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Financial Statement Analysis Report 2011Kelani CablesPLC
Group Members
G.V.A.Premalal (090405D) Rupasena J.P (090441H) K.L.J.A.Perera (090374E) Mallawaarachchi (090315C) Mudunkotuwa (090333E)
Content
1. Introduction.
2. About the Company.
3. Profitability Ratio Analysis.
3.1. Gross Profit margin.
3.2. Net Profit Margin.
3.3. Earning power.
3.4. Return on Asset.
3.5. Return on Equity.
4. Asset Management Ratio Analysis.
4.1. Inventory Turnover.
4.2. Asset Turnover.
4.3. Average days of turnover.
5. Liquidity Ratio Analysis.
5.1. Current Ratio.
5.2. Quick Ratio.
5.3. Days Payable.
6. Financial Structure Ratio Analysis.
6.1. Debt/Equity
6.2. Times interest Earned.
7. Horizontal Analysis
7.1. Balance Sheet
7.2. Income Statement.
8. Horizontal Analysis(Balance Sheet and Income Statement).
9. Vertical Analysis(Balance Sheet and income Statement).
10. Cash Flow Analysis.
11. Recommendations.
Introduction
This report studied the financial statements of Kelani cables, comparing 2011, And 2010 years. Trends of major balance sheet and income statementitems as well as financial ratios are presented. And Each and every ratio is criticized with respect to the relevant bench marks. At the End of the Report we have presented an overall analysis of the company and provided with some recommendations.
For the analysis purposes we have calculated all the major ratios based on company’s annual report 2011.And under each category we have presented a comparison between the past year and the current yearvalues. All the values used for the calculations are taken from the consolidated column.Most of the time average values are not presented in the company’s Annual report in such cases we have used the total value for the calculations.
About the Company
Kelani Cables PLC manufactures and sells power cables, telecommunication cables, and enameled winding wires in Sri Lanka. The company’s products comprise various cables, such as Ariel bundled, iron lead and boat, lead free submersible pump, telephone, control, instrumentation, armored and unarmored power, auto, coaxial and data, and welding cables, as well as TV down leads, house and building wires, flexible cords, bare conductors, and overhead lines. It serves government departments, local contractors.
Kelani Cables PLC. (KCL) was founded in 1969. Kelani is the pioneer in Sri Lanka’s wire drawing industry. In 1973, KCL was incorporated as a quoted public limited liability company or the manufacture of power cables, telecommunications cables, and enameled winding wires in Sri Lanka.
The company was a subsidiary of the Pacific Dunlop Cables Group of Australia until 1996 and it thereafter became a fully owned Sri Lankan Company. The ACL Cables group of companies acquired majority shares of Kelani in 1999. Since then Kelani has been recognized as a fast developing cable-manufacturing company in Sri Lanka.
Values Used For the Calculations
2011(Rs.) 2010(Rs.)Gross Profit 616,513,689 695,429,425Sales 3,382,653,178 3,322,756,298Current Asset 2,299,645,119 2,129,865,457Current Liabilities 1,087,769,874 1,022,430,685Net Profit After Tax 133,733,000 139,783,000Inventories 1,120,623,940 950,371,744Earnings before Interest and Tax 265,493,000 314,479,000Cost of God Sold 3,215,727,589 2,626,784,185Total Asset 2,801,695,043 2,599,670,637Interest 511,011,542 415,830,002No. of Ordinary Shares 5,120,000Market price per Share 95.3 114.5Earnings per Share 6.13 6.41Equity 1,656,191,064 1,517,722,022Debt 511,001,542 415,830,002
Profitability Ratio
Profitability ratios measure how well a company is performing by analyzing how profit was earned relative to sales, total assets and net worth. In other words profitability ratios are reflections of company’s efficiency and its ability to generate profits.Usually higher values indicate that the company is efficient in making profit. However these values are used by the investors in comparing companies with in the same industry that have same revenue numbers and business models.
Profitability Ratios
2011 2010
Gross Profit margin
Gross ProfitSales
616,513,6893,382,653,178
=¿
16.1%
695,429,4253,322,756,298
=¿
20.9%Net Profit Margin
Net ProfitSales
133,733,0003,382,653,178
=¿
3.9%
139,783,0003,322,756,298
=¿
4.2%Earning Power Earningsbefore I∧T
AverageTotal Asset265,493,000
2,801,695,043=¿
9.4%
314,479,0002,599,670,637
=¿
12%Return on Assets
Net income after TaxTotal Asset
133,733,0002,801,695,043
=¿
4.78%
139,783,0002,599,670,637
=¿
5.39%
Return on Equity
Netincome
Averageequity
133,733,0001,656,191,064
=¿
8.4%
139,783,0001,517,722,022
=¿
9.5%
Looking at the Profitability ratios we can clearly see a drop in all the ratio values Compared with the year 2010.Especially the gross profit margin has decreased by 4.8%.The key point for this drop can be identified as that the copper prices on the London Metal Exchange averagedat USD 8,140 per MT for the year under review, whereas in 2009/10, the price was USD 6,101 per MT.
