ACL Cables financed more by debt than equity

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By 2017-02-15

By M Rishar M Saleem

ACL Cables Plc is more debt-financed than equity. Though the ratio has shown a marginal decline in the recent financial year, generally over 50% of its operations are financed by debt. The earnings per share of ACL Cables improved significantly during the recent years, mainly due to the increase in profitability, Prof. Kennedy D.Gunawardana Professor of Accounting Information Systems of Faculty of Graduate Studies and Coordinator PhD programme, University of Sri Jayawardenepura observed after analysis of the financial statements of ACL Cables Plc.

ACL Cables PLC is one of the largest manufacturers of cables in Sri Lanka. Having pioneered the industry in 1962, today ACL has grown and holds a 70% share of the cable market in Sri Lanka. ACL is the most sought after brand of cables in Sri Lanka, having supplied 80% of the requirements of duty free projects involving overseas investors approved by the Board of Investment, despite the presence of many competing, foreign brands of cables. ACL has already exported cables to projects and electricity distribution authorities in Bangladesh, the Maldives, the UK and Tanzania.

The study is focused on five financial years commencing from 2011/2012 - 2015/2016. The accounting information /data was analyzed using horizontal and vertical analysis methods. Four types of accounting ratios were also used to analyze the performance of the Company during the aforesaid financial period. Types of ratios are namely, Profitability Ratios, Liquidity Ratios, Solvency Ratios and Stock Market Ratios.

Considering the liquidity ratios of the Company, ACL Cables is in a satisfactory position to meet its obligations. However, one of the major drawbacks of the Company is that its collection period is fairly long, ranging four to five months, Professor Kennedy observed.

ACL Cables Plc is more debt-financed than equity. Though the ratio has shown a marginal decline in the most recent financial year, generally over 50% of its operations are financed by debt. The earnings per share of ACL Cables improved significantly during recent years mainly due to the increase in profitability, he further observed.

The performance of the Company is expected to improve in the next few years, considering the major projects the government and private sector have undertaken recently. The Megapolis and proposed housing schemes for low and middle income earners would increase the demand for cables considerably. Further, the private sector has also initiated major construction projects, which will have a positive impact of the performance of the Company.

Profitability Ratio
The first profitability ratio in relation to sales is the gross profit margin. This ratio shows profits relative to sales after deduction of production costs and indicates the relation between production costs and the selling price. A high gross profit margin ratio is a sign of good management.

The gross profit margin of ACL Cables has shown a gradual increase from 2013/2014 financial year after recording a moderate decline from 2011/2012 onwards. This decrease in the gross profits is mainly due to the gradual increase in the cost of sales during that period.

(Fig. A)
The net profit margin of ACL Cables has recorded a notable decline from 2011/2012 financial year and reached its lowest point of 1.55% in 2013/2014. A significant increase in the distribution costs could be identified as the major reason for the low profitability. This may be due to increase in the advertising and other promotional expenditure due to stiff competition in the industry.

(Fig B)
Asset turnover ratio measures the efficiency of a company's use of its assets in generating sales revenue to the company. In this respect, ACL Cables has a higher asset turnover ratio during the period under review implying that company is generating more revenue per rupee of assets.
Return on Assets (ROA) 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.

The ACL Cables has recorded a low ROA in the financial year 2013/2014 most likely is due to low profits. However, ROA has increased considerably during the next two years indicating that company has managed to convert its investments into profits.

(Fig C)
The return on shareholder's equity is calculated to see the profitability of owners' investment. Return on Equity (ROE) indicates how well the firm has used the resources of owners. The earnings of a satisfactory return is the most desirable objective of a business. The ratio of net profit to owners' equity reflects the extent, to which this objective has been accomplished.

The ROE of ACL Cables has declined from 2011/2012 onwards and reached its lowest in 2013/2014 financial year. This is mainly due to the gradual decline in net profits during that period.

(Fig D)
The working capital represents the amount of current assets that is left if all current debts are paid. The company's ability to meet obligations, expand volume and take advantage of opportunities is often determined by its working capital.
ACL Cables has maintained a comfortable amount of working capital during the period under review. In the 2013/2014 financial year, the working capital has decreased to a certain extent mainly due to high borrowings. The burden of borrowings has eased afterwards and as a result, the Company maintained a comfortable working capital, which is a positive sign of growth and health.

(Fig E)
The current ratio is a measure of the firm's short-term solvency. It indicates the availability of current assets in rupees for every one rupee of current liability. A ratio of greater than one means that the firm has more current assets than current claims against them.

ACL Cables has maintained a steady current ratio during the entire period. However, the ratio has dropped to 1.33:1 in 2013/2014 financial year nevertheless has managed to record a health ratio of close to 2:1 in 2015/2016. In other words, margin of safety for creditors has improved significantly.
Accounts receivable turnover indicates the number of times debtors turnover each year. Generally, the higher the value of debtors turnover, more efficient is the management of credit.
The accounts receivable turnover is relatively low at ACL Cables. The average of debtors turnover is 2.7 times which is consistent during the period with marginal fluctuations.

(Fig F)
Overall profitability of ACL Cables has shown a significant improvement during 2011/2012-2015/2016 the period under review, although there were few difficult years. The returns on equity has shown a declining trend at the initial years but have recovered significantly during the last two years. This may be due to the effective utilization of borrowings the Company has obtained in the middle period of our analyzing period. Professor Kennedy made these remarks based on the analysis he had made by analyzing the financial statements of ACL Cables Plc.

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