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International Standard on Auditing

Option .1 Cross Sectional Analysis

1. Liquidity Ratios:-
• Current Ratio
Current Assets / Current Liabilities =

the current ratio measure the firm ability to meet it short term obligation. The higher the
current ratio the better the firm considers. We see that the current ratio is more than industry
ratio that is a good sign for this firm. And this ratio also shows that the current asset is a
increasing trend and the current liabilities are decreasing trend.

• Quick Ratio
= (Current Assets – inventory) / Current Liabilities =
Interpretation:-
Quick Ratio indicates the level to which a company can pay its current liabilities without relying
on the sale of inventory. This is a fairly strong measure of liquidity because it is based on those
current assets, which are highly liquid. Inventories are excluded from this ratio because they are
deemed the least liquid component of current assets. Generally, a quick ratio of 1:1 is considered
good. We see that with the comparison with industry average Q Ratio in good position

Activity Ratios

• Inventory turnover

Interpretation:-
Activity ratio measures the speed with which various account are converted in to sale or cash
inflow or outflow. The inventory turnover in 2008 is 3.60; in industry average are 2.50, this
shows better position. 3.60 This means that one Rs. invested in stock will turn into 3.60 times in
sales.

Kohat Cement Company Limited 1


International Standard on Auditing

• Average Collection Period


Account Receivable/ Credit sale*365=

Interpretation:-
The average collection period or average age of the account receivable is useful in evaluation
credit, and collection policies. The average collection period for 2008 is 89days, in industry
average, 37.5 days. The lengthened collection period resulted from intentional relaxation of
credit term enforcement in response to competitive pressures. Therefore the collection periods
in the above 2008 are not good, which is unbeneficial for this firm. And it easily shows that the
firm takes this long collection period to convert account receivable in to cash.

Profitability Ratios
• Gross Profit margin For 2009

Gross Profit / Sales*100=

Interpretation:-

We know that the more profit margins a company makes the better. The gross profit margin in
2008 is 50%% and industry average 38% which is good for this company.

• Net Profit margin For 2009


Net Profit / Sales*100 =

Interpretation:-

The net profit margin in 2008 is 6.6%, and in industry average is 3.5% it indicate that net profit
increased as compare with the industry average which is better for the firm.

Return on Total Asset

Kohat Cement Company Limited 2


International Standard on Auditing

• Return on Total Assets For 2009

Net Profit after interest &Tax / Total assets =

Interpretation:-
The higher the ROA the good for company, the return on assets in 2008 is 6%, and in industry
average is, 4% it indicate that the company earned 6 % on each rupees of assets in 2008. ROA
gives an idea as to how efficient management is at using its assets to generate earnings.

Return on Common stock Equity For 2009

Return on Common Equity = Net Profit after interest &Tax / Common Stock Equity

Interpretation: - It measures the return on the common stockholders investment in the firm,
ROE means that the return on shareholders funds is 9.5 % cents per Rs, They invested. This
same with their industry average ratio, this is better for the firm on bad.

Kohat Cement Company Limited 3