Introduction
Financial
statement analysis is the process of assessing a firm’s financial statements to
ascertain its effectiveness & appropriateness. This is frequently used to
determine whether a company is solid, financially sound, liquid, or profitable enough
to justify a financial investment.
This report has analyzed five years of
annual report data of Kelani Cables PLC (KCL) which mainly discuss about the
financial ratios under following topics.
1. Liquidity ratios
2. Efficiency Ratios
3. Profitability Ratios
4. Solvency Ratios
5. Market Ratios
In addition to that, report has further
explained the trend analysis of the company.
Background of the Company
“Kelani Cables was
founded in 1969 as a manufacturer and distributor of power and
telecommunication cables and enamelled winding wires. 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 acquired by ACL Cables PLC. These alliances have
provided opportunities
for expansion and knowledge sharing which have enabled the company to enhance
its operations. Kelani Cables became a public quoted company in 1973 and its
shares trade on the Colombo Stock Exchange”. (KCL PLC, 2021;22)
Ratio Analysis
A ratio
is a mathematical presentation of the relationship among two variables in a set of financial
statements.
Liquidity &
Efficiency Ratios
A liquidity ratio is used
to assess company's capacity to settle its short-term debt obligations. This
helps in figuring out if a business can use its liquid or current assets to pay
its current liabilities. A company's liquidity ratio computation complies with
the two key elements. Those are Current Ratio & Quick Ratio.
Efficiency ratios are
used to assess how well a business can utilize its assets and capital to
generate revenue. The more efficiently a company is managed and operated, the
more likely it is to generate maximum profitability for its owners and
shareholders over the long term.
Liquidity Ratios
|
Liquidity Ratios |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Current ratio |
2.19 |
1.82 |
1.91 |
1.89 |
2.23 |
|
Quick ratio |
1.65 |
1.23 |
1.36 |
1.27 |
1.48 |
|
Working Capital |
5,205,143,755 |
3,113,721,074 |
2,914,996,864 |
2,640,597,002 |
2,752,201,550 |
Current Ratio
This measures the
short-term solvency of the company. It indicates if a company has enough money
to cover its debts over the course of the next 12 months. The efficiency of a company's operational cycle or its capacity to
convert its product into cash can both be derived from the current ratio. In
general, a ratio between 1 & 3 is satisfactory.
Quick Ratio
This ratio illustrates
the relationship between quick assets and current liabilities and the capacity
of the company to settle its short-term debt.
Working Capital
Working capital is the
difference between the current asset and current liabilities. This amount is
used to run the business on a daily basis.
Looking at KCL's numbers
reveals that both current & quick ratios have declined from 2018 to 2021,
which is not encouraging for the business. However, in 2022, the current and
quick ratios rose to 2.19 and 1.65, respectively, which is a positive sign.
Working capital has also increased throughout the period in the company. This
may be advantageous for the company if it treats it like a reserve account,
otherwise it is unfavorable because of less utilization of the current asset.
Efficiency Ratios
|
Efficiency Ratios |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Inventory Turnover |
5.19 |
4.21 |
4.14 |
4.16 |
4.20 |
|
Inventory Turnover Days |
70.3 |
86.8 |
88.1 |
87.7 |
86.8 |
|
Debtors Turnover |
6.00 |
3.27 |
3.58 |
4.11 |
3.75 |
|
Debtors Turnover Days |
60.8 |
111.7 |
102.0 |
88.8 |
97.4 |
|
Creditors Turnover |
4.78 |
5.18 |
7.69 |
7.29 |
5.21 |
|
Creditors Turnover Days |
76.4 |
70.4 |
47.5 |
50.1 |
70.1 |
|
Working Capital Turnover |
2.90 |
3.10 |
3.01 |
3.22 |
2.90 |
|
Assets Turnover |
1.50 |
1.21 |
1.24 |
1.31 |
1.36 |
Inventory Turnover
Inventory turnover
is an efficiency ratio which measures how often a company can sell its average
inventory. Generally higher the ratio the better as it usually indicates good
sales performance. A lower ratio may indicate weak sales or declining market
demand.
Inventory Turnover
Days
This ratio shows the
average number of days it takes a business to convert its inventory into sales.
Generally, lower the ratio the better.
When considering the
values of the KCL, both ratios have fluctuated slightly between 2018 and 2021.
However, in 2022, inventory turnover has increased to 5.19 and inventory
turnover days has decreased to 70.3 which indicates good sales performance of
the company.
Debtors Turnover
Debtors turnover
also known as receivable turnover measures how efficiently a company collects
its average accounts receivable. A high ratio is preferred since it shows how
frequently and effectively the business collects accounts receivable.
Debtors Turnover
Days
This shows the
average number of days it takes a customer to pay a business for sales made on
credit. Generally, lower the ratio the better.
During 2018 to 2021,
debtors turnover has marginally changed between 3.27 and 4.11, while a
significant increase can be seen in 2022. On the other hand, debtors turnover
days has increased until 2021 and a drastic drop can be seen in 2022, which is
60.8. This indicates that the company has a solid client base that can make
timely payments for their debts. Additionally, this may indicate that the
company follows a conservative credit policy.
Creditors
Turnover
Payable
turnover or creditors turnover reveals how efficient a company is at paying its
suppliers and short-term debts. A high ratio shows that suppliers are being
promptly paid for purchases made on credit.
Creditors Turnover Days
This refers to the average number of days it takes a
company to pay their suppliers. It shows how effectively a business is managing
its cash outflow. This ratio shouldn't be excessively high or low. If it is
really high, it indicates that the business is taking a long time to pay off
its debts, which could harm its relationships with suppliers. If it is really
low, it indicates that the business is repaying in a hurry, which reduces the
amount of cash available for other investments.
According to the KCL data, creditors turnover has increased until 2020
and started declining from there onwards. Meanwhile creditors turnover days is
gradually increasing since 2020, from 47.5 to 76.4. This reflects that the
business is taking a long time to pay off its debts. On the other hand, they
might be using a strategy of investing the available cash on other projects.
Working Capital Turnover
This ratio evaluates the efficiency of using working
capital of a company to promote its sales and growth. Generally higher the
ratio the better.
Assets Turnover
The asset turnover ratio evaluates how effectively a
business utilizes its assets in order to generate income or sales. A higher
ratio is favorable.
During 2018 to 2021, assets turnover has marginally reduced from 1.36 to 1.21,
while a significant increase can be seen in 2022. However, similar to working
capital turnover, it is required to pay attention on improving the ratio by
efficiently using the assets to generate revenue.
Profitability Ratios
Profitability ratios are financial indicators that analysts
and investors use to assess a company's capacity to generate income or profit
in relation to sales, balance sheet assets, operating expenses, and
shareholders' equity over a given time period.
|
Profitability Ratios |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Gross Profit Margin |
21.55% |
13.30% |
14.99% |
13.72% |
12.59% |
|
Net Profit Margin |
14.11% |
6.43% |
4.05% |
2.65% |
2.46% |
|
Return on Assets |
21.22% |
7.81% |
5.03% |
3.47% |
3.34% |
|
Return on Equity |
37.66% |
14.46% |
9.30% |
6.10% |
5.50% |
|
Return on Investment |
37.80% |
17.68% |
14.07% |
11.70% |
8.34% |
Gross Profit Margin
Gross profit as a percentage of net sales is displayed by
the gross profit margin ratio. Gross profit margin explains the sales that
cover operating expenses and profit after considering the cost of sales.
According to the KCL data, gross profit margin has
gradually climbed up until 2020; later, it has dropped in 2021 and re picked up
in 2022. This is a positive sign for the company.
Net Profit Margin
Net profit as a percentage of net sales is displayed by the
net profit margin ratio. Net profit margin describes a company's ability to
generate net income from sales revenue.
During the last five years KCL shows a stable growth in net
profit margin from 2.46% to 14.11%.
The higher the ratio, the better the organization's market
position. KCL demonstrates the success of the business operation as the profit
margin increases.
Return on Assets
Return on assets is a financial statistic that measures how
profitable a firm is in relation to its total assets.
KCL's return on asset has steadily increased from 3.34% to
21.22% during the last five years.
Return on Equity
This ratio assesses how effectively the company used the
owners' investment to generate revenue. A company that can sustain and grow its
ROE over time is likely to be good at creating shareholder value because it
understands how to reinvest its earnings sensibly to improve productivity and
profits.
KCL's return on equity also has steadily increased from
5.50% to 37.66% during the last five years, meaning its good at creating
shareholder value.
Return on Investment
Return on investment is a ratio that calculates the benefit
an investor receives in comparison to the cost of their investment.
During the period of last five years, KCL’s ROI has
gradually increased up to 37.8%, which demonstrates the success in its
performance.
Solvency Ratios
Solvency ratios are performance indicators that allow us to
assess the financial health of a business. It is frequently used by potential
business lenders to evaluate a company's capacity to pay its long-term debt.
|
Solvency Ratios |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Debt to Equity Ratio |
71.43% |
86.16% |
84.09% |
85.33% |
66.93% |
|
Total Debt Ratio |
41.67% |
46.28% |
45.68% |
46.04% |
40.18% |
|
Interest Cover |
30.66 |
7.71 |
3.89 |
3.48 |
5.24 |
Debt to Equity Ratio
The debt-to-equity ratio is a leverage measure that
calculates the weight of overall debt and financial liabilities against total
shareholder equity. A high debt-to-equity ratio can be favorable as it
indicates that a company can easily service its debt obligations and is leveraging
to boost equity returns.
When considering the values of the KCL, debt-to-equity ratio has fluctuated
throughout the period with an upward tendency.
Total Debt Ratio
A financial ratio that measures a company's level of
leverage is known as debt ratio. This ratio demonstrates how much of an
organization's assets are covered by its liabilities. The ratio greater than 1
means it has more liabilities than assets.
According to the KCL data, total debt ratio also has fluctuated
throughout the period. Highest recorded in 2021 with an overall upward trend. However,
it has reduced to 41.67% in 2022.
Interest Cover
The interest coverage ratio, also known as the times
interest earned ratio, measures how many times the company can cover its
interest expenses with its annual revenue. A higher ratio will be better for
the organization.
KCL’s interest coverage ratio has gradually increased until
2021 and drastically picked up in 2022 due to the drastic improvement in
earnings.
Market Ratios
Market ratios can be used to assess the financial health of
publicly traded companies. This can be used to identify equities that may be
overvalued, undervalued, or fairly valued. In addition to that, this also
provides management with a sense of how investors see the performance and
prospects of a company.
|
Market Ratios |
2022 |
2021 |
2020 |
2019 |
2018 |
|
Price-Earning Ratio |
2.97 |
3.92 |
3.19 |
6.54 |
10.30 |
|
Dividend Yield |
1.55% |
4.03% |
6.73% |
5.19% |
3.76% |
Price-Earning Ratio
Price-Earning ratio is one of the most popular valuation metrics
of stocks. It indicates whether a stock is costly or cheaper at its present
market price.
KCL’s price-earning ratio has considerably decreased from
10.3 to 2.97 throughout the period. A low price-earning ratio can imply that a
business is currently undervalued or that it is performing extremely well in
comparison to its historical patterns.
Dividend Yield
This ratio illustrates how much a business pays out in
dividends each year in comparison to the value of its stock.
According to the KCL data, the dividend yield has increased
until 2020, and thereafter it has gradually decreased. Yield-seeking investors
will look for companies with high dividend yields, but it is necessary to go
deeper to understand the factors that led to the high yield.
Trend Analysis
Trend analysis is a method for examining and forecasting
movements of an item based on current and past data. Following illustrates the
trend analysis of KCL.
|
KCL |
2022 |
2021 |
2020 |
2019 |
2018 |
2017 |
|
|
|
|
||||
|
Revenue |
212% |
135% |
123% |
119% |
112% |
100% |
|
Cost
of Goods Sold |
198% |
140% |
124% |
122% |
117% |
100% |
|
Gross
Profit |
287% |
113% |
116% |
103% |
89% |
100% |
|
Finance
Cost |
275% |
354% |
481% |
393% |
238% |
100% |
|
Earning
Before Interest and Tax |
502% |
160% |
108% |
84% |
61% |
100% |
|
Profit
Before Tax |
524% |
150% |
86% |
65% |
53% |
100% |
|
Profit
After Tax |
566% |
165% |
94% |
60% |
52% |
100% |
|
Equity |
|
|
|
|
|
|
|
Stated
Capital |
100% |
100% |
100% |
100% |
100% |
100% |
|
Capital
Reserves |
201% |
201% |
136% |
136% |
136% |
100% |
|
General
Reserves |
100% |
100% |
100% |
100% |
100% |
100% |
|
Retained
Earings |
215% |
135% |
115% |
104% |
105% |
100% |
|
Equity
attributable to owners |
193% |
133% |
114% |
106% |
106% |
100% |
|
Non-Current
Assets |
|
|
|
|
|
|
|
Property,
plant and equipment |
174% |
152% |
124% |
132% |
129% |
100% |
|
Intangible
assets |
- |
- |
- |
- |
- |
- |
|
Investment
property |
272% |
256% |
121% |
116% |
110% |
100% |
|
Right-of-use
assets |
- |
- |
- |
- |
- |
- |
|
Investment
in equity accounted investee |
332% |
332% |
332% |
332% |
141% |
100% |
|
|
204% |
185% |
127% |
131% |
124% |
100% |
|
Current
Assets |
|
|
|
|
|
|
|
Inventories |
142% |
135% |
106% |
112% |
102% |
100% |
|
Trade
and other receivables |
98% |
141% |
139% |
94% |
103% |
100% |
|
Amount
due from related companies |
1307% |
1% |
24% |
65% |
202% |
100% |
|
Value
added tax recoverable |
303% |
301% |
261% |
233% |
160% |
100% |
|
Deposits
and prepayments |
221% |
147% |
146% |
142% |
14% |
100% |
|
Investment
in FDs |
814% |
- |
- |
- |
- |
100% |
|
Cash
and cash equivalents |
507% |
185% |
153% |
233% |
135% |
100% |
|
|
203% |
146% |
129% |
119% |
106% |
100% |
|
Total
Assets |
203% |
152% |
129% |
121% |
109% |
100% |
|
Non-Current
Liabilities |
|
|
|
|
|
|
|
Employee
benefit |
147% |
193% |
141% |
137% |
114% |
100% |
|
Deferred
taxation |
78% |
70% |
22% |
98% |
212% |
100% |
|
Interest
bearing borrowings |
3052% |
71% |
64% |
100% |
142% |
100% |
|
|
272% |
138% |
90% |
120% |
154% |
100% |
|
Current
Liabilities |
|
|
|
|
|
|
|
Trade
and other payables |
224% |
146% |
95% |
50% |
100% |
100% |
|
Amount
due to related companies |
270% |
317% |
234% |
256% |
148% |
100% |
|
Current
taxation |
259% |
120% |
113% |
132% |
114% |
100% |
|
Unclaimed
dividends |
111% |
155% |
135% |
121% |
109% |
100% |
|
Interest
bearing borrowings |
658% |
3348% |
4216% |
4647% |
962% |
100% |
|
Bank
overdrafts |
13% |
44% |
82% |
167% |
39% |
100% |
|
|
216% |
187% |
158% |
146% |
111% |
100% |
|
Total
Liabilities |
220% |
183% |
153% |
144% |
114% |
100% |
Summary
The COVID-19 global pandemic caused many industry
disruptions worldwide, together with a volatile local economic environment,
which led to an extraordinary period that Kelani Cables PLC had to recover
from. Despite the fact that the economy has continued to decline into the
current fiscal year, the company has rapidly and effectively adjusted and
displayed strong performance in FY2021/22.
Price increases throughout the product line, along with a
shift from credit to cash sales, amounted to a 57% increase in income to Rs.
15.1 billion, up from Rs. 9.7 billion in the previous financial year.
Additionally, the Company was able to benefit from a
significant exchange gain of Rs 191.8Mn due to its substantial holding of US
Dollar denominated deposits, which helped to drive a 200% increase in operating
profits to Rs 2.4Bn from Rs 819.6Mn in the previous financial year.
It can be seen that, by taking these strategical decisions and given reasons, KCL has performed well in 2022 compared to previous years
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