Net profit margin, is a ratio that measures how much income is kept in a company as compared to the total revenue, Simply put it is a measure of profitability. In 2011 margin is 3.9% meaning the company keep 3.9 Rs for every 100Rs of revenue.Compared to the previous year the margin is lowered by 0.3%.This is an important ratio for the calculation of future price policies.The decrease in this margin can be seen, because for reducing product prices in hopes of increasing sales.
Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. This is an important ratio for the investors. There is a drop in ROE by 1.1% in this year.So there is a drop in the profitearned. Here it is convenient for the shareholders to compare the ROE values of the companies before buying shares. High value of ROE usually indicates that the firm is efficient in making profit with the invested money.
Return on Asset is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. This year ROA also dropped down by 0.61%.This is a key value which would concerned by the shareholders. Rather than comparing a company it is more convenient to compare the ROA ratios of two companies with same operations. Since Kelani cables is a manufacturing company it has a large amount of asset so efficient Asset management is a must in order to generate profit.
Earning power measures the operating business performance which is not affected interest charge and taxation. Earnings power is used to analyze stocks to assess whether the underlying company is worthy of investment. Possessing greater long-term earnings power is one indication that a stock may be a good investment. In this company the drop down in Earning Power is 2.6% which is a considerable amount.
Asset management ratio
Also known as the activity management ratios.These are the typical indicators to measure the firm's success in managing its assets to generate sales.
Asset Management Ratio
2011 2010
Inventory Turnover Cost of Good SoldAverage Inventory
3,215,727,5841,120,623,940
=¿2.862,626,784,185950,371,744
=¿2.76
Asset Turnover SalseAverageassets
3,382,653,1782,801,695,043
=¿1.213,322,756,2982,599,670,637
=¿1.29
Average days of Turnover
365Inventory Turnover
3652.86
=¿1373652.76
=¿133
In here we mainly considered about three types of turn over ratios. The first one is the inventory turnover ratio and it is one of the most important asset management or asset turnover ratios. We can calculate Inventory turnover as the cost of good sales/average Inventory and AverageInventory as the (Beginning inventory + Ending inventory)/2.
As a full overview about this ratio we can say that a low turnover rate may point to overstocking obsolescence, or deficiencies in the product line or marketing effort. However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or shortages. Also a high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business. Because it says that company is danger in the stock outs. So in here we can see this company has Inventory value as 2.68 for 2011 and 2.76 for 2010. I think this a good inventory levels in both years. Because 2.68 is either not a very law value nor very high value. But comparing the 2010 and 2011, we can see that, this value has decreased little bit. That means company has less cost of goods sold value or high average inventory value in 2011 than the 2010.
According to Total assets ratio, it can be known as the asset management ratio which is the summary ratio for all the other asset management ratios. If there is a problem with inventory, receivables, working capital, or fixed assets, it will show up in the total asset turnover ratio. The total asset turnover ratio shows how efficiently your assets generate sales. Because the higher the total asset turnover ratio, is better. So in here we can see, this company has 2.2 ratio value for 2010 and 2.3 for 2011. I think this is a very normal value. But if this has higher value, it is very good. Also comparing the ratio value for 2010 and 2011 we can see that company has increased
their ratio value. So in that case this company very good improvement about their future activities.
Also the last analyzed ratio is Average days of Inventory. The Average days of Inventory ratio tells the business owner how many days, on average, it takes to sell inventory. The usual rule is that the lower the Average days of Inventory is, the better, since it is better to have inventory sell quickly than to have it sit on your shelves. So in here we saw that, this company has good Inventory Turnover ratio. Therefore this Average daysof Inventory is also good for this company.
Liquidity Ratio
A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.
