FINANCIAL RATIOS ANALYSIS

INTRODUCTION TO BUSINESS FINANCE

TOBACCO INDUSTRY

SUBMITTED TO: MA’AM SABERA SULEMAN

PREPARED BY:
AHMED ALAM
ISRA RAHOO
KARISHMA FEROZ
SAMRA ALI KHAN
SHAHMEER KHAN

DATED: DECEMBER 13th, 2016.

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 LETTER OF TRANSMITTAL

December 13th, 2016.

Ma’am Sabera Suleman,

Institute of Business Management,
Korangi Creek, Karachi.

Dear Ma’am Sabera,

We are submitting our Term Report on “Financial Ratio Analysis of Tobacco Industries of Pakistan”,
which is to be submitted on December 13th, 2016. The report comprises of the following aspects which
includes business finance, its application, implementation and practical work.
We have greatly benefited from this report. It helped us to widen our vision, improve our quality of
work, build self-reliance work and gave us a vital experience in order to improve our analytical and
practical skills. We hope it is up to your expectations and fulfils all the requirements given by you.

Yours Sincerely,
Ahmed Alam
Isra Rahoo
Karishma Feroz
Samra Ali Khan
Shahmeer Khan

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 ACKNOWLEDGEMENT

We are thankful to God for giving us the capability and strength to complete this Term Report on
“Financial Ratio Analysis of Tobacco Industries of Pakistan” for the Introduction to Business Finance
Course. As a group project, all the members have provided their highest efforts in order to complete
this research report. Without each other’s constant assistance, this term report would not have been
finished.
We would also like to thank our course Instructor Ma’am Sabera Suleman whose utmost dedication
and devotion provided us with the insight to analyse all the data regarding the report. It was due to her
guidance and teachings that enabled us to finish this term report. We are highly grateful for her
continuous support.

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 EXECUTIVE SUMMARY

The report focuses on the comparative analysis of three tobacco giants operating in Pakistan based
on market share. The three companies we have worked with includes:

 Pakistan Tobacco Limited

 Khyber Tobacco Limited
 Philip Morris (Pakistan) Limited

All the companies are listed on Pakistan Stock Exchange (PSX). We have chosen Pakistan Tobacco
Limited as our main company and Khyber Tobacco Limited and Philip Morris (Pakistan) Limited as its
strong competitors. This report comprises of the complete analysis of how the companies' ratios and
values change from the year 2014 to 2015 and how the company have been performing in the
previous years. The analysis provides us with an idea of how the companies respond to different
economic changes through different indicators and financial ratios. The analysis also provides us
with a detailed idea of how key ratios affects the liquidity and profitability of the firm and whether
the company is performing efficiently in the market or not. The report also highlights earnings and
pay-outs to its shareholders of each company. This report would help us in creating a better
understanding of how sales and changes made in the asset borrowings effects the firm's decisions
and key business finance decisions based on the firm’s overall performance.

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Table of Contents

1. Introduction of Tobacco Industry in Pakistan .................................................................... 8

2. Pakistan Tobacco Company Limited
 Historical Overview ...................................................................................................... 9
 Ratios ........................................................................................................................ 10
 Trend Analysis………………………………………………………………………………………….………………..11
 Common Size Ratios……………………………………………………………..……………………………………12
 Common Size Analysis……………………..………………………………………………………………………..13
3. Khyber Tobacco Company Limited
 Introduction
 Ratios……………………………………………………..…………………………………………………………………15
 Trend Analysis……………………………………………………………………………………………………………16
4. Philip Morris (Pakistan) Limited
 Introduction………………………………………………………………………………………………………………18
 Ratios………………………………………………………………………………………………………………………..19
 Trend Analysis……………………………………………………………………………………………………………20
5. Comparative Analysis…………………………………………………………………………………………………….23
6. Recommendations…………………………………………………………………………………………………………25

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Tables:

 Table 1.1: Ratios of Pakistan Tobacco Company Limited …………………………..10

 Table 1.2: Common size Ratios ………………..………………………………………12
 Table 1.3: Ratios of Khyber Tobacco Company Limited ………………………….....15
 Table 1.4: Ratios of Philip Morris (Pakistan) Limited……………………………….19

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 Introduction of Tobacco Industry in Pakistan
Presently there are seven listed tobacco companies in Pakistan which constitute as the organized
sector of the industry:
Companies with foreign ownership:

 Pakistan Tobacco Company (PTC)

 Phillip Morris Pakistan Limited Company (PMI)
 Premier Tobacco Industry (PTI)

Companies with local ownership:

 Souvenir Tobacco Company

 Khyber Tobacco Company
 Sarhad Tobacco Company
 Tobacco International Ltd.

Though tobacco is grown on around 0.25% of total irrigated land of Pakistan, the crop plays an
important role in Pakistan’s economy by generating income and employment in the tobacco farming,
manufacturing, distribution and retailing. A work force of 350,000 is directly and indirectly employed
in the tobacco industry, which generate annual income of around Rs.300 billion and a source of
livelihood for 1.2 million people.
There are 75,000 tobacco growers producing tobacco all over Pakistan. Out of these more than 45,000
growers are located in Khyber Pakhtunkhwa producing 95% of Flue Cured Virginia over an area of
30,000 hectares in the districts of Swabi, Mardan, Charsadda, Buner and Mansehra. On average 80-85
million kg of FCV, which is the main ingredient of cigarettes, is produced by growers of these
districts every year. The Sector is also one of the main contributors to the Government exchequer and
sourced more than Rs.89 billion in Federal Excise Duty/ Sales Tax in FY 2013-14.

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 Pakistan Tobacco Company Limited
Historical Overview:
From being just a single factory operation to a company which is involved in every aspect
of cigarette production, from tobacco cultivation to packaging we have evolved and grown
with Pakistan. However, what is significant about these sixty-two years is the effort that PTC has
demonstrated in the development of the country. By being instrumental in the campaign for
modern agricultural and industrial practices, we have helped in the development and progress of
the agricultural & industrial sector in the country. Pakistan Tobacco Company Ltd. is one of the
largest tax contributors in the private sector in Pakistan. During 2015 Pakistan Tobacco Company Ltd.
contributed over Rs/. 86 billion, an increase of Rs. 12.8 billion, 17% v/s SPLY to Government
revenues in the form of Excise Duty, Sales Tax, Income Tax & Custom duties. This amounts to over
Rs. 268 million per working day. Over one million people are economically dependent on
the industry in Pakistan.
From being the first multinational to set up its business in Pakistan in 1947 and beginning
operations out of a warehouse near Karachi Port.

From being just a single factory operation to a company which is now involved in every aspect of
cigarette production, from crop to consumer, we have evolved and grown with Pakistan. However,
what is significant about these 62 years is the effort that Pakistan Tobacco Company has
demonstrated in the development of the country. By being instrumental in the campaign for modern
agricultural and industrial practices, we have helped in the development and progress of the
agricultural and industrial sector in the country.

We have been supporting and contributing to various causes of national interest. Educating growers
in the latest techniques and technology in agriculture, afforestation and free health care in
designated areas are but a few examples.

Throughout these 62 years, our continuous investment in people, brands, technology, innovation
and the communities in which we operate has borne fruit in many ways. We are deemed as a
partner of choice by many, our Environmental, Health and Safety standards are a source of
inspiration for local companies, our industrial relations practices have led and influenced local
practices, and as a result of all these, our managers are highly valued and sought after people in the
Pakistani corporate world based on the training and exposure we give them from very early on in
their careers.

Pakistan Tobacco Company Limited is part of the following trade and industrial associations:

 Cigarette Manufacturers Association of Pakistan (CMA)

 Management Association of Pakistan (MAP)
 Overseas Investors Chamber of Commerce & Industry (OICCI)
 Anti-Counterfeit and Infringement Forum (ACIF)

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Ratios:

2014 2015
Profitability Ratios:
Gross Profit Margin 37.81 43.24
Net Profit Margin
Return on Equity 60.54 67.98
Return on Assets 24.64 30.81
Liquidity Ratios:
Current Ratio 1.06 1.20
Quick Ratio 0.10 0.12
Inventory Turnover Rate 1.91 times 1.74 times
Inventory Turnover in Days 191 days 209 days
A/C Receivables Turnover Rate
A/C Receivables Turnover Days 87 days 117 days
A/C payables Turnover Rate 4.19 times 3.13 times
A/C Payables Turnover Days
Operating Cycle 103 days 93 days
Cash Conversion Cycle
Asset Management Ratios:
Total Assets Turnover Rate 4.89 5.05
Fixed Assets Turnover Rate 12.3 13.61
Financial Leverage Ratios:
Interest Coverage Ratio 73.56 148.2
Market Value Ratios:
Earnings per Share 18.98 27.58
Price Earnings Ratio 55.82 40.39
Dividend Yield Ratio 0.85 1.62
Dividend Cover Ratio 2.11 1.53
Market Value per share Year-End 1059.6 1114
Market Value per Share High 1539 1169
Market Value per Share Low 568 743
Table 1.1

