FINANCIAL MANAGEMENT AND ENTREPRENEUSHIP

Table of Contents
1. Executive Summary............................................................................................................1

2. Overview.............................................................................................................................1

3. Backgrounds of the Chosen Business Organizations.........................................................1

3.1. Sierra Cables PLC.......................................................................................................1

3.2. Lanka Aluminium PLC...............................................................................................2

4. Financial Performance Analysis.........................................................................................2

4.1. Profitability Ratios.......................................................................................................2

4.2. Liquidity Ratios...........................................................................................................3

4.3. Efficiency Ratios.........................................................................................................4

4.4. Solvency Ratios...........................................................................................................6

4.5. Stock Market Performance Ratios...............................................................................7

4.6. Areas to Improve and Remedial Actions.....................................................................8

5. Cruciality of Managing Working Capital...........................................................................9

6. Assessment of Managing Working Capital of the Chosen Companies............................10

7. Financial Factor Analysis.................................................................................................12

8. Non Financial Factor Analysis.........................................................................................13

9. Conclusion........................................................................................................................14

References................................................................................................................................15

List of Figures
Figure 1: Profitability Evaluation : Lanka Aluminium PLC..................................................2

Figure 2: Profitability Evaluation : Sierra Cables PLC..........................................................3

Figure 3: Liquidity Evaluation : Lanka Aluminium PLC......................................................4

Figure 4: Liquidity Evaluation : Sierra Cables PLC..............................................................4

Figure 5: Efficiency Evaluation : Lanka Aluminium PLC.....................................................5

Figure 6: Efficiency Evaluation : Sierra Cables PLC.............................................................5

Figure 7: Solvency Evaluation : Lanka Aluminium PLC......................................................6

Figure 8: Solvency Evaluation : Sierra Cables PLC..............................................................7

Figure 9: Market Value Evaluation : Lanka Aluminium PLC...............................................8

Figure 10: Market Value Evaluation : Sierra Cables PLC.....................................................8

Figure 11: Lanka Aluminium PLC : Working Capital.........................................................10

Figure 12 : Sierra Cables PLC : Working Capital................................................................11

Figure 13: Lanka Aluminium PLC : Working Capital Cycle...............................................11

Figure 14: Sierra Cables PLC : Working Capital Cycle.......................................................12

List of Tables
Table 1: Financial Factor Evaluation...................................................................................13
1. Executive Summary
A necessary influence that drives organizations towards growth decisions is the realization of
the strategic fit between resources and competencies of an organization (Angwin, et al.,
2022). As a cutting-edge and innovative company in technology, ACL Cables has established
a high brand reputation. In this report, a suitable related diversification strategy is
recommended for ACL to further grow and expand its market dominance within the Sri
Lankan context and overseas.

2. Overview
Related diversification is amongst the most prominent strategic options that a company can
embrace. As a result of the convergence of resonant impacts on resource consumption, this
strategy calls for organizations to depend on brand linkages between the organization and
new regions of operations (Tien, 2019). In this report, appropriate internal business growth
strategies are recommended for ACL, notably, enabling the company to share and transmit
crucial success factors, that results resource allotment efficiency and cost benefits (Martínez-
Campillo, 2016).

3. Backgrounds of the Chosen Business Organizations

The selected two companies to assess the suitability for related diversification for ACL are
Sierra Cables, which is a competitive product launcher and Lanka Aluminium PLC, which is
a producer of a core raw material, aluminium.

3.1. Sierra Cables PLC

A wide variety of copper and aluminium cable products are designed, manufactured,
supplied, and exported by Sierra Cables PLC for use in the power, industrial, and
telecommunication domains in the local context and beyond. It has a great history of over 25
years and the first cable manufacturer of Sri Lanka (Sierra Cables PLC, n.d.).

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3.2. Lanka Aluminium PLC
A BOI-approved business, Lanka Aluminium Industries PLC, specializes in producing
anodized and powder-coated aluminium moulds. The product line has divisions for usage in
architecture, industrial hardware and other sophisticated industries. Being an ISO 9001:2008
certified company, it operates since 1986 (Lanka Aluminium PLC, n.d.).

4. Financial Performance Analysis

4.1. Profitability Ratios
Profitability ratio is an indication that implies how well an organization can make use of its
resources to generate returns with respect to sales and operating expenses (Lesáková, 2007).

In the given scenario, Gross Profit margin (GP), Profit Before Tax ratio (PBT) and admin
cost margin were reviewed. The gross profit margin demonstrates the amount of gross profit
the company may generate for each rupee of total income. GP margin of both the companies
have showcased an increasing trend throughout the past three years, though Sierra indicate a
slight drop in the second year. Identically, the PBT ratio also has grown over the years
demonstrating a favourable indication for both the organizations. The admin cost to sales
margin has dropped by 2022 in comparison to year 2020 for both the companies and it is
even a good sign.

The efficacy of the internal management is indicated by the significant growth of the said
ratios. Even amidst the pandemic situation the financial performance of Lanka Aluminium
PLC has not got impacted. However, Sierra was slightly impacted, but the company has
recovered and has got back to the track by 2022.

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Figure 1: Profitability Evaluation : Lanka Aluminium PLC

Figure 2:
Profitability Evaluation : Sierra Cables PLC

4.2. Liquidity Ratios

Liquidity ratios generally demonstrate the capability of a firm to settle all of its current
liabilities through its current assets(Meng, et al., 2021).

As liquidity of both firms are concerned, both the companies have indicated a positive growth
in the past three financial years.  current ratio reveals how much of its current assets are offset
by its current liabilities (Krishnankutty & Chakraborty, 2011). Both current ratios have
increased by 2022, in comparison to 2020. Furthermore, maintaining the current ratio at a 2:1
ratio is standard procedure. But, both the firms have not complied with that demand. Second,
the quick asset ratio demonstrates how well a business can settle its present liabilities entirely
with its cash-generating short-term assets. It has also shown a growing pattern throughout
time. The ratio is maintained at a 1:1 level, which is the accepted industry standard.

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Figure 3: Liquidity Evaluation : Lanka Aluminium PLC

Figure 4: Liquidity Evaluation : Sierra Cables PLC

4.3. Efficiency Ratios

Efficiency ratios are used to evaluate a management's ability to effectively utilize company
resources, such as the money and assets utilized. It is a measure of how much cash an
organization may produce with respect to the cash it invested on operations. Two of the basic
efficiency ratios were calculated accordingly (CFI, 2022).

Receivable period is an indication that indicate the total number of days that the trade
receivables would take to get converted into cash. Accordingly, the receivable days of Lanka
Aluminium PLC has dropped over the three years signalling a positive trend. Though,

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receivable days have increased significantly in 2021 with the pandemic shock, Sierra could
also witness a low level of receivable period by 2022. Payable period is the total number of
days that the company is taking to settle down its trade payables. Lanka Aluminium PLC has
recorded a increasing trend with respect to its payable period which is favourable. However,
Sierra has received a low number of payable set off days in 2022 in comparison to 2021 and
it is unfavourable to the organization.

Figure 5: Efficiency
Evaluation : Lanka Aluminium PLC

Figure 6: Efficiency
Evaluation : Sierra Cables PLC

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4.4. Solvency Ratios
The ability of a certain corporation to satisfy its non current liability obligations is referred to
as "solvency." Calculations of the solvency ratio are utilized to establish a proper balance of
the capital structure (Abdul Rahman, 2017).

The calculated two solvency ratios are the debt to equity ratio and interest coverage ratio. It is
favourable if the company can maintain a low amount of debts in respect to equity. Less debt
means that the organization is less leveraged, which is good for it. Lanka Aluminium PLC
has indicated a decreasing trend in relation to debt to equity ratio throughout the past three
years. However, Sierra has demonstrated a little increase in its debt to equity ratio in 2022, in
comparison to 2021. As the interest coverage is concerned, a high rate is acceptable because
it illustrates the corporate potentiality to bear high amounts of liabilities. The interest
coverage has grown in relation to Lanka Aluminium PLC but it has downgraded in relation to
Sierra Cables by 2022.

Figure 7: Solvency Evaluation : Lanka Aluminium PLC

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Figure 8: Solvency Evaluation : Sierra Cables PLC

4.5. Stock Market Performance Ratios

Stock market performance ratios (known as market value ratios) are used to assess how well
a certain firm generates earnings and income. Maintaining favourable values is essential for
the business continuation (wikiaccounting, 2023).

Earning per share is the proportion of earnings that the company witness with respect to total
number of outstanding shares. Higher the EPS, it is better for the organization. Both the
companies have indicated a favourable trend with respect to EPS. The price-earnings ratio is
used to evaluate the relationship between corporate earnings and share price. Investors can
gain a better grasp of the company's possible risk-return swings by looking at the trend of this
ratio. The PE ratio has dramatically dropped of Lanka Aluminium PLC by 2022 in
comparison to 2020. That was because of the significant market price drop. Sierra has
indicated a growth in 2021 but has witnessed a drop by 2022 with respect to its PE ratio.

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Figure 9: Market Value Evaluation : Lanka Aluminium PLC

Figure 10: Market Value Evaluation : Sierra Cables PLC

4.6. Areas to Improve and Remedial Actions

• Examining the production expenses to find places where money might be saved.

• Make an effort to bargain with vendors for price drops for savings at on-time payments.

• By offering upsells and discounts to the 80% of customers who are most lucrative (Pareto
Principle)
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• Market expansion through the targeting of new demographics and the introduction of
cutting-edge products

• Stock repurchase program to lower the number of outstanding shares and raise EPS

• Keep your financial options open while raising your income.

• Pay off debt and ensure that borrowing is kept to a minimum

5. Cruciality of Managing Working Capital

Working capital management can be defined as an organization's capacity to settle its current
liabilities with the assistance of its current assets. Maintaining an appropriate level of
working capital improves overall organizational performance while achieving operational
success and minimizing risks (Harris, 2005).

An organization uses working capital to meet its financial commitments with a settlement
time of less than a year. It is the responsibility of financial managers to determine the
appropriate amount of working capital to keep in hand while preserving the ability of the
organization's financial resources to generate profits. Similar to how good blood flow is
essential to the health of the human body, efficient cash flow circulation is also essential to
the continued survival and well being of any firm. As a result, working capital management is
regarded as a key component of financial management (Padachi, 2006).

Three components make up the majority of working capital: inventory, receivables, and
payables. The working capital cycle is the relationship between inventory, trade receivables,
and trade payables. The working capital cycle is the amount of time needed to convert net
current assets into cash. Long cycles are warning signs that capital is being trapped and not
producing an income for an extended length of time. So, it is believed that short cycles are
healthier and produce more benefits for the entity (Panigrahi, 2015).

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6. Assessment of Managing Working Capital of the Chosen
Companies
One of the crucial aspects of financial management is working capital management. It
focuses on the business's short-term financing, which is a closely associated trade between
profitability and liquidity(Politeknik NSC Surabaya, 2010).

Net working capital is the difference between current assets and current liabilities(Politeknik
NSC Surabaya, 2010). Throughout the period of three years, both the organizations have
maintained current assets over current liabilities hence both the organizations are having a
sound working capital management established within themselves.

Figure 11: Lanka Aluminium PLC : Working Capital

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Figure 12 : Sierra Cables PLC : Working Capital

Working Capital Cycle can be computed by adding inventory days to receivable days and
deducting total number of payable days from the result. Shorter working capital cycle is
preferable because it allows an organization to speedily free up cash and become more agile.
Accordingly, Lanka Aluminium PLC represents a declining working capital cycle.
Contrastingly, the working capital cycle of Sierra Cables has risen over the three years.

Figure 13: Lanka Aluminium PLC : Working Capital Cycle

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Figure 14: Sierra Cables PLC : Working Capital Cycle

Appropriately, it is evidential that Lanka Aluminium PLC is having a better working capital
management compared to Sierra Cables. As the management illustrates, all segments of the
Group have adopted a tactical working capital management plan, under which
trade collections are observed and debtors' periods are kept to a minimum. To maximize the
working cash cycle, thorough vendor assessments and purchasing techniques ensure that the
right prices are paid for supplies and that highest credit durations are negotiated (Lanka
Aluminium PLC, 2021/22).

7. Financial Factor Analysis

Based on the financial assessment made, the below summary illustrates the suitability of the
firms for the targeted acquisition decision of ACL Cable PLC.

Criteria Lanka Aluminium PLC Sierra Cables PLC

Profit Earning Very Good Good

Liquidity Very Good Good
Efficiency Very Good Average
Solvency Very Good Good
Capital Market Productivity Average Average

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 Working Capital Management Very Good Average

Table 1: Financial Factor Evaluation

The analysis suggests that the best strategic alignment that can be proposed for ACL for a
backward integration is with Lanka Aluminium PLC.

ACL can have timely operations if it either get merged or acquire a giant upstream
aluminium supplier. Apparently, ACL benefits greatly from being able to source a sizable
portion of its aluminium needs from Lanka Aluminium PLC's plants. As a result, ACL can
successfully manage changes in the price of raw materials since no external acquisitions are
required (Dissanayake & Munasinghe, 2017).

All financial ratios are supporting the company to have an excellent level of financial
performance within the organisation. Price earning ratio under stock market performance is
the only ratio that have behaved unfavourably in 2022. Instead of that, all other ratios are
positive and supportive. Even the working capital efficiency is at a fine position indicating
that the company is not struggling with short term liquidity concerns.

8. Non Financial Factor Analysis

Strategic mergers and acquisitions are tough and risky business decisions. Apart from the
financial evaluation, non financial factors should be considered when formulating a suitable
acquisition strategy. One of the consideration is cross business strategic fits that are beneficial
to ACL. Specifically, ACL has a supply chain strategic fit with Lanka Aluminium PLC. Due
to the possibility for skills transmission in material procurement, increased negotiating
leverage when dealing with shared suppliers, the advantages of increased collaboration with
shared supply chain partners, and/or increased leverage with shippers in trying to secure bulk
discounts on incoming items, businesses that have strategic supply chain fits can perform
much better together. Moreover, the strategic fit attached to technological activities would
enable ACL to yield benefits through the transmission of manufacturing technologies and
technical know-hows as both the organizations are operating in the same industry (Balhareth,
2017).

Extending the production portfolio is a regulation that is connected to corporate

diversification. When improving efficiency is the main objective, relevant diversification is

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preferable since combinations boost organizational effectiveness. Moreover, related
diversification is mostly attached to profitability motives. Effective strategies would exploit
economies of scale. To be more specific, if ACL get merged with Lanka Aluminium PLC,
that would be a backward vertical diversification. Backward integration is a strategy that
Businesses might adopt in the hopes of lowering costs, boosting profits, and enhancing
production efficiency. Backward integration can also be used to obtain a competitive edge
and raise barriers to entry for new competitors in the market. Thereby, the company can
secure its market leadership in the long term of operations (Anıl & Yigit, 2011).

Further, the proposed synergy with the upstream party is bringing manufacturing procedures
back in house. The strategy would enable ACL to have a greater control over its supply chain,
thereby the quality can be maintained at high standards. Raw material plants can be operated
as separate business units and they can facilitate ACL to grow in higher volumes in the
future.

9. Conclusion
The evaluation was limited to two firms and a few financial and non financial evaluation
criteria due to analytical constraints. Yet, the analysis can be further extended with the use of
factors that were not subjected to this analysis as disregarded financial ratios, legislative
standards applicable for the M&A decisions and strength of the relationships. Moreover,
several other firms, that are not listed in the Colombo Stock Exchange can be subject to
analysis.

As according to all the financial and non-financial aspects discussed in the above sections, it
is conclusive that the considered strategic integration with Lanka Aluminium PLC is a viable
decision that ACL Cables can move on with.

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 References
Abdul Rahman, A. A. A., 2017. The Relationship between Solvency Ratios and Profitability
Ratios: Analytical Study in Food Industrial Companies listed in Amman Bursa. International
Journal of Economics and Financial Issues, 7(2), pp. 86-93.

Angwin, D. N. et al., 2022. Does merger & acquisition (M&A) strategy matter? A
contingency perspective. European Management Journal, 40(6), pp. 847-856.

Anıl, I. & Yigit, I., 2011. The Relation between Diversification Strategy and Organizational
Performance: A Research on Companies Registered to the Istanbul Stock Exchange Market.
Procedia Social and Behavioral Sciences, Volume 24, p. 1494–1509.

Balhareth, H., 2017. THE NATURE OF THE STRATEGIC FIT BETWEEN BUSINESS
AND IT. International Journal of Information Technology & Management Information
System, 8(3), pp. 1-8.

CFI, 2022. Efficiency Ratios. [Online]

Available at: https://corporatefinanceinstitute.com/resources/accounting/efficiency-ratios/
[Accessed 10 March 2023].

Dissanayake, D. M. R. & Munasinghe, A., 2017. Strategic Synergy of Post-Acquisition: A

Case Story on ACL Cables PLC vs Kelani Cables PLC & Key Insights of Brand Positioning
of“Kelani Brand''. Sri Lanka Journal of Marketing, 3(1), pp. 59-71.

Harris, A., 2005. Working capital management: difficult, but rewarding, s.l.: Financial
Executive.

Krishnankutty, R. & Chakraborty, K. S., 2011. Determinants of Current Ratios: A Study with
Reference to Companies Listed in Bombay Stock Exchange, Tripura: ICFAI University.

Lanka Aluminium PLC, 2021/22. Annual Report, Colombo: Lanka Aluminium PLC.

Lanka Aluminium PLC, n.d.. Our Company. [Online]

Available at: https://www.aluminium.lk/OUR%20COMPANY.html
[Accessed 23 March 2023].

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Lesáková, L., 2007. Uses and Limitations of Profitability Ratio. Budapest, Hungary , 5th
International Conference on Management, Enterprise and Benchmarking, Faculty of
Economics, Matej Bel University.

Martínez-Campillo, A., 2016. The benefits of related and unrelated diversification strategies
in the Spanish context: What is the difference that executive leadership style can make?.
Leadership, 12(1), pp. 86-119.

Meng, S., Wei, B., Xu, G. & Zhang, R., 2021. Analysis of Enterprise Operation Under the
Impact of COVID-19 Epidemic: A Case Study of Nike Inc.. Paris, International Conference on
Financial Management and Economic Transition- Atlantis Press.

Padachi, K., 2006. Trends in Working Capital Management and its Impact on Firms’
Performance: An Analysis of Mauritian Small Manufacturing Firms. International Review of
Business Research Papers, 2(2), pp. 45 -58.

Panigrahi, A. K., 2015. Managing Working Capital – A Practical Approach. International

Journal on Textile Engineering and Processes, 1(1), pp. 1-12.

Politeknik NSC Surabaya, 2010. Working Capital, East Java: Politeknik NSC Surabaya.

Sierra Cables PLC, n.d.. About Us- Sierra Cables PLC. [Online]
Available at: https://www.sierracables.com/
[Accessed 23 March 2023].

Tien, N. H., 2019. Related and Non-Related Diversification Strategy of Domestic Business
Groups in Vietnam. International Journal Of Advanced Research in Engineering&
Management , 5(7), pp. 12-17.

wikiaccounting, 2023. Investor Ratios: Defenition And Types Of Investor Ratios. [Online]
Available at: https://www.wikiaccounting.com/investor-ratios/
[Accessed 10 March 2023].

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 Appendix

Lanka Aluminium PLC

Profitability Ratios
Year Varience
2022 2021 2020 2022/21 2021/20 Overall
Gross Profit Ratio
Gross Profit/ Sales *100% 32.52% 31.45% 25.47% 1.08% 5.97% 7.05%
Profit Before Tax Ratio
Profit Before Tax/ Sales *100% 17.44% 13.62% 3.44% 3.82% 10.17% 13.99%
Administrative Cost Margin
Admin Cost/ Revenue *100% 5.83% 7.16% 7.34% -1.33% -0.18% -1.51%

Sierra Cables PLC

Profitability Ratios
Year Varience
2022 2021 2020 2022/21 2021/20 Overall
Gross Profit Ratio
Gross Profit/ Sales *100% 18.70% 16.02% 17.02% 2.68% -1% 1.68%
Profit Before Tax Ratio
Profit Before Tax/ Sales *100% 7.07% 6.14% 4.75% 0.93% 1.39% 2.32%
Administrative Cost Margin
Admin Cost/ Revenue *100% 2.13% 3.04% 2.92% -0.90% 0.12% -0.78%

Lanka Aluminium PLC

Liquidity Ratios
Year Varience
2022 2021 2020 2022/21 2021/20 Overall
Current Ratio
Current Asset/ Current Liabilities 1.8269 1.416 1.13406 29.02% 24.86% 61.09%
Quick Ratio
(Current Assets- Inventory)/ Current Liabilities 0.93968 0.85898 0.63121 9.39% 36.08% 48.87%

Sierra Cables PLC

Liquidity Ratios
Year Varience
2022 2021 2020 2022/21 2021/20 Overall
Current Ratio
Current Asset/ Current Liabilities 1.44169 1.31849 1.35533 9.34% -2.72%
17 | P6.37%
age
Quick Ratio
(Current Assets- Inventory)/ Current Liabilities 0.87692 0.82337 0.78844 6.50% 4.43% 11.22%
 In Rs. 000
Lanka Aluminium PLC

Stock Market Performance Ratios

Year Varience
2022 2021 2020 2022/21 2021/20 Overall
Basic EPS 5.3 3.76 0.63 41% 497% 741%

Price Earning Ratio 2.96 4.41 68.25 -33% -94% -96%

Sierra Cables PLC

Stock Market Performance Ratios

Year Varience
2022 2021 2020 2022/21 2021/20 Overall
Basic EPS 0.87 0.6 0.43 45% 40% 102%

Price Earning Ratio 7.85 9.48 4.92 -17% 93% 60%

Lanka Aluminium PLC

2022 2021 2020
Inventory Days
Inventories/ Cost of Sales *365 days 182.37 150.27 155.63
Receivable Period
Receivables/ Revenue *365 days 100.95 123.44 129.94
Payable Period
Payables/ Cost of Sales * 365 days 85.96 65.64 42.31
Working Capital Cycle 197.37 208.07 243.27

Sierra Cables PLC

2022 2021 2020

Inventory Days
Inventories/ Cost of Sales *365 days 116.46 144.71 126.97
Receivable Period
Receivables/ Revenue *365 days 121.20 176.02 119.15
Payable Period
Payables/ Cost of Sales * 365 days 78.64 170.17 128.66
Working Capital Cycle 159.01 150.57 117.46

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