Final Project

Virtual University of Pakistan
Fin619-Final Project
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Name of Student: Waseem Asghar
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scheme
Marking tal
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Proposal Writing Report writing Presenta tion & Viva voce Grand total 0
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Credit hours: 3 To Obtai ned marks marks 10 7.5 60 53 30 10
FALL 2008
Students ID: MC070200272
Evaluation Date: __________________
Supervisor: Asma Rafique Chughtai
Visit Virtualians.com for past assignments,Papers,Video Lectures ,Study discussion,Chat
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Evaluation Sheet for Project
Prefatory part
Acknowledgement Table of contents List of illustrations Executive summary Introduction Summary Analysis to support the idea/plan Ratio Analysis Common Size Analysis Trend Analysis and Industry Averages
Marking Scheme for Project Marks 5
Obtained Marks 4.5
40 Analysis and interpretation
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Conclusions Recommendations Project Write Up
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Supplementary Parts
Appendices Bibliography Index Total
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60
4.5
36
4 4
53
Final Project Good job Well done Keep it up
AND
NISHAT MILLS LIMITED
SUBMITTED TO THE DEPARTMENT OF MANAGEMENT SCIENCES, VIRTUAL UNIVERSITY OF PAKISTAN IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTERS IN BUSINESS ADMINISTRATION
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A REPORT
Submitted By MC070200272 Waseem Asghar
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KOHINOOR TEXTILE MILLS LIMITED
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FINANCIAL STATEMENTS ANALYSIS OF
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Department of Management Sciences, Virtual University of Pakistan
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I dedicate this thesis to my parents.
have been possible.
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completion of this project would not
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support and most of all love, the
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Without their patience, understanding,
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DEDICATION
ACKNOWLEDGEMENT First of all I would like to say thanks to Almighty Allah for enabling me to complete the work on this project. Then I would like to thank my Instructor Miss Asma Rafique
Mr. Muhammad Farhan Sadiq for their valuable tolerance, endurance, patience, cooperation and guidance. I thank my Deputy Director (F&A) Mr. Rashid Latif Shaikh for
I also thank my supervisor Mr. Naeem Ur Rehman (Accounts
conducting this study and for his suggestions given. Without the generous help of these individuals, completion of this project would not have been possible.
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Officer) for reviewing my work throughout the process of
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suggesting to take on this study and his invaluable comments.
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Chughtai and Head of Department of Management Sciences
EXECUTIVE
SUMMARY
This study emphasizes comparing financial statements of two industrial concerns through evaluating their financials. Financial comparative analysis is a valuable tool for investors, lenders and financial institutions to develop an understanding about liquidity and profitability of an organization. Even though Financial comparative analyses are always criticized for inadequacy of their results due to doubtful financial figures reported in financial statements (financial redressing) and not considering several intangible, nonfinancial aspects, but still it is of immense importance for almost all stakeholders of an
analysis on two major textile industries i.e. Kohinoor Textile Mills Limited and Nishat Mills Limited and let it analyze and compare financial performance of these two
statement analysis and its comparison using various techniques i.e. ratio analysis, horizontal, vertical, trend and industry analysis over the period of three years. It has revealed from analysis that despite of some slight problematic areas, overall outlook of liquidity, leverage, profitability and operations of NML are stable and consistent since last three years. However, it has been found that extensive use of equity and lowering the levels of leverage is affecting the profitability and operational efficiency of NML, which should be removed by taking corrective measures to avoid any major mishaps in future.
With regard to KTML, various flaws are found and observations have been made. Liquidity position of KTML is weak and very low level of liquid assets is being maintained to meet short term obligations of the firm. The same situation has been portrayed with regard to leverage of KTML. Extensive use of leverage made KTML unattractive for lenders and investors and market prices of KTML are declining over vii
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industries. The study will help to understand and elaborate the concepts of financial
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Major objective of the study is to apply the knowledge of financial statements
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organization.
time. Overall financial position of KTML is not satisfactory and management needs to work a lot to let it regularized. It has been suggested that NML may acquire additional funds to level the leverage with equity. This may increase the level of leverage and profitability may be increased by use of leverage. With regard to KTML it has been recommended that management needs to take serious actions for improvement of profitability and to restore the trust of lenders and investors. Additional funds may be acquired by issuing equity shares to raise the level of equity and decrease the level of leverage. This may increase the working capital and profitability of KTML. It would also help the management to lower its cost of finance.
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TABLE
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OF
CONTENTS
INTRODUCTION .............................................................................1 1.1. 1.2. 1.3. BACKGROUND OF THE PROJECT INTRODUCTION OF TEXTILE SECTOR COMPANYS INTRODUCTION 1.3.1. 1.3.2. 1.4. 1.5. 1
Kohinoor Textile Mills Limited......................................2 Nishat Mills Limited .......................................................4
OBJECTIVES OF THE PROJECT SIGNIFICANCE OF THE PROJECT
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2.
PROCESSING AND ANALYSIS ..................................................87 2.1. DATA COLLECTION & PROCESSING 2.1.1. 2.1.2. 2.1.3. 2.2. 87
ANALYSIS 2.2.1.
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Data Collection Sources ...............................................87 Data Collection Tools ...................................................87 Data Processing and Analysis .......................................87 87
Ratio Analysis ...............................................................98
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2 2 5 6
2.2.2. 2.2.3. 3. 4. 5. 6. 7. 8. 9.
Common Size Analysis.........................................167166 Comparisons .........................................................187186
SUMMARY..............................................................................313312 CONCLUSIONS/ FINDINGS ................................................315314
INTRODUCTION OF THE STUDENT ...............................320319 APPENDIX/ APPENDICES ..................................................321320 BIBLIOGRAPHY ...................................................................322321 INDEX ......................................................................................325323
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RECOMMENDATIONS ........................................................318317
LIST
OF
ILLUSTRATIONS
Figure 1 - Current Ratio (NML) ............................................................. 187186 Figure 2 - Acid Test Ratio (NML) .......................................................... 188187
Figure 9 - Debt to Tangible Net Worth Ratio (NML) ............................ 195194
Figure 11 - Fixed Assets Ratio / Equity Ratio (NML)............................ 197196 Figure 12 - Long Term Assets Versus Long Term Debt (NML) ............ 198197 Figure 13 - Debt Coverage Ratio (NML) ............................................... 199198 Figure 14 - Net Profit Margin (NML)..................................................... 200199 Figure 15 - Return on Assets (NML) ...................................................... 201200 xi
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Figure 10 - Total Capitalization Ratio (NML) ........................................ 196195
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Figure 8 - Debt/ Equity Ratio (NML) ..................................................... 194193
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Figure 7 - Debt Ratio (NML) .................................................................. 193192
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Figure 6 - Average Collection Period (NML)......................................... 192191
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Figure 5 - Times Interest Earned (NML) ................................................ 191190
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Figure 4 - Sales to Working Capital (NML) ........................................... 190189
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Figure 3 - Working Capital (NML) ........................................................ 189188
Figure 16 - DuPont Return on Assets (NML) ......................................... 202201 Figure 17 - Operating Income Margin (NML) ....................................... 203202 Figure 18 - Operating Assets Turnover (NML) ...................................... 204203 Figure 19 - Return on Operating Assets (NML) ..................................... 205204 Figure 20 - Sales to Fixed Assets (NML) ............................................... 206205 Figure 21 - Return on Investment (NML)............................................... 207206 Figure 22 - Return on Total Equity (NML) ............................................ 208207 Figure 23 - Gross Profit Margin (NML) ................................................. 209208 Figure 24 - Accounts Receivable Turnover (NML) ............................... 210209 Figure 25 - Average Collection Period (NML)....................................... 211210 Figure 26 - Accounts Payable Turnover (NML)..................................... 211210 Figure 27 - Average Payment Period (NML) ......................................... 212211 Figure 28 - Inventory Turnover (NML) .................................................. 213212 Figure 29 - Average Age of Inventory (NML) ....................................... 214213 Figure 30 - Operating Cycle (NML) ....................................................... 215214 Figure 31 - Total Assets Turnover (NML) ............................................. 216215
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Figure 32 - Dividend Per Share (NML) .................................................. 217216 Figure 33 - Earnings Per Share (NML)................................................... 218217 Figure 34 - Price/ Earnings Ratio (NML) ............................................... 219218 Figure 35 - Percentage of Earnings Retained (NML) ............................. 220219 Figure 36 - Dividend Payout (NML) ...................................................... 221220 Figure 37 - Dividend Yield (NML) ........................................................ 222221 Figure 38 - Book Value Per Share (NML).............................................. 223222 Figure 39 - Operating Cash Flow/ Current Maturities of Long Term Debt and
Figure 41 - Operating Cash Flow Per Share (NML)............................... 226225
Figure 43 - Current Ratio (KTML) ......................................................... 227226 Figure 44 - Acid Test Ratio (KTML) ..................................................... 228227 Figure 45 - Working Capital (KTML) .................................................... 229228 Figure 46 - Sales to Working Capital Ratio (KTML) ............................. 230229 Figure 47 - Times Interest Earned (TKML) ........................................... 231230 xiii
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Figure 42 - Operating Cash Flow / Cash Dividends (NML) .................. 226225
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Figure 40 - Operating Cash Flow / Total Debt (NML) ........................... 225224
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Current Notes Payable (NML) ................................................................ 224223
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Figure 48 - Fixed Charge Coverage (KTML) ......................................... 232231 Figure 49 - Debt Ratio (KTML) ............................................................. 233232 Figure 50 - Debt/ Equity Ratio (KTML)................................................. 234233 Figure 51 - Debt to Tangible Net Worth Ratio (KTML) ........................ 235234 Figure 52 - Current Worth/ Net Worth Ratio (KTML)........................... 236235 Figure 53 - Total Capitalization Ratio (KTML) ..................................... 237236 Figure 54 - Fixed Assets Ratio / Equity Ratio (KTML) ......................... 238237 Figure 55 - Long Term Assets Vs Long Term Debt (KTML) ................ 239238 Figure 56 - Debt Coverage Ratio (KTML) ............................................. 240239 Figure 57 - Net Profit Margin (KTML) .................................................. 241240 Figure 58 - Return on Assets (KTML) ................................................... 242241 Figure 59 - DuPont Return on Assets (KTML) ..................................... 243242 Figure 60 - Operating Income Margin (KTML) ..................................... 243242 Figure 61 - Operating Assets Turnover (KTML) ................................... 244243 Figure 62 - Return on Operating Assets (KTML) .................................. 245244 Figure 63 - Sales to Fixed Assets (KTML) ............................................. 246245
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Figure 64 - Return on Investment (KTML) ............................................ 247246 Figure 65 - Return on Total Equity (KTML) .......................................... 248247 Figure 66 - Gross Profit Margin (KTML)............................................... 249248 Figure 67 - Accounts Receivalbe Turnover (KTML) ............................. 250249 Figure 68 - Average Collection Period (KTML) .................................... 251250 Figure 69 - Accounts Payable Turnover (KTML) .................................. 252251 Figure 70 - Average Payment Period (KTML) ....................................... 253252 Figure 71 - Inventory Turnover (KTML) ............................................... 254253 Figure 72 - Average Age of Inventory (KTML) ..................................... 255254 Figure 73 - Operating Cycle (KTML) .................................................... 256255 Figure 74 - Total Assets Turnover (KTML) ........................................... 257256 Figure 75 - Dividend Per Share (KTML) ............................................... 258257 Figure 76 - Earnings Per Share (KTML) ................................................ 259258 Figure 77 - Price/ Earnings Ratio (KTML)............................................. 260259 Figure 78 - Percentage of Earnings Retained (KTML) .......................... 261260 Figure 79 - Dividend Payout (KTML) .................................................... 262261
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Figure 80 - Dividend Yield (KTML) ...................................................... 263262 Figure 81 - Book Value Per Share (KTML) ........................................... 263262 Figure 82 - Operating Cash Flow / Current Maturities of Long term Debt and Current Notes Payable (KTML) ............................................................. 264263
Figure 89 - Sales to Working Capital Ratio (Consolidated) ................... 272271
Figure 91 - Fixed Charge Coverage (Consolidated) ............................... 274273 Figure 92 - Debt Ratio (Consolidated).................................................... 275274 Figure 93 - Debt/ Equity Ratio (Consolidated) ....................................... 276275 Figure 94 - Debt to Tangible Net Worth Ratio (Consolidated) .............. 277276 Figure 95 - Current Worth/ Net Worth Ratio (Consolidated) ................. 278277 xvi
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Figure 90 - Times Interest Earned (Consolidated) .................................. 273272
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Figure 88 - Working Capital (Consolidated) .......................................... 271270
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Figure 87 - Acid Test Ratio (Consolidated) ............................................ 270269
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Figure 86 Current Ratio (Consolidated) .............................................. 269268
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Figure 85 - Operagint Cash Flow/ Cash Dividends (KTML) ................. 267266
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Figure 84 - Operating Cash Flow Per Share (KTML) ............................ 266265
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Figure 83 - Operating Cash Flow/ Total Debt (KTML) ......................... 265264
Figure 96 - Total Capitalization Ratio (Consolidated) ........................... 279278 Figure 97 - Fixed Assets Ratio/ Equity Ratio (Consolidated) ................ 281280 Figure 98 - Long Term Assets Versus Long Term Debt (Consolidated) 282281 Figure 99 - Debt Coverage Ratio (Consolidated) ................................... 283282 Figure 100 - Net Profit Margin (Consolidated) ...................................... 284283 Figure 101 - Return on Assets (Consolidated) ........................................ 285284 Figure 102 - DuPont Return on Assets (Consolidated) .......................... 286285 Figure 103 - Operating Income Margin (Consolidated) ......................... 287286 Figure 104 - Operating Assets Turnover (Consolidated)........................ 288287 Figure 105 - Return on Operating Assets (Consolidated) ....................... 289288 Figure 106 - Sales to Fixed Assets (Consolidated) ................................. 290289 Figure 107 - Return on Investment (Consolidated) ................................ 291290 Figure 108 - Return on Total Equity (Consolidated) .............................. 292291 Figure 109 - Gross Profit Margin (Consolidated) ................................... 293292 Figure 110 - Accounts Receivable Turnover (Consolidated) ................. 294293 Figure 111 - Average Collection Period (Consolidated) ........................ 295294
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Figure 112 - Accounts Payable Turnover (Consolidated) ...................... 296295 Figure 113 - Average Payment Period (Consolidated) ........................... 297296 Figure 114 - Inventory Turnover (Consolidated).................................... 298297 Figure 115 - Average Age of Inventory (Consolidated) ......................... 299298 Figure 116 - Operating Cycle (Consolidated) ......................................... 300299 Figure 117 - Total Assets Turnover (Consolidated) ............................... 301300 Figure 118 - Dividend Per Share (Consolidated) .................................... 302301 Figure 119 - Earnings Per Share (Consolidated) .................................... 303302 Figure 120 - Price/ Earnings Ratio (Consolidated) ................................. 304303 Figure 121 - Percentage of Earnings Retained (Consolidated) ............... 305304 Figure 122 - Dividend Payout (Consolidated) ........................................ 306305 Figure 123 - Dividend Yield (Consolidated) .......................................... 307306 Figure 124 - Book Value Per Share (Consolidated) ............................... 308307 Figure 125 - Operating Cash Flow/ Current Matutiries of Long Term Debt and Notes Payable (Consolidated) ................................................................. 309308 Figure 126 - Operating Cash Flow/ Total Debt ...................................... 310309 Figure 127 - Operating Cash Flow Per Share (Consolidated) ................ 311310 xviii
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Figure 128 - Operating Cash Flow/ Cash Dividends (Consolidated) ..... 312311
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1.
INTRODUCTION
1.1. Background of the Project
This study emphasizes comparing financial statements of two industrial concerns through evaluating their financials. Preparation of financial statements is a mandatory requisite by law for all registered organizations. Financial statements of an organization organization. Financial statements and financial ratios itself are not much useful for provide valuable insights into operational and financial feasibility of business of an
to industry and economy to economy. Different industries have different standards, different averages, different contexts, and different capital requirements. Hence, in order benchmark or industry averages. Financial comparative analysis is a valuable tool for to determine the performance of an organization, it is necessary to compare it with some
and profitability of an organization. Even though Financial comparative analyses are always criticized for inadequacy of their results due to doubtful financial figures reported in financial statements (financial redressing) and not considering several intangible, nonfinancial aspects, but still it is of immense importance for almost all stakeholders of an organization.
Comparing an organizations feasibility with other similar organizations is a very important issue for stakeholders of an organization. Stakeholders are always keen to know how their organization is operating and how much beneficial it is for them to stay in touch with that organization. Comparing financial statements of an organization with a benchmark or other similar organization in same industry always provide various valuable insights for stakeholders. Through this comparison stakeholders sort out whether
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investors, lenders and financial institutions to develop an understanding about liquidity
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predicting future, because of varying contexts from organization to organization, industry
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their organization is operating profitably or not? If no then what could be done to improve the performance.
1.2.
Introduction of Textile Sector
Pakistan is primarily an agricultural country and especially famous worldwide for its finest quality cotton. This finest quality cotton is then used as raw material in textile sector to produce fabric that is about 60% of our export. These fabrics produce through yarn and yarn produce from raw cotton. More than 200 Spinning Companies producing yarn for knitting companies in Pakistan. Pakistan is fourth largest producer of cotton and third largest consumer in the world. Pakistan textile industry is amongst the top in the the challenges and to take the opportunities of increasing worldwide demand for textiles and consumption of textile products, Government of Pakistan established a separate ministry for this purpose i.e. Ministry of Textile Industry in 2004.
export earnings, accounting for around 46% of total manufacturing and employing over 38% of the manufacturing labor force. Over USD 4 billion of textile and garment machinery has been imported in Pakistan in the last few years that has significantly improved the quality and productivity of Pakistan textile products in the last few years and the Government of Pakistan is targeting over USD 10 billion of exports of textiles and garments made-ups in the successive years. Import of textile machinery has registered an impressive growth of 66.29% in the current fiscal year.
1.3.
Companys Introduction
1.3.1. Kohinoor Textile Mills Limited Company Profile
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Textile and Garment is principal industry contributing more than 67% to total
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world and playing a leading role in the development of the manufacturing sector. To meet
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The company commenced operation in 1953 as a private limited Company and became a Public Limited Company in 1968. The initial capacity of its Rawalpindi unit comprised 25,000 spindles and 600 looms. Later, fabric processing facilities were added and spinning capacity was augmented. Additional production facilities were acquired on the Raiwind-Mang Road near Lahore in District Kasur and on the Gulyana Road near Gujar Khan, by way of merger. The Companys production facilities now comprise 179,220 ring spindles capable of spinning a wide range of counts using cotton and Man-made fibers. The weaving
fabrics for the home textile market. The stitching facilities produce a diversified range of home textiles for the export market. Both the dyeing and stitching facilities are being augmented to take advantage of greater market access.
have been up at all three sites. The Company has been investing heavily in Information Technology, training of its human resources and preparing its management to meet the challenges of market integration.
position is maintained as well as supporting the ongoing improvement process in our endeavor to maintain world best practice manufacturing. Mission Statement
The Kohinoor Textile Mills Limited stated mission is to achieve and then remain as the most progressive and profitable Company in Pakistan in terms of industry standards and stakeholders interest.
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Kohinoor Textile Mills Limited continues to ensure that its current competitive
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Fully equipped laboratory facilities for quality control and process optimization
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The processing facilities at the Rawalpindi unit are capable of dyeing and printing
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facilities at Raiwind comprise 204 looms capable of weaving wide rang of greige fabrics.
The Company shall achieve its mission through a continuous process of having sourced, developed, implemented and managed the best leading edge technology, industry best practice, human resource and innovative products and services and sold these to tits customers, suppliers and stakeholders. 1.3.2. Nishat Mills Limited
The Group
Pakistan with 5 listed companies, concentrating on 4 core businesses; Textiles, Cement, multinationals operating locally in terms of its quality products and management skills.
Annual turnover 17 billion Rupees 14 Billion from textiles
Earn foreign exchange US $ 236 million Taxes and levi of 2,080 million Rupees annually Nishat Mills Limited Flagship Company established in 1951
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Banking and Power Generation. Today, Nishat is considered to be at par with
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Nishat has grown from a cotton export house into the premier business group of
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Company Profile
Most Modern, Biggest Composite unit of Pakistan Professional and Client Oriented Marketing Green Company ISO 9001 and IKO-TEX100 Certified SA 8000 Certification currently in process NML today has 173,000 spindles, 284 Sulzer shuttle-less looms and 244 TSUDAKOMA air jet looms. NML also has the most modern textile-processing unit, 2
export for the year 2000 was Rs. 9.1 billion (US$ 143 million). Due to the application of prudent management policies, consolidation of operations, a strong balance sheet and an Company's production facilities comprise spinning, weaving, processing, stitching and power generation. Mission Statement effective marketing strategy, this trend is expected to continue in the years to come. The
To provide quality products to customers and explore new markets to promote/
team, so as to achieve optimum prices of products of the Company for sustainable and equitable growth and prosperity of the Company.
1.4.
Objectives of the Project
Major objective of the study is to apply the knowledge of financial statements analysis on two major textile industries i.e. Kohinoor Textile Mills Limited and Nishat Mills Limited and let it analyze and compare financial performance of these two 5
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expand sales of the Company through good governance and foster a sound and dynamic
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stitching units and Power Generating plant with a capacity of 33.6 MW. NML total
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industries. The study will help to understand and elaborate the concepts of financial statement analysis and its comparison using various techniques i.e. ratio analysis, horizontal, vertical, trend and industry analysis over the period of three years. Other objectives include: 1) To compare and evaluate the standardized financial information within and between both organizations and with industry averages. 2) To study the efficiency of operations through identifying major changes in trends, amounts and relationships. 3) To investigate the reasons behind said major changes.
for my project which can be more knowledgeable for me and which can be more practical in nature for my future life as finance professional. There are several reasons for me to analysis and comparison of financial statements is that financial statements are the end products of accounting cycle and financial statement analysis is of keen importance for financial structure. My research work is of extreme importance for the banking companies financial planning so that they can get their financial goals. Financial statements are to provide information that is useful in making investment and credit decisions; in assessing the amount, timing, and uncertainty of future cash flows; and learning about the banks economic resources, claims to resources, and changes in claims to resources. Working on the project would help me to understand the concepts associated with accounting cycle and financial analysis and will elaborate the general choose financial statement analysis as a topic for my project. Major reason for choosing
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almost all types of stakeholders. Financial statements act as nucleus for the whole
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As a student of finance, for me, it is of utmost importance to choose such a topic
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1.5.
Significance of the Project
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concepts of several analytical tools being used and studied during the course of this MBA for analyzing financial statements.
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2.
PROCESSING
2.1.
AND
ANALYSIS
Data Collection & Processing
2.1.1. Data Collection Sources Data has been gathered through published financial data of both companies. Data has been gathered through online material available over internet on following websites: Kohinoor Textile Mills Limited
Source: http://www.kmlg.com/kmlg/financialreport.php?fid=4 [Online] This online web link contains all annual, half yearly and quarterly reports of Kohinoor Textile Mills Limited available over internet. Nishat Mills Limited
Source: http://www.nishatmillsltd.com/nishat/invest.html [Online] This online web link contains all annual, half yearly and quarterly reports
2.1.2. Data Collection Tools
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of Nishat Mills Limited available over internet.
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Formatted: Highlight
Existing statistics have been used to collect the data. 2.1.3. Data Processing and Analysis Microsoft Excel has been used to process and analyze the data.
2.2.
Analysis
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2.2.1. Ratio Analysis
1. Nishat Mills Limited

1) Liquidity Ratios
Liquidity ratios are representative of the short term financial position of the company and their ability to meet the obligations and liabilities of the company. i. Current Ratio Current Ratio states that how efficiently an organization can meet its current
Current Ratio
= 9,743,720 / 7,051,533
Year 2007
Current Assets
Current Liabilities = 7,649,373 Current Ratio = 13,309,087 / 7,649,373 = 1.74 9
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= 1.38
= 13,309,087
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Current Liabilities = 7,051,533
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Current Assets
= 9,743,720
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Year 2006
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Current Ratio = Current Assets / Current Liabilities
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Year 2008 Current Assets = 13,929,518
Current Liabilities = 11,721,605 Current Ratio = 13,929,518 / 11,721,605 = 1.19 ii. Acid Test Ratio (Quick Ratio)
Quick ratio or acid test ratio provides that how liquid are the company assets to
inventories are not included in assets while examining acid test ratio. Inventory is the most less liquid asset, hence, quick ratio portrays a more true picture of companys ability to pay its short term obligations.
