ABANS ELECTRICALS PLC

Analysis of Financial Performance and Financial position for 2009/2010

Group Members

G.Ganadheipan090149UR.R.Fonseka

090140J

H.Y.V.Dias

090111X

M.B.C.Hemadasa090176A

H.C.Gunasekara 090159B

Date of Submission:17/03/2012Table of Contents

2Introduction

3Relevant Ratios

4Notes on Calculated Ratios

5Profitability/Efficiency

7Liquidity

8Asset Management

9Financial Structure or Capitalization ratios

11Market Test

Introduction

The objective of formulating this report is to analyze the financial performance for the year ended 31st March 2010 of ABANS Electricals PLC and to assess the financial position of the same company as at 31st March 2010. In addition to this, the report will also comprise of a horizontal analysis between the performance and position parameters of the company too. Relevant Ratios

Notes2009/20102008/2009

Profitability/Efficiency RatiosLKRLKR

Revenue2,419,974,7222,069,058,660

Cost of sales2,086,528,2411,824,219,777

Gross profit333,446,481244,838,883

Profit before interest and tax205,643,40396,747,061

Net Profit 67,562,106-28,092,354

Total Capital Employed1503,609,745485,371,430

Total Assets(Current Assets + Non Current Assets)1,530,946,5621,199,213,797

Gross Profit Margin13.78%11.83%

Net Profit Margin2.79%-1.36%

Asset Turnover Ratio(Sales/Closing Assets)1.581.73

Earning Power(PBIT/Closing total assets)0.130.08

ROE(Net income/Closing equity)230.69%-18.41%

ROCE(NOPAT/Total Capital Employed*100)40.83%19.93%

Liquidity Ratios

Current Ratio31.151.15

Quick Ratio30.920.76

Asset Management/ Activity Ratios

Debtors turnover ratio(Cost of sales/Closing debtors)67.6129.31

Average collection period(360/Debtors turnover ratio)47.3312.28

Average payment period(Closing creditors/purchases)x360536.3842.53

Inventory turnover(Cost of sales/Closing inventory)48.145.68

Financial Structure or Capitalization ratios

Debt/Equity Ratio71.292.18

Debt/Total Assets Ratio(Total debt/Total Assets*100)1118.51%27.75%

Equity Ratio(Total equity/Total Assets*100)1114.38%12.73%

Interest Cover/Times interest earned(PBIT/ Finance cost)81.930.84

Market Test Ratios

Earnings per Share931.73-13.19

Dividends per Share3.40

Dividend Payout Ratio10.72%0.00%

Price Earnings Ratio104.56-4.85

Notes on Calculated Ratios

NOTESBalance as at 31/03/2010Balance as at 31/03/2009

LKRLKR

1) Total Capital Employed = Total equity + Long term Liabilities + bank O/D=503,609,745485,371,430

2)Total Equity=220,179,215152,617,109

3) Current Assets=1,293,813,769955,326,666

Current Liabilities=1,125,642,663831,171,653

Current Assets - Inventories=1,037,561,034634,306,627

4)Closing Inventory=256,252,735321,020,039

5)Closing creditors=210,875,138215,488,641

6)Closing debtors=274,337,41362,229,526

7) Debt(Total Noncurrent liabilities+ Bank O/D)=283,430,530332,754,321

8) Finance cost=106,728,482115,242,254

9)Weighted average number of shares=21294002129400

10)Market price of a share=144.7564.00

11)Total Assets=1,530,946,5621,199,213,109

Profitability/Efficiency

The Revenue of the company ended 31st March 2010 exceeds Rs 2.4 billion. This is a Rs 350 million increase from the previous year. The cost of sales of the company has risen by Rs. 262 million from last year. As a result the gross profit of Rs 333.4 million of the company for the year ended 31st March 2010 is a rise of Rs 88.6 million from that of the previous year. Therefore it is noticeable that the company has been able to sustain an increase in operational profitability with the period 2009/2010.

The profit before interest and tax has had a rise of Rs 20 million between the two sessions. The reason for this is the increase in other incomes (Rs 9 million) and reductions in both distribution costs (Rs 10 million) and administrative expenses (Rs 1 million). This can be considered as a significant improvement in terms of efficiency because the reduction in costs has occurred in a period where sales have increased. The reason for the reduction in distribution costs could be the use of effective distribution channels and techniques.

The finance cost of the company for the period 2009/2010 is about Rs 9 million lower than the respective amount for the period 2008/2009. The reason for this is the repayment of interest bearing borrowings during the accounting period. According to the balance sheet, an effective reduction of Rs 34 million of the interest bearing borrowings has occurred during the period. This amounts to a 59.6% reduction of the interest bearing borrowings. An added advantage of this is the reduced gearing level which would reduce the risk posted towards the stakeholders of the company.

There has been a significant increase in the total assets. When analyzing the balance sheet it was found that this increase is almost entirely due to the increase in current assets. No new additions have been done to the noncurrent assets (property, plant and equipment).

The gross profit margin which was 11.83% for the period 2008/2009 has gone up to 13.78% during the period 2009/2010. The 2% increase indicates a marginal increase in the profitability with respect to production and selling operations.

