Kelani Cables PLC Company as follows;

Z > 2.60  - Safe Zone

1.1 <  Z > 2.60 – Grey Zone

Z < 1.1  - Distress Zone

 

Based on the above calculations Kelani Cables PLC Company in safe zone from 2016 to 2018. After 2018 the company is in the grey zone till 2021.

 

4.0 Conclusion

 

When considered ratio analysis of Kelani cables PLC 2016 has most favorable ratios than last 5 years and year 2020 and 2021 has basically lowest ratios. The main reason of financial declines of last two years is global pandemic of Covid-19. According to the z-score analysis from 2016 to 2018, company is in safe zone but from 2019 to 2021 company is in grey zone. Kelani Cables PLC company should focus on these values and they should take actions to increase economical position of company.