Liabilities Year 2006 Current Assets Inventory Inventory
= 9,743,720
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= Stores, spare parts and loose tools + Stock in trade = 471,520 + 3,003,174 = 3,474,694
Current Liabilities = 7,051,533 Quick Ratio = (9,743,720 3,474,694) / 7,051,533 = 6,269,026 / 7,051,533
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Quick Ratio = (Current Assets Inventory prepaid expenses) / Current
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pay off its current liabilities. This is same as the current ratio except that
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= 0.89 Year 2007 Current Assets Inventory Inventory = 13,309,087 = Stores, spare parts and loose tools + Stock in trade = 422,428 + 3,106,436 = 3,528,864
Quick Ratio
= (13,309,087 3,528,864) / 7,649,373 = 9,780,223 / 7,649,373 = 1.28
Year 2008 Current Assets Inventory Inventory = 13,929,518
= Stores, spare parts and loose tools + Stock in trade = 490,229 + 4,103,648 = 4,593,877
Current Liabilities = 11,721,605 Quick Ratio = (13,929,518 4,593,877) / 11,721,605 = 9,335,642 / 11,721,605 = 0.80 iii. Working Capital
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Working capital is the amount of current assets which is access of current liabilities. Neither too much nor too low working capital is beneficial for the organization because capital is not free of cost. The more capital pledged into current assets the more cost company will have to pay for it. On the other side low working capital also have negative implications on the organizations liquidity, because company must have to pay its short term obligations for which it needs capital. Otherwise it may be declared insolvent in case of nonpayment of its obligations. So a balance must be maintained between current
Working Capital = Current Assets Current Liabilities Year 2006 Current Assets = 9,743,720
Current Liabilities = 7,051,533 Working Capital = 9,743,720 7,051,533 = 2,692,187 Year 2007 Current Assets
Current Liabilities = 7,649,373 Working Capital = 13,309,087 7,649,373 = 5,659,714 Year 2008
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= 13,309,087
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assets and current liabilities.
Current Assets
= 13,929,518
Current Liabilities = 11,721,605 Working Capital = 13,929,518 11,721,605 = 2,207,913 iv. Sales to Working Capital Ratio Sales to working capital ratio examine that how much the working capital is
must have to pay cost for using this working capital. So, this working capital must generate sales for company to cover the finance cost associated with it. Sales to Working Capital Ratio = Net Sales / Working Capital Year 2006 Net Sales Working Capital Current Assets = 16,659,607
= Current Assets Current Liabilities = 9,743,720
Current Liabilities = 7,051,533 Working Capital = 9,743,720 7,051,533 = 2,692,187
Sales to Working Capital Ratio
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Year 2007
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= 16,659,607 / 2,692,187 = 6.19
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contributing to generate sales. Companies want to know this ratio because they
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Net Sales Working Capital Current Assets
= 17,180,192 = Current Assets Current Liabilities = 13,309,087
Current Liabilities = 7,649,373 Working Capital = 13,309,087 7,649,373 = 5,659,714
= 3.04
Year 2008 Net Sales Working Capital Current Assets = 19,267,633
Current Liabilities = 11,721,605 Working Capital
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= 13,929,518 11,721,605
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= 19,267,633 / 2,207,913 = 8.73
2) Leverage Ratios
Leverage ratios are concerned with analysis of balance between two capital components i.e. equity financing and debt financing. Neither extensive use of capital 14
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= 2,207,913
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= 17,180,192 / 5,659,714
nor debt is in favor of company. There must be a balance between equity and debt to achieve the economies. This balance can be examined through leverage ratios. i. Times Interest Earned Times interest earned or interest coverage ratio is a very important leverage ratio in the sense that it calculates that how many times a companys profits can pay its finance cost. The more interest coverage ratio a company has, the more it will be attractive for lenders to lend money because they know that company has the ability to pay its interest charges so there is no fear of insolvency. At the same time investors will also start thinking to invest in the company because
Interest Charges Year 2006 EBIT
= Profit/ (Loss) before Taxation + Interest Charges
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Times Interest Earned = Earnings before Interest and Taxes (EBIT) /
s.
extensive profits are available to pay as dividends.
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Profit/ (Loss) before Taxation = 1,758,866 Interest Charges EBIT = 755,054
ww w.
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= 1,758,866 + 755,054 = 2,513,920
Times Interest Earned
= 2,513,920 / 755,054 = 3.33
Year 2007 EBIT = Profit/ (Loss) before Taxation + Interest Charges

15
Profit/ (Loss) before Taxation = 1,356,208 Interest Charges EBIT Times Interest Earned = 819,267 = 1,356,208 + 819,267 = 2,175,475 / 819,267 = 2.66 Year 2008 EBIT = 2,175,475
Profit/ (Loss) before Taxation = 6,396,968 Interest Charges EBIT Times Interest Earned = 907,432 = 6,396,968 + 907,432 = 7,304,400 / 907,432
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ii. Fixed Charge Coverage Ratio
Fixed charge ratio helps management to examine whether company can pay its fixed charges or not. Fixed charges are the amount must have to be paid to lenders in terms of markup on long term financing and finance charges on lease liabilities. Same like interest coverage ratio, fixed coverage ratio examines that how many times a company can meet its fixed charges out of its profits. Fixed Charge Coverage = EBIT + Fixed Charge (Before Tax) / Fixed Charge (Before Tax) + Interest Charges
ww w.
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= 8.05
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= 7,304,400 16
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Fixed Charge = Markup on Long Term Financing + Finance Charges on Lease Liabilities Year 2006 EBIT = Profit/ (Loss) before Taxation + Interest Charges
(Note 32)
Profit/ (Loss) before Taxation = 1,758,866 Interest Charges EBIT = 755,054
Year 2007 EBIT
Profit/ (Loss) before Taxation = 1,356,208 Interest Charges EBIT = 819,267 = 1,356,208 + 819,267 = 2,175,475 =328,117
Fixed Charge (Before Tax) = 322,382 + 5,735 Interest Charges = 819,267
ww w.
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= 2.62
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= 2,841,461 / 1,082,595
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Fixed Charge Coverage
= (2,513,920 + 327,541) / (327,541 + 755,054)
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Interest Charges
= 755,054
s.
Fixed Charge (Before Tax) = 318,414 + 9,127
= 327,541
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17
= 1,758,866 + 755,054
= 2,513,920
= (2,175,475 + 328,117) / (328,117 + 819,267) = 2,503,592 / 1,147,384 = 2.18
Interest Charges EBIT
= 907,432 = 6,396,968 + 907,432
= 7,304,400
Fixed Charge (Before Tax) = 181,988 + 2,186 Interest Charges Fixed Charge Coverage = 907,432
= (7,304,400 + 184,174) / (184,174 + 907,432)
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= 184,174
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iii. Debt Ratio
Debt ratio indicates the value of total liabilities to its total assets. It states that with what proportion of the assets are financed through debt. Debt Ratio = Total Debt / Total Assets Year 2006 Total Debt = 10,066,917 18
ww w.
vi rt
= 7,488,574 / 1,091,606 = 6.86
Profit/ (Loss) before Taxation = 6,396,968
Total Assets = 30,661,326 Debt Ratio = 10,066,917 / 30,661,326 = 0.33 Year 2007 Total Debt = 9,423,193 Total Assets = 39,587,091 Debt Ratio = 9,423,193 / 39,587,091 = 0.24 Year 2008 Total Debt = 12,769,399 Total Assets = 37,916,579 Debt Ratio = 12,769,399 / 37,916,579 = 0.34 iv. Debt / Equity Ratio
Debt/ Equity ratio states that what is the proportion of debt and equity to form total capital portion of the company. There are two options for funding the projects i.e. equity financing and debt financing. Through debt/ equity ratio we can analyze that how much of the companys finance belong to debt financing and how much to equity financing. Debt / Equity Ratio = Total Debt / Total Equity 19
ww w.
vi rt
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Year 2006 Total Debt Total Equity = 10,066,917 = 20,594,409
Debt / Equity Ratio = 10,066,917 / 20,594,409 = 0.49 Year 2007 Total Debt Total Equity = 9,423,193 = 30,163,898
Debt / Equity Ratio = 9,423,193 / 30,163,898 = 0.31 Year 2008 Total Debt Total Equity = 12,769,399
= 25,147,180
Debt / Equity Ratio = 12,769,399 / 25,147,180 = 0.51
v. Debt to Tangible Net Worth Ratio This ratio differs from Debt/ Equity Ratio in the sense that it excludes intangible assets from the equity to get a more precise figure for proportion of debt and equity, because intangible assets are tough to value and it is difficult to realize
ww w.
vi rt
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20
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their value in several circumstances. Hence, it is prudent to calculate the ratio of debt and equity after excluding intangible assets from equity. Debt to Tangible Net Worth Ratio = Total Debt / Tangible Net Worth Tangible Net Worth = Total Assets Total Liabilities Intangible Assets Year 2006 Total Debt Total Assets Total Liabilities Intangible Assets Tangible Net Worth = 10,066,917
Year 2007 Total Debt Total Assets
Total Liabilities Intangible Assets Tangible Net Worth
ww w.
vi rt
= 0.49
= 9,423,193 = 39,587,091 = 9,423,193
= NIL = 39,587,091 9,423,193 = 30,163,898
Debt to Tangible Net Worth= 9,423,193 / 30,163,898 21
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Debt to Tangible Net Worth= 10,066,917 / 20,594,409
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= 30,661,326 10,066,917
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= NIL
= 20,594,409
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= 10,066,917
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= 30,661,326
= 0.31 Year 2008 Total Debt Total Assets Total Liabilities Intangible Assets Tangible Net Worth = 12,769,399 = 37,916,579 = 12,769,399 = NIL = 37,916,579 12,769,399 = 25,147,180
Debt to Tangible Net Worth= 12,769,399 / 25,147,180 = 0.51 vi. Current Worth / Net Worth Ratio
Current worth / net worth ratio states the proportion of current worth and net assets is called net worth. Whereas, current worth is the amount of current assets left after payment of current liabilities.
Current Worth / Net Worth Ratio = Current Worth / Net Worth Current Worth = Total Current Assets Total Current Liabilities Net Worth = Total Assets Total Liabilities Year 2006 Total Current Assets = 9,743,720
ww w.
vi rt
worth. The amount of total assets left after payment of all liabilities out of its
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Total Current Liabilities Current Worth Total Assets Total Liabilities Net Worth
= 7,051,533 = 9,743,720 7,051,533 = 30,661,326 = 10,066,917 = 30,661,326 10,066,917 = 20,594,409 = 2,692,187
= 0.13 Year 2007 Total Current Assets Total Current Liabilities Current Worth Total Assets Total Liabilities Net Worth = 13,309,087 = 7,649,373
= 13,309,087 7,649,373
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li
= 5,659,714 = 30,163,898
Current Worth / Net Worth Ratio = 5,659,714 / 30,163,898 = 0.19 Year 2008 Total Current Assets = 13,929,518
ww w.
vi rt
= 39,587,091 = 9,423,193
= 39,587,091 9,423,193
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Current Worth / Net Worth Ratio = 2,692,187 / 20,594,409
Total Current Liabilities Current Worth Total Assets Total Liabilities Net Worth
= 11,721,605 = 13,929,518 11,721,605 = 37,916,579 = 12,769,399 = 37,916,579 12,769,399 = 25,147,180 = 2,207,913
= 0.09 vii. Total Capitalization Ratio
Total capitalization ratio measures that how much a companys capital structure
Equity) Year 2006 Long Term Debt Total Equity
Total Capitalization Ratio = 3,015,384 / (3,015,384 + 20,594,409) = 3,015,384 / 23,609,793 = 0.13 Year 2007
ww w.
vi rt
= 3,015,384
= 20,594,409
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Total Capitalization Ratio = Long Term Debt / (Long Term Debt + Total
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consist of debt to support its operations and growth.
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24
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Current Worth / Net Worth Ratio = 2,207,913 / 25,147,180
Long Term Debt Total Equity
= 1,773,820 = 30,163,898
Total Capitalization Ratio = 1,773,820 / (1,773,820 + 30,163,898) = 1,773,820 / 31,937,718 = 0.06 Year 2008 Long Term Debt Total Equity = 1,047,794 = 25,147,180
Total Capitalization Ratio = 1,047,794 / (1,047,794 + 25,147,180) = 1,047,794 / 26,194,974 = 0.04 viii. Fixed Assets Ratio / Equity Ratio
Fixed assets ratio to equity ratio states that how much of the fixed assets are financed with equity. The more assets being financed with equity lesser will be the cost. However, a reasonable balance should be maintained between both to achieve the economies of leverage. Fixed Assets Ratio / Equity Ratio = Fixed Assets Ratio = Long Term Funds / Net Fixed Assets Long Term Funds = Total Equity + Long Term Loans Fictitious Assets
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25
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Equity Ratio Year 2006 Long Term Funds Total Equity Long Term Loans Fictitious Assets Long Term Funds Net Fixed Assets
= Total Equity / Total Assets
= Total Equity + Long Term Loans Fictitious Assets = 20,594,409 = 3,015,384 = NIL = 20,594,409 + 3,015,384 = 23,609,793
= Property, Plant & Equipment + Investment in Property = 10,611,353 + 6,377 = 10,617,730
Fixed Assets Ratio = 23,609,793 / 10,617,730 = 2.22 Equity Ratio Total Equity Total Assets Equity Ratio
= Total Equity / Total Assets = 20,594,409
Fixed Assets Ratio / Equity Ratio = 2.22 / 0.67 = 3.31
ww w.
= 30,661,326
= 20,594,409 / 30,661,326 = 0.67
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26
Year 2007 Long Term Funds Total Equity Long Term Loans Fictitious Assets Long Term Funds Net Fixed Assets = Total Equity + Long Term Loans Fictitious Assets = 30,163,898 = 1,773,820 = NIL = 30,163,898 + 1,773,820 = 31,937,718
= Property, Plant & Equipment + Investment in Property = 10,586,159 + 15,672,980 = 26,259,139
Fixed Assets Ratio = 31,937,718 / 26,259,139 = 1.22 Equity Ratio Total Equity Total Assets Equity Ratio
= Total Equity / Total Assets = 30,163,898 = 39,587,091
Fixed Assets Ratio / Equity Ratio = 1.22 / 0.76 = 1.61 Year 2008
ww w.
= 30,163,898 / 39,587,091 = 0.76
vi rt
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Long Term Funds Total Equity Long Term Loans Fictitious Assets Long Term Funds Net Fixed Assets
= 10,647,310 + 13,321,088 Fixed Assets Ratio = 26,194,974 / 23,968,398 = 1.09 Equity Ratio Total Equity Total Assets Equity Ratio = Total Equity / Total Assets = 25,147,180 = 37,916,579
= 23,968,398
= 25,147,180 / 37,916,579
Fixed Assets Ratio / Equity Ratio = 1.09 / 0.66 = 1.65 ix. Long Term Assets Versus Long Term Debt
ww w.
= 0.66
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= Property, Plant & Equipment + Investment in Property
Long term assets versus long term debt compares the ratio of long term assets with long term debt. Ratio indicates that how much of the long term assets have been financed with long term debt. Long Term Assets Versus Long Term Debt = Long Term Assets / Long Term Debt Year 2006 Long Term Assets Long Term Debt Long Term Assets / Long Term Debt = 20,917,606 = 3,015,384
= 20,917,606 / 3,015,384 = 6.94
Year 2007 Long Term Assets Long Term Debt
Long Term Assets / Long Term Debt
ww w.
Year 2008
Long Term Assets Long Term Debt Long Term Assets / Long Term Debt
vi rt
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= 26,278,004
= 1,773,820 = 26,778,004 / 1,773,820 = 14.81
= 23,987,061 = 1,047,794 = 23,987,061 / 1,047,794
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= 22.89 x. Debt Coverage Ratio Debt coverage ratio indicates that how efficiently a company can payout its annual debt service out of its operating income. Debt Coverage Ratio = Operating Income / Annual Debt Service Year 2006
Annual Debt Service Debt Coverage Ratio
Year 2008 Operating Income Annual Debt Service Debt Coverage Ratio = 7,304,400 = 907,432 = 7,304,400 / 907,432 30
ww w.
vi rt
Operating Income
= 2,175,475 = 819,267
= 2,175,475 / 819,267 = 2.66
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Year 2007
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= 2.63
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Debt Coverage Ratio
= 1,986,526 / 755,054
s.
Annual Debt Service
= 755,054
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Operating Income
= 1,986,526
= 8.05
3) Profitability Ratios
Profitability ratios indicate the profitability of an organization. It is useful for investors to analyze that how much a company is profitable in which they are going to invest. i. Net Profit Margin Net Profit Margin is a very common and widely used profitability ratio which states how much of a companys sales is going to be its profit and how much of sales is left after pay all of its expenditures except taxes.
Net Profit Margin
ww w.
Year 2007
Net Profit/ (Loss) before Taxation Net Sales Net Profit Margin
vi rt
Net Sales
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Net Profit/ (Loss) before Taxation
= 1,758,866
= 16,659,607 = 1,758,866 / 16,659,607 x 100 = 10.56 %
= 1,356,208 = 17,180,192 = 1,356,208 / 17,180,192 x 100 = 7.89 % 31
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Year 2006
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Net Profit Margin = Net Profit/ (Loss) before Taxation / Net Sales x 100
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Year 2008 Net Profit/ (Loss) before Taxation Net Sales Net Profit Margin = 6,396,968 = 19,267,633 = 6,396,968 / 19,267,633 x 100 = 33.20 % ii. Return on Assets
Return on assets measures that how much profits a company is earning by
investors to get a hint about profitability of an organization.
Return on Assets (ROA) = Net Profit/ (Loss) After Taxation / Average Total Assets x 100
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putting its assets. This ratio is also known as ROA and being widely used by
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Average Total Assets = (Opening Total Assets + Closing Total Assets) / 2 Year 2006
Net Profit/ (Loss) After Taxation Opening Total Assets Closing Total Assets Average Total Assets
ww w.
vi rt
= 1,632,866 = 21,917,602 = 30,661,326 = (21,917,602 + 30,661,326) / 2 = 26,289,464

Formatted: Highlight Formatted: Border: Box: (Single solid line, Auto, 0.5 pt Line width)
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Return on Assets
= 1,632,866 / 26,289,464 x 100 = 6.21 %
Year 2007 Net Profit/ (Loss) After Taxation Opening Total Assets Closing Total Assets Average Total Assets = 1,211,208 = 30,661,326 = 39,587,091 = (30,661,326 + 39,587,091) / 2 = 35,124,209 Return on Assets
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= 1,211,208 / 35,124,209 x 100 = 3.45 %
Year 2008 Net Profit/ (Loss) After Taxation Opening Total Assets Closing Total Assets
ww w.
Average Total Assets
vi rt
= 6,138,968 = 39,587,091 = 37,916,579 = (39,587,091 + 37,916,579) / 2 = 38,751,835

Return on Assets
= 6,138,968 / 38,751,835 x 100 = 15.84 %
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iii. DuPont Return on Assets DuPont developed a model to show that return on assets is result of two components i.e. assets turnover and profit margin and more precise return on assets can be obtained by combining these both components. The only difference in return on assets and DuPont return on assets is that DuPont took total assets to represent assets rather ROA considers average total assets for calculation of ROA.
By solving the equation we get the following formula to calculate DuPont Return on Assets: DuPont Return on Assets = Net Income / Total Assets Year 2006 Net Income Total Assets DuPont Return on Assets = 1,632,866
Year 2007 Net Income Total Assets
DuPont Return on Assets
ww w.
vi rt
= 30,661,326
= 1,632,866 / 30,661,326 = 0.05
= 1,211,208 = 39,587,091 = 1,211,208 / 39,587,091 = 0.03 34
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DuPont Return on Assets = Net Income / Sales x Sales / Total Assets
Year 2008 Net Income Total Assets DuPont Return on Assets = 6,138,968 = 37,916,579 = 6,138,968 / 37,916,579 = 0.16 iv. Operating Income Margin
Operating income margin indicates that how much a company is earning
Operating Income Margin = 1,986,526 / 16,659,607 x 100
Year 2007
Operating Income Net Sales
Operating Income Margin = 2,175,475 / 17,180,192 x 100 = 12.66 % 35
ww w.
vi rt
Net Sales
= 16,659,607
= 11.92 %
= 2,175,475 = 17,180,192
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Operating Income
= 1,986,526
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Year 2006
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Operating Income Margin = Operating Income / Net Sales x 100
s.
through its operations out of net sales.
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Year 2008 Operating Income Net Sales = 7,304,400 = 19,267,633
Operating Income Margin = 7,304,400 / 19,267,633 x 100 = 37.91 % v. Operating Assets Turnover
Operating assets turnover suggests that how much 1 rupee of operating assets is
Loose Tools + Stock in Trade + Cash and Bank Balances Property, Plant and Equipment
Stores, Spare Parts and Loose Tools = 471,520 Stock in Trade
Cash and Bank Balances Operating Assets Operating Assets Net Sales
ww w.
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= 10,611,353
= 3,003,174
= 50,250 = 10,611,353 + 471,520 + 3,003,174 + 50,250 = 14,136,297 = 16,659,607
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Operating Assets
= Property, Plant and Equipment + Stores, Spare Parts and
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Year 2006
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Operating Assets Turnover = Net Sales / Operating Assets
s.
generating net sales.
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Operating Assets Turnover = 16,659,607 / 14,136,297 = 1.18 Year 2007 Operating Assets = Property, Plant and Equipment + Stores, Spare Parts and
Loose Tools + Stock in Trade + Cash and Bank Balances Property, Plant and Equipment = 10,586,159
Operating Assets Turnover = 17,180,192 / 14,184,630
Year 2008
Operating Assets
Stores, Spare Parts and Loose Tools = 490,229
ww w.
vi rt
Net Sales
= 17,180,192
= 1.21
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Operating Assets
= 14,184,630
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Operating Assets
= 10,586,159 + 422,428 + 3,106,436 + 69,607
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Cash and Bank Balances
= 69,607
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Stock in Trade
= 3,106,436
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Stock in Trade Cash and Bank Balances Operating Assets Operating Assets Net Sales
= 4,103,648 = 73,752 = 10,647,310 + 490,229 + 4,103,648 + 73,752 = 15,314,939 = 19,267,633
= 1.26 vi. Return on Operating Assets
Return on operating assets indicates that how much operating assets are
Assets x 100 Year 2006
Net Profit/ (Loss) after Taxation Operating Assets
Stores, Spare Parts and Loose Tools = 471,520 Stock in Trade = 3,003,174
ww w.
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= 1,632,866
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Return on Operating Assets = Net Profit/ (Loss) After Taxation / Operating
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contributing towards sales.
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s.
38
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Cash and Bank Balances Operating Assets Operating Assets
= 50,250 = 10,611,353 + 471,520 + 3,003,174 + 50,250 = 14,136,297
Return on Operating Assets = 1,632,866 / 14,136,297 x 100 = 11.55 % Year 2007 Net Profit/ (Loss) after Taxation Operating Assets = 1,211,208
Cash and Bank Balances Operating Assets
Operating Assets
Return on Operating Assets = 1,211,208 / 14,184,630 x 100 = 8.54 % Year 2008 Net Profit/ (Loss) after Taxation = 6,138,968 39
ww w.
vi rt
Stock in Trade
= 3,106,436
= 69,607
= 10,586,159 + 422,428 + 3,106,436 + 69,607 = 14,184,630
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Property, Plant and Equipment
= 10,586,159
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Loose Tools + Stock in Trade + Cash and Bank Balances
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Operating Assets
Stores, Spare Parts and Loose Tools = 490,229 Stock in Trade Cash and Bank Balances Operating Assets Operating Assets = 4,103,648 = 73,752
assets to generate sales.
Sales to Fixed Assets = Net Sales / Fixed Assets Year 2006 Net Sales Fixed Assets
ww w.
= Property, Plant and Equipment + Investment in Property = 10,611,353 + 6,377 = 10,617,730
Sales to Fixed Assets
vi rt
Sales to fixed assets ratio indicates that how well is company using its fixed
= 16,659,607
= 16,659,607 / 10,617,730
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vii. Sales to Fixed Assets
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= 40.08 %
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40
Return on Operating Assets = 6,138,968 / 15,314,939 x 100
s.