The net profit margin which was poor (1.36%) last year has risen up to 2.79% this year. This 4.15% increase is greater than the 2% increase in gross profit and may be as a result of the increased efficiency in supporting activities such as transportation and administration. Some contribution has been done by the reduction in finance cost as well. It should be noted that there is a considerable increase in the income tax expense between the two years. The increase amounts to about Rs 22 million.

Even though the revenue has increased compared to the last year, the asset turnover ratio has come down to 1.58 from the last year figure of 1.73. This is due to the significant rise in the total assets figure. The values could be misleading when considering the efficiency because its the current assets that have increased not the revenue generating noncurrent assts.

ROE has shown a negative figure for 2008/2009 and this has resulted due to the net loss made at the yearend by the company. At the end of 2009/2010, figure has gone up by 49.1%, to a value of 30.69% mainly due to the significant increase in the net profit. It is important to notice that the total capital employed has also risen during the rear due to the retention of 2008/2009 earnings. ROCE has increased drastically by 20.9% over the year from 19.93% in 2008/2009 to 40.83% in 2009/2010. This indicates a massive development in overall performance of the company. Operating profit of the company has increased by 108 million LKR due to better management of operating cost which includes administration cost and distribution cost (improved efficiency) and this is the main cause for the rise in ROCE. LiquidityThere is no change seen in the companys current ratio for the two years and it remains at 1.15. But when analyzing the values of each current asset given in the Balance sheet, we can see that this same value of 1.15 in both years have been reached by pure co-incidence.

The inventory levels have fallen down by LKR 65 million where as the trade receivables have increased by a thundering LKR 212 million. This indicates the fact that the company has done credit sales in a very large scale and is yet to collect the cash from a lot of customers. Having a receivable amount this big introduces the risk of bad debt. The sales department will have to keep a close eye on the debtors and maintain a well updated portfolio of all the debtors for the inspection purposes. It is important to consider the credit worthiness of the current debtors to figure out the high risk customers who are likely to become bad debts. Suitable measures should be adopted in collecting the cash from those customers.

It is possible that the sales department has adopted reducing the terms of credit sales with the intention of increasing sales so that the profitability of the company would increase. There would have been pressure applied on the relevant personnel to make a good impression on the shareholder after making a loss during the 2008/2009. The credit terms should have to be re-evaluated and re-adjusted to that the level of trade receivables would not increase to such a great value which poses a high risk towards the company.Another observation made is the increase of LKR 180 million of the Amounts due from related parties figures. Notes to the balance sheet shows that majority of these related parties are subsidiaries of ABANS group and internal circulation of cash within these entities should also be efficient, especially because it affects the measurement of performance of each entity. There have not been significant changes in current liabilities except for the Interest bearing borrowings. Interest bearing borrowings has undergone an increase of LKR 316 million. Even though theres no standard value for the current ratio, its better to maintain the current ratio around 2:1. Identifying the current ratio of the similar companies in the market would help to determine a benchmark for this figure. The current ratio of the company at the moment (1.15:1) can be considered to be within the acceptable limits. This indicates that the company is able to meet its current liabilities as they fall due. The critical factor to be remembered is that there is a significant risk in the realization of the current assets because majority of the current assets amount to trade receivables which is subjected to the risk of bad debts.

Quick ratio has gone up from 0.76 to 0.92, which is better when considering the risk. By the increment it can be said that the risk of not being able to meet its short term debts as they fall due has been lowered and also having 0.92 can be a healthy, compared to 0.76, when the business is considered. It is accepted in general that having a quick ratio of around 1:1 is adequate. The quick ratio of the company (0.92:1) is very close to this and hence falls under acceptable conditions.Asset ManagementDebtors turnover ratio has gone down significantly by 21.7 probably because of the significant increase of 212.1million LKR in the closing debtors over the year. Average collection period also has gone up significantly from 12.28 days to 47.33days (an increase of 35 days), due to the significant decrease of the above ratio. Having a high receivable collection period is not favorable as it poses greater risk and the company needs to concentrate more on receivables management. Its possible that having a high level of debtors might cause a financial problem to the company in the future.Average payment period indicates a slight decrease which may cause positive reputation for the company, and this may have occurred due to the near 5 million LKR decreases of the closing creditors. The ratio has fallen by 6 days. This would be because the company was able to pay the creditors early due to better circulation of cash. This is well indicated by the cash and cash equivalents balance which has risen up to LKR 29 million from just LKR 5 million at the beginning of the year. Paying the creditors in time would help in improving the credit worthiness of the entity.Inventory turnover has increased over the year due to increased cost of sales and decreased closing inventory. This indicates that the inventory in hand is fast moving and inventory circulates fast within the organization. A reasonably high inventory turnover level is desired as it indicates fast moving stocks and lowers the risk of carrying obsolete stock. It also gives away the message that the company is active in the market and there is high demand for the companys products within consumers.The topic Asset Management is closely related to the topic Liquidity. The risk of bad debts is highlighted by the increased Average collection period value.