Liquidity Ratios
2011 2010
Current Ratio Current Asset (CA)CurrentLiabilities(CL)
2,299,645,1191,087,769,874
=¿2.12,129,865,4571,022,430,685
=¿2.1
Quick Ratio Quick Asset (CA)CurrentLiabilities(CL)
2,299,645,1191,087,769,874
=¿1.082,129,865,4571,022,430,685
=¿1.15
Days Payable Outstanding
Account PayableCOGS
∗3651,145,503,979∗365
3,215,727,589=¿
132
1,081,948,635∗3652,626,784,185
=¿
150
Current Ratio is mainly used to get an idea of the company’s ability to payback its short term liabilities. Generally 2 is the normal ratio value in simple words the company is capable of paying back its obligations.But it should not be greater than 2 because then the company is keeping money without investing. Here in both the years current ratio is 2.1 so the company is good in financial health but they can lower the ratio to, may be to 1.8 and do further investment on the company to make more profit rather than keeping in hand.
The second concerned ratio is Quick ratio; it is an indication of a company’s short term liquidity (how fast the company can turn the asset to money).Sometimes turning inventory to money takes significant time so quick ratio in comparison to the current ratio is more conservative. Generally a company with Quick ratio less than 1 cannot pay back its current liabilities.Kelani cables in both the years have a ratio greater than 1, so in general the company is financially stable.
The next ratio Days Payable Outstanding Indicates, how long a company is taking to pay its trade creditors.Having greater days payables outstanding may indicate the Company's ability to
delay payment and conserve cash. This could arise from better terms with vendors.In this company days payable is lower in 2011 compared to 2010.But in average it has 141 days payable which is sufficient and acceptable to a production company.
Financial Structure Ratio
Financial Structure ratios also known as the capitalization ratios. This is a direct measurement of the riskiness of the business in terms of debt gearing.And this ratio reflects the extent to which a corporation is trading on its equity.
Financial Structure
Ratios
2011 2010
Debt/Equity DebtEquity
511,001,5421,656,191,064
=¿
0.31
415,832,0021,517,722,002
=¿
0.277TIE(Times Interest Earned)
Earningsbefore Interest∧TaxInterest
265,493,000511,011,542
=¿0.52314,479,000415,830,002
=¿
0.76
In Financial Structure Ratio section we considered about two types of ratios which are Debt/Equity ratio and TIE(Times Interest Earned) ratio.
Debt/Equity indicates what proportion of equity and debt the company is using to finance its assets in simple terms it’s a measure of company’s financial leverage. Here in both the years debt to equity ratio is lower than 1 which means company’s risk level is low in other words company’s equity is higher than the debts. But in comparison to the past year 2010 debt to equity is high in 2011.As a manufacturing company it is always good to have a low debt to equity ratio.
TIE indicates how many times a company can cover its interest charges on a pretax basis.A high value of the ratio can indicate that a company has an undesirable lack of debt or is paying down too much debt with earnings that could be used for other projects.But in both the years TIE is less than 1.This is not a good value,ratio is smaller than 1, the company is not generating enough cash from its operations to meet its interest obligations. The Company would then have to either use cash on hand to make up the difference or borrow funds. In the year 2011 TIE falls down by 0.24.
Market Test Ratio
Market Test Ratios help investor to estimate the attractiveness of a potential or existing investment and get an idea of its valuation. These ratios are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company's shares. So in here we mainly considered about four types of market test ratios.
Market Test Ratio
2011 2010
Earnings per Share
Net profit after TaxNo .of issuedOrdinary Shares
133,733,00021,800,000
=¿
6.13
139,783,00021,800,000
=¿
6.41Dividends per Share
DividendsNo .of issuedOrdinary Shares
10,900,00021,800,000
=¿0.5043,600,00021,800,000
=¿2.75
Dividend payout Ratio
Dividends per shareEarnings per Share
∗1000.5
6.13∗100=¿8.15
2.756.41
∗100=¿44.79
Price Earnings ratio
Market Price per shareEarnings per Share
95.306.13
=¿15.55114.56.41
=¿17.87
The first one is the Earnings per Share ratio is a measurement of a company’s profit. In here Earnings per Share is 6.13 for 2011 and 6.41 for 2010. So we can see that this value has decreased in 2011 than the 2010 value. So this is not a good sign for the company. Also when consider about the Dividends per Share value, it has also decreased. That means company didn’t give more dividends to their shareholders. That means their most portion of profit they left for investment to provide for future earnings growth. Also considering the Dividend payout Ratio, it highly decreased than the previous year. Actually Dividend payout Ratio is the ratio that gives the Dividends/Net Income value. Since company pays law dividend value for their shareholders, it will have law dividend payout ratio if it has sufficient net income.
The last considered ratio is the Price Earnings ratio which is a measure of the price paid for ashare relative to the annualnet income orprofit earned by the firm per share. In general, a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with a lower P/E ratio. So in here we can see that the Price Earnings ratio is decreased in 2011 in compare with the 2010 value without large variation in the Earnings per Share value. So that means market value for share is reduced in 2011 than the 2010.
Horizontal Analysis
A procedure in fundamental analysis in which an analyst compares ratios or line items in a company's financial statements over a certain period of time. The analyst will use his or her discretion when choosing a particular timeline; however, the decision is often based on the investing time horizon under consideration.Here We have considered a period of year in comparing ratios of kelanicables.
Balance Sheet
2010 2011 Horizontal Analysis
Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000Current AssetsTrade and Other Receivables
795,715,107 936,668,581
Amount due from Related Companies
42,059,789 45,601,272
Value Added Tax Recoverable
143,957,809 109,320,610
Deposits and Prepayments
7,000,841 7,498,161
Short Term Deposits
183,792,867 77,229,219
Cash and Cash Equivalents
6,967,300 2,703,336
Inventory 950,371,744 1,120,623,9402,129,865,457 2,299,645,119 108
Non-current assetsInvestment in Equity Accounted Investee
9,511,540 29,905,849
Investment Property
120,000,000 125,000,000
Land & Building (net)
340,293,640 347,144,075
469,805,180 502,049,924 107Total Assets 2,599,670,637 2,801,695,043 108
EquityStated Capital 218,000,000 218,000,000Capital Reserves 121,976,514 143,062,597General Reserves 431,136,000 431,136,000Retained Earnings 746,609,488 863,992,467
1,517,722,002 1,656,191,064 109Current LiabilitiesTrade Payable 378,712,994 467,056,619Other Payables 56,960,328 86,445,020Dividend Payable 4,698,206 4,746,046Interest - Bearing Loans and Borrowings
415,830,002 511,001,542
Income tax 166,229,155 18,520,6471,022,430,685 1,087,769,874 106
Non-Current liabilitiesRetirement Benefit Obligations
31,857,897 37,719,959
Provision for Payment in Lieu of-Employee Share Issue Scheme
2,920,369 2,775,329
Deferred Tax Liabilities
24,739,684 17,238,818
59,517,950 57,734,106 97Total liabilities & equity
2,599,670,637 2,801,695,043 108
Income Statement
2010 2011 Horizontal Analysis
Sales 3,322,213,610
3,832,241,278 115
Less Cost of goods sold
2,626,784,185
3,215,727,589 122
Gross profit 695,429,425 616,513,689 89Change in fair value of Investment Property
- 5,000,000
Other Income 3,911,862 7,947,341 Distribution Expenses
(237,801,640) (219,076,196)
Administrative Expenses
(136,540,651) (155,553,264)
Net Finance Cost
(23,087,578) (37,474,365)
Share of Equity Accounted Investee Profit /(Loss)
(22,451,068) (415,969,075) 946,547 (398,209,937) 96
Net Profit before Tax
279,460,350 218,303,752 78
Less Income Tax
139,782,558 84,570,773 61
Net Profit After Tax
139,677,792 133,732,979 96
2010 2011 Horizontal Analysis
Net cash inflow / (outflow) fromOperating activities
(151,167,862) (161,797,132) 107
Net cash inflow / (outflow) fromInvesting activities
(9,743,529) (27,899,860) 286
Net cash inflow / (outflow) fromFinancing activities
(42,563,314) (16,302,160) 38
Cash and cash equivalents atEnd of the year
(225,069,835) (431,068,987) 192
Vertical Analysis
Vertical analysis of financial statements is a technique in which the relationship between items in the same financial statement is identified by expressing all amounts as a percentage of a total amount. This method compares different items to a single item in the same accounting period. The financial statements prepared by using this technique are known as common size financial statements.
Balance Sheet.When applying this method on the balance sheet, all of the three major categories accounts (i.e. assets, liabilities, and equity) are compared to the total assets. All of the balance sheetitems are presented as a proportion of the total assets. These percentages are shown along with the absolute currency amounts.
Amount Percentage of Total Assets
2010 2011 2010 2011Current AssetsTrade and Other Receivables 795,715,107 936,668,581 30.61 33.43Amount due from Related Companies
42,059,789 45,601,272 1.62 1.63
Value Added Tax Recoverable 143,957,809 109,320,610 5.54 3.90Deposits and Prepayments 7,000,841 7,498,161 0.27 0.27Short Term Deposits 183,792,867 77,229,219 7.07 2.76Cash and Cash Equivalents 6,967,300 2,703,336 0.27 0.10Inventory 950,371,744 1,120,623,94
036.56 40.00
2,129,865,457 2,299,645,119
81.93 82.08
Non-current assetsInvestment in Equity Accounted Investee
9,511,540 29,905,849 0.37 1.07
Investment Property 120,000,000 125,000,000 4.62 4.46Land & Building (net) 340,293,640 347,144,075 13.09 12.39
469,805,180 502,049,924 18.07 17.92Total Assets 2,599,670,637 2,801,695,04
3100.00 100.00
EquityStated Capital 218,000,000 218,000,000 8.39 7.78Capital Reserves 121,976,514 143,062,597 4.69 5.11General Reserves 431,136,000 431,136,000 16.58 15.39Retained Earnings 746,609,488 863,992,467 28.72 30.84
1,517,722,002 1,656,191,064
58.38 59.11
Current LiabilitiesTrade Payable 378,712,994 467,056,619 14.57 16.67Other Payables 56,960,328 86,445,020 2.19 3.09Dividend Payable 4,698,206 4,746,046 0.18 0.17Interest - Bearing Loans and Borrowings
415,830,002 511,001,542 16.00 18.24
Income tax 166,229,155 18,520,647 6.39 0.661,022,430,685 1,087,769,87
439.33 38.83
Non-Current liabilitiesRetirement Benefit Obligations 31,857,897 37,719,959 1.23 1.35Provision for Payment in Lieu of-Employee Share Issue Scheme
2,920,369 2,775,329 0.11 0.10
Deferred Tax Liabilities 24,739,684 17,238,818 0.95 0.6259,517,950 57,734,106 2.29 2.06
Total liabilities & equity 2,599,670,637 2,801,695,043
100.00 100.00
Income Statement.
And when applying this technique to the income statement, each of the expense is compared to the total sales revenue. The expenses are presented as a proportion of total sales revenue along with the absolute amounts.
Amount Percentage of net sales
2010 2011 2010 2011Sales 3,322,213,610 3,832,241,278 100.00 100.00Less Cost of goods sold 2,626,784,185 3,215,727,589 79.07 83.91Gross profit 695,429,425 616,513,689 20.93 16.09Change in fair value of Investment Property
- 5,000,000 0.13
Other Income 3,911,862 7,947,341 0.12 0.21Distribution Expenses -237,801,640 -219,076,196 7.16 5.72Administrative Expenses -136,540,651 -155,553,264 4.11 4.06Net Finance Cost -23,087,578 -37,474,365 0.69 0.98Share of Equity Accounted Investee Profit /(Loss)
-22,451,068 946,547 0.68 0.02
Net Profit before Tax 279,460,350 218,303,752 8.41 5.70Less Income Tax 139,782,558 84,570,773 4.21 2.21Net Profit After Tax 139,677,792 133,732,979 4.20 3.49
Cash Flow Vertical Analysis
Amount Percentage of net sales2010 2011 2010 2011
Net cash inflow / (outflow) fromOperating activities
(151,167,862)
(161,797,132) 4.6 4.2
Net cash inflow / (outflow) fromInvesting activities
(9,743,529) (27,899,860) 0.3 0.7
Net cash inflow / (outflow) fromFinancing activities
(42,563,314) (16,302,160) 1.3 0.4
Cash and cash equivalents atEnd of the year
(225,069,835)
(431,068,987) 6.8 11.2
Recommendations.
In this section we will look at the overall picture of the company. And as an investor is it good to go with Kelani cables PLC.
To do the analysis we will refer to some graphs presented in the annual report 2010.
These two graphs very informatively illustrates how the company is serving for his shareholders as we can clearly observe, although the market values per share increased the dividend per share decrease by huge amounts.This means the company is not earning a satisfactory amount of profit.
Sales Growth – Compared to the year 2010 there is a 510,027,668Rs growth in sales Ratio values – All the Ratio values are up to the industry level except financial structure
ratios. TIE is less than 1. Cash flow from Operating activities are form 151,167,862 Rs to 161,797,132Rs which is
an increase of 106,292,270 Rs .This is a strong point of the company. And at the end of the year 2011 the company has cash and cash equivalence of
431,068,987 Rs.Which is an increase of 205,999,152 Rs. ROE doesn’t have a favorable value with the industry standards. It has decreased from
past year value.
>>It is not recommended that the investor purchase shares in the Kelani cables PLC.
References
[1] Kelani cables PLC –Annual Report 2011
[2] Wikipedia– Avalable :www.wikipedia.org
[3] Investopedia – Available : www.investopedia.com
[4] Investor Words – Available : www.investorwords.com