= 15,314,939
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= 10,647,310 + 490,229 + 4,103,648 + 73,752
= 1.57 Year 2007 Net Sales Fixed Assets = 17,180,192 = Property, Plant and Equipment + Investment in Property = 10,586,159 + 15,672,980 Sales to Fixed Assets = 17,180,192 / 26,259,139 = 0.65 Year 2008 Net Sales Fixed Assets = 19,267,633 = 26,259,139
= Property, Plant and Equipment + Investment in Property = 10,647,310 + 13,321,088
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viii. Return on Investment
Return on investment indicates that how much a company is earning through its investment, either through debt financing or through equity financing. Return on Investment = Net Profit/ (Loss) before Taxation / (Equity + Liabilities) x 100 Year 2006
ww w.
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= 19,267,633 / 23,968,398 = 0.80
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= 23,968,398 41
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Net Profit/ (Loss) before Taxation Total Equity Total Liabilities Return on Investment = 20,594,409 = 10,066,917
= 1,758,866
= 1,758,866 / (20,594,409 + 10,066,917) x 100 = 1,758,866 / 30,661,326 x 100 = 5.74 %
Year 2007 Net Profit/ (Loss) before Taxation Total Equity Total Liabilities Return on Investment = 30,163,898 = 9,423,193 = 1,356,208
= 1,356,208 / (30,163,898 + 9,423,193) x 100
Year 2008
Net Profit/ (Loss) before Taxation Total Equity Total Liabilities Return on Investment = 25,147,180 = 12,769,399
ww w.
vi rt
= 1,356,208 / 39,587,091 x 100 = 3.43 %
= 6,396,968 / (25,147,180 + 12,769,399) x 100
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= 6,396,968
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= 6,396,968 / 37,916,579 x 100 = 16.87 % ix. Return on Total Equity Return on total equity or ROE indicates the net earnings per hundred rupees of company which can be distributed to shareholders. Return on Total Equity = Net Profit/ (Loss) after Taxation / Issued,
Year 2006 Net Profit/ (Loss) after Taxation Issued, Subscribed and Paid up Capital Return on Total Equity = 1,632,866 = 1,452,597
= 1,632,866 / 1,452,597 x 100
Year 2007
Net Profit/ (Loss) after Taxation
Issued, Subscribed and Paid up Capital Return on Total Equity
ww w.
Year 2008 Net Profit/ (Loss) after Taxation = 6,138,968
vi rt
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= 112.41 %
= 1,211,208
= 1,597,857 = 1,211,208 / 1,597,857 x 100 = 75.80 %
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Subscribed and Paid up Capital x 100
= 1,597,857 = 6,138,968 / 1,597,857 x 100 = 384.20%
x. Gross Profit Margin Gross profit margin is an important and basic ratio. It shows how much gross profit company is earning out of its net sales.
Year 2007 Gross Profit Net Sales
Gross Profit Margin
Year 2008 Gross Profit = 2,968,776 44
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= 17.76 %
= 2,844,938
= 17,180,192 = 2,844,938 / 17,180,192 x 100 = 16.56 %
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Gross Profit Margin
= 2,957,981 / 16,659,607 x 100
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Net Sales
= 16,659,607
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Gross Profit
= 2,957,981
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Year 2006
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Gross Profit Margin = Gross Profit / Net Sales x 100
Net Sales Gross Profit Margin
= 19,267,633 = 2,968,776 / 19,267,633 x 100 = 15.41 %
4) Activity Ratios
Activity ratios represent firms ability to convert its different accounts into cash or sales.
Logically company is offering interest free loans to its debtors whereas company itself is paying cost for those loans. Accounts receivable turnover indicates that how efficiently a firm uses its accounts receivables to generate sales.
Accounts Receivable Turnover = Net Sales / Average Accounts Receivable Year 2006 Net Sales
Average Accounts Receivable Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable Average Accounts Receivable
ww w.
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= 16,659,607 = (Opening Accounts Receivable + Closing
= 877,358 = 1,026,884 = (877,358 + 1,026,884) / 2
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Accounts receivables are important part of a companys balance sheet.
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i. Accounts Receivable Turnover
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= 952,121 Accounts Receivable Turnover = 16,659,607 / 952,121 = 17.50 Year 2007 Net Sales Average Accounts Receivable Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable Average Accounts Receivable = 1,026,884 = 831,653 = 17,180,192 = (Opening Accounts Receivable + Closing
Year 2008 Net Sales
ww w.
Average Accounts Receivable Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable
vi rt
Accounts Receivable Turnover
= 17,180,192 / 929,269 = 18.49
= 831,653 = 1,329,027
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= 929,269
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= (1,026,884 + 831,653) / 2
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Average Accounts Receivable
= (831,653 + 1,329,027) / 2 = 1,080,340
= 19,267,633 / 1,080,340 = 17.83
ii. Average Collection Period Average collection period states that how much time a firm takes to convert its
Sales / 365) Year 2006
Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable
ww w.
Annual Credit Sales Average Collection Period
vi rt
= 877,358
= 1,026,884
= (877,358 + 1,026,884) / 2 = 952,121 = 16,659,607 = 952,121 / (16,659,607 / 365) = 952,121 / 45,643
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47
s.
Average Collection Period = Average Accounts Receivable / (Annual Credit
co
accounts receivable into cash or how efficiently a firm collects its debt.
= 20.86 Year 2007 Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable Average Accounts Receivable = 1,026,884 = 831,653
Year 2008
Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable Average Accounts Receivable = 831,653 = 1,329,027 = (831,653 + 1,329,027) / 2 = 1,080,340
ww w.
vi rt
= 19.74
ua
= 929,269 / 47,069
li
Average Collection Period
= 929,269 / (17,180,192 / 365)
an
Annual Credit Sales
= 17,180,192
s.
48
= 929,269
co
= (1,026,884 + 831,653) / 2
= 19,267,633 = 1,080,340 / (19,267,633 / 365) = 1,080,340 / 52,788 = 20.47
iii. Accounts Payable Turnover Accounts payable are creditors of a company who grants credit to the company
much a company purchases against attraction of one rupee of credit.
Accounts Payable Turnover = Net Purchases / Average Accounts Payable Year 2006 Net Purchases = 4,488,131
Average Accounts Payable = (Opening Accounts Payable + Closing Accounts Payable) / 2
Opening Accounts Payable = 812,216
Closing Accounts Payable = 960,436 Average Accounts Payable = (812,216 + 960,436) / 2 = 886,326 Accounts Payable Turnover = 4,488,131 / 886,326 = 5.06
ww w.
vi rt
ua
li
an
49
s.
co
without any interest charges. Accounts payable turnover provides that how
Year 2007 Net Purchases = 4,759,081
Average Accounts Payable = (Opening Accounts Payable + Closing Accounts Payable) / 2 Opening Accounts Payable = 960,436 Closing Accounts Payable = 926,593
Opening Accounts Payable = 926,593 Closing Accounts Payable = 1,141,227 Average Accounts Payable = (926,593 + 1,141,227) / 2 = 1,033,910 Accounts Payable Turnover = 6,054,256 / 1,033,910
ww w.
vi rt
Net Purchases
= 6,054,256
ua
Year 2008
li
= 5.04
an
50
Accounts Payable Turnover = 4,759,081 / 943,515
s.
= 943,515
co
Average Accounts Payable = (960,436 + 926,593) / 2
= 5.86 iv. Average Payment Period Average payment period indicates that how much time a company takes to pay its credit. Which means that how much a company takes advantage of this interest free loan. Average Payment Period = Average Accounts Payable / (Annual Credit Purchases / 365) Year 2006
Average Accounts Payable = (Opening Accounts Payable + Closing Accounts
Average Payment Period
Year 2007
ww w.
Annual Credit Purchases
vi rt
Average Accounts Payable = (812,216 + 960,436) / 2 = 886,326
= 4,488,131
= 886,326 / (4,488,131 / 365) = 886,326 / 12,296 = 72.08
ua
Closing Accounts Payable = 960,436
li
an
51
Payable) / 2
s.
co
Average Accounts Payable = (Opening Accounts Payable + Closing Accounts Payable) / 2 Opening Accounts Payable = 960,436 Closing Accounts Payable = 926,593 Average Accounts Payable = (960,436 + 926,593) / 2 = 943,515
Payable) / 2
Closing Accounts Payable = 1,141,227 Average Accounts Payable = (926,593 + 1,141,227) / 2 = 1,033,910 Annual Credit Purchases Average Payment Period = 6,054,256 = 1,033,910 / (6,054,256 / 365)
ww w.
vi rt
ua
Year 2008
li
= 72.36
an
52
= 943,515 / 13,039
s.
= 943,515 / (4,759,081 / 365)
co
= 4,759,081
= 1,033,910 / 16,587 = 62.33 v. Inventory Turnover Inventory turnover ratio states that how many times inventory has been sold or replaced. Inventory Turnover = Cost of Goods Sold / Average Inventory
stock in trade Ending Inventory in trade
= Ending Stores, spare parts and loose tools + Ending stock
Opening Stores, spare parts and loose tools Opening Stock in Trade
vi rt
ua
ww w.
Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory = 424,827 + 2,897,392 Ending Inventory = 471,520 + 3,003,174
li
Opening Inventory = Opening Stores, spare parts and loose tools + Opening
= 424,827 = 2,897,392 = 471,520 = 3,003,174 = 3,322,219 = 3,474,694
an
Average Inventory = (Opening Inventory + Ending Inventory) / 2
s.
53
Cost of Goods Sold = 13,701,626
co
Year 2006
Average Inventory = (3,322,219 + 3,474,694) / 2 = 3,398,457 Inventory Turnover = 13,701,626 / 3,398,457 = 4.03 Year 2007 Cost of Goods Sold = 14,335,254 Average Inventory = (Opening Inventory + Ending Inventory) / 2
in trade Opening Stores, spare parts and loose tools Opening Stock in Trade
ua
vi rt
Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade
ww w.
Opening Inventory = 471,520 + 3,003,174 Ending Inventory = 422,428 + 3,106,436
Average Inventory = (3,474,694 + 3,528,864) / 2 = 3,501,779
li
Ending Inventory
= 471,520 = 3,003,174 = 422,428 = 3,106,436 = 3,474,694 = 3,528,864
an
stock in trade
s.
co
54
Inventory Turnover = 14,335,254 / 3,501,779 = 4.09 Year 2008 Cost of Goods Sold = 16,298,857 Average Inventory = (Opening Inventory + Ending Inventory) / 2 Opening Inventory = Opening Stores, spare parts and loose tools + Opening
in trade Opening Stores, spare parts and loose tools Opening Stock in Trade Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade
= 422,428
ua
vi rt
Opening Inventory = 422,428 + 3,106,436 Ending Inventory
ww w.
= 490,229 + 4,103,648
Average Inventory = (3,528,864 + 4,593,877) / 2 = 4,061,371 Inventory Turnover = 16,298,857 / 4,061,371 = 4.01
li
= 3,106,436
= 490,229 = 4,103,648 = 3,528,864 = 4,593,877
an
55
s.
Ending Inventory
co
stock in trade
vi. Average Age of Inventory Average age of inventory tells us that how many days inventory has taken to be replaced or sold. Average Age of Inventory = Average Inventory / Cost of Goods Sold x 365 Year 2006 Average Inventory = (Opening Inventory + Ending Inventory) / 2
stock in trade Ending Inventory in trade Opening Stores, spare parts and loose tools Opening Stock in Trade
li
ua
Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory Ending Inventory
vi rt
ww w.
= 424,827 + 2,897,392 = 471,520 + 3,003,174
Average Inventory
= (3,322,219 + 3,474,694) / 2 = 3,398,457
Cost of Goods Sold
= 13,701,626
an
= 424,827 = 2,897,392 = 471,520 = 3,003,174 = 3,322,219 = 3,474,694 56
s.
co
Average Age of Inventory = 3,398,457 / 13,701,626 x 365 = 90.53 Year 2007 Average Inventory = (Opening Inventory + Ending Inventory) / 2 Opening Inventory = Opening Stores, spare parts and loose tools + Opening stock in trade
in trade Opening Stores, spare parts and loose tools Opening Stock in Trade Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory Ending Inventory Average Inventory
an li ua vi rt
= 471,520 + 3,003,174 = 422,428 + 3,106,436 = (3,474,694 + 3,528,864) / 2 = 3,501,779 = 14,335,254 = 89.16
Cost of Goods Sold
Average Age of Inventory = 3,501,779 / 14,335,254 x 365
ww w.
s.
= 471,520 = 3,003,174
= 422,428 = 3,106,436 = 3,474,694 = 3,528,864
co
Ending Inventory
57
Year 2008 Average Inventory = (Opening Inventory + Ending Inventory) / 2 Opening Inventory = Opening Stores, spare parts and loose tools + Opening stock in trade Ending Inventory in trade = Ending Stores, spare parts and loose tools + Ending stock
Opening Stock in Trade Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory Ending Inventory Average Inventory = 422,428 + 3,106,436
= 3,106,436 = 490,229
li
= 490,229 + 4,103,648
ua
Cost of Goods Sold
Average Age of Inventory = 4,061,371 / 16,298,857 x 365 = 90.95 vii. Operating Cycle
ww w.
vi rt
= (3,528,864 + 4,593,877) / 2 = 4,061,371
= 16,298,857
an
= 4,103,648
= 3,528,864 = 4,593,877
s.
58
co
Opening Stores, spare parts and loose tools
= 422,428
Operating cycle consist of three critical operating capital components i.e. inventory, receivables and payables. Operating cycle indicates that how efficiently company is managing its inventory, receivables and payables. Operating Cycle = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) Days Payable Outstanding (DPO) DIO = Average Inventory / (Cost of Sales / 365) DSO = Average Accounts Receivable / (Net Sales / 365) DPO = Average Accounts Payable / (Net Purchases / 365) Year 2006
Average Inventory = (Opening Inventory + Ending Inventory) / 2 Opening Inventory = Opening Stores, spare parts and loose tools + Opening
an
s.
in trade
Opening Stores, spare parts and loose tools Opening Stock in Trade
vi rt
Ending Inventory
ua
stock in trade
li
= 424,827 = 2,897,392 = 471,520 = 3,003,174
Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory Ending Inventory = 424,827 + 2,897,392 = 471,520 + 3,003,174
ww w.
= 3,322,219 = 3,474,694
co
59
Average Inventory
= (3,322,219 + 3,474,694) / 2 = 3,398,457
Cost of Sales
= 13,701,626
DIO = Average Inventory / (Cost of Sales / 365) DIO = 3,398,457 / (13,701,626 / 365) = 3,398,457 / 37,539 = 90.53
Average Accounts Receivable = (Opening Accounts Receivable + Closing
Net Sales
ww w.
DSO = Average Accounts Receivable / (Net Sales / 365) DSO = 952,121 / (16,659,607 / 365) = 952,121 / 45,643 = 20.86
vi rt
= (877,358 + 1,026,884) / 2 = 952,121
= 16,659,607
ua
Closing Accounts Receivable
= 1,026,884
li
Opening Accounts Receivable
= 877,358
an
60
Accounts Receivable) / 2
s.
co
= 90.53 + 20.86 72.08
Year 2007
Average Inventory = (Opening Inventory + Ending Inventory) / 2 Opening Inventory = Opening Stores, spare parts and loose tools + Opening stock in trade
ww w.
= 39.31
vi rt
Operating Cycle
= DIO + DSO DPO
ua
= 72.08
li
= 886,326 / 12,296
an
61
DPO = 886,326 / (4,488,131 / 365)
s.
DPO = Average Accounts Payable / (Net Purchases / 365)
co
Net Purchases
= 4,488,131
Ending Inventory in trade
Opening Stores, spare parts and loose tools Opening Stock in Trade Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory Ending Inventory Average Inventory = 471,520 + 3,003,174 = 422,428 + 3,106,436 = (3,474,694 + 3,528,864) / 2
= 471,520 = 3,003,174 = 422,428 = 3,106,436
DIO = 3,501,779 / (14,335,254 / 365) = 3,501,779 / 39,275 = 89.16
Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable = 1,026,884 = 831,653
ww w.
vi rt
DIO = Average Inventory / (Cost of Sales / 365)
ua
Cost of Sales
= 14,335,254
li
= 3,501,779
an
62
s.
= 3,528,864
co
= 3,474,694
= (1,026,884 + 831,653) / 2 = 929,269
Net Sales
= 17,180,192
DSO = Average Accounts Receivable / (Net Sales / 365) DSO = 929,269 / (17,180,192 / 365) = 929,269 / 47,069 = 19.74
Net Purchases
DPO = Average Accounts Payable / (Net Purchases / 365) DPO = 943,515 / (4,759,081 / 365) = 943,515 / 13,039 = 72.36 Operating Cycle = DIO + DSO DPO 63
ww w.
vi rt
= 4,759,081
ua
li
an
Payable) / 2
s.
co
= 89.16 + 19.74 72.36 = 36.54 Year 2008 Average Inventory = (Opening Inventory + Ending Inventory) / 2 Opening Inventory = Opening Stores, spare parts and loose tools + Opening stock in trade
in trade Opening Stores, spare parts and loose tools Opening Stock in Trade Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory Ending Inventory Average Inventory
= 422,428
li
ua
vi rt
= 422,428 + 3,106,436 = 490,229 + 4,103,648
Cost of Sales
DIO = Average Inventory / (Cost of Sales / 365) DIO = 4,061,371 / (16,298,857 / 365)
ww w.
= (3,528,864 + 4,593,877) / 2 = 4,061,371
= 16,298,857
an
= 3,106,436
= 490,229 = 4,103,648 = 3,528,864 = 4,593,877
s.
64
co
Ending Inventory
= 4,061,371 / 44,654 = 90.95 Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable Average Accounts Receivable = 831,653 = 1,329,027
= 20.47
Opening Accounts Payable Closing Accounts Payable Average Accounts Payable
ww w.
vi rt
= 1,080,340 / 52,788
= 926,593 = 1,141,227 = (926,593 + 1,141,227) / 2 = 1,033,910
ua
DSO = 1,080,340 / (19,267,633 / 365)
li
DSO = Average Accounts Receivable / (Net Sales / 365)
an
65
Net Sales
= 19,267,633
s.
= 1,080,340
co
= (831,653 + 1,329,027) / 2
Net Purchases
= 6,054,256
DPO = Average Accounts Payable / (Net Purchases / 365) DPO = 1,033,910 / (6,054,256 / 365) = 1,033,910 / 16,587 = 62.33 Operating Cycle = DIO + DSO DPO = 90.95 + 20.47 62.33 = 49.08 viii. Total Assets Turnover
Total assets turnover indicates that how efficiently a company is using its assets
Year 2006 Net Sales Total Assets
Total Assets Turnover
Year 2007 Net Sales = 17,180,192 66
ww w.
vi rt
Total Assets Turnover = Net Sales / Total Assets
= 16,659,607 = 30,661,326 = 16,659,607 / 30,661,326 = 0.54
ua
in order to generate sales.
li
an
s.
co
Total Assets Total Assets Turnover
= 39,587,091 = 17,180,192 / 39,587,091 = 0.43
Year 2008 Net Sales Total Assets Total Assets Turnover = 19,267,633 = 37,916,579 = 19,267,633 / 37,916,579 = 0.51
5) Market Ratios
Investors are always keen to know that which investment is better and which stock will offer them best return. Market or investor ratios are designed to address investors from a specific investment. i. Dividend Per Share to predict that how profitable an investment is and what return can an investor expect
Dividend per share indicates that how much a company was profitable for its shareholders in terms of dividends. The more the company will pay dividends to its shareholders the more attractive it will be for investors. (Amount in Rs.) Dividend Per Share = Dividends Paid / Number of Shares Issued Year 2006
ww w.
vi rt
ua
li
an
67
s.
co
Dividends Paid Number of Shares Issued Dividend Per Share
= 358,905,000 = 145,259,743 = 358,905,000 / 145,259,743 = 2.47
Year 2007 Dividends Paid Number of Shares Issued Dividend Per Share = 218,772,000 = 159,785,717 = 218,772,000 / 159,785,717 = 1.37 Year 2008 Dividends Paid Number of Shares Issued Dividend Per Share = 396,086,000 = 159,785,717
ii. Earnings Per Share
Similar to dividends per share, earnings per share also indicates that how much investors are earning per share. But difference is that dividends per share considers dividends company actually paid. Whereas, in case of earnings per share, earnings available for distribution to shareholders are taken into consideration apart from it that whether company is paying any actual dividends 68
ww w.
vi rt
= 396,086,000 / 159,785,717 = 2.48
ua
li
an
s.
co
to its shareholders or not. The company may not have announced any dividends for its shareholders but it does not mean that company has not earned anything to pay to its shareholders. Company may have more profitable opportunities to avail rather paying its shareholders. Even it would still be attractive for shareholders if it is earning but not distributing any dividends, because market price would be increasing in that case and investors can earn capital gains by selling the shares at higher rates. (Amounts in Rs.) Earnings Per Share = Net Profit/ (Loss) after Taxation / Number of Shares Year 2006 Net Profit/ (Loss) after Taxation Number of Shares Earnings Per Share =1,632,866,000 = 145,245,743
= 1,632,866,000 / 145,259,743
Year 2007
Net Profit/ (Loss) after Taxation Number of Shares
ww w.
Earnings Per Share
Year 2008 Net Profit/ (Loss) after Taxation = 6,138,968,000 69
vi rt
= 11.24
= 1,211,208,000 = 159,785,717 = 1,211,208,000 / 159,785,717 = 7.58
ua
li
an
s.
co
Number of Shares Earnings Per Share
= 159,785,717 = 6,138,968,000 / 159,785,717 = 38.42
iii. Price / Earning Ratio Price earning ratio suggests that what investors are expecting about a particular investment. If price earning ratio is high, it means that investors are expecting
Price / Earning Ratio = Market Price Per Share / Earning Per Share
Year 2006 Market Price Per Share Earnings Per Share = 111.92
= Profit/ (Loss) after Taxation / Number of Shares
Net Profit/ (Loss) after Taxation Number of Shares Earnings Per Share
ww w.
Price / Earning Ratio
vi rt
=1,632,866,000 = 145,245,743 = 1,632,866,000 / 145,259,743 = 11.24 = 111.92 / 11.24 = 9.96
ua
li
an
70
s.
(Amount in Rs.)
co
high growth in future earnings of a company.
Note: Average prices have been taken from www.pkfinance.info. A soft copy of which can be found in annexes section of this study. Year 2007 Price Per Share Earnings Per Share = 111.03 = Profit/ (Loss) after Taxation / Number of Shares = 1,211,208,000
which can be found in annexes section of this study. Year 2008 Price Per Share
ww w.
Earnings Per Share
vi rt
Note: Average prices have been taken from www.pkfinance.info. A soft copy of
= 89.45
= Profit/ (Loss) after Taxation / Number of Shares = 6,138,968,000 = 159,785,717 = 6,138,968,000 / 159,785,717
ua
= 14.65
li
= 111.03 / 7.58
an
71
= 7.58
s.
= 1,211,208,000 / 159,785,717
co
= 159,785,717
= 38.42 Price / Earning Ratio = 89.45 / 38.42 = 2.33 Note: Average prices have been taken from www.pkfinance.info. A soft copy of which can be found in annexes section of this study. iv. Percentage of Earnings Retained
retained out of its profits. Companies never distribute all of their profits to its shareholders. Rather they retain some or all of its profits to their own hands for the purpose of future projects and reserves. Retained Earnings = Earnings Dividends Paid
Net Earnings Dividends Paid
Retained Earnings
ww w.