Financial Structure or Capitalization ratios

Under this section, an in depth analysis of the entitys capital structure and its position will be carried out. Sources of finance, level of gearing, ability of the company in meeting ownerships objectives will be discussed.

Being a listed company in the Colombo Stock Exchange, the company is financed by equity shareholders and debt investors. The company passes its returns to the equity shareholders by means of dividends and share capital appreciations.

The gearing ratio indicates the risk to the shareholders in the company. It makes a comparison between the debt financing and equity financing based on their amounts. Debt/Equity ratio has been 2.18 at the end of 2008/2009 period. This can be considered as a very high risk situation where the contribution of financing of the company has been primarily been done by the debt investors (banks etc). The situation has somewhat been dealt with during the period 2009/2010 as at the end of that period Debt/Equity ratio has fallen down to 1.29. Still the debt financing is greater than equity financing.

The returns on debt financing (interest etc) take preference over the returns given to equity financing (dividends). This makes equity financing the risk capital. The company has to decide up on the suitable capital structure. This can be done by doing some research on the industry benchmarks. There will be other entities which do business similar to ABANS Electricals PLC. By identifying the companies who have a well functioning finance structure among them and adopting a similar structure would help ABANS Electricals to mitigate the risk.One observation done when going through the companys financial statements is that it has done no equity share issue within the period 2009/2010. The share capital remains static at LKR 27.027 million with 2129400 shares. One can argue that the companys expansion has not been financed by proportionate share of equity and debt financing. Interest bearing borrowings falling under Current Liabilities has raised by LKR 316 million and it looks like this money has been used in running the companys operations. Thus it is possible that the growth of the company in 2009/2010 period was not financed by a long term financing source. Usually the organic growth of a company is financed by wither equity capital, debt financing or both but not current liabilities.

The Debt/Total Assets ratio also has fallen from 27.75 to 18.51 within the year. This indicated a reduction in the level of debt financing for the total assets. This effectively reduces the risk of creditor pressure that could be applied on the company. A company with a high Debt/Total Assets has to be on the alert especially in times of rising interest rates. Since ABANS Electrical PLCs Debt/Total Assets ratio is in the decline, one can deduce that the proportion on equity financing towards total assets is in the rise compared to the proportion of debt financing.

The Equity ratio identifies the proportion of total assets that has been financed by the equity shareholders. It has risen marginally from 12.73% to 14.38%, thus indicating the fact that the proportion of equity financing in total assets has increased. But still, at the end of financial period 2009/2010, the Debt/Total assets ratio remains greater than Equity/Total assets ratio. This might be a fact to be considerate about.

The Interest Cover ratio gives an indication of the ease of paying interest on the current outstanding debt. It is generally accepted than if the Interest Cover is less than 1.5, the company would be having difficulty in meeting the interest payment requirements. A ration less than 1.0 indicates that the company is not generating enough funds to repay the finance cost arising from debt financing. The Interest Cover ratio of ABANS Electricals PLC at the end of 2008/2009 period has been 0.84. This shows that the company must have struggled in meeting their debt obligations that year. But at the end of the 2009/2010 session it has risen to 1.93 and this is a reasonably safe level to stand in the view of the company as it is evident that the company is able to pay off their finance cost without any difficulty. As a result of this, the company may be able to build up reputation among creditors and lenders, thus increasing the companys credit worthiness. The main advantage in improving the credit worthiness if that in long term, the company will be able to borrow at a lower interest rate from its trusted debt investors.

Although it does not strictly apply to ratio analysis, it is important to consider the share price fluctuations within the year when discussing capital structure of the company. The share price of the company at the beginning of the period 2009/2010 was Rs 64.00 and this has gone up to Rs 144.75 within the year. This is a 126% increase in the share price. This would certainly please the equity shareholders and would contribute towards the reputation of the company within the stock exchange.Market Test

In 2008/2009, company has suffered a net loss of 28,092,354 LKR, and in 2009/2010 it has recorded a net profit of 67,562,106 LKR. So, the increase in net profit over the year is more than 95 million LKR. Weighted average number of shares was maintained constant. As a result of this, EPS has recorded a significant increase by Rs 44.92. This would have created a pleasant impression among the shareholders.Dividend per share, dividend payout ratio has increased from a null figure in 2009 to Rs 3.4 in 2010. The lost attraction for the investors in the previous financial year has been restored by the company and it can be considered as a significant comeback. This may have contributed to the increase in the share price as well.The Dividend Payout ratio for the year ended 31st March 2009 is 0.00% because no dividend was paid during that year. But the same ratio is 10.72% for the year ended 31st March 2010 since the company has declared a dividend per share of Rs 3.4.

The P/E ratio gives an indication towards the risk to the equity investor in investing in a company. Higher the P/E ratio, lower the risk to the investor. Since it was a loss that the company yielded at the end of the period 2008/2009, the P/E ratio for that year is a negative value. This would have distorted the figure of the company. But the company has been able to comeback strongly and increases the P/E ratio up to 4.56 from last years figure of -4.85. This would have helped to increase the confidence in the minds of the investors as to the risk in investing in the company is low.

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