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Trend Analysis:
Liquidity Ratio
Liquidity has increased from 2014 to 2015 as shown in the financial statement of Pakistan Tobacco
Company. The current Ratio has increased by 0.14 which means it was able to cover its current
liabilities via its current assets. Quick ratio has also increased. The long-term liabilities have
decreased over the year. Inventory turnover has however decreased by a small amount which means it
was taking more time to sell its inventory. Account receivables turnover ratio has also decreased.
Average Account Receivables Turnover shows that how many times a company is able to recover the
amount of credit sales to people.
Asset Management:
Total asset turnover increased which means for every dollar of assets, assets were able to generate
0.16 of more sales. Fixed asset turnover ratio has also increased from 12.30 to 13.61. The company
was having a good asset management keeping inventory turnover ratio aside
The cash conversion cycle period is 16 days which is good because the period between making
payment to creditors (87 days) and operating cycle (103days) is not large. firm has less chances for
bearing more finance cost. It can remove this risk by slightly delaying the payment to its creditors.
Financial Leverage:
The debt ratios have increased which means firm was having high debt financing. The debt has
increased and equity has decreased which is why the debt to equity ratio has increased from 0.07 to
0.12. Interest coverage ratio has also increased by a very large amount from 73.56 to 148.21 which
means EBIT’s ability to cover it interest expense has decreased due to the large amount of debt
financing.
Profitability:
Pakistan Tobacco Companies Profitability ratios clearly reflect it’s great ability to generate huge
profits and of generating dividends for its shareholders Net profit margin has increased which might
be due to the increase in sales and decrease in costs in the year 2015. Gross profit ratio has also
increased. Return on assets increased due to the increase in Net Profit Margin more than the increase
in TATR Return on equity has also increased by a large amount due to the increase in net profit
margin and increase in the equity multiplier. Earnings per share are a measure of net income earned
on each share of common stock which has also increased over the year.
Overall Review:
Overall performance of the company is very good. The analysis of Pakistan Tobacco Company’s
financial statement shows that it has a high tendency to pay its debts and to convert assets into liquid
form within short intervals of time. The current ratio shows its ability to pay short term liabilities. It
shows the company’s ability to convert its current assets into liquid form (cash form) in order to meet
current liabilities. It shows the sales of the company are on a very large scale and also gives rise to the
company opportunity to generate huge profits in the long run. Cost of goods sold has decreased in
2015 and expenses with increase in sales generate has made firm’s sales profitability position good.
Asset management and sales profitability has made firm’s liquidity and profitability position good.
Though Excessive debts has badly affected its leverages position

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 Common Size Analysis of Pakistan Tobacco Company:
Income Statement and Balance Sheet:

2014 % 2015 %
Net Turnover 100 100
COGS 62.20 56.80
Gross Profit 37.80 43.20
Selling and Distribution Expenses 10.60 11.30
Administration Expenses 6.60 5.70
Other Operating Expenses 0.50 0.30
Other Operating Income 1.80 2.50
Operating Profit 19.40 24.10
Finance Income 0.50 0.70
Finance Cost 0.30 0.20
Profit Before Taxation 19.60 24.70
Taxation 6.40 8.20
Profit for the Year 13.2 16.4

Non-Current Assets: 2014 % 2015 %

Property Plant and Equipment 39.70 37.70
Investment in Subsidiary 0.02 0.02
Long-Term Loans 0.01 -
Long-Term Deposits/Prepayments 0.15 0.18
Total Non-Current Assets 39.88 37.30
Current Assets:
Stock in Trade 54.20 56.90
Stores and Spares 2.15 2.73
Trade Debt 0.01 0.01
Loans and Advances 0.30 0.73
Other Receivables 1.94 1.80
Cash and Bank Balance 0.69 0.21
Total Current Assets 60.12 62.76
Share Capital and Reserves:
Share Capital 11.64 10.32
Revenue Reserves 24.86 31.55
Non-Current Liabilities:
Differed Taxation 5 4.20
Differed Liabilities 1.90 1.70
Total Non-Current Liabilities 6.80 5.90
Current Liabilities:
Trade and Other Payables 51.3 42.1
Accrued Interest 0.10 0.05
Short-Term Finances 2.60 5
Income Tax Payable 2.10 4.60
Total Current Liabilities 56.70 52.30
Table 1.2

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Common size Income Statement Analysis:
The common size analysis expresses the various components of a balance sheet as percentage of total
assets. In addition to this can be done for the income statement as percentage of net sales.
For every dollar of sales, the firm incurred 62.2 cents of cost of sales in 2014 which decreased by
5.4% to 56.8 cents in 2015. In 2014 the firm incurred 37.8 cents of gross profit for every dollar of
sales which increased by 5.4% to 43.2 cents in 2015. We can see that the gross profit is increasing
exactly by the same percentage (5.4%) as the cost of goods sold is decreasing.
The operating profit is up by 4.7%as the operating profit recorded in 2014 was 19.4 cents for every
dollar of sales whereas in 2015 it increased to 24.1 cents for every dollar of sales. This increase is
probably because of an increase in the gross profit. Although administration expenses are decreasing
by 0.9%, selling and distribution expenses and other expenses are both increasing by 0.7% each. So
basically, there is an overall increase in the expenses but since gross profit have increased by greater
proportion so hence operating profit also increased. We have learned from the data that the
administration expenses are increasing in terms of the absolute amount by Rs. 35,693 but in terms of
percentage of net sales it is decreasing by 0.9%. Hence earnings before interest and tax (EBIT)
increased because of an increase in the gross profit as the overall expenses increased.
We can see a slight decrease in the finance cost by 0.1% which was 0.3 cents for every dollar of sales
in 2014 which decreased to 0.2 cents for every dollar of sales in 2015. Finance cost is decreasing
because accrued interest and accrued mark-up are decreasing by 51.1%. Hence earnings before
taxation (EBT) has increased by 5.1% as it was 19.6 cents for every dollar of sales in 2014 increasing
to 24.7 cents for every dollar of sales in 2015. Although finance cost has slightly decreased, the main
factor for an increase in earnings before tax (EBT) is because of an increase in earnings before interest
and tax (EBIT).
Net profit after tax (NPAT) is up by 3.2% as it was 13.2 cents for every dollar of sales in 2014
increasing to 16.4 cents for every dollar of sales in 2015. So overall net profit after tax (NPAT) is
increasing because of an increase in the earnings before tax (EBT) though taxation has increased by
1.8% from 2014 to 2015.
Overall:
If we just look at the company’s income statement it looks favourable because of a positive increase
in the net profit after tax (NPAT). But the company must reduce their expenses in order to avoid
future concerns because they are earning profit on the basis of decreasing cost of goods sold as their
overall expenses are increasing. Also, there is one more important factor which needs attention that in
future their finance cost might increase significantly which is worrying as it could lead to a significant
increase in their interest expense hence resulting in lower earnings before tax (EBT) and net profit
after tax (NPAT). The finance cost might increase in the future because their short-term finances and
lease liability have increased significantly by 116% and 29.3% from 2014 to 2015.
Common Size Balance Sheet Analysis:
The common size balance sheet shows for every dollar of total assets in 2014 the firm has spent 39.7 cents on
its property plant and equipment where as in 2015 it has been decline to 37.1 cents which means that the firm
preferred to invest less in their fixed assets and minimize or decrease its production process. Although there
has been increase in the balance sheet of the firm but the increase in total assets is much higher than the
increase in the actual amount of plant and equipment. There has been constant investment of 0.02cents in a
subsidiary limited company. For every dollar of total assets there has been no long-term loan provided in 2015
as compare to 2014 where there has been 0.01cents of every dollar of total asset.

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There has been increase in the long-term deposits and prepayments in 2015 as compare to 2014; it has been up
to 0.18 from 0.15cents which actually means that the firm having more of its customers availing the service.
Although in the balance sheet there has been decline in the long-term prepayments but the amount decrease is
much lesser than the increase in the number of total assets.
For every dollar of total asset in 2014 the firm has spent 2.15cents on stores and spares where as it has
increased to 2.73 cents in 2015. The increase in cash may incur due to the decrease in the trade in
debts of 2015, for every dollar of total assets the firms trade debt was 0.014 in 2014 and it decreased
to 0.01cents in 2015. Similarly, for every dollar of the firm’s total assets increased from 0.30 in 2014
to 0.73 in 2015, this shows that the firm is providing more advances and loan to its employee. For
every dollar of total assets, the firm short term prepayments are decreasing from 0.83 in 2014 to 0.69
in 2015 which shows incoming of cash in the firm. Similarly, the other receivables of the firm
deceased due to which more cash to come in the firms account. But here the common size says that
for every dollar of total asset the cash and the bank balance of the firm has declined, this is because
although the firm short term receivables have decreased but on the other hand its non-current assets
including long term receivables have increased at a much higher rate.
When it comes to firm’s liability, it is divided in to two categories current liabilities and non-current
liabilities. For every dollar of total assets firm financed its total assets from financing liabilities, its
trade and other payment decreased from 51.3 cents in 2014 to 42.1cents in 2015, it indicates decrease
in cash. For every dollar of total assets firm paid 0.1 cents of interest on liabilities in 2014 and it
declined to 0.05 cents in 2015. Here short term financing increased as there is an increase in total
assets of the firm, for every dollar of total asset firm short-term finance increased to 4.93 cents in
2015 from to 2.56 in 2014.For every dollar of the total asset of the firm there is an increase in lease
liability from 0.54 cents in 2014 to 0.62 cents in 2015. Similarly, the income tax payable has also
increased in 2015, for every dollar of the total asset firm’s income tax payable increased to 4.57cents
in 2015 from 2.1 cents in 2014. Its non-current liabilities have decreased which creates one of the
reasons for the decline in the cash of the firm. For every dollar of total asset firms deferred taxation
has decreased from 5 cents to 4.2 cents and for every dollar of firm asset there has been decline in the
deferred liabilities from 1.9cents in 2014 to 1.7cents in 2015. This is indications that firm paid off its
non-current liabilities and hence decline in cash. But on the other hand, there is a rise in current
liabilities, this increase may not effect much as they are to be paid within short term period of time.
Firm’s equity showed both ups and downs. For every dollar of total asset firms share capital has
declined from 11.64 cents in 2014 to 10.32cents in 2015. Although in the original balance sheet firms
share capital has not changed but due to the increase in the total assets in 2015 there is a slight
decrease in the amount of share capital. A revenue reserve of the firm has risen at higher rate. For
every dollar of total asset firm generated 24.86 cents of revenue in 2014 which continued to increase
in 2015 to 31.55 cents.

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 Khyber Tobacco Company Limited
Introduction:
KTC is a public limited company since 1954 and is listed on Pakistan Stock Exchange. Khyber
Tobacco Company (KTC) A public limited company is renowned in tobacco and cigarette industry
from last 5 decades. Khyber tobacco has achieved the heights of business with its clear and ambitious
vision, high quality and vigilant team and enjoying the status of top few companies of Pakistan in
tobacco industry. The company has extended its operation around the world with an established
distribution network in parts of Eastern Europe, South and West Africa, Central and South Asia and
the Middle East.
Ratios:

Ratios 2015 2014

Liquidity Ratios:
Current Ratios 2.08 2.48

Quick Ratios 0.78 0.83

Financial Leverage Ratios:

Interest Coverage Ratio 29 18
Debt to equity ratio 0.76 0.53

Asset Management Ratios:

Inventory T/O rate 1.77 2.45
Inventory T/O in days 206 149

A/c Receivable rate 7.61 8.57

Receivables in days 48 days 43 days

Total Asset T/O rate 0.90 1.10

Profitability Ratios:
Gross profit margin 22.51 26.82

Net profit margin 11.49 16

ROI/ROA 6.81 7.97

ROE 18.54 32

Earnings per share after tax 84.39 118.38

Table 1.3

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TREND ANALYSIS OF KHYBER TOBACCO COMPANY
Liquidity ratio
In 2015 current ratio lined which indicates that firm’s ability to pay its debt has fallen as compared to
2014. Decline has occurred due to huge increase account payable by 86.5 percent which is only
current liability while current assets are increased by 55 percent in 2015. Similarly, slight increase in
market securities and huge increase in account payable cause quick acid ratio to fall. Increase in
inventory selling period may cause firm to be out of cash. Increase in receivable collection period also
is not good for firm as it may find difficulty to pay its creditors. Overall liquidity of the firm is not
good, firm needs to control its account payables to maintain its liquidity.
Leverages ratios
Debt ratios is increased by around 37 percent in 2015 which indicates that finance of assets through
liability has increased in 2015. Similarly, debt equity ratio indicating increased debt finance of assets
in 2015. Due to increase in the debt, firm’s ability to pay its financial cos has decreased from 29 times
to 18 times this would create a problem for firm to get loans and attract new investors in future.
overall leverages position is very poor due to excessive liabilities over the firm. Debt ratios has
increased by around 37 percent in 2015 which indicates that finance of assets through liabilities has
increased in 2015. Similarly, debt equity ratio indicating increased debt finance of assets in 2015. Due
to increase in the debt, firm’s ability to pay its financial cost (the increase is 42 percent in 2015) has
decreased from 29 times to 18 times this would create a problem for firm to get loans and attract new
investors in future. Long term debt to total capitalization ratio is also increasing from 6 percent to 8
percent which indicates that more long-term debt financing in 2015. Overall leverages position is very
poor due to excessive increase in liabilities
Asset management analysis
Lower receivable turnover in 2015 indicates the increased time period between credit sales and
collection period. In 2015 firm’s capability of converting its inventory into sales has also declined.
Overall firm is taking 253 days (operating cycle) in converting its days, inventory into sales and 88
days in paying to its creditor, so period between paying the payment and receiving the payment is 165
days (cash cycle) which is too long period for managing its cash liquidity. Suppose firm pays its
available cash to its creditor but it may have to borrow the cash for other expenses till it receives its
receivable amount. This unfavourable period may increase firms financial cost.
In 2015 asset’s capability to generate revenue is declined from 1.1 per dollar to 0.9 per dollar. Overall,
firm’s asset management is not good all changes in 2015 has brought unfavourable results firm can
improve its current asset management by increasing account payable to shorten the cash cycle period
for lowering g the risk of bearing financial cost
Profitability analysis
Gross profit margin is declined by 16 percent in 2015, decreasing firms budget for the payment of the
expenses. Khyber Tabaco is earning less profit for per dollar of sales as net profit is declined by 28
percent in 2015. Return on asset has fallen from 12 percent to 11 percent due to less sale profitability
and lower asset efficiency
Return on equity is decreased because of rate of increase equity multiplier beacuse debts is lesser than
rate of decrease in firm’s sales profitability and asset management efficiency So profitability of the
firm is also not maintained.

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Market structure analysis
Due to decline in firm’s profitability its earning per share is decline from 84.39 to 118.38 which is
28.7 percent decline.

Conclusion
Overall company’s performance in 2015 is very poor. Excessive debts has badly affected its leverages
position. Mismanagement between payment and collection period has more chances of further
financial cost. Excess in cost of goods sold and expenses with decline in sales generate has made
firm’s sales profitability position weak. Increased in debt with decline asset management and sales
profitability has made firm’s liquidity and profitability position poor.

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 Philip Morris (Pakistan) Limited
Introduction:
Philip Morris (Pakistan) Limited is an affiliate of Philip Morris International Inc. (PMI), is a public
limited company listed on the Pakistan Stock Exchange. Our main brands are Morven Gold,
Marlboro, Diplomat, K2, Red & White. Philip Morris (Pakistan) Limited is the second largest tobacco
company in Pakistan by market share and has been the recipient of a number of awards including
being listed as a top 25 Company at the Karachi and Lahore Stock Exchanges between 2003 and
2008. Philip Morris (Pakistan) Limited is the 2nd largest tobacco company in Pakistan with a market
share of 32.2%. Their annual production capacity is 50.1 billion. They contribute to the Pakistan’s
economy by generating Rs. 25.9 billion revenue every year in terms of taxes. Our main brands are
Morven Gold, Marlboro, Diplomat, K2, Red & White.

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Ratios:

Liquidity Ratios: 2015 2014

Current Ratio 0.62 0.73

Quick Ratio 0.11 0.18

Leverage Ratios:
Debt to equity ratio 6.29 3.65

Debt to assets ratio 0.86 0.79

Asset Management
Ratios:
Inventory T/O rate 1.13 1.24

Inventory T/O in days 323 294

A/c Receivable rate 150.29 60

Receivables in days 2 days 6 days

Total Asset T/O rate 0.74 0.75

Coverage Ratio

Interest Coverage ratio 1.14 1.5

Profitability Ratios
Gross profit margin 33.68 28.42

Net profit margin 9.12 10.77

ROI/ROA 6.81 7.97

ROE 49.71 36.23

Earnings per share (24.07) (21.35)

Table 1.4

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Trend Analysis of Philip Morris (Pakistan) Limited:
Liquidity Ratios:
The ratio helps us in analysing the ability of the firm to pay its short-term debts. The current ratio for
Philip Morris (Pakistan) limited has declined from $ 0.73 in 2014 to $ 0.62 in 2015. the current assets
ratio is declining mainly because the total current assets are decreasing while the total liabilities are
increasing from the year 2014 to 2015. We can see from the data provided that A/c receivables have
decreased sharply by 57.4% also other receivables have by 96%. Although inventory have increased
by 6.4 % and cash have increased by 103 % but the decreases in A/c receivables and other receivables
counts for more value hence leading to decrease in the CA. The current liabilities have increased from
last year as short term borrowings have significantly increased by 22.1 % also trade payables have
significantly by 25.2 %. These two are the main factors for average increase in total current liabilities.
Hence it clearly proves that why their current assets declined.

The quick ratio is also decreasing from $ 0.18 in 2014 to 0.11 in 2015 which tells us about the firm’s
ability to pay its short-term debt with most liquid assets. As we know that CA are decreasing and CL
are increasing but the inventory is also increasing by 6.4% because of which the numerator is
decreasing with greater proportion hence leading to a decrease in quick ratio
The current ratio and quick ratio both are decreasing which shows that the firm’s inability to pay for
the firm’s short term debts through its most liquid assets.
A/c receivables turnover in days have decreased from 6 days to 2 days which is favourable for the
firm as the collections are made sooner. Also, inventory turnover rate has slightly decreased from 1.24
to 1.13 which is not favourable as the higher the inventory turnover, the more efficient the inventory
management of the firm and the more liquid. Decline in inventory turnover rate shows that the firm is
not efficient in inventory management. Inventory turnover in days is also increasing which is not
favourable from 294 days in 2014 to 323 days in 2015. The firm is taking more time to turn its
inventory into cash and getting slower as compared to 2014. Because of inventory turnover in days
and A/c receivables in days the operating cycle have also increased from 300 days I n2014 to 325
days in 2015. Operating cycle shows that in how many days a firm is able to convert its inventory into
cash. It shows that the firm is taking more time to convert its inventory into cash and hence the
operating cycle in days is increasing because of increase in inventory turnover in days though A/c
receivables in days has decreased but the increase in inventory turnover in days, value greater
proportion of charge.
Asset Management:
The asset management ratios show how efficiently and effectively the firm is managing its assets.
Inventory turnover rate that tells us about how many times you sold the average inventory with a
period of 1 year. The inventory turnover rate of the firm is slightly decreasing from 1.24 times in 2014
to 1.13 times in 2015. It is not favourable as more cash is being tied up in average inventory. We can
see a decrease in inventory turnover rate probably because the average inventory is increasing faster
that COGS hence leading to a decrease in inventory turnover rate. Also, inventory turnover in days is
increasing from 294 days in 2014 to 324 days in 2015 which is also not favourable as now the firm is
taking more time to convert its inventory into receivables through sales.

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A/c receivables turnover in days and turnover rate to further average analyse the asset management
ratios A/c receivables turnover rate shows how many times in a year a firm is collecting cash from
their customers an average. There have been a significantly increase in the A/c receivables turnover
rate from 60 times in 2014 to 150.29 in 2015. It is favourable and is increasing because A/c
receivables are decreasing by 57.4% through net credit sales are increasing but the decrease is by a
greater proportion hence leading to an in A/c receivable turnover rate. That means the firm is now
collecting more cash an average from its customers in a period of 1 year

Average A/c receivables in days have also decreased from 6 days in 2014 to 2 days in 2015. It is
favourable because the collections will be made sooner. However firm operating cycle is increasing
and row the firm is taking more time to convert its inventory into cash as operating cycle in 2014 was
300 days and in 2015 it has 325 days. The increase is mainly because of an increase in inventory
turnover in days although receivables in days is decreasing and it is not favourable for the firm as it
can lead to lesser collection.
The most important ratio of asset management is total asset turnover rate. It shows the ability of the
firm utilize its total assets turnover rate was 0.74 in 2014 which increased to 0.74 in 2014 which
increase to 0.75 in 2015. It slightly increased by 1.35%. The increase is mainly because net sales have
increased by greater proportion (4.7%) whereas total assets have increased by 4%

Philip Morris (Pakistan) tobacco limited is not very effective in managing its assets as the operating
cycle is increasing because of increasing inventory turnover in days although receivables in days is
decreasing that means more time to convert it inventory into cash. Secondly their assets management
turnover has increased not significantly which depicts that they are not very effective in utilizing their
resources.

Financial Leverage Ratios:

Leverage ratios shows the debt financing of the firm. The very first debt financing id in assets or we
can say the firm’s debt to asset ratio. There’s been a slight increase in the debt for financing its asset,
it increased from 0.79 to 0.86. The reason for the increasing debt to asset ratio is due to the increase in
short term borrowing, accrued expenses and as well as trade and other payables, similarly due to more
debt financing, the value of total assets have also increased which ultimately hit to the increase in debt
to equity ratio.
Secondly debt to equity ratio refers to the amount of debt financing required to be financed on equity
of the firm. The debt to equity ratio haven been increased from 3.65 in 2014 to 6.29 in 2015. As
discussed earlier there has been increase in short-term borrowing, accrued expenses and as well as
trade and other payables, similarly the equity has declined due` to the increase in the unappropriated
loss of the firm which actually made equity to decline. As debt increased and the equity declined, the
debt to equity ratio has increase.
When we talk about increase in debt it directly reflects to the increase in the interest coverage of the
frim. But here the firm borrowed in short term process because of which there is a lesser amount of
interest on total borrowing. One of the reason in the reduction of interest expense can be that there
might has been decline in the interest rate on the borrowings, for which there has been a decline in
interest coverage ration from 1.5 in 2014 to 1.14 in 2015.

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Profitability Ratios:

Gross profit margin of PMPTL shows that percentage of earning of every dollar of sales, there is an
increase in the GPM of the firm. It has been increased from 28.42% to 33.68% in 2015 because of the
increase n sales and Gross profit however the GP have increase in the much higher rate than sales due
to decline in COGS in 2015.

Secondly when we see firm’s profit earning, the firm is actually facing loss in both 2014 and 2015
years but the positive thing that can be seen here in2015 is that there is a reduction in loss of PMPTL
from 10.77% to 9.12%. Because o the increase in the sale which is comparatively higher than the rate
of net loss of the firm. As we know the reduction in the distribution and marketing expense of PMPTL

ROA shows the earning power of each assets. The ROA of PMPTL is been in negative in both year
which means there have been no return in its assets and the firm have to bear more loss than their
actual spending. But in 2015 there have been decline in the net loss margin and increase in the total
asset turnover rate where net loss margin has declined at much higher rate than the increase in TATR

ROE shows the net income available to common stock holder for every dollar of investment. There
has been continuous loss in both 2014 and 2015 and the loss on equity has been increased from
36.23% to49.71 %. Here loss on asset has declined but equity multiplier has increased in more ratio
which similarly increased the loss on equity. Due to the negative ROA the firm’s ROE has been
negative and increasing in loss on equity. As well as LPS
(Loss per share) has been increase because of the less no of shares outstanding. Although the loss has
been declined in 2015 as compared to 2014 but due to the less no. of shares outstanding has been
increase in loss per share from (21.35) in 2014 to (24.07) in 2015.

Overall:
The firm has been in loss from 2014 and its losses continued in 2015 but the positive thing is that the
firm was able to reduce the amount of loss incurring. Continuous reduction in losses can be seen and
it assets and non-current liabilities are being stabilizing. As well as firm, should start investing in most
liquidate assets to overcome the loss factor. More investment to production sector and minimize the
cost incurring for inventories.

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 Comparative Analysis

Liquidity ratios
Our main company Pakistan Tobacco Company is going to give an extreme competition to its
competitors as the liquidity ratios (current ratios and quick ratios are higher of Pakistan Tobacco
company). Further Pakistan Tobacco Company’s current ratio has increased from 1.06 to 1.20 in 2014
to 2015, in comparison to Phillip Morris and Khyber tobacco. Both the competitors are facing
declining current ratios. The main reason due to the decrease in ratios of both companies is due to
their decrease in current assets and increase in their current liabilities.
However, in PTC their current ratio has increased by a larger amount compared to the increase in their
current liabilities. Same is the case in quick ratio, PTC's quick ratio is higher compared to Khyber and
Morris due to decrease in trade in stock which means PTC has more cash than its competitors.

Asset management ratio

The total asset turnover rate is increasing of Pakistan Tobacco Company, In comparison to Morris and
Khyber Company. This means they were able to generate 0.16 more sales from their total assets.
However, PTC's inventory turnover has decreased along with the competitor’s inventory turnover so
all three companies were facing problem in converting their inventory into sales. But Pakistan
Tobacco Company inventory turnover has decreased at a much smaller amount compared to Khyber
and Morris.
Account receivables turnover of Pakistan Tobacco Company is decreasing from 4.19 to 3.13. In
comparison to Philip Morris whose receivables turnover has increased by a very large amount. But
Khyber tobacco was also facing the same problem of decreasing account receivable. PTC needs to
work on collecting cash from credit customers.
The operating cycle of Pakistan Tobacco Company has decreased from 103 to 93 and Khyber
Tobacco Company’s operating cycle which has increased at a very large amount. In conclusion to that
Pakistan tobacco company had a high TATR and a decreased operating cycle it was managing its
assets efficiently.
Leverage ratios
Debt to equity ratios has increased in all three company which means that all three companies have
increased their debt financing over the year. But the debt ratio of Pakistan Tobacco Company has
increased at a smaller rate than Phillips Morris and Khyber Tobacco Company. Debt to total asset
ratio has also increased bot the three companies.
Interest coverage ratio has increased at a very high rate of Pakistan Tobacco Company due to the
increase in debt financing from 2014 to 2015. But when we look at the finance cost of Pakistan
tobacco company it has decreased by a really large amount from 2104 to 2015 when compared to
Phillip Morris.

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Profitability ratios:
The net profit margin of Pakistan Tobacco Company has increased over the year from 13.24 to 16.92
in comparison to Khyber and Phillips Morris their net profit margin has decreased. This shows there
was a significant increase in net profit at a much higher rate than the increase in sales
The gross margin has also increased of Pakistan tobacco along with the Phillips Morris Company that
means they both had a good profitability ratio when compared to Khyber Company whose gross profit
has also decreased over the year. The high gross margin indicates that their gross turnover has
increased in year 2015. A higher profit margin indicates a more profitable company that has better
control over its costs compared to its competitors. ROA gives an idea as to how efficient management
is at using its assets to generate earnings and thus Pakistan tobacco company has been able to
maintain its Return on assets better compared to its competitors.
Return of assets have also increased for Pakistan Tobacco Company compared to Phillips Morris and
Khyber tobacco. This was due to the high net profit margin of Pakistan Tobacco Company.
Return on equity has increase for Pakistan Tobacco Company due to the increase in ROA and equity
multiplier. Philip Morris has also faced a high Roe in 2015 when compared to 2014. Khyber tobacco's
ROE decreased from 2014 to 2015 due to low net profit margin.

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 Recommendations

PTC should start using its debt financing for its most liquid assets like trade debts where the return is
guaranteed and in its fixed asset like machinery and equipment which can increase the production of
the firm. Investing over inventories may create a risk of damage or unsold inventories, in short
revenue is never guaranteed on inventories and PTC's inventories has been increased much over a
year. Similarly, PTC's debt financing has risen at a higher ratio which ultimately increased the interest
expense.
Khyber company limited administrative expenses has risen at a much higher rate and because of this
firms Profit has decreased from year 2014 to 2015. To overcome this expense firm should start
reducing discounts and offers. Reduce bonus and commissions of the employees till the firm gets into
stabilizing position.
The point of inventory comes up here also in Khyber company limited where the investment in stock
has increased at a much higher rate and this continued the risk of revenue. Khyber should start
reducing its trade in debts to increase cash conversion. By limiting number of days for the payment by
its customer will help to increase the inflow of cash and will reduce the chances of frauds. And as
well as the fund can be used for the investment. As well as, firm should start financing more of it debt
to equipment for faster and efficient production process. Khyber should focus on its current liabilities
and reduce its long-term liabilities which will cause a decline in its financing cost.
Philip Morris company should start focusing on decreasing its liabilities, due to excessive debts firms
financing cost increased and follows to be in loss in each year. Reducing debt will reduce its interest
expense where as it will help to overcome the loss. Secondly it should start managing its stock. Invest
less to avoid losses and increase the selling of the left inventories and start improving the quality of its
product by investing more in product phase (equipment, machinery and affective work force).

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 Appendix
Appendix 1: Income Statement of Pakistan Tobacco Company Limited.

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Appendix 2: Balance Sheet of Pakistan Tobacco Company Limited.

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Appendix 3: Income statement of Khyber Tobacco Company Limited.

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Appendix 4: Balance Sheet of Khyber Tobacco Company Limited.

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Appendix 5: Income Statement of Philip Morris (Pakistan) Limited.

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Appendix 6: Balance Sheet of Philip Morris (Pakistan) Limited.

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