Percentage of Earnings Retained
Year 2007 72
vi rt
Year 2006
= 1,632,866
= 358,805 = 1,632,866 358,805 = 1,274,061
= 1,274,061 / 1,632,866 x 100 = 78.02 %
ua
Percentage of Earnings Retained = Retained Earnings / Earnings x 100
li
an
s.
co
Percentage of earnings retained suggests the amount of a companys earnings
Net Earnings Dividends Paid Retained Earnings
= 1,211,208 = 218,772 = 1,211,208 218,772 = 992,436
= 992,436 / 1,211,208 x 100 = 81.94 %
Year 2008 Net Earnings Dividends Paid Retained Earnings = 6,138,968 = 396,086
= 6,138,968 396,086 = 5,742,882
v. Dividend Payout Ratio
Dividend payout ratio suggests that what percentage of a companys earnings are being paid by company to its shareholders. (Amounts in Rs.) Dividend Payout Ratio = Dividend Per Share / Earning Per Share x 100 Dividend Per Share = Dividends Paid / Number of Shares 73
ww w.
vi rt
= 5,742,882 / 6,138,968 x 100 = 93.55 %
ua
li
an
s.
co
Earnings Per Share Year 2006 Dividends Paid Number of Shares Net Earnings Dividend Per Share
= Net Earnings / Number of Shares
= 358,805,000 = 159,785,717 = 1,632,866,000 = 358,805,000 / 159,785,717 = 2.25
Earnings Per Share
= 1,632,866,000 / 159,785,717 = 10.22
Dividend Payout Ratio
= 2.25 / 10.22 x 100 = 22.01 %
Year 2007 Dividends Paid Number of Shares Net Earnings
Dividend Per Share
Earnings Per Share
ww w.
vi rt
= 218,772,000
= 159,785,717 = 1,211,208,000
= 218,772,000 / 159,785,717 = 1.37 = 1,211,208,000 / 159,785,717
ua
li
an
74
s.
co
= 7.58 Dividend Payout Ratio = 1.37 / 7.58 x 100 = 18.07 % Year 2008 Dividends Paid Number of Shares Net Earnings Dividend Per Share = 396,086,000 = 159,785,717 = 6,138,968,000 = 396,086,000 / 159,785,717 = 2.48 Earnings Per Share
= 6,138,968,000 / 159,785,717 = 38.42
vi. Dividend Yield
Dividend yield suggests that how much an investment is earning against one rupee of investment. (Amounts in Rs.) Dividend Yield = Dividend Per Share / Market Price Per Share Dividend Per Share = Dividends Paid / Number of Shares 75
ww w.
vi rt
= 2.48 / 38.42 x 100 = 6.45%
ua
li
an
s.
co
Year 2006 Dividends Paid Number of Shares Dividend Per Share = 358,805,000 = 145,259,743 = 358,805,000 / 145,259,743 = 2.47 Market Price Per Share Dividend Yield = 111.92 = 2.47 / 111.92 = 2.21%
Number of Shares Dividend Per Share
Market Price Per Share Dividend Yield
ww w.
vi rt
Dividends Paid
= 218,772,000
= 159,785,717
= 218,772,000 / 159,785,717 = 1.37
= 131.83 = 1.37 / 111.03 = 1.23%
ua
Year 2007
li
which can be found in annexes section of this study.
an
s.
76
co
Note: Average prices have been taken from www.pkfinance.info. A soft copy of which can be found in annexes section of this study. Year 2008 Dividends Paid Number of Shares Dividend Per Share = 396,086,000 = 159,785,717 = 396,086,000 / 159,785,717
which can be found in annexes section of this study. vii. Book Value Per Share
Book value per share is perceived to indicate whether shares of a company are over or undervalued. However, realistically speaking book value per share and market share has nothing common. (Amounts in Rs.)
Book Value Per Share = Shareholders Equity / Number of Shares Year 2006 Shareholders Equity = 20,594,409,000 77
ww w.
vi rt
ua
li
= 2.77%
an
Dividend Yield
= 2.48 / 89.45
s.
Market Price Per Share
= 89.45
co
= 2.48
Number of Shares Book Value Per Share
= 145,259,743 = 20,594,409,000 / 145,259,743 = 141.78
Year 2007 Shareholders Equity Number of Shares Book Value Per Share = 30,163,898,000 = 159,785,717 = 30,163,898,000 / 159,785,717 = 188.78 Year 2008 Shareholders Equity Number of Shares Book Value Per Share = 25,147,180,000 = 159,785,717
6) Cash Flow Ratios
Cash flows are very important to analyze whether companys cash flows are supporting its operations or not. A company may be earning huge profits but it be declared bankrupt if it does not have cash to pay to its creditors. Only being a profitable firm is not sufficient. Rather a firm must have sufficient liquid funds to meet its obligations. So, importance of cash must be realized. Cash flow ratios are indicators of cash inflows and outflows of business.
ww w.
vi rt
= 25,147,180,000 / 159,785,717 = 157.38
ua
li
an
78
s.
co
i. Operating Cash Flow/ Current Maturities of Long Term Debt and Current Notes Payable Operating cash flow to current maturities of long term debt and current notes payable is a measure indicating that how well a company can pay its current liabilities to avoid bankruptcy. Year 2006 Net Cash Generated from Operating Activities Current Maturities of Long Term Debt Current Notes Payable = 1,704,084
= 1,342,771 = 960,436
Operating Cash Flow / Current Maturities of Long Term Debt and Current
Year 2007
Current Maturities of Long Term Debt Current Notes Payable
ww w.
Net Cash Generated from Operating Activities
vi rt
ua
= 1,704,084 / 2,303,207 = 0.74
= 1,341,565 = 926,593
Operating Cash Flow / Current Maturities of Long Term Debt and Current Notes Payable = 2,413,477 / (1,341,565 + 926,593) = 2,413,477 / 2,268,158
li
Notes Payable
= 1,704,084 / (1,342,771 + 960,436)
= 2,413,477
an
s.
79
co
= 1.06 Year 2008 Net Cash Generated from Operating Activities Current Maturities of Long Term Debt Current Notes Payable = 4,301,175
= 926,025 = 1,141,227
flows from operations.
Operating Cash Flow / Total Debt = Operating Cash Flow / Total Debt Year 2006
Net Cash Generated from Operating Activities Total Debt = 10,066,917
ww w.
vi rt
ua
This ratio indicates companys ability to meet its all obligations through its cash
Operating Cash Flow / Total Debt = 1,704,084 / 10,066,917 = 0.17 Year 2007
li
ii. Operating Cash Flow / Total Debt
= 1,704,084
an
80
= 2.08
s.
= 4,301,175 / 2,067,252
co
Notes Payable
= 4,301,175 / (926,025 + 1,141,227)
Operating Cash Flow / Current Maturities of Long Term Debt and Current
Net Cash Generated from Operating Activities Total Debt = 9,423,193
= 2,413,477
Operating Cash Flow / Total Debt = 2,413,477 / 9,423,193 = 0.26 Year 2008 Net Cash Generated from Operating Activities Total Debt = 12,769,399 = 4,301,175
Operating Cash Flow / Total Debt = 4,301,175 / 12,769,399 = 0.34 iii. Operating Cash Flow Per Share
Many financial experts consider operating cash flow per share as a better financial redressing and other techniques whereas cash flows are always real. It is almost impossible to show off fake cash to prove yourself financially strong.
ww w.
vi rt
indicator than earnings per share because earnings can be manipulated by
ua
li
(Amount in Rs.) = 1,704,084,000 = 145,259,743 81
Operating Cash Flow Per Share = Operating Cash Flow / Number of Shares Year 2006 Net Cash Generated from Operating Activities Number of Shares
an
s.
co
Operating Cash Flow Per Share
= 1,704,084,000 / 145,259,743 = 11.73
Year 2007 Net Cash Generated from Operating Activities Number of Shares Operating Cash Flow Per Share = 2,413,477,000
= 159,785,717 = 2,413,477,000 / 159,785,717 = 15.10
Year 2008 Net Cash Generated from Operating Activities Number of Shares Operating Cash Flow Per Share
= 4,301,175,000
= 159,785,717
iv. Operating Cash Flow / Cash Dividends
Operating cash flow to cash dividends indicates the proportion of operating cash flow which has been paid to shareholders as cash dividends. Year 2006 Net Cash Generated from Operating Activities Dividends Paid Operating Cash Flow / Cash Dividends = 1,704,084
ww w.
vi rt
ua
= 4,301,175,000 / 159,785,717 = 26.92
= 358,805 = 1,704,084 / 358,805 82
li
an
s.
co
= 4.75 Year 2007 Net Cash Generated from Operating Activities Dividends Paid Operating Cash Flow / Cash Dividends = 2,413,477
= 218,772 = 2,413,477 / 218,772 = 11.03
Year 2008 Net Cash Generated from Operating Activities Dividends Paid Operating Cash Flow / Cash Dividends = 4,301,175
= 396,086
= 4,301,175 / 396,086
Summary:
Liquidity Ratios
Current Ratio
ww w.
Ratio
vi rt
ua
= 10.86
2006
li
1.38
an
2007 2008 1.74 1.19 1.28 0.80 5,659,714 2,207,913 83
Quick Ratio
0.89
Working Capital
2,692,187
s.
co
6.19
3.04
8.73
3.33
2.66
8.05
Fixed Charge Coverage Ratio
2.62
2.18
6.86
Debt Ratio
0.33
0.24
0.34
Debt Equity Ratio
0.49
0.31
co
Leverage Ratios
Debt to Tangible Net Worth Ratio
0.49
s.
0.31
Total Capitalization Ratio
ua
li
Current Worth / Net Worth Ratio
0.13
an
0.19
0.13
0.06
Fixed Assets Ratio / Equity Ratio
vi rt
3.31
1.61
ww w.
6.94
14.81
Debt Coverage Ratio
2.63
2.66
Pro
Net Profit Margin
10.56 %
7.89 %
m
0.51 0.51 0.09 0.04 1.65 22.89 8.05 33.20 % 84
Return on Assets
6.21 %
3.45 %
15.84 %
0.05
0.03
0.16
Operating Income Margin
11.92 %
12.66 %
37.91 %
Operating Assets Turnover
1.18
1.21
1.26
Return on Operating Assets
11.55 %
8.54 %
1.57
s.
0.65
co
Return on Total Equity
ua
112.41%
li
Return on Investment
5.74%
an
3.43%
75.80%
384.20%
Gross Profit Margin
vi rt
17.76%
16.56%
ww w.
17.50
18.49
Activity Ratios
20.86
19.74
Accounts Payable Turnover
5.06
5.04
72.08
72.36
m
40.08 % 0.80 16.87% 15.41% 17.83 20.47 5.86 62.33 85
Inventory Turnover Ratio
4.03
4.09
4.01
Average Age of Inventory
90.53
89.16
90.95
Operating Cycle
39.31
36.54
49.08
0.54
0.43
0.51
Dividend Per Share
2.47
1.37
co
Earnings Per Share
11.24
s.
7.58
Market Ratios
ua
78.02%
li
Price / Earnings Ratio
9.96
an
14.65
81.94%
vi rt
22.01%
18.07%
Dividend Yield
ww w.
2.21%
1.23%
Book Value Per Share
141.78
188.78
Cash
Operating Cash Flow / Current Maturities of Long Term Debt and Current Notes Payable
0.74
1.06
m
2.48 38.42 2.33 93.55% 6.45% 2.77% 157.38 2.08 86
Operating Cash Flow / Total Debt
0.17
0.26
0.34
11.73
15.10
26.92
Operating Cash Flow / Cash Dividends
4.75
11.03
10.86
ww w.
vi rt
ua
li
an
87
s.
co
2. Kohinoor Textile Mills Limited (KTML)

1) Liquidity Ratios
Liquidity ratios are representative of the short term financial position of the company and their ability to meet the obligations and liabilities of the company. i. Current Ratio Current Ratio states that how efficiently an organization can meet its current
= 1.02 Year 2007
Current Assets
Current Liabilities = 4,231,049 Current Ratio = 4,547,065 / 4,231,049 = 1.07 Year 2008 88
ww w.
= 4,547,065
vi rt
Current Ratio
= 3,939,417 / 3,855,596
ua
li
Current Assets
= 3,939,417
an
Year 2006
s.
Current Ratio = Current Assets / Current Liabilities
co
liabilities.
Current Assets
= 5,757,221
Current Liabilities = 5,477,572 Current Ratio = 5,757,221 / 5,477,572 = 1.05 ii. Acid Test Ratio (Quick Ratio) Quick ratio or acid test ratio provides that how liquid are the company assets to
inventories are not included in assets while examining acid test ratio. Inventory is the most less liquid asset, hence, quick ratio portrays a more true picture of companys ability to pay its short term obligations.
Liabilities Year 2006 Current Assets Inventory Inventory = 3,939,417
= Stores, spare parts and loose tools + Stock in trade
ww w.
= 502,870 + 1,607,795
vi rt
ua
Current Liabilities = 3,855,596 Quick Ratio = (3,939,417 2,110,665) / 3,855,596 = 1,828,752 / 3,855,596 = 0.47
li
Quick Ratio = (Current Assets Inventory- prepaid expenses) / Current
= 2,110,665
an
s.
co
pay off its current liabilities. This is same as the current ratio except that
89
Year 2007 Current Assets Inventory Inventory = 4,547,065 = Stores, spare parts and loose tools + Stock in trade = 284,228 + 1,755,097 = 2,039,325
Current Liabilities = 4,231,049 Quick Ratio = (4,547,065 - 2,039,325) / 4,231,049 = 2,507,740 / 4,231,049 = 0.59 Year 2008 Current Assets Inventory Inventory = 5,757,221
= Stores, spare parts and loose tools + Stock in trade = 290,947 + 1,673,062
vi rt
ua
Current Liabilities = 5,477,572 Quick Ratio
iii. Working Capital Working capital is the amount of current assets which is access of current liabilities. Neither too much nor too low working capital is beneficial for the 90
ww w.
= (5,757,221 - 1,964,009) / 5,477,572 = 3,793,212 / 5,477,572 = 0.69
li
= 1,964,009
an
s.
co
organization because capital is not free of cost. The more capital pledged into current assets the more cost company will have to pay for it. On the other side low working capital also have negative implications on the organizations liquidity, because company must have to pay its short term obligations for which it needs capital. Otherwise it may be declared insolvent in case of nonpayment of its obligations. So a balance must be maintained between current assets and current liabilities. Working Capital = Current Assets Current Liabilities Year 2006 Current Assets = 3,939,417
Current Liabilities = 3,855,596 Working Capital = 3,939,417 - 3,855,596 = 83,821 Year 2007 Current Assets
= 4,547,065
Current Liabilities = 4,231,049 Working Capital = 4,547,065 - 4,231,049 = 316,016 Year 2008 Current Assets = 5,757,221
Current Liabilities = 5,477,572 91
ww w.
vi rt
ua
li
an
s.
co
Working Capital
= 5,757,221 - 5,477,572 = 279,649
iv. Sales to Working Capital Ratio Sales to working capital ratio examine that how much the working capital is contributing to generate sales. Companies want to know this ratio because they must have to pay cost for using this working capital. So, this working capital must generate sales for company to cover the finance cost associated with it. Sales to Working Capital Ratio = Net Sales / Working Capital Year 2006 Net Sales Working Capital Current Assets = 6,903,625
Current Liabilities = 3,855,596 Working Capital
= 3,939,417 - 3,855,596
vi rt
ua
ww w.
= 6,903,625 / 83,821 = 82.36
Year 2007 Net Sales Working Capital = 7,140,167 = Current Assets Current Liabilities
li
= 83,821
an
92
s.
co
Current Assets
= 4,547,065
Current Liabilities = 4,231,049 Working Capital = 4,547,065 - 4,231,049 = 316,016
= 7,140,167 / 316,016 = 22.59
Net Sales Working Capital Current Assets
= 7,558,322 = Current Assets Current Liabilities = 5,757,221
Current Liabilities = 5,477,572 Working Capital = 5,757,221 - 5,477,572
ua
2) Leverage Ratios
Leverage ratios are concerned with analysis of balance between two capital components i.e. equity financing and debt financing. Neither extensive use of capital nor debt is in favor of company. There must be a balance between equity and debt to achieve the economies. This balance can be examined through leverage ratios. i. Times Interest Earned
ww w.
vi rt
= 7,558,322 / 279,649 = 27.03
li
= 279,649
an
93
s.
co
Year 2008
Times interest earned or interest coverage ratio is a very important leverage ratio in the sense that it calculates that how many times a companys profits can pay its finance cost. The more interest coverage ratio a company has, the more it will be attractive for lenders to lend money because they know that company has the ability to pay its interest charges so there is no fear of insolvency. At the same time investors will also start thinking to invest in the company because extensive profits are available to pay as dividends. Times Interest Earned = Earnings before Interest and Taxes (EBIT) / Interest Charges Year 2006 EBIT
Year 2007 EBIT
Profit/ (Loss) before Taxation = (28,293) Interest Charges EBIT = 603,951 = (28,293) + 603,951 = 575,658 94
ww w.
vi rt
EBIT
= 354,984 + 448,072 = 803,056
= 803,056 / 448,072 = 1.79
ua
Interest Charges
= 448,072
li
Profit/ (Loss) before Taxation = 354,984
an
s.
co
Formatted: Highlight Formatted: Highlight
= 575,658 / 603,951 = 0.95
Profit/ (Loss) before Taxation = 130,805 Interest Charges EBIT Times Interest Earned = 882,335 = 130,805 + 882,335 = 1,013,140 = 1,013,140 / 882,305 = 1.15 ii. Fixed Charge Coverage Ratio
Fixed charge ratio helps management to examine whether company can pay its lenders in terms of markup on long term financing and finance charges on lease liabilities. Same like interest coverage ratio, fixed coverage ratio examines that how many times a company can meet its fixed charges out of its profits. Fixed Charge Coverage = EBIT + Fixed Charge (Before Tax) / Fixed Charge (Before Tax) + Interest Charges Fixed Charge = Markup on Long Term Financing + Finance Charges on Lease Liabilities Year 2006 EBIT = Profit/ (Loss) before Taxation + Interest Charges 95
ww w.
vi rt
fixed charges or not. Fixed charges are the amount must have to be paid to
ua
li
(Note 32)
an
s.
co
Profit/ (Loss) before Taxation = 354,984 Interest Charges EBIT = 448,072 = 354,984 + 448,072 = 803,056 = 193,050
Fixed Charge (Before Tax) = 172,907 + 20,143 Interest Charges Fixed Charge Coverage = 448,072
= 996,106 / 641,122 = 1.55 Year 2007 EBIT
li
an
s.
Profit/ (Loss) before Taxation = (28,293) Interest Charges EBIT = 603,951
Fixed Charge (Before Tax) = 256,879 + 27,602 Interest Charges = 603,951
ww w.
vi rt
= (28,293) + 603,951 = 575,658 = 284,481
= (575,658 + 284,481) / (284,481 + 603,951) = 860,139 / 888,432 = 0.97
ua
co
96
= (803,056 + 193,050) / (193,050 + 448,072)

Profit/ (Loss) before Taxation = 130,805 Interest Charges EBIT = 882,335 = 130,805 + 882,335 = 1,013,140 = 345,741
Interest Charges Fixed Charge Coverage
= 882,335
= (1,013,140 + 345,741) / (345,741 + 882,335) = 1,358,881 / 1,228,076 = 1.11
iii. Debt Ratio
Debt ratio indicates the value of total liabilities to its total assets. It states that with what proportion of the assets are financed through debt. Debt Ratio = Total Debt / Total Assets Total Debt = Short Term Debt + Long Term Debt Year 2006 Total Debt = 2,776,985 + 3,855,596 Total Assets = 11,339,989 Debt Ratio = 6,632,581 / 11,339,989 97 = 6,632,581
ww w.
vi rt
ua
li
an
s.
co
Fixed Charge (Before Tax) = 317,622 + 28,119
= 0.58 Year 2007 Total Debt = 2,959,093 + 4,231,049 Total Assets = 14,484,053 Debt Ratio = 7,190,142 / 14,484,053 = 0.50 Year 2008 Total Debt = 3,052,128 + 5,477,572 Total Assets = 13,515,322 Debt Ratio = 8,529,700 / 13,515,322 = 0.63 iv. Debt / Equity Ratio = 8,529,700 = 7,190,142
Debt/ Equity ratio states that what the proportion of debt and equity to form total capital portion of the company is? There are two options for funding the projects i.e. equity financing and debt financing. Through debt/ equity ratio we can analyze that how much of the companys finance belongs to debt financing and how much to equity financing. Debt / Equity Ratio = Total Debt / Total Equity Year 2006 Total Debt = 2,776,985 + 3,855,596 = 6,632,581 98
ww w.
vi rt
ua
li
an
s.
co
Total Equity
= 4,707,408
Debt / Equity Ratio = 6,632,581 / 4,707,408 = 1.41 Year 2007 Total Debt Total Equity = 2,959,093 + 4,231,049 = 6,030,319 = 7,190,142
Debt / Equity Ratio = 7,190,142 / 6,030,319 = 1.19 Year 2008 Total Debt Total Equity = 3,052,128 + 5,477,572 = 3,722,030
Debt / Equity Ratio = 8,529,700 / 3,722,030 = 2.29
v. Debt to Tangible Net Worth Ratio This ratio differs from Debt/ Equity Ratio in the sense that it excludes intangible assets from the equity to get a more precise figure for proportion of debt and equity, because intangible assets are tough to value and it is difficult to realize their value in several circumstances. Hence, it is prudent to calculate the ratio of debt and equity after excluding intangible assets from equity. Debt to Tangible Net Worth Ratio = Total Debt / Tangible Net Worth 99
ww w.
vi rt
ua
li
= 8,529,700
an
s.
co
Tangible Net Worth = Total Assets Total Liabilities Intangible Assets Year 2006 Total Debt Total Assets Total Liabilities Intangible Assets Tangible Net Worth = 2,776,985 + 3,855,596 = 11,339,989 = 2,776,985 + 3,855,596 = NIL = 11,339,989 - 6,632,581 = 4,707,408 = 6,632,581 = 6,632,581
Debt to Tangible Net Worth= 6,632,581 / 4,707,408 = 1.41 Year 2007 Total Debt Total Assets Total Liabilities Intangible Assets
= 2,959,093 + 4,231,049
ua
li
= 7,190,142
vi rt
= 14,484,053
= 2,959,093 + 4,231,049
Tangible Net Worth
ww w.
= NIL = 14,484,053 7,190,142 = 7,293,911
Debt to Tangible Net Worth= 7,190,142 / 7,293,911 = 0.99 Year 2008
an
= 7,190,142 100
s.
co
Total Debt Total Assets Total Liabilities Intangible Assets Tangible Net Worth
= 3,052,128 + 5,477,572 = 13,515,322 = 3,052,128 + 5,477,572 = NIL = 13,515,322 8,529,700
= 8,529,700
= 8,529,700
= 4,985,622
= 1.71 vi. Current Worth / Net Worth Ratio
Current worth / net worth ratio states the proportion of current worth and net assets is called net worth. Whereas, current worth is the amount of current assets left after payment of current liabilities.
Current Worth / Net Worth Ratio = Current Worth / Net Worth Current Worth = Total Current Assets Total Current Liabilities Net Worth = Total Assets Total Liabilities Year 2006
Total Current Assets Total Current Liabilities Current Worth
ww w.
vi rt
= 3,939,417 = 3,855,596 = 3,939,417 - 3,855,596 = 83,821
ua
li
worth. The amount of total assets left after payment of all liabilities out of its
an
s.
101
co
Debt to Tangible Net Worth= 8,529,700 / 4,985,622
Total Assets Total Liabilities Net Worth
= 11,339,989 = 2,776,985 + 3,855,596 = 11,339,989 6,632,581 = 6,632,581 = 4,707,408
Current Worth / Net Worth Ratio = 83,821 / 4,707,408 = 0.02 Year 2007 Total Current Assets Total Current Liabilities Current Worth Total Assets Total Liabilities Net Worth = 4,547,065 = 4,231,049 = 4,547,065 - 4,231,049 = 14,484,053
= 2,959,093 + 4,231,049
ua
li
= 7,190,142 = 7,293,911 = 279,649
Current Worth / Net Worth Ratio = 316,016 / 7,293,911
ww w.
Year 2008
Total Current Assets Total Current Liabilities Current Worth
vi rt
= 14,484,053 7,190,142
= 0.04
= 5,757,221 = 5,477,572 = 5,757,221 - 5,477,572
an
= 316,016
s.
102
co
Total Assets Total Liabilities Net Worth
= 13,515,322 = 3,052,128 + 5,477,572 = 13,515,322 8,529,700 = 8,529,700 = 4,985,622
Current Worth / Net Worth Ratio = 279,649 / 4,985,622 = 0.06 vii. Total Capitalization Ratio
Total capitalization ratio measures that how much a companys capital structure
Equity) Year 2006 Long Term Debt Total Equity = 2,723,236 = 4,707,408
Total Capitalization Ratio = 2,723,236 / (2,723,236 + 4,707,408)
Year 2007 Long Term Debt Total Equity = 2,688,281 = 6,030,319
ww w.
vi rt
= 2,723,236 / 7,430,644 = 0.37
ua
li
an
Total Capitalization Ratio = Long Term Debt / (Long Term Debt + Total
s.
consist of debt to support its operations and growth.
co
m
103
Total Capitalization Ratio = 2,688,281 / (2,688,281 + 6,030,319) = 2,688,281 / 8,718,600 = 0.31 Year 2008 Long Term Debt Total Equity = 2,585,229 = 3,722,030
Total Capitalization Ratio = 2,585,229 / (2,585,229 + 3,722,030) = 2,585,229 / 6,307,259 = 0.41 viii. Fixed Assets Ratio / Equity Ratio
Fixed assets ratio to equity ratio states that how much of the fixed assets are the cost. However, a reasonable balance should be maintained between both to achieve the economies of leverage.
Fixed Assets Ratio / Equity Ratio = Fixed Assets Ratio = Long Term Funds / Net Fixed Assets Long Term Funds = Total Equity + Long Term Loans Fictitious Assets Equity Ratio Year 2006 = Total Equity / Total Assets
ww w.
vi rt
financed with equity. The more assets being financed with equity lesser will be
ua
li
an
104
s.
co
Long Term Funds Total Equity Long Term Loans Fictitious Assets Long Term Funds Net Fixed Assets
= 3,561,259 + 0 Fixed Assets Ratio = 7,430,644 / 3,561,259 = 2.09 Equity Ratio Total Equity Total Assets Equity Ratio = Total Equity / Total Assets = 4,707,408 = 11,339,989
= 3,561,259
= 4,707,408 / 11,339,989
Fixed Assets Ratio / Equity Ratio = 2.09 / 0.42 = 4.98 Year 2007 Long Term Funds = Total Equity + Long Term Loans Fictitious Assets
ww w.
= 0.42
vi rt
ua
li
an
105
s.
co
= Property, Plant and Equipment + Investment Property
Total Equity Long Term Loans Fictitious Assets Long Term Funds Net Fixed Assets
= 6,030,319 = 2,688,281 = NIL = 6,030,319 + 2,688,281 = 8,718,600
= Property, Plant and Equipment + Investment Property = 3,971,021 + 1,384,577 = 5,355,598
Fixed Assets Ratio = 8,718,600 / 5,355,598 = 1.63 Equity Ratio Total Equity Total Assets Equity Ratio = Total Equity / Total Assets = 6,030,319 = 14,484,053
= 6,030,319 / 14,484,053 = 0.42
Fixed Assets Ratio / Equity Ratio = 1.63 / 0.42 = 3.88
Year 2008 Long Term Funds Total Equity = Total Equity + Long Term Loans Fictitious Assets = 3,722,030
ww w.
vi rt
ua
li
an
106
s.
co
Long Term Loans Fictitious Assets Long Term Funds Net Fixed Assets
= 2,585,229 = NIL = 3,722,030 + 2,585,229 = 6,307,259
= Property, Plant and Equipment + Investment Property = 3,972,540 + 1,720,835 = 5,693,375
= 1.11 Equity Ratio Total Equity Total Assets Equity Ratio = Total Equity / Total Assets = 3,722,030 = 13,515,322 = 3,722,030 / 13,515,322 = 0.28
Fixed Assets Ratio / Equity Ratio = 1.11 / 0.28
ww w.
ix. Long Term Assets Versus Long Term Debt Long term assets versus long term debt compares the ratio of long term assets with long term debt. Ratio indicates that how much of the long term assets have been financed with long term debt.
vi rt
= 3.96
ua
li
an
107
s.
co
Fixed Assets Ratio = 6,307,259 / 5,693,375
Long Term Assets Versus Long Term Debt = Long Term Assets / Long Term Debt Year 2006 Long Term Assets Long Term Debt Long Term Assets / Long Term Debt = 7,400,572 = 2,723,236 = 7,400,572 / 2,723,236
Year 2008 Long Term Assets Long Term Debt
ww w.
x. Debt Coverage Ratio
vi rt
ua
= 9,936,988 / 2,688,281 = 3.70
= 7,758,101 = 2,585,229 = 7,758,101 / 2,585,229 = 3.00
li
Long Term Debt
= 2,688,281
an
108
Long Term Assets
= 9,936,988
s.
Year 2007
co
= 2.72
Debt coverage ratio indicates that how efficiently a company can payout its annual debt service out of its operating income. Debt Coverage Ratio = Operating Income / Annual Debt Service Year 2006 Operating Income Annual Debt Service Debt Coverage Ratio = 803,056 = 448,072
Year 2008
Operating Income
Annual Debt Service Debt Coverage Ratio
109
ww w.
vi rt
Debt Coverage Ratio
= 575,658 / 603,951 = 0.95
= 1,013,140 = 882,335
= 1,013,140 / 882,335 = 1.15
ua
Annual Debt Service
= 603,951
li
Operating Income
= 575,658
an
Year 2007
s.
= 1.79
co
= 803,056 / 448,072
Profitability ratios indicate the profitability of an organization. It is useful for investors to analyze that how much a company is profitable in which they are going to invest. i. Net Profit Margin Net Profit Margin is a very common and widely used profitability ratio which states how much of a companys sales is going to be its profit and how much of sales is left after pay all of its expenditures except taxes. Net Profit Margin = Net Profit/ (Loss) before Taxation / Net Sales x 100
Year 2007
Net Sales
ww w.
Net Profit Margin
Year 2008 Net Profit/ (Loss) before Taxation = 130,805 110
vi rt
ua
Net Profit Margin
= 354,984 / 6,903,625 x 100 = 5.14 %
= (28,293)
= 7,140,167 = (28,293) / 7,140,167 x 100 = - 0.40 %
li
Net Sales
= 6,903,625
an
= 354,984
s.
Year 2006
co
Net Sales Net Profit Margin
= 7,558,322 = 130,805 / 7,558,322 x 100 = 1.73 %
ii. Return on Assets Return on assets measures that how much profits a company is earning by putting its assets. This ratio is also known as ROA and being widely used by
Return on Assets (ROA) = Net Profit/ (Loss) After Taxation / Average Total Assets x 100
co
111
m
investors to get a hint about profitability of an organization.
Average Total Assets = (Opening Total Assets + Closing Total Assets) / 2 Year 2006 Net Profit/ (Loss) After Taxation Opening Total Assets Closing Total Assets Average Total Assets = 298,204
an
s.
ww w.
Return on Assets
Year 2007
vi rt
= 8,815,656 = 11,339,989
= (8,815,656 + 11,339,989) / 2 = 10,077,823 = 298,204 / 10,077,823 x 100 = 2.96 %
ua
li
Net Profit/ (Loss) After Taxation Opening Total Assets Closing Total Assets Average Total Assets
= (39,822) = 11,339,989 = 14,484,053 = (11,339,989 + 14,484,053) / 2 = 12,912,021
= -0.31 % Year 2008 Net Profit/ (Loss) After Taxation Opening Total Assets Closing Total Assets Average Total Assets = (3,520) = 14,484,053
= 13,515,322
Return on Assets
ww w.
iii. Return on Assets DuPont developed a model to show that return on assets is result of two components i.e. assets turnover and profit margin and more precise return on assets can be obtained by combining these both components. The only
vi rt
= (14,484,053 + 13,515,322) / 2 = 13,999,688
= (3,520) / 13,999,688 x 100 = -0.03 %
ua
li
an
112
s.
co
Return on Assets
= (39,822) / 12,912,021 x 100
difference in return on assets and DuPont return on assets is that DuPont took total assets to represent assets rather ROA considers average total assets for calculation of ROA. DuPont Return on Assets = Net Income / Sales x Sales / Total Assets By solving the equation we get the following formula to calculate DuPont Return on Assets: DuPont Return on Assets = Net Income / Total Assets Year 2006 Net Income Total Assets DuPont Return on Assets = 298,204 = 11,339,989 = 298,204 / 11,339,989 = 0.026 Year 2007 Net Income Total Assets
Year 2008 Net Income = (3,520)
ww w.
vi rt
= (39,822)
= 14,484,053
= (39,822) / 14,484,053 = -0.0027
ua
li
an
113
s.
co
Total Assets DuPont Return on Assets
= 13,515,322 = (3,520) / 13,515,322 = -0.0026
iv. Operating Income Margin Operating income margin indicates that how much a company is earning through its operations out of net sales.
Year 2007 Operating Income Net Sales
Operating Income Margin = 575,658 / 7,140,167 x 100 = 8.06 % Year 2008 Operating Income = 1,013,140 114
ww w.
vi rt
= 11.63 %
= 575,658
= 7,140,167
ua
Operating Income Margin = 803,056 / 6,903,625 x 100
li
Net Sales
= 6,903,625
an
Operating Income
= 803,056
s.
Year 2006
co
Operating Income Margin = Operating Income / Net Sales x 100
Net Sales
= 7,558,322
Operating Income Margin = 1,013,140 / 7,558,322 x 100 = 13.40 % v. Operating Assets Turnover Operating assets turnover suggests that how much 1 rupee of operating assets is generating net sales.
Stores, Spare Parts and Loose Tools = 502,870 Stock in Trade Cash and Bank Balances Operating Assets Operating Assets Net Sales
Operating Assets Turnover = 6,903,625 / 6,108,735 = 1.13
ww w.
vi rt
= 1,607,795
= 436,811
= 3,561,259 + 502,870 + 1,607,795 + 436,811 = 6,108,735
= 6,903,625
ua
li
an
Operating Assets
s.
Year 2006
co
115
Operating Assets Turnover = Net Sales / Operating Assets
Year 2007 Operating Assets = Property, Plant and Equipment + Stores, Spare Parts and
Stores, Spare Parts and Loose Tools = 284,228 Stock in Trade Cash and Bank Balances Operating Assets Operating Assets Net Sales = 1,755,097
Year 2008 Operating Assets
Stores, Spare Parts and Loose Tools = 290,947 Stock in Trade Cash and Bank Balances = 1,673,062 = 75,387
ww w.
vi rt
= 1.18
ua
li
= 7,140,167
an
116
= 6,074,077
s.
= 3,971,021 + 284,228 + 1,755,097 + 63,731
co
= 63,731
Operating Assets Operating Assets Net Sales
= 3,972,540 + 290,947 + 1,673,062 + 75,387 = 6,011,936 = 7,558,322
Operating Assets Turnover = 7,558,322 / 6,011,936 = 1.26 vi. Return on Operating Assets
Return on operating assets indicates that how much operating assets are
Assets x 100 Year 2006 Net Profit/ (Loss) after Taxation Operating Assets = 298,204
Loose Tools + Stock in Trade + Cash and Bank Balances Property, Plant and Equipment
ww w.
Stores, Spare Parts and Loose Tools = 502,870 Stock in Trade Cash and Bank Balances Operating Assets = 1,607,795 = 436,811 = 3,561,259 + 502,870 + 1,607,795 + 436,811
vi rt
= 3,561,259
ua
li
an
Return on Operating Assets = Net Profit/ (Loss) After Taxation / Operating
s.
contributing towards sales.
co
m
117
Operating Assets
= 6,104,735
Return on Operating Assets = 298,204 / 6,104,735 x 100 = 4.88 % Year 2007 Net Profit/ (Loss) after Taxation Operating Assets = (39,822)
Operating Assets
Return on Operating Assets = (39,822) / 6,074,077 x 100 = -0.66 %
Year 2008 Net Profit/ (Loss) after Taxation Operating Assets = (3,520)
ww w.
vi rt
Operating Assets
= 3,971,021 + 284,228 + 1,755,097 + 63,731 = 6,074,077
ua
Cash and Bank Balances
= 63,731
li
Stock in Trade
= 1,755,097
an
118
s.
= 3,971,021
co
= 3,972,540
Stores, Spare Parts and Loose Tools = 290,947 Stock in Trade Cash and Bank Balances Operating Assets Operating Assets = 1,673,062 = 75,387 = 3,972,540 + 290,947 + 1,673,062 + 75,387 = 6,011,936
Return on Operating Assets = (3,520) / 6,011,936 x 100 = -0.0586 % vii. Sales to Fixed Assets
Sales to fixed assets ratio indicates that how well is company using its fixed
Year 2006 Net Sales Fixed Assets
ww w.
= Property, Plant and Equipment + Investment in Property = 3,561,259 + NIL = 3.561,259
Year 2007 119
vi rt
Sales to Fixed Assets = Net Sales / Fixed Assets
= 6,903,625
= 6,903,625 / 3,561,259 = 1.94
ua
assets to generate sales.
li
an
s.
co
Net Sales Fixed Assets
= 7,140,167 = Property, Plant and Equipment + Investment in Property = 3,971,021 + 1,384,577 = 5,355,598
= 7,140,167 / 5,355,598 = 1.33
Net Sales Fixed Assets
= 7,558,322
= Property, Plant and Equipment + Investment in Property = 3,972,540 + 1,720,835
= 7,558,322 / 5,693,375 = 1.33
Return on investment indicates that how much a company is earning through its investment, either through debt financing or through equity financing. Return on Investment = Net Profit/ (Loss) before Taxation / (Equity + Liabilities) x 100 Year 2006 Net Profit/ (Loss) before Taxation Total Equity = 4,707,408 = 354,984
ww w.
vi rt
ua
li
an
= 5,693,375
s.
co
120
Year 2008
Total Liabilities Return on Investment
= 2,776,985 + 3,855,596
= 6,632,581
= 354,984 / (4,707,408 + 6,632,581) = 354,984 / 11,339,989 x 100 = 3.13 %
Year 2007 Net Profit/ (Loss) before Taxation Total Equity Total Liabilities Return on Investment = 6,030,319 = 2,959,093 + 4,231,049 = (28,293)
= 7,190,142
= (28,293) / (6,030,319 + 7,190,142) = (28,293) / 13,220,461 x 100 = -0.21 %
Year 2008
Net Profit/ (Loss) before Taxation Total Equity
Total Liabilities
ww w.
vi rt
= 3,722,030 = 3,052,128 + 5,477,572 = 8,529,700
= 130,805 / (3,722,030 + 8,529,700) = 130,805 / 12,251,730 x 100 = 1.07 %
ua
= 130,805
li
an
s.
co
121
ix. Return on Total Equity Return on total equity or ROE indicates the net earnings per hundred rupees of company which can be distributed to shareholders. Return on Total Equity = Net Profit/ (Loss) after Taxation / Issued, Subscribed and Paid up Capital x 100 Year 2006
= 1,058,374
= 298,204 / 1,058,374 x 100 = 28.18 %
Year 2007 Net Profit/ (Loss) after Taxation Issued, Subscribed and Paid up Capital Return on Total Equity
ww w.
Year 2008
Net Profit/ (Loss) after Taxation Issued, Subscribed and Paid up Capital Return on Total Equity
vi rt
ua
= (39,822)
= 1,455,262 = (39,822) / 1,455,262 x 100 = -2.74 %
= (3,520) = 1,455,262 = (3,520) / 1,455,262 x 100
li
an
122
s.
co
= 298,204
= -0.24 % x. Gross Profit Margin Gross profit margin is an important and basic ratio. It shows how much gross profit company is earning out of its net sales. Gross Profit Margin = Gross Profit / Net Sales x 100 Year 2006
Net Sales Gross Profit Margin
Year 2008 Gross Profit Net Sales Gross Profit Margin = 1,162,700 = 7,558,322 = 1,162,700 / 7,558,322 x 100 123
ww w.
vi rt
Gross Profit
= 1,045,526
= 7,140,167
= 1,045,526 / 7,140,167 x 100 = 14.64 %
ua
Year 2007
li
= 14.80 %
an
Gross Profit Margin
= 1,021,807 / 6,903,625 x 100
s.
Net Sales
= 6,903,625
co
Gross Profit
= 1,021,807
= 15.38 %
4) Activity Ratios
Activity ratios represent firms ability to convert its different accounts into cash or sales. i. Accounts Receivable Turnover Accounts receivables are important part of a companys balance sheet. Logically company is offering interest free loans to its debtors whereas company itself is paying cost for those loans. Accounts receivable turnover sales. indicates that how efficiently a firm uses its accounts receivables to generate
Accounts Receivable Turnover = Net Sales / Average Accounts Receivable Year 2006 Net Sales Average Accounts Receivable
= 6,903,625
Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable
ww w.
vi rt
= (Opening Accounts Receivable + Closing
= 640,382 = 887,407 = (640,382 + 887,407) / 2 = 763,895 = 6,903,625 / 763,895
ua
li
an
s.
co
124
= 9.04 Year 2007 Net Sales Average Accounts Receivable Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable Average Accounts Receivable = 887,407 = 7,140,167 = (Opening Accounts Receivable + Closing
Net Sales
Average Accounts Receivable Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable Average Accounts Receivable
ww w.
vi rt
Year 2008
= 1,062,320 = 1,340,460 = (1,062,320 + 1,340,460) / 2 = 1,201,390
ua
= 7.32
li
= 7,140,167 / 974,864
an
125
= 974,864
s.
= (887,407 + 1,062,320) / 2
co
= 1,062,320
= 7,558,322 / 1,201,390 = 6.29
ii. Average Collection Period Average collection period states that how much time a firm takes to convert its accounts receivable into cash or how efficiently a firm collects its debt. Average Collection Period = Average Accounts Receivable / (Annual Credit
Year 2006
Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable Average Accounts Receivable = 640,382 = 887,407
Annual Credit Sales
ww w.
Year 2007
vi rt
= (640,382 + 887,407) / 2 = 763,895
= 6,903,625 = 763,895 / (6,903,625 / 365) = 763,895 / 18,914.04 = 40.39 days
ua
li
an
126
s.
co
Sales / 365)
Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable Average Accounts Receivable = 887,407 = 1,062,320 = (887,407 + 1,062,320) / 2 = 974,864
Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable
ww w.
vi rt
Average Accounts Receivable = (Opening Accounts Receivable + Closing
= 1,062,320 = 1,340,460
= (1,062,320 + 1,340,460) / 2 = 1,201,390 = 7,558,322 = 1,201,390 / (7,558,322 / 365)
ua
Year 2008
li
= 49.83 days
an
127
= 974,864 / 19,562.10
s.
= 974,864 / (7,140,167 / 365)
co
Annual Credit Sales
= 7,140,167
= 1,201,390 / 20,707.73 = 58.02 days iii. Accounts Payable Turnover Accounts payable are creditors of a company who grants credit to the company without any interest charges. Accounts payable turnover provides that how much a company purchases against attraction of one rupee of credit.
Year 2006 Net Purchases = 2,521,542
Average Accounts Payable = (Opening Accounts Payable + Closing Accounts Payable) / 2 Opening Accounts Payable = 528,018 Closing Accounts Payable = 835,990
Accounts Payable Turnover = 2,521,542 / 682,004 = 3.70 Year 2007 Net Purchases = 2,740,584
ww w.
vi rt
= 682,004
ua
li
an
s.
128
co
Accounts Payable Turnover = Net Purchases / Average Accounts Payable
Payable) / 2 Opening Accounts Payable = 475,000
Accounts Payable Turnover = 2,643,682 / 555,999 = 4.75 iv. Average Payment Period
ww w.
vi rt
ua
li
Net Purchases
= 2,643,682
an
129
Year 2008
s.
= 4.18
co
Accounts Payable Turnover = 2,740,584 / 655,495
Average payment period indicates that how much time a company takes to pay its credit. Which means that how much a company takes advantage of this interest free loan. Average Payment Period = Average Accounts Payable / (Annual Credit Purchases / 365) Year 2006 Average Accounts Payable = (Opening Accounts Payable + Closing Accounts
Year 2007
Average Accounts Payable = (Opening Accounts Payable + Closing Accounts Payable) / 2 Opening Accounts Payable = 835,990
ww w.
vi rt
= 2,521,542
= 682,004 / (2,521,542 / 365) = 682,004 / 6,908.33 = 98.72 days
ua
= 682,004
li
an
130
s.
co
Payable) / 2
Closing Accounts Payable = 475,000 Average Accounts Payable = (835,990 + 475,000) / 2 = 655,495 Annual Credit Purchases Average Payment Period = 2,740,584 = 655,495 / (2,740,584 / 365) = 655,495 / 7,508.45 = 87.30 days Year 2008
v. Inventory Turnover 131
ww w.
vi rt
= 555,999
= 2,643,682
= 555,999 / (2,643,682 / 365) = 555,999 / 7,242.96 = 76.76 days
ua
li
Payable) / 2
an
s.
co
Inventory turnover ratio states that how many times inventory has been sold or replaced. Inventory Turnover = Cost of Goods Sold / Average Inventory Year 2006 Cost of Goods Sold = 5,881,818 Average Inventory = (Opening Inventory + Ending Inventory) / 2
ua
vi rt
ww w.
Average Inventory = (1,576,386 + 2,110,665) / 2 = 1,843,526 Inventory Turnover = 5,881,818 / 1,843,526
li
= 463,701 = 1,112,685
= 502,870 = 1,607,795 = 1,576,386 = 2,110,665
an
132
s.
co
= 3.19 Year 2007 Cost of Goods Sold = 6,094,641 Average Inventory = (Opening Inventory + Ending Inventory) / 2 Opening Inventory = Opening Stores, spare parts and loose tools + Opening stock in trade
in trade Opening Stores, spare parts and loose tools Opening Stock in Trade Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade = 502,870
= 1,607,795
ua
vi rt
Average Inventory = (2,110,665 + 2,039,325) / 2 = 2,074,995
Inventory Turnover = 6,094,641 / 2,074,995 = 2.94 Year 2008
ww w.
li
= 284,228 = 1,755,097 = 2,110,665 = 2,039,325
an
133
s.
co
Ending Inventory
Cost of Goods Sold = 6,395,622 Average Inventory = (Opening Inventory + Ending Inventory) / 2 Opening Inventory = Opening Stores, spare parts and loose tools + Opening stock in trade Ending Inventory in trade = Ending Stores, spare parts and loose tools + Ending stock
Opening Stock in Trade Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory = 284,228 + 290,947 Ending Inventory = 1,755,097 + 1,673,062
= 1,755,097 = 290,947
= 1,673,062
ua
Average Inventory = (575,175 + 3,428,159) / 2 = 2,001,667
Inventory Turnover = 6,395,622 / 2,001,667 = 3.20
vi. Average Age of Inventory Average age of inventory tells us that how many days inventory has taken to be replaced or sold.
ww w.
vi rt
li
= 575,175 = 3,428,159
an
134
s.
co
Opening Stores, spare parts and loose tools
= 284,228
Average Age of Inventory = Average Inventory / Cost of Goods Sold x 365 Year 2006 Average Inventory = (Opening Inventory + Ending Inventory) / 2 Opening Inventory = Opening Stores, spare parts and loose tools + Opening stock in trade Ending Inventory in trade Opening Stores, spare parts and loose tools Opening Stock in Trade Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory = 463,701 + 1,112,685 Ending Inventory Average Inventory = 463,701 = 1,112,685 = 502,870 = Ending Stores, spare parts and loose tools + Ending stock
ua
= 502,870 + 1,607,795
vi rt
= (1,576,386 + 2,110,665) / 2 = 1,843,526
Cost of Goods Sold
Average Age of Inventory = 1,843,526 / 5,881,818 x 365 = 114.40 days Year 2007
ww w.
= 5,881,818
li
= 1,607,795
= 1,576,386 = 2,110,665
an
135
s.
co
Average Inventory = (Opening Inventory + Ending Inventory) / 2 Opening Inventory = Opening Stores, spare parts and loose tools + Opening stock in trade Ending Inventory in trade Opening Stores, spare parts and loose tools Opening Stock in Trade Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory = 502,870 + 1,607,795 Ending Inventory Average Inventory = 284,228 + 1,755,097 = 502,870 = Ending Stores, spare parts and loose tools + Ending stock
= 284,228 = 1,755,097 = 2,110,665
= (2,110,665 + 2,039,325) / 2
Cost of Goods Sold
Average Age of Inventory = 2,074,995 / 6,094,641 x 365 = 124.27 days
Year 2008 Average Inventory = (Opening Inventory + Ending Inventory) / 2
ww w.
vi rt
= 2,074,995
= 6,094,641
ua
li
= 2,039,325
an
136
s.
co
= 1,607,795
Opening Inventory = Opening Stores, spare parts and loose tools + Opening stock in trade Ending Inventory in trade Opening Stores, spare parts and loose tools Opening Stock in Trade Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory = 284,228 + 290,947 Ending Inventory Average Inventory = 1,755,097 + 1,673,062 = 284,228 = 1,755,097 = Ending Stores, spare parts and loose tools + Ending stock
= 1,673,062 = 575,175
= 3,428,159
= (575,175 + 3,428,159) / 2 = 2,001,667
Cost of Goods Sold
Average Age of Inventory = 2,001,667 / 6,395,622 x 365
vii. Operating Cycle
ww w.
vi rt
= 6,395,622
= 114.24 days
Operating cycle consist of three critical operating capital components i.e. inventory, receivables and payables. Operating cycle indicates that how efficiently company is managing its inventory, receivables and payables.
ua
li
an
137
s.
co
= 290,947
Operating Cycle = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) Days Payable Outstanding (DPO) DIO = Average Inventory / (Cost of Sales / 365) DSO = Average Accounts Receivable / (Net Sales / 365) DPO = Average Accounts Payable / (Net Purchases / 365) Year 2006
ua
vi rt
ww w.
Opening Inventory = 463,701 + 1,112,685 Ending Inventory Average Inventory = 502,870 + 1,607,795
= (1,576,386 + 2,110,665) / 2 = 1,843,526
li
= 463,701 = 1,112,685 = 502,870 = 1,607,795 = 1,576,386 = 2,110,665
an
s.
co
Average Inventory = (Opening Inventory + Ending Inventory) / 2
m
138
Cost of Sales
= 5,881,818
DIO = Average Inventory / (Cost of Sales / 365) DIO = 1,843,526 / (5,881,818 / 365) = 1,843,526 / 16,114.57 = 114.40 days Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable Average Accounts Receivable = 640,382 = 887,407
DSO = Average Accounts Receivable / (Net Sales / 365) DSO = 763,895 / (6,903,625 / 365) = 763,895 / 18,914.04 = 40.39 days Average Accounts Payable = (Opening Accounts Payable + Closing Accounts Payable) / 2 Opening Accounts Payable = 528,018
ww w.
vi rt
Net Sales
= 6,903,625
ua
= 763,895
li
= (640,382 + 887,407) / 2
an
139
s.
co
Closing Accounts Payable = 835,990 Average Accounts Payable = (528,018 + 835,990) / 2 = 682,004 Net Purchases = 2,521,542
DPO = Average Accounts Payable / (Net Purchases / 365) DPO = 682,004 / (2,521,542 / 365) = 682,004 / 6,908.33 = 98.72 days Operating Cycle = DIO + DSO DPO = 114.40 + 40.39 - 98.72 = 56.07 Year 2007
Average Inventory = (Opening Inventory + Ending Inventory) / 2 Opening Inventory = Opening Stores, spare parts and loose tools + Opening stock in trade Ending Inventory in trade Opening Stores, spare parts and loose tools Opening Stock in Trade = 502,870 = 1,607,795
ww w.
vi rt
ua
li
an
140
s.
co
Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory Ending Inventory Average Inventory = 502,870 + 1,607,795 = 284,228 + 1,755,097 = (2,110,665 + 2,039,325) / 2 = 2,074,995 Cost of Sales = 6,094,641
= 284,228 = 1,755,097 = 2,110,665 = 2,039,325
DIO = Average Inventory / (Cost of Sales / 365) DIO = 2,074,995 / (6,094,641 / 365) = 2,074,995 / 16,697.65 = 124.27
Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) / 2 Opening Accounts Receivable Closing Accounts Receivable
ww w.
Net Sales
DSO = Average Accounts Receivable / (Net Sales / 365) 141
vi rt
= 887,407 = 1,062,320 = (887,407 + 1,062,320) / 2 = 974,864 = 7,140,167
ua
li
an
s.
co
DSO = 974,864 / (7,140,167 / 365) = 974,864 / 19,562.10 = 49.83 Average Accounts Payable = (Opening Accounts Payable + Closing Accounts Payable) / 2 Opening Accounts Payable = 835,990
= 655,495 / 7,508.45 = 87.30
Operating Cycle
Year 2008 Average Inventory = (Opening Inventory + Ending Inventory) / 2 142
ww w.
= DIO + DSO DPO = 124.27 + 49.83 87.30 = 86.80
vi rt
DPO = 655,495 / (2,740,584 / 365)
ua
DPO = Average Accounts Payable / (Net Purchases / 365)
li
Net Purchases
= 2,740,584
an
= 655,495
s.
co
Opening Inventory = Opening Stores, spare parts and loose tools + Opening stock in trade Ending Inventory in trade Opening Stores, spare parts and loose tools Opening Stock in Trade Ending Stores, Spare Parts and Loose Tools Ending Stock in Trade Opening Inventory Ending Inventory Average Inventory = 284,228 + 1,755,097 = 290,947 + 1,673,062 = 284,228 = 1,755,097 = Ending Stores, spare parts and loose tools + Ending stock
= 1,673,062
= 2,039,325
= (2,039,325 + 1,964,009) / 2 = 2,001,667
Cost of Sales
DIO = Average Inventory / (Cost of Sales / 365) DIO = 2,001,667 / (6,395,622 / 365) = 2,001,667 / 17,522.25 = 114.24 Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) / 2
ww w.
vi rt
= 6,395,622
ua
li
an
= 1,964,009
s.
co
143
= 290,947
Opening Accounts Receivable Closing Accounts Receivable Average Accounts Receivable
= 1,062,320 = 1,340,460 = (1,062,320 + 1,340,460) / 2 = 1,201,390
Net Sales
= 7,558,322
DSO =1,201,390 / (7,558,322 / 365) = 1,201,390 / 20,707.73 = 58.02
Net Purchases
DPO = Average Accounts Payable / (Net Purchases / 365) DPO = 555,999 / (2,643,682 / 365) = 555,999 / 7,242.96 144
ww w.
vi rt
= 2,643,682
ua
Payable) / 2
li
an
s.
co
DSO = Average Accounts Receivable / (Net Sales / 365)
= 76.76 Operating Cycle = DIO + DSO DPO = 114.24 + 58.02 - 76.76 = 95.49 viii. Total Assets Turnover Total assets turnover indicates that how efficiently a company is using its assets
Year 2007 Net Sales Total Assets
Year 2008 145
ww w.
vi rt
= 6,903,625 / 11,339,989 = 0.61
= 7,140,167 = 14,484,053 = 7,140,167 / 14,484,053 = 0.49
ua
Total Assets
= 11,339,989
li
Net Sales
= 6,903,625
an
Year 2006
s.
Total Assets Turnover = Net Sales / Total Assets
co
in order to generate sales.
Net Sales Total Assets Total Assets Turnover
= 7,558,322 = 13,515,322 = 7,558,322 / 13,515,322 = 0.56
5) Market Ratios
to predict that how profitable an investment is and what return can an investor expect from a specific investment. i. Dividend Per Share
Dividend per share indicates that how much a company was profitable for its
its shareholders the more attractive it will be for investors.
vi rt
ua
shareholders in terms of dividends. The more the company will pay dividends to
li
an
(Amount in Rs.) = 208,000 = 105,837,249 = 208,000 / 105,837,249 = 0.0019 146
Dividend Per Share = Dividends Paid / Number of Shares Issued Year 2006
Dividends Paid
Number of Shares Issued Dividend Per Share
ww w.
s.
co
will offer them best return. Market or investor ratios are designed to address investors
Investors are always keen to know that which investment is better and which stock
Year 2007 Dividends Paid Number of Shares Issued Dividend Per Share = 15,000 = 145,526,216 = 15,000 / 145,526,216 = 0.0001 Year 2008 Dividends Paid Number of Shares Issued Dividend Per Share = 1,000 = 145,526,216 = 1,000 / 145,526,216 = 0.000006 ii. Earnings Per Share
Similar to dividends per share, earnings per share also indicates that how much investors are earning per share. But difference is that dividends per share considers dividends company actually paid. Whereas, in case of earnings per share, earnings available for distribution to shareholders are taken into consideration apart from it that whether company is paying any actual dividends to its shareholders or not. The company may not have announced any dividends for its shareholders but it does not mean that company has not earned anything to pay to its shareholders. Company may have more profitable opportunities to avail rather paying its shareholders. Even it would still be attractive for shareholders if it is earning but not distributing any dividends, because market
ww w.
vi rt
ua
li
an
147
s.
co
price would be increasing in that case and investors can earn capital gains by selling the shares at higher rates. (Amounts in Rs.) Earnings Per Share = Net Profit/ (Loss) after Taxation / Number of Shares Year 2006 Net Profit/ (Loss) after Taxation Number of Shares Earnings Per Share = 298,204,000
Earnings Per Share
ww w.
Year 2008
vi rt
Number of Shares
= 122,650,292 = (39,822,000) / 122,650,292 = -0.32
= (3,520,000) = 145,526,216 = (3,520,000) / 145,526,216 = -0.02 148
ua
= (39,822,000)
li
Year 2007
an
= 2.82
s.
= 298,204,000 / 105,837,249
co
= 105,837,249
iii. Price / Earning Ratio Price earning ratio suggests that what investors are expecting about a particular investment. If price earning ratio is high, it means that investors are expecting high growth in future earnings of a company. Price / Earning Ratio = Market Price Per Share / Earning Per Share (Amount in Rs.)
Market Price Per Share Earnings Per Share
= 37
= Profit/ (Loss) after Taxation / Number of Shares = 298,204,000 = 105,837,249
= 298,204,000 / 105,837,249
ww w.
Note: Average prices have been taken from www.pkfinance.info. A soft copy of which can be found in annexes section of this study. Year 2007 Market Price Per Share = 23.40
vi rt
= 2.82
= 37 / 2.82 = 13.12
ua
li
an
149
s.
co
Year 2006
Earnings Per Share
= Profit/ (Loss) after Taxation / Number of Shares = (39,822,000) = 122,650,292 = (39,822,000) / 122,650,292 = (0.32)
= -73.13
Net Profit/ (Loss) after Taxation Number of Shares
ww w.
Earnings Per Share
vi rt
Earnings Per Share
= Profit/ (Loss) after Taxation / Number of Shares = (3,520,000) = 145,526,216 = (3,520,000) / 145,526,216 = (0.02) = 13.25 / (0.02) = 662.5
ua
Market Price Per Share
= 13.25
li
Year 2008
an
150
s.
co
= 23.40 / (0.32)
Note: Average prices have been taken from www.pkfinance.info. A soft copy of which can be found in annexes section of this study. iv. Percentage of Earnings Retained Percentage of earnings retained suggests the amount of a companys earnings retained out of its profits. Companies never distribute all of their profits to its shareholders. Rather they retain some or all of its profits to their own hands for the purpose of future projects and reserves. Retained Earnings = Earnings Dividends Paid
ww w.
Year 2007 Net Earnings
Dividends Paid Retained Earnings
vi rt
Retained Earnings
= 298,204 - 208 = 297,996
= 297,996 / 298,204 x 100 = 99.93 %
= (39,822) = 15 = (39,822) - 15 151
ua
Dividends Paid
= 208
li
Net Earnings
= 298,204
an
Year 2006
s.
Percentage of Earnings Retained = Retained Earnings / Earnings x 100
co
= (39,837) Percentage of Earnings Retained = (39,837) / (39,822) x 100 = 100.04 % Year 2008 Net Earnings Dividends Paid Retained Earnings = (3,520) =1 = (3,520) - 1 = (3,521) Percentage of Earnings Retained
= (3,521) / (3,520) x 100 = 100.02 %
Dividend payout ratio suggests that what percentage of a companys earnings are being paid by company to its shareholders.
ww w.
vi rt
ua
li
(Amounts in Rs.)
Dividend Payout Ratio = Dividend Per Share / Earning Per Share x 100 Dividend Per Share Earnings Per Share Year 2006 Dividends Paid = 208,000 152 = Dividends Paid / Number of Shares = Net Earnings / Number of Shares
an
s.
co
Number of Shares Net Earnings Dividend Per Share
= 105,837,249 = 298,204,000 = 208,000 / 105,837,249 = 0.0019
Earnings Per Share
= 298,204,000 / 105,837,249 = 2.82
= 0.0019 / 2.82 x 100 = 0.07 %
Year 2007 Dividends Paid Number of Shares Net Earnings Dividend Per Share = 15,000 = 145,526,216
Earnings Per Share
ww w.
vi rt
= (39,822,000)
= 15,000 / 145,526,216 = 0.0001
= (39,822,000) / 145,526,216 = (0.27)
= 0.0001 / (0.27) x 100 = -0.04 %
ua
li
an
153
s.
co
Year 2008 Dividends Paid Number of Shares Net Earnings Dividend Per Share = 1,000 = 145,526,216 = (3,520,000) = 1,000 / 145,526,216 = 0.000006 Earnings Per Share = (3,520,000) / 145,526,216 = (0.02) Dividend Payout Ratio = 0.000006 / (0.02) x 100 = -0.03 % vi. Dividend Yield
Dividend yield suggests that how much an investment is earning against one rupee of investment.
ww w.
vi rt
ua
li
(Amounts in Rs.)
Dividend Yield = Dividend Per Share / Market Price Per Share Dividend Per Share = Dividends Paid / Number of Shares Year 2006 Dividends Paid Number of Shares = 208,000 = 105,837,249 154
an
s.
co
Dividend Per Share
= 208,000 / 105,837,249 = 0.0019
= 37 = 0.0019 / 37 x 100 = 0.005 %
Note: Average prices have been taken from www.pkfinance.info. A soft copy of which can be found in annexes section of this study. Year 2008 Dividends Paid = 1,000
ww w.
vi rt
= 0.0001
= 23.40
= 0.0001 / 23.40 x 100 = 0.0004%
ua
Dividend Per Share
= 15,000 / 122,650,292
li
Number of Shares
= 122,650,292
an
155
Dividends Paid
= 15,000
s.
Year 2007
co
Number of Shares Dividend Per Share
= 145,526,216 = 1,000 / 145,526,216 = 0.000006
= 13.25 = 0.000006 / 13.25 x 100 = 0.000004 %
over or undervalued. However, realistically speaking book value per share and market share has nothing common.
vi rt
ua
li
Book value per share is perceived to indicate whether shares of a company are
Book Value Per Share = Shareholders Equity preferred stock/ Number
Year 2006
Shareholders Equity Number of Shares
ww w.
of Shares
= 4,707,408,000 = 105,837,249 = 4,707,408,000 / 105,837,249 = 44.48 156
an
vii. Book Value Per Share
s.
(Amounts in Rs.)
co
Year 2007 Shareholders Equity Number of Shares Book Value Per Share = 6,030,319,000 = 122,650,292 = 6,030,319,000 / 122,650,292 = 49.17 Year 2008 Shareholders Equity Number of Shares Book Value Per Share = 3,722,030,000 = 145,526,216 = 3,722,030,000 / 145,526,216 = 25.58
6) Cash Flow Ratios
Cash flows are very important to analyze whether companys cash flows are supporting its operations or not. A company may be earning huge profits but it be profitable firm is not sufficient. Rather a firm must have sufficient liquid funds to meet its obligations. So, importance of cash must be realized. Cash flow ratios are indicators of cash inflows and outflows of business. i. Operating Cash Flow/ Current Maturities of Long Term Debt and Current Notes Payable declared bankrupt if it does not have cash to pay to its creditors. Only being a
ww w.
vi rt
ua
li
an
157
s.
co
Operating cash flow to current maturities of long term debt and current notes payable is a measure indicating that how well a company can pay its current liabilities to avoid bankruptcy. Year 2006 Net Cash Generated from Operating Activities Current Maturities of Long Term Debt Current Notes Payable = (226,700)
= 701,923
= (226,700) / (701,923 + 835,990) = (226,700) / 1,537,913 = (0.15)
Year 2007
Net Cash Generated from Operating Activities Current Maturities of Long Term Debt Current Notes Payable
vi rt
ua
= 921,325 = 475,000
Operating Cash Flow / Current Maturities of Long Term Debt and Current Notes Payable = (215,659) / (921,325 + 475,000) = (215,659) / 1,396,325 = (0.15) Year 2008 158
ww w.
li
= (215,659)
an
s.
co
= 835,990
Net Cash Generated from Operating Activities Current Maturities of Long Term Debt Current Notes Payable
= (51)
= 609,654 = 636,998
Operating Cash Flow / Current Maturities of Long Term Debt and Current Notes Payable = (51) / (609,654 + 636,998) = (51) / 1,246,652
flows from operations.
Operating Cash Flow / Total Debt = Operating Cash Flow / Total Debt Year 2006
Net Cash Generated from Operating Activities Total Debt
vi rt
ua
= 2,776,985 + 3,855,596 =6,632,581
Operating Cash Flow / Total Debt = (226,700) / 6,632,581 = -0.03 Year 2007 Net Cash Generated from Operating Activities = (215,659)
ww w.
li
= (226,700)
an
This ratio indicates companys ability to meet its all obligations through its cash
s.
co
159
= -0.00004
Total Debt
= 2,959,093 + 4,231,049 = 7,190,142
Operating Cash Flow / Total Debt = (215,659) / 7,190,142 = -0.03 Year 2008 Net Cash Generated from Operating Activities Total Debt = (51)
= 3,052,128 + 5,477,572 = 8,529,700
Operating Cash Flow / Total Debt = (51) / 8,529,700 = -0.000006 iii. Operating Cash Flow Per Share
Many financial experts consider operating cash flow per share as a better indicator than earnings per share because earnings can be manipulated by financial redressing and other techniques whereas cash flows are always real. It is almost impossible to show off fake cash to prove yourself financially strong. (Amount in Rs.)
Operating Cash Flow Per Share = Operating Cash Flow / Number of Shares Year 2006 Net Cash Generated from Operating Activities = (226,700,000) 160
ww w.
vi rt
ua
li
an
s.
co
Number of Shares Operating Cash Flow Per Share
= 105,837,249 = (226,700,000) / 105,837,249 = -2.14
Year 2007 Net Cash Generated from Operating Activities Number of Shares Operating Cash Flow Per Share = (215,659,000)
= (215,659,000) / 122,650,292 = -1.76
Year 2008 Net Cash Generated from Operating Activities Number of Shares Operating Cash Flow Per Share
iv. Operating Cash Flow / Cash Dividends Operating cash flow to cash dividends indicates the proportion of operating cash flow which could have been paid to shareholders as cash dividends. Year 2006 Net Cash Generated from Operating Activities Dividends Paid = 208 161 = (226,700)
ww w.
vi rt
ua
= 145,526,216
= (51,000) / 145,526,216 = -0.0003
li
= (51,000)
an
s.
co
= 122,650,292
= (226,700) / 208 = (1089.90)
Year 2007 Net Cash Generated from Operating Activities Dividends Paid Operating Cash Flow / Cash Dividends = 15 = (215,659) / 15 = (14,377.27) Year 2008 Net Cash Generated from Operating Activities Dividends Paid Operating Cash Flow / Cash Dividends =1 = (51) = (215,659)
Summary:
ww w.
Ratio
vi rt
ua
= (51) / 1 = -51
2006
li
2007 2008 1.02 1.07
Liquidity
Current Ratio
an
1.05 0.59 0.69 162
Quick Ratio
0.47
s.
co
Working Capital
83,821
316,016
279,649
82.36
22.59
27.03
1.79
0.95
1.15
1.55
0.97
1.11
Debt Ratio
0.58
0.50
co
Debt Equity Ratio
1.41
s.
1.19
Leverage Ratios
ua
li
1.41
an
0.99
0.02
0.04
vi rt
0.37
0.31
ww w.
4.98
3.88
2.72
3.70
Debt Coverage Ratio
1.79
0.95
m
0.63 2.29 1.71 0.06 0.41 3.96 3.00 1.15 163
Net Profit Margin
5.14%
-0.40%
1.73%
Return on Assets
2.96%
-0.31%
-0.03%
0.026
-0.0027
-0.0026
Profitability Ratios
11.63%
8.06%
13.40%
1.13
1.18
co
4.88%
-0.66%
s.
1.33 7.32 49.83 4.18
-0.0586%
ua
3.13%
li
1.94
an
-0.21%
vi rt
28.18%
-2.74%
Gross Profit Margin
ww w.
14.80%
14.64%
9.04
Activity
40.39
3.70
m
1.26 1.33 1.07% -0.24% 15.38% 6.29 58.02 4.75 164
98.72
87.30
76.76
3.19
2.94
3.20
114.40
124.27
114.24
Operating Cycle
56.07
86.80
95.49
0.61
0.49
co
Dividend Per Share
0.0019
0.0001
s.
-0.32 -73.13 0 49.17 -0.15
0.000006
Market Ratios
ua
13.12
li
Earnings Per Share
2.82
an
vi rt
99.93%
100.04%
100.02%
ww w.
0.07%
-0.04%
Dividend Yield
m
0.56 -0.02 -662.50 -0.03% 0 Book Value Per Share 44.48 25.58
Cas
Operating Cash Flow / Current Maturities of Long Term Debt and
-0.15
-0.00004
165
Current Notes Payable
-0.03
-0.03
-0.000006
-2.14
-1.76
-0.0003
-1089.90
-14,377.27
-51.00
ww w.
vi rt
ua
li
an
166
s.
co
2.2.2. Common Size Analysis 1) Horizontal Analysis Horizontal analysis of a firm reveals the trend of various balance sheet and profit & loss account items and shows that whether the performance of various balance sheet and profit & loss account items is improving, declining or remaining consistent a specific period of time.
Balance Sheet
Particulars
Total Equity Non Current Liabilities Current Liabilities Total Liabilities
ua
100%
li
2006
an
2007
146.47% 58.83% 108.48% 93.61% 129.11% 125.63% 136.59%
s.
2008
122.11% 34.75% 166.23% 126.85% 123.66%
vi rt
100% 100%
ww w.
100% 100%
Total Equity & Liabilities
Non Current Assets Current Assets
100% 100%
co
114.67% 142.96% 167
1. Nishat Mills Limited (NML)
Total Assets
100%
129.11%
123.66%
Interpretation:
Following observations have been made after analyzing the balance sheet of Nishat Mills Limited (NML): Equity and Liabilities Side: Total Equity: Total equity of NML has been varying a lot since 2006. There were an increase of 46% in 2007 and it reduced by 24% in 2008. Total variations in level of reserves. increase in total equity of NML is 22% since 2006. Variations are due to
Non current Liabilities: Non current or long term liabilities of NML are consistently declining since 2006. Non current liabilities of NML first
24% in the year 2008. Overall non current liabilities of NML have been reduced by 65% since 2006.
Current Liabilities: Oppositely to non current liabilities of NML, current NML first increased by 8% in 2007 and then further increased by 58% in 2008. We can say that managements tendency is towards converting the long term liabilities to short term liabilities, which need more liquid funds and bear less finance cost. Since 2006, current liabilities of NML have been increased by 66%.
Total Equity and Liabilities: Overall trend of equity and liabilities side of balance sheet is stable and moving smoothly. NML is consistently decreasing
ww w.
liabilities moving with same pace to opposite direction. Current liabilities of
vi rt
ua
declined by about 41% in the year 2007 and then further declined by about
li
an
s.
co
168
its long term liabilities and diverting it with taking over short term funds through current liabilities. This has been decreasing the cost of debt. Since 2006, company has declined its total equity and liabilities by 23%. Out of which major portion of variation belongs to equity portion. Overall there are very slight variations in the liabilities portion. Hence, liabilities side of NML is posing a sense of stability. Assets Side:
26% in 2007 and then declined by 11% 2008. Since 2006, non current assets
reasonable pace since 2006. It first increased by 37% in 2007 and further increased by 6% in 2008. Since 2006, current assets of NML have been increased by 43%.
is not putting much impact on total assets. However, since 2006, total assets of NML have been increased by 23%, which is comparatively very impressive
Profit & Loss Account:

Particulars
Sales Cost of Sales
ww w.
figure as compared to variations in total borrowings.
vi rt
Total Assets: Composition of current and non current assets into total assets
ua
2006
100% 100%
li
an
2007
Current Assets: Current assets of NML are consistently increasing at a
s.
of NML have been increased by 15% i.e. slight variations.
103.12% 104.62%
co
2008
115.65% 118.96%
Non Current Assets: Non current assets of NML have been increased first by
169
Gross Profit Selling & Distribution Expenses Administrative Expenses Other Operating Expenses Operating Profit Finance Cost Net Profit before Taxation Provision for Taxation Net Profit after Taxation
100% 100% 100% 100% 100% 100% 100% 100% 100%
96.18% 102.52% 120.92% 116.61% 88.04% 108.50% 77.11%
100.36% 106.16% 150.58% 140.78% 87.65%
s.
an
115.08% 74.18%
li
Following observations have been made after analyzing the profit and loss account of Nishat Mills Limited (NML):
Sales: Sales of NML are increasing consistently and constantly at a low pace. Net sales of NML first increased by 3% in the year 2007 and then further increased by 13% in the year 2008. Since 2006, total increase in net sales is about 16%, which is just reasonable.
Cost of Sales: Although cost of sales is also moving consistently alongwith net sales, however pace is a bit higher than sales. Since 2006, total increase in cost of cost of sales is about 19%, near about same as net sales.
ww w.
vi rt
Interpretation:
ua
co
120.18% 363.70% 204.76% 375.96%
m
170
Gross Profit: Gross profit of NML has been dropped in 2007 by 4%. However, it restored itself back by increasing by 4% in 2008. Since 2006, there is almost no variations in gross profit of NML.
Selling & Distribution Expenses: Selling and distribution expenses of NML are also increasing consistently since 2006, showing the same spirit as other components of profit and loss account did. It first increased by 3% in 2007 and then further increased by 3% in 2008. Since 2006, administrative expenses of NML have been increased by 6% in toto.
Administrative Expenses: Oppositely to other items of profit and loss
2007, they increased by 21% and then further increased by 30% in 2008. Since 2006, administrative expenses of NML have been increased by one half of what they were in 2006. Management should take notice of it. Other Operating Expenses: Like administrative expenses, operating expenses of NML are also increasing rapidly. Other operating expenses first increased by 17% in 2007 and then further increased by 24% in 2008. In totality, other operating expenses of NML have been decreased by 41% since 2006.
Operating Profit: Operating profit of NML has tendency to decline. In the year 2007, operating profit of NML has been declined by 12%. However it stopped declining and remained almost constant in 2008. Since 2006, operating profit of NML has been decreased by 12%.
Finance Cost: In the year 2007, finance cost of NML first increased by 9% in 2007 and then further increased by 11% in 2008. Since 2006, finance cost of NML has almost been increased by 20%.
ww w.
vi rt
ua
li
an
s.
account, administrative expenses of NML are increasing rapidly. In the year
co
m
171
Net Profit before Taxation: Net profit before taxation of NML has been declined in 2007 by about 23%. However, it surprisingly jumped in 2008 and net profit before taxation for the year 2008 was about 363% of the profit company earned in 2006, not due to operations, rather the reason was due to increase in gain on sale of investment.
Provision for Taxation: Provision for taxation of NML is varying rapidly since 2006. In the year 2007, it has been increased by 15%. It further jumped in 2008 to 204.76%. The reason was increase in profit before taxation which been doubled.
Net Profit after Taxation: Net earnings of NML has been declined in 2007 by 26% and then increased in 2008 to 375%, reason for which has already been mentioned i.e. gain on sale of investment.
Total Equity
ww w.
Particulars
vi rt
Balance Sheet
ua
2006
100% 100% 100% 100%
li
an
2007
s.
128.10% 106.56% 109.74% 127.73%
Non Current Liabilities Current Liabilities
co
was due to gain on sale of investment. Since 2006, provision for taxation has
2008
79.07% 109.91% 142.07% 119.18%
172
Non Current Assets Current Assets Total Assets
100% 100% 100%
134.27% 115.42% 127.73%
104.83% 135.27% 119.18%
Interpretation:
Following observations have been made after analyzing the balance sheet of
with a percentage of 128.10% due to increase of about 4 million in issued, subscribed and paid up capital and increase of about 1 billion in reserves. In 24% (about two billion) in total equity due to utilization of excess reserves has declined the total equity by 29%. Since 2006, the total equity of KTML has the year 2008, share capital of KTML remained constant whereas decline of
Non current Liabilities: Non current or long term liabilities of KTML are consistently increasing since 2006. Non current liabilities of KTML first increased by about 7% in the year 2007 and then further increased by about 3% in the year 2008. Increase in long term debt is increasing the cost being paid for debt.
Current Liabilities: Current liabilities of KTML are also revealing the same trend as non current liabilities did. However, pace of increase is much more 173
ww w.
been declined by 21%.
vi rt
ua
li
Total Equity: Total equity of KTML has been increased in the year 2007
an
Equity and Liabilities Side:
s.
Kohinoor Textile Mills Limited (KTML):
co
than non current liabilities. Current liabilities of KTML first increased by 10% in 2007 and then further increased by 32% in the year 2008. Since 2006, current liabilities of KTML has been increased by 50%, which is a very high ratio. Total Equity and Liabilities: Overall trend of equity and liabilities side of balance sheet is not much good. KTML is consistently decreasing its equity and diverting it with taking over additional funds through current and non current liabilities. This has been increasing the cost of debt. Since 2006, increased by 51%. Assets Side: company has declined its total equity by 21%, whereas total debt has been
Non Current Assets: Non current assets of KTML have been increased first in 2007 by 34.27% and restored itself back by decreasing by about 30% in 2008, which means that there is almost no increase in long term assets of KTML since 2006.
Current Assets: Current assets of KTML are consistently increasing since 2006. It first increased in 2007 by 15.42% and further increased by 20% in
Total Assets: Composition of current and non current assets into total assets is not putting much impact on total assets. However, since 2006, total assets of KTML have been increased by 19%. This is not an impressive figure as compared to 51% increase in total liabilities.
ww w.
2008. Since 2006, current assets of KTML have been increased by 35%.
vi rt
ua
li
an
s.
174
co
Particulars
Sales Cost of Sales Gross Profit Selling & Distribution Expenses Administrative Expenses Other Operating Expenses Operating Profit Finance Cost Net Profit before Taxation Provision for Taxation Net Profit after Taxation
2006
100% 100% 100% 100% 100% 100% 100% 100%
2007
103.43% 103.62% 102.32% 92.80% 108.86% 92.77%
2008
109.48% 108.74% 113.79% 94.99%
s.
an
108.73% 134.79% -7.97% 20.30% -13.35%
li
ua
100% 100% 100%
vi rt
Interpretation:
Following observations have been made after analyzing the profit and loss account of Kohinoor Textile Mills Limited (KTML): Sales: Sales of KTML are increasing consistently but pace is very low. Net sales of KTML first increased by 3% in the year 2007 and then further
ww w.
co
120.28% 95.95% 128.24% 196.92% 36.85% 236.57% -1.18%
m
175
increased by 6% in the year 2008. Since 2006, total increase in net sales is about 9%, which is not an impressive figure. Cost of Sales: Cost of sales is also moving consistently alongwith net sales. Cost of sales following the same trend as the sales did. Since 2006, total increase in cost of cost of sales is about 9%, almost same as net sales. Gross Profit: Gross profit of KTML is consistently increasing since 2006. In the year 2007, gross profit increased by almost 2% and then further increased in the year 2008 by 12%. Since 2006, gross sales of KTML have been increased by 14%.
Selling & Distribution Expenses: Selling and distribution expenses of
then increased by 2% in 2008; however, since 2006 it has been declined by about 5%. Administrative Expenses:
Administrative
ua
li
expenses of KTML
an
KTML are declining since 2006. It declined by about 7% in the year 2007 and
s.
co
are
further increased by 11% in 2008. Since 2006, administrative expenses of KTML have been increased by 20% in toto. Other Operating Expenses: Operating expenses of KTML have first been decreased by 7% in 2007 but then increased by 3% in 2008. In totality, other operating expenses of KTML have been decreased by 4% since 2006. Operating Profit: Operating profit of KTML is increasing at a sufficient pace since 2006. In the year 2007, it has been increased by 9% and then further increased in the year 2008 by 19%. Since 2006, operating profit of KTML has been increased by 28%.
ww w.
vi rt
continuously increasing since 2006. It first increased by 9% in 2007 and then
176
Finance Cost: As the liabilities section of balance sheet of KTML suggests, finance cost of KTML has been increasing rapidly since 2006. In the year 2007, it first increased by 35% and then further increased by 62% in 2008. Since 2006, we cay say that finance cost of KTML has almost been doubled. It is a very negative sign and it should be reduced by reducing high cost debt.
Net Profit before Taxation: Net profit before taxation is also suffering from finance cost. In the year 2007, although it reduced so much rapidly by 107% however it covered itself by increasing the net profit before taxation by 44%. by 63%, which shows very bad performance of management.
Provision for Taxation: Provision for taxation of KTML is varying rapidly since 2006. In the year 2007, it has been reduced by 80% and lead KTML to year. However, it surprisingly increased to 236% in the year 2008. Difference decrease its provision for taxation to 20% of the provision held in the previous was due to divergence of deferred tax of Rs.95,975,000/-.
Net Profit after Taxation: Same disappointing situation can be seen in net profit after taxation of KTML, where net earnings first declined to -13% in 2007 and then restored a little bit to -1.18%. This is a very disappointing should inquire the reasons to take corrective measures.
ww w.
situation for stakeholders of company. Management must take notice of it and
vi rt
ua
li
an
s.
co
In totality, since 2006, net profit before taxation of KTML has been decreased
177
2) Vertical Analysis Vertical analysis is a term used for analyzing financial statements by knowing that how much of a balance sheet/ profit and loss accounts portion is being held by its different items and sub items. For the purpose of balance sheet analysts use the amount of total assets as base and analyze that how much portion of total assets has been held by different balance sheet items, whereas for the purpose of analyzing profit and loss account analysts use sales as the base. The analysis help to reveal that how much each item is contributing to total assets/ sales and analyze the patterns developed from those outputs.
Particulars
Total Equity Non Current Liabilities Current Liabilities
2006
li
an
2007
76.20% 4.48% 19.32% 100%
Balance Sheet
s.
2008
66.32% 2.76% 30.91% 100% 67.17% 9.83% 23.00% 100% 68.22% 31.78% 66.38% 33.62% 63.26% 36.74% 178
1. Nishat Mills Limited (NML)
Non Current Assets Current Assets
ww w.
vi rt
ua
co
Total Assets
100%
100%
100%
Interpretation:
Following observations have been made after analyzing the balance sheet of Nishat Mills Limited (NML): Equity and Liabilities Side: Total Equity: There are some variations in total equity of NML since 2006. In the year 2006, total equity of NML was consisting of 67.17% of its total back to 66.32% in 2008. Variations are due to variations in reserves. Non current Liabilities: There are some variations in non current liabilities of NML since 2006. Non current liabilities of NML in 2006 were almost 10% assets. It increased in 2007 to 76.20% of total assets and then restored itself
4.48% in 2007 and further reduced it to just 2.76% of total assets in 2008. Long term financing is consistently being reduced by the management. Current Liabilities: Current liabilities of NML are also varying since 2006. 19.32% in 2007 but then increased to 30.91% in 2008. The reason for increase of this 11% was increase in short term borrowings. By analyzing current and non current assets we can conclude that NML management has a tendency towards reduction of liabilities. This will obviously have effects on liquidity as well as capital structure and cost of capital of NML. Assets Side:
ww w.
They were consisting of 23% of total assets in 2006. It then reduced to
vi rt
ua
of total assets. It is a reasonable figure. However, company reduced it to
li
an
s.
co
179
Non Current Assets: Non current assets of KTML has been increased from 68.22% to 68.38% in 2007 and then reduced to 63.26% in 2008. The reason for decrease in investment in property. There were almost no changes in fixed assets since 2006.
Current Assets: Current assets of NML are consistently increasing since 2006. In 2006, current assets were consisting of 31.78% of total assets. It then increased to 33.62% in 2007 and further increased to 36.74% in 2008. The company has increased its stock in trade as well as its trade debts. Reduction towards diverting its non current assets towards current assets. The company investments.
Particulars
Sales Cost of Sales Gross Profit
ua
2006
li
2007
100% 83.44% 16.56% 5.41% 1.86% 0.53%
an
2008
100% 84.59% 15.41% 4.99% 2.07% 0.57% 100% 82.24% 17.76% 5.445% 1.59% 0.47% 180
Selling & Distribution Expenses Administrative Expenses Other Operating Expenses
ww w.
vi rt
s.
may be expecting more revenue than it was earning by holding long term
co
in non current assets and increase in current assets shows companys tendency
Operating Profit Finance Cost Net Profit before Taxation Provision for Taxation Net Profit after Taxation
10.56% 4.53% 10.56% 0.76% 9.80%
8.76% 4.77% 7.89% 0.84% 7.05%
7.77% 4.71% 33.20% 1.34% 31.86%
Interpretation:
Following observations have been made after analyzing the profit and loss account of
Cost of Sales: Cost of sales of NML has been remained almost constant but cost of sales.
Gross Profit: Gross profit of NML has also been remained almost constant but consistently decreasing slightly since 2006.
Selling & Distribution Expenses: There are very slight changes in the selling and distribution expenses of NML since 2006. However, the tendency is towards decline.
Administrative Expenses: Administrative expenses of NML are also almost constant since 2006 but tendency is towards increase.
Other Operating Expenses: Other operating expenses of NML are also almost constant since 2006 but tendency is towards increase.
ww w.
vi rt
ua
consistently increasing slightly since 2006. There are very slight variations in
li
an
181
Nishat Mills Limited (NML):
s.
co
Operating Profit: Operating profit of NML is slowly and consistently decreasing since 2006. In the year 2006, operating profit was 10.26% of sales. It then reduced to 8.76% in 2007 and further decreased to 7.77% of sales in 2008. Consistently decrease in operating profit may suppose to be a bad sign for stakeholders.
Finance Cost: There are little variations in finance cost of NML since 2006. However, the tendency is towards increase.
of NML. In 2006, net profit of NML was consisting of 10.56% of sales. It
in 2008. The reason was sale of investments. However, if we exclude sale of investments then tendency of net profit of NML is still towards reduction. Provision for Taxation: Provision for taxation of NML almost constant since
from 9.80% to 7.05%. However, in 2008, it surprisingly improved to 31.86% of total sales. The reason has already been mentioned while analyzing net
2. Kohinoor Textile Mills Limited (KTML) Balance Sheet

Particulars
Total Equity
ww w.
profit before taxation.
vi rt
Net Profit after Taxation: Net profit of NML has been decreased in 2007
ua
2006 however, tendency is towards increase.
2006
41.51%
li
an
2007
s.
then reduced to 7.89% in 2007 but surprisingly increased in 2008 to 33.20%
41. 63%
co
2008
27.54%
Net Profit before Taxation: There are variations in net profit before taxation
182
Non Current Liabilities Current Liabilities Total Equity & Liabilities
24.49% 34.00% 100%
20.43% 29.21% 100%
22.58% 40.53% 100%
Non Current Assets Current Assets Total Assets
65.26% 34.74% 100%
68.61% 31.39% 100%
57.40%
s.
Interpretation:
Following observations have been made after analyzing the balance sheet of Kohinoor Textile Mills Limited (KTML): Equity and Liabilities Side:
Total Equity: In the year 2006, total equity of KTML was consisting of 27.54% in 2008. The reduction was due to reduction in reserves. Moreover, percentage is too low. At least 35% of total assets is considered to be a reasonable percentage of total equity out of total assets.
Non current Liabilities: Non current liabilities of KTML a few variations over time. Non current liabilities of KTML were holding about 24.49% of its total assets in 2006. It reduced to 20.43% in 2007 and increased in 2008 to 22.58%. 183
ww w.
21.51% of its total assets. It remained almost same in 2007 and reduced to
vi rt
ua
li
an
co
39.43% 100%
Current Liabilities: Current Liabilities of KTML are showing some variations since 2006. They were consisting of 34% of total assets in 2006. It then reduced to 29.21% in 2007 but then increased to 40.53% in 2008. The reason was increase in short term borrowings. By analyzing current and non current assets we can conclude that KTML management has a tendency towards reduction of long term financing and increasing short term borrowings. This will obviously have effects on liquidity of KTML.
Assets Side: Non Current Assets: Non current assets of KTML has been increased from for increase of 11% in 2008 was increase of about 2 billion in long term
Current Assets: There are almost same variations in current assets of KTML. decreased to 31.39% in 2007 and then increased to 42.60% in 2008. Reason for this increase of 11% in current assets was increase in short term investments. Management has decided to reduce its non current assets and increase short term investments. Possible reason is increasing burden of current liabilities which are calling for liquidity.

Particulars
Sales Cost of Sales
ww w.
vi rt
ua
Current assets of KTML were about 35% of total assets in 2006. It then
2006
100% 85.20%
li
an
2007
100% 85.36%
investments.
s.
65.26% to 68.61% in 2007 and then reduced to 57.40% in 2008. The reason
co
2008
100% 84.62%
m
184
Gross Profit Selling & Distribution Expenses Administrative Expenses Other Operating Expenses Operating Profit Finance Cost Net Profit before Taxation Provision for Taxation Net Profit after Taxation
14.80% 5.81% 1.80% 0.19% 6.99% 6.49% 5.14% 0.82% 4.32%
14.64% 5.22% 1.90% 0.17% 7.35% 8.46% -0.40%
15.38% 5.04% 1.98% 0.17% 8.19%
s.
an
0.16%
li
-0.56%
Following observations have been made after analyzing the profit and loss account of Kohinoor Textile Mills Limited (KTML):
Cost of Sales: Cost of sales of KTML has been remained almost constant since 2006. There are almost no variations in cost of sales.
Gross Profit: Gross profit of KTML has also been remained almost constant since 2006.
Selling & Distribution Expenses: There are very slight changes in the selling and distribution expenses of KTML since 2006. They remained almost constant over time. 185
ww w.
vi rt
Interpretation:
ua
co
11.67% 1.73% 1.78% -0.05%
Administrative Expenses: Administrative expenses of KTML are also constant over time.
Other Operating Expenses: Other operating expenses of KTML are also remained constant over time.
Operating Profit: There are very slight variations in operating profit of KTML since 2006.
which then increased to 8.46% in 2007 and further increased to about 11% in 2008. Variation of about 5% since 2006 have increased finance cost of KTML, which is due to increase in liabilities.
2007 from 5.14% to -0.40%, however it improved a bit in 2008 to 1.73% of total sales. Net profit is too low. Management needs to take serious notice of it.
Provision for Taxation: Provision for taxation of KTML has very slight variations since 2006.
Net Profit after Taxation: KTML is consistently remaining in losses since 2007. The company earned 4.32% of total sales in 2006. Since then company is still in losses. In 2007, losses were about 0.56% of total sales. It improved slightly in 2008 to 0.05% but still remained in loss. Management needs to take serious notice of it.
ww w.
vi rt
ua
li
Net Profit before Taxation: Net profit before taxation has been declined in
an
s.
co
In the year 2006, the finance cost of KTML was about 6.49% of total sales,
Finance Cost: There are little variations in finance cost of KTML since 2006.
186
2.2.3. Comparisons Trend Analysis
1. Nishat Mills Limited

1) Liquidity Ratios
i. Current Ratio
Current Ratio
1.38
1.74
s.
Figure 1 - Current Ratio (NML)
Nishat Mills Limited improved its current ratio in the year 2007 from 1.38 to 1.74 but declined again in the year 2008 to 1.19. Major reason for boost in liquidity position of the company during the year 2007 was increase of about 4 billion rupees in fair value of short term investments during the year 2007. But in the year 2008 short fall of liquidity from 1.74 to 1.19 demolished the impact of increase in short term investments for the year 2007. Major reason for decline 187
ww w.
vi rt
ua
li
an
co
1.19
Ratio
2006
2007
2008
in liquidity position for the year 2008 was increase in short term running finances, which increased by about 4 billion. However, overall health of companys liquidity is satisfactory from the perspective of short term lenders. ii. Acid Test Ratio (Quick Ratio)
Ratio
2006
2007
2008
Figure 2 - Acid Test Ratio (NML)
in current ratio of the company. There are very slight variations in the inventory position of the company except for the year 2008, where inventory holdings increased by almost 1 billion. Other reasons for decline in quick ratio from 2007 to 2008 are same as for current ratio. However, overall health of companys quick liquidity is satisfactory from the perspective of short term lenders. iii. Working Capital
ww w.
Variations in quick ratio of Nishat Mills Limited also follow the variations
vi rt
ua
li
an
188
s.
co
Quick Ratio
0.89
1.28
0.80
Ratio
2006
2007
2008
Working Capital
2,692,187
5,659,714
2,207,913
Figure 3 - Working Capital (NML)
The same slump of variation can be seen in working capital too. High working capital in 2007 is due to increase in short term investments which is not
additional cost for this additional working capital. However during the year 2008 the slump was covered by additional short term borrowings. This slump will be discussed in detail in comparisons section. iv. Sales to Working Capital Ratio
Ratio
ww w.
vi rt
a good sign from the investors point of view. Company must have paid
ua
2006
li
an
2007 2008 Sales to Working Capital Ratio 6.19 3.04 8.73 189
s.
co
Figure 4 - Sales to Working Capital (NML)
The same slump of increase in fair value of short term investments in 2007 and increase in short term borrowings in 2008 can be seen in sales to working capital ratio. However, sales has been improved reasonably each year which reduced the impact of increase in short term investment and short term borrowings up-to some extent. Other macroeconomic factors might also have comparisons section when we will compare this ratio with industry averages. affected these ratios which can be better explained in more details in
2) Leverage Ratios
i. Times Interest Earned
Ratio
ww w.
vi rt
ua
2006
li
an
2007
s.
3.33
2.66
co
2008
m
8.05 190
Figure 5 - Times Interest Earned (NML)
There is a very slight shortfall of 0.67 in interest coverage ratio during the year 2007. However, the ratio has been increased to 8.05 during the year 2008. It means that company can easily pay its debts out of profits and after payment of interest charges, sufficient funds are available to pay equity holders. There is a slight change in interest charges from the year 2006 to 2007 and 2008. This increase of about 5 billion increased times interest earned ratio. ii. Fixed Charge Coverage Ratio However, profits have been increased from 1,356,208 to 6,396,968 in 2008.
ww w.
Ratio
vi rt
ua
2006
li
an
2007
s.
2.62
2.18
co
2008
m
6.86 191
Figure 6 - Average Collection Period (NML)
Same like interest coverage ratio, fixed charge ratio has also been increased from 2.18 to 6.86 during the year 2008. The reason is also same. ratio. Company can easily meet its fixed charges out of its profits and sufficient funds are left to invest by retaining them or to pay dividends after payment of
Ratio
vi rt
iii. Debt Ratio
ua
fixed charges.
2006
li
an
2007
Profits have been increased in 2008, which increased the fixed charge coverage
s.
Debt Ratio
ww w.
0.33
0.24
co
2008
m
0.34 192
Figure 7 - Debt Ratio (NML)
Debt ratio of the company over time is providing a favorable position of company. The slump in the year 2007 is indicating increase in fair value of short term investments. At the end of the year 2008, companys total debt is contributing 34% towards its total assets, which means that 66% of companys assets are financed through equity. Company is in a good position to take loans no fear of insolvency for lenders and investors. It is a favorable indicator for to finance more projects. Company is in good health to pay its debts and there is
iv. Debt / Equity Ratio
Ratio
ww w.
vi rt
lenders and investors.
ua
2006
li
an
2007
s.
Debt Equity Ratio
0.49
0.31
co
2008
m
0.51 193
Figure 8 - Debt/ Equity Ratio (NML)
The same slump of increase in fair value of short term investments in 2007 and increase in short term borrowings in 2008 can be seen in debt equity ratio Company is being financed 51% by debt and 49% by equity, which is a strong position and lenders and financers always welcome the company with such
Ratio
vi rt
v. Debt to Tangible Net Worth Ratio
ua
strong position.
2006
li
an
2007
too. However, companys debt/ equity position is favorable and strong.
s.
ww w.
0.49
0.31
co
2008
m
0.51 194
Figure 9 - Debt to Tangible Net Worth Ratio (NML)
As the company has no intangible assets, so its debt to tangible net worth ratio would be the same as the debt equity ratio, which means that company has a very strong position to take loans and can get sufficient finance through borrowing long term funds to finance its projects. vi. Current Worth / Net Worth Ratio
vi rt
Ratio
ua
2006
li
2007 2008 0.13 0.19 0.09
ww w.
an
s.
co
m
195
An increase of 0.13 to 0.19 can be seen in current worth / net worth ratio can been seen from the year 2006 to 2007 respectively. The reason was increase of about 4 million of current assets on account of increase in fair value of short term investment. Whereas, the decline in current worth/ net worth ratio is representing the increase in short term borrowings of about 4 billion in the year 2008. vii. Total Capitalization Ratio
0.13
0.06
s.
Figure 10 - Total Capitalization Ratio (NML)
Total capitalization ratio of the company is continuously falling since year 2006. Fall of 0.13 to 0.06 in the year 2007 is due to increase of about 8 billion in fair value reserve and increase of about 1.3 billion in general revenue reserve. Although there is a slight decrease of about 1.3 billion in long term debt but impact of increase of 8 billion in fair value reserve is much greater. During the year 2008, capitalization ratio fall with 0.02 because long term liabilities as well 196
ww w.
vi rt
ua
li
an
co
0.04
Ratio
2006
2007
2008
as reserves both fallen. Overall capitalization position of the company is satisfactory. However, detailed discussion can be found in the comparison section of this study. viii. Fixed Assets Ratio / Equity Ratio
Ratio
2006
2007
2008
Figure 11 - Fixed Assets Ratio / Equity Ratio (NML)
ratio, which decreased to 1.61 in 2007 due to increase in investment in property and then further increased by 0.05 in year 2008 again due to increase in investment in property, which means that company has increased its net fixed assets and decreased long term funds due to which fixed assets ratio has been decreased in 2008, which is a good sign for lenders and financial institutions. ix. Long Term Assets Versus Long Term Debt
ww w.
In the year 2006 companys fixed assets ratio was about 3 times of equity
vi rt
ua
li
an
197
s.
co
3.31
1.61
1.65
Ratio
2006
2007
2008
6.94
14.81
22.89
Figure 12 - Long Term Assets Versus Long Term Debt (NML)
At the end of year 2006 long term assets versus long term debt was 6.94, which means that company is financing only a few long term assets with long improved during the year 2007 to 14.81 and in the year 2008 company is almost financing one forth of its long term assets with long term debt. x. Debt Coverage Ratio term debt. It is inappropriate use of debt financing. However, the position
Ratio
ww w.
vi rt
ua
2006
li
an
2007 2008 Debt Coverage Ratio 2.63 2.66 8.05 198
s.
co
Figure 13 - Debt Coverage Ratio (NML)
There were very slight changes in debt coverage ratio of Nishat Mills Limited for the year 2006 and 2007 but the ratio moved up in 2008 by 5.34 which is a good sign. It means that company is covering 8 times of its finance cost in its operating income. Operating income in 2008 has been increased dramatically from 2 billion to 7 billion with a very slight increase in finance earnings. cost i.e. company is justifying its finance cost by increasing its operating
i. Net Profit Margin
Ratio
ww w.
vi rt
ua
2006
li
an
2007
s.
Net Profit Margin
10.56 %
7.89 %
co
2008
33.20 %
m
199
Figure 14 - Net Profit Margin (NML)
Companys profitability is improving over time. During the year 2006 companys net profit was only 10.56%, which further reduced in 2007 to 7.89% 33.20% in the year 2008. The reason for this huge increase in net profit margin was not due to improvement of its operations; rather, the reason was increase in
Ratio
vi rt
ii. Return on Assets
ua
gain on sale of investments amounting to about 5 billion.
2006
li
an
2007
of total sales. But the company improved its position with a big bounce of
s.
Return on Assets
ww w.
6.21 %
3.45 %
co
2008
15.84 %
m
200
Figure 15 - Return on Assets (NML)
Return on assets of Nishat Mills Limited declined in the year 2007 by 2.76%. The reason for this decline was increase in fair value of short term on assets. However, the company improved its return on assets in the year 2008 investments which in turn increased companys assets and declined the return by jumping from 3.45% to 15.84%. Major reason was gain on sale of short term investments amounting to almost 5 billion. This increased the net profit of the company and increased the return on assets. iii. DuPont Return on Assets
ww w.
Ratio
vi rt
ua
2006
li
an
2007
s.
0.05
0.03
co
2008
m
0.16 201
Figure 16 - DuPont Return on Assets (NML)
Companys DuPont return on assets is currently improving. During the year 2006 companys DuPont Return on Assets was only 0.05, which further reduced in 2007 to 0.03. But the company improved its position with a big bounce of 0.16 in the year 2008. The reason for this huge increase in DuPont Return on Assets is again not due to improvement of its operations; rather, the reason is increase in gain on sale of investments amounting to about 5 billion. iv. Operating Income Margin
Ratio
vi rt
ua
2006
li
an
2007
s.
ww w.
11.92 %
12.66 %
co
2008
37.91 %
m
202
Figure 17 - Operating Income Margin (NML)
In the year 2006 company was earning 11.92% from operations out of its sales. This ratio slightly increased to 12.66% in the year 2007. The company jump was increase of about 5 billion in the gain on sale of investments. v. Operating Assets Turnover
vi rt
Ratio
ua
2006
li
2007 2008 1.18 1.21 1.26
ww w.
an
further improved its operating income margin to 37.91%. Major reason for this
s.
co
m
203
Figure 18 - Operating Assets Turnover (NML)
Operating assets turnover of Nishat Mills Limited is almost consistent but slightly improving over time. In the year 2006 1 rupee invested in operating assets was generate 1.18 rupees of sales. The ratio improved in 2007 from 1.18 to 1.21 and further improved in 2008 to 1.26. Ratio more than 1 is considered to be good. vi. Return on Operating Assets
Ratio
vi rt
ua
2006
li
2007 2008
ww w.
11.55 %
an
8.54 %
s.
co
40.08 %
m
204
Figure 19 - Return on Operating Assets (NML)
Return on operating assets in 2006 was 11.55% which declined in 2007 to 8.54% and then increased dramatically in 2008 by about 32%. Major reason for by about 5 billion. However, overall position of the company is good. vii. Sales to Fixed Assets this increase was increase in gain on sale of investments, which was increased
vi rt
Ratio
ua
2006
li
2007 2008 1.57 0.65 0.80
ww w.
an
s.
co
m
205
Figure 20 - Sales to Fixed Assets (NML)
Sales to fixed assets ratio of Nishat Mills Limited is continuously improving over time. In the year 2006, company was generating 1.57 rupees of 0.82 due to increase in investment in property and increased in 2008 by 0.15 due to increase in sales. Ratio of 1 is considered to be good. viii. Return on Investment
Ratio
vi rt
ua
2006
li
an
2007
sales by investing 1 rupee of fixed assets. In the year 2007 the ratio declined by
s.
ww w.
5.74%
3.43%
co
2008
16.87%
m
206
Figure 21 - Return on Investment (NML)
Return on investment is a good way to find out the worth of a companys investment. During the year 2006, return on investment of Nishat Mills Limited was 5.74% which is a satisfactory figure. During year 2007, a slight decline can be seen. But there is a huge jump in the year 2008, where return on investment jumped from 3.43% to 16.87%. This huge jump is due to sale of investments, should keep in mind the reason of this boost and should know that this boost is which gave a temporary boost to the profits of the company. So, the investor
ix. Return on Total Equity
Ratio
ww w.
vi rt
temporary.
ua
2006
li
an
2007
s.
112.41%
75.80%
co
2008
384.20%
m
207
Figure 22 - Return on Total Equity (NML)
A slump of 37% can be seen in the year 2007, which was due to increase in cost of sales. And same temporary jump of gain on sale of investments can be seen in return on equity where ROE is jumping from 75.80% to 384.2%. If we can exclude the amount of 5 billion of gain on sale of investment from net profit, there would again be a slump of about 5%. With this slump, ROE would from investors point of view. x. Gross Profit Margin decline to 70%. A continuously declining ROE is obviously not a good sign
Gross Profit Margin
ww w.
Ratio
vi rt
ua
2006
li
an
2007
s.
17.76%
16.56%
co
2008
15.41%
m
208
Figure 23 - Gross Profit Margin (NML)
The impact of exclusion of gain on sale of investment can be seen in gross profit margin, where ratio is continuously declining over the time of three years. which declined by 1.2% and further declined by 1.15% in the year 2008. Profit In the year 2006, gross profit margin of Nishat Mills Limited was 17.76%, margin of company is continuously getting a downward slope, which is not a good sign from investors point of view.
Ratio
ww w.
vi rt
4) Activity Ratios
ua
2006
li
an
2007
s.
17.50
18.49
co
2008
m
17.83 209
Figure 24 - Accounts Receivable Turnover (NML)
Analysis of accounts receivable turnover ratio of Nishat Mills Limited is indicating that credit policy of company for issuance of credit and collection of credit is almost consistent over time. In the year 2006, company was generating 17.5 rupees by offering 1 rupee of debt. This ratio is increased a bit to 18.5 in the year 2007 and again declined in 2008 by 0.67. Overall performance is comparisons section. ii. Average Collection Period consistent and satisfactory. However, detailed analysis will be done in the
ww w.
Ratio
vi rt
ua
2006
li
an
2007
s.
20.86
19.74
co
2008
m
20.47 210
Figure 25 - Average Collection Period (NML)
Same consistency of accounts receivable turnover can be seen in average collection period too. Overall collection policy of company is satisfactory and
Ratio
ua
2006
li
2007 2008 5.06 5.04 5.86
iii. Accounts Payable Turnover
ww w.
Figure 26 - Accounts Payable Turnover (NML)
vi rt
an
211
consistent.
s.
co
Accounts payable turnover is also consistent over time. By comparing accounts receivable and accounts payable turnover we can see that company is selling stock of about 17 rupees by offering 1 rupee of debt whereas company is purchasing stock of about 5 rupees by availing 1 rupee of credit. iv. Average Payment Period
Ratio
2006
2007
2008
Figure 27 - Average Payment Period (NML)
Average payment period of Nishat Mills Limited has been remained consistent in first two years but during year 2008 it has been dropped by 10 days due to increase in sales. However, overall performance is good as compared to average payment period of 20 days. v. Inventory Turnover
ww w.
vi rt
ua
li
an
212
s.
co
72.08
72.36
62.33
Ratio
2006
2007
2008
4.03
4.09
4.01
Figure 28 - Inventory Turnover (NML)
Inventory turnover ratio of Nishat Mills Limited has been remained consistent over three years under consideration. A slight change can be seen in
vi. Average Age of Inventory
Ratio
ww w.
vi rt
year 2008 where inventory turnover has been dropped by 0.08.
ua
2006
li
an
2007 2008 Average Age of Inventory 90.53 89.16 90.95 213
s.
co
Figure 29 - Average Age of Inventory (NML)
Same like inventory turnover ratio average age of inventory is also consistent over time. It is difficult to say anything about average age of So, it will be discussed in detail in comparisons section of this study. vii. Operating Cycle
Operating Cycle
vi rt
Ratio
ua
2006
li
2007 2008 39.31 36.54 49.08
ww w.
an
inventory that whether it is good or bad without considering industry standards.
s.
co
m
214
Figure 30 - Operating Cycle (NML)
There are little variations in operating cycle of Nishat Mills Limited. In the year 2006, operating cycle of NML was 39 days which reduced to 36 days this upward move was drop of payables turnover from 72 days in the year 2007 in the year 2007 and then jumped over to 49 days in the year 2008. Reason for to 62 days in 2008. It is difficult to decide about health of operating cycle without comparing it with industry standards. It will be discussed in detail later in the section of comparisons. viii. Total Assets Turnover
ww w.
Ratio
vi rt
ua
2006
li
an
2007
s.
0.54
0.43
co
2008
m
0.51 215
Figure 31 - Total Assets Turnover (NML)
Total assets turnover of Nishat Mills Limited is consistent over time. Initially in the year 2006 it was 0.54, which is a good figure. In the year 2007, which total assets turnover moved down to 0.43 but in the year 2008 it restored itself back to 0.51.
5) Market Ratios
i. Dividend Per Share
Ratio
vi rt
ua
2006
li
2007 2008 2.47 1.37 2.48
Dividend Per Share
ww w.
an
the company increased its total assets in terms of short term investments due to
s.
co
m
216
Figure 32 - Dividend Per Share (NML)
Dividend per share for the year 2006 was 2.47 which then reduced to 1.37 and again moved up towards 2.48. Dividends history of Nishat Mills Limited is not much impressive. However, without considering any benchmark or industry standards it would be unfair to suggest anything about dividend per share of Nishat Mills Limited. ii. Earnings Per Share
Ratio
vi rt
ua
2006
li
2007 2008 11.24 7.58 38.42
ww w.
Earnings Per Share
an
s.
co
m
217
Figure 33 - Earnings Per Share (NML)
History of earnings per share of Nishat Mills Limited is also not very impressive because earnings are continuously dropping over time. In the year 2006 earnings per share were 11.24 which declined to 7.58 in the year 2007. Although earnings then moved up dramatically from 7.58 to 38.42, however this increase is a temporary move because reason of this dramatic increase in available next year. So, we can predict from the past pattern that earnings per increase in gain on sale of investments. Obviously these investments will not be
direction. However, they may be several reasons for decline in earnings per share. True picture can only be portrayed by comparing this ratio with some industry benchmark or industry standards. iii. Price / Earning Ratio
Ratio
ww w.
vi rt
share will further decline in next year if company continued moving into same
ua
2006
li
an
2007
s.
9.96
14.65
co
2008
m
2.33 218
Figure 34 - Price/ Earnings Ratio (NML)
There are a lot of variations in the price earning ratio (P/E Ratio) of Nishat Mills Limited. In the year 2006 P/E ratio of Nishat Mills Limited was 9.96 which then moved up so high to 14.65 in the year 2007 and again slumped down at the end of 2008 to 2.33. Reasons are variations in share price as well as earnings of Nishat Mills Limited. iv. Percentage of Earnings Retained
Ratio
vi rt
ua
2006
li
2007 2008 78.02% 81.94% 93.55%
ww w.
an
s.
co
m
219
Figure 35 - Percentage of Earnings Retained (NML)
There are very little variations in percentage of earnings retained of Nishat Mills Limited. The company retained 78% of its profits and then increased to year 2008. History suggests that companys management wants to retain and reabout 82% in the year 2007 and then further increased this ratio to 94% in the invest the profits into more profitable activities. v. Dividend Payout Ratio
Ratio
vi rt
ua
2006
li
2007 2008 18.07% 6.45%
ww w.
22.01%
an
s.
co
m
220
Figure 36 - Dividend Payout (NML)
Dividend payout ratio is the amount left after retained earnings distributable to its shareholders as dividends. As we have seen that retained earnings ratio is increasing continuously year by year. So, the remaining portion of earnings which is distributable to shareholders is declining with the same proportion. Company is continuously reducing its dividend payout ratio and retaining most of its earnings to its own self. vi. Dividend Yield
Ratio
vi rt
ua
2006
li
an
2007
s.
Dividend Yield
ww w.
2.21%
1.23%
co
2008
m
2.77% 221
Figure 37 - Dividend Yield (NML)
Dividend yield of Nishat Mills Limited is not attractive for investors because history tells us that in the year 2006 companys dividend was only 2.21% which further declined in the year 2007 to 1.23% but restored itself back to 2.77% in the year 2008. Variation is too little and yield company is offering to its shareholders is also very low. So, the only interest for investors left is to much hope for dividends of Nishat Mills Limited to increase. vii. Book Value Per Share look for capital gains because historical pattern of dividend yield does not show
ww w.
Ratio
vi rt
ua
2006
li
an
2007
s.
141.78
188.78
co
2008
157.38
m
222
Figure 38 - Book Value Per Share (NML)
There are a lot of variations in book value per share of Nishat Mills Limited. In the year 2007 book value per share increased dramatically due to increase in reserves but again moved down in 2008 and the reason are again reserves.
6) Cash Flow Ratios
i. Operating Cash Flow/ Current Maturities of Long Term Debt and Current Notes Payable
Ratio
vi rt
ua
2006
li
2007 2008 0.74 1.06 2.08
ww w.
an
s.
co
m
223
Figure 39 - Operating Cash Flow/ Current Maturities of Long Term Debt and Current Notes Payable (NML)
the red line. However, in the year 2007 it improved its position and touched the satisfactory level of 1.0 and further improved the ratio in 2008. At the end of
because its operating cash flows are twice of its current liabilities which are to be paid in 2008. ii. Operating Cash Flow / Total Debt
Ratio
vi rt
ua
2006
li
year 2008 company was in a good position from the liquidity point view
an
2007
s.
In the year 2006, operating cash flows of Nishat Mills Limited was below
ww w.
0.17
0.26
co
2008
m
0.34 224
Figure 40 - Operating Cash Flow / Total Debt (NML)
Same like operating cash flow to current maturities of long term debt and notes payable, operating cash flow to total debt is also very low in the year 2006 but it has been improved in 2007 to 0.26 and then further improved to 0.34 in 2008. Currently company is in good health to meet its obligations from its operating cash flows. iii. Operating Cash Flow Per Share
Ratio
vi rt
ua
2006
li
2007 2008 11.73 15.10 26.92
ww w.
an
s.
co
m
225
Figure 41 - Operating Cash Flow Per Share (NML)
History of operating cash flow per share of Nishat Mills Limited is not much impressive in 2006 but it is consistently improving over time. iv. Operating Cash Flow / Cash Dividends
Ratio
2006
li
an
2007 2008
Figure 42 - Operating Cash Flow / Cash Dividends (NML)
ww w.
vi rt
ua
4.75
11.03
s.
10.86 226
co
Proportion of operating cash flows to cash dividends of Nishat Mills Limited is going quite well over time. The ratio was 4.75 in the year 2006 which increased to 11.03 in the year 2007 due to increase in operating cash flows and slightly declined from 11.03 to 10.86 in the year 2007.

1) Liquidity Ratios
Current Ratio
1.02
an
1.07
s.
Ratio
2006
2007
Current ratio of Kohinoor Textile Mills Limited (KTML) has been remained consistent from 2006 to 2008. There are very slight changes in the current ratio of KTML. Overall liquidity position of KTML is satisfactory.
ww w.
vi rt
ua
Figure 43 - Current Ratio (KTML)
li
co
2008 1.05 227
i. Current Ratio
ii. Acid Test Ratio (Quick Ratio)
Ratio
2006
2007
2008
Quick Ratio
0.47
0.59
0.69
Figure 44 - Acid Test Ratio (KTML)
2006 quick ratio of KTML was 0.47, which improved by 0.12 in the year 2007 due to increase in current assets as well as decline in inventory holdings. The assets and decreased inventory holdings. Currently quick ratio of KTML is satisfactory. ratio further increased in the year 2008, when KTML further increased current
iii. Working Capital
Ratio
ww w.
vi rt
Quick ratio of KTML is consistently improving over time. In the year
ua
2006
li
2007 2008
an
228
s.
co
Working Capital
83,821
316,016
279,649
Figure 45 - Working Capital (KTML)
Working capital of KTML is consistently increasing since 2006, which is not a good sign. Company is not justifying this increase in capital through more pace as compared to sales. iv. Sales to Working Capital Ratio
ww w.
Ratio
vi rt
ua
increase in sales. Sales are increasing but working capital is increasing with
2006
li
an
2007
s.
2008 82.36 22.59 27.03 229
co
Figure 46 - Sales to Working Capital Ratio (KTML)
A shortfall can be seen from the year 2006 to 2007, where the sales to working capital ratio has been declined from 82.36 to 22.59. The reason is that than the sales did. The ratio needs to be increased. Company may reduce its working capital by reducing inventory holdings and accounts receivables to restore the position. working capital of KTML has been increased with comparatively high speed
Ratio
ww w.
vi rt
2) Leverage Ratios
ua
2006
li
an
2007
s.
1.79
0.95
co
2008
m
1.15 230
Figure 47 - Times Interest Earned (TKML)
year 2007. However, the ratio has been increased to 1.14 during the year 2008. Times interest earned ratio of KTML has not crossed the redline yet but position interest earned ratio but ratio of 1.15 in 2008 is showing that companys is very disappointing for lenders. Although KTML has improved its times
next year can reduce the times interest earned to below 1, which means that company is not even earning to pay interest to its debtors. So, the situation currently is so alarming for lenders.
Ratio
ww w.
ii. Fixed Charge Coverage Ratio
vi rt
ua
earnings are just sufficient to pay interest. A very slight negative variation in
2006
li
an
2007
s.
There is a very slight shortfall of 0.84 in interest coverage ratio during the
1.55
0.97
co
2008
m
1.11 231
Figure 48 - Fixed Charge Coverage (KTML)
increased from 0.97 to 1.11 during the year 2008. But, ratio is too low and too late to respond. iii. Debt Ratio
Ratio
vi rt
ua
2006
li
2007 2008 0.58 0.50 0.63
Debt Ratio
ww w.
an
alarming for lenders to collect their debts and stop lending to KTML before it is
s.
Same like interest coverage ratio, fixed charge ratio has also been
co
m
232
Figure 49 - Debt Ratio (KTML)
figures. The ratio decreased from 0.58 to 0.50 during the year 2007 and then hope from lenders point of view. iv. Debt / Equity Ratio
Ratio
vi rt
ua
2006
li
2007 2008 1.41 1.19 2.29
Debt Equity Ratio
ww w.
an
increased a bit in 2008 to 0.63 but this improvement does not contain much
s.
Debt ratio of the company over time is also providing very disappointment
co
m
233
Figure 50 - Debt/ Equity Ratio (KTML)
where debt is more than twice of equity and this situation continuously getting company is holding more than twice of its equity, which is really alarming for lenders as well as management of KTML. Company needs to immediately take
Ratio
vi rt
ua
corrective measures to cover the deficiency.
2006
li
an
2007
worst. Debt equity ratio is consistently increasing and in the year 2008, the
s.
Same disappointing situation can be seen in debt equity ratio of KTML,
ww w.
1.41
0.99
co
2008
m
1.71 234
Figure 51 - Debt to Tangible Net Worth Ratio (KTML)
ratio would be a bit similar as the debt equity ratio, Like debt equity ratio, debt year 2008, KTML is holding 1.71 debt equity ratio, which means company is holding debt near about twice of its tangible net worth. A slight shortfall at this stage can lead to insolvency. vi. Current Worth / Net Worth Ratio
Ratio
vi rt
ua
2006
li
an
2007
to tangible net worth ratio of KTML is also signaling danger for lenders. In the
s.
As the company has no intangible assets, so its debt to tangible net worth
ww w.
0.02
0.04
co
2008
m
0.06 235
Figure 52 - Current Worth/ Net Worth Ratio (KTML)
year. Although current worth to net worth of KTML consistently increasing but with this proportion can take hundreds of years to get to a reasonable point. Management needs to take serious actions to improve the position. vii. Total Capitalization Ratio
Ratio
vi rt
ua
2006
li
an
2007
ratio is too low and increase is also very slight. Increasing current to net worth
s.
An increase of 0.02 can be seen in current worth / net worth ratio each
ww w.
0.37
0.31
co
2008
m
0.41 236
Figure 53 - Total Capitalization Ratio (KTML)
2006 and 2007, but it has been increased in 2008 from 0.31 to 0.41. Currently Generally ratio of 65 35 considered to be ideal. However it changes from sector to sector and economy to economy. It will be discussed in detail in comparisons section. viii. Fixed Assets Ratio / Equity Ratio
Ratio
vi rt
ua
2006
li
an
2007
total capitalization ratio of KTML is nearly about two fifth of total capital.
s.
Total capitalization ratio of the company was of reasonable size in the year
ww w.
4.98
3.88
co
2008
m
3.96 237
Figure 54 - Fixed Assets Ratio / Equity Ratio (KTML)
equity ratio, which increased by 5.24 in 2007 and then decreased by 5.68 in year 2006. ix. Long Term Assets Versus Long Term Debt
Ratio
vi rt
ua
2006
li
2007 2008 2.72 3.70 3.00
ww w.
an
2008. KTMLs fixed assets ratio to equity ratio is continuously increasing since
s.
In the year 2006 companys fixed assets ratio was about 4.98 times of
co
m
238
Figure 55 - Long Term Assets Vs Long Term Debt (KTML)
which means that company is financing only a few long term assets with long improved during the year 2007 to 3.70 and in the year 2008 company is almost financing one third of its long term assets with long term debt, but the ratio is assets/ long term debt ratio of KTML, it would be more reasonable to compare it with bench mark or industry standards. x. Debt Coverage Ratio still below general considerations. However, before arguing about long term
Ratio
ww w.
vi rt
ua
2006
li
an
2007
term debt. It is inappropriate use of debt financing. Although the position
s.
At the end of year 2006 long term assets versus long term debt was 2.72,
Debt Coverage Ratio
1.79
0.95
co
2008
m
1.15 239
Figure 56 - Debt Coverage Ratio (KTML)
year 2006 it was 1.79. Improvement in debt coverage ratio of KTML can be seen in the shape of shortfall of 0.84 from 2006 to 2007. But the ratio again 1.15th of finance cost it has to pay. Only 0.15th of its earnings are left after situation for lenders and management.
Ratio
ww w.
vi rt
ua
paying out its interest charges. Debt coverage ratio of KTML is in an alarming
2006
li
moved up in 2008 by 1.15, which means that currently KTML is earning only
an
2007
s.
Debt coverage ratio of KTML is very disappointing since 2006. In the
Net Profit Margin
5.14%
-0.40%
co
2008
m
1.73% 240
Figure 57 - Net Profit Margin (KTML)
consistency. In the year 2006, net profit margin of KTML was 5.14%, It However, in the year 2008, company improved its profitability to 1.73% but it is still not satisfactory. Serious corrective actions are needed by company to improve the profitability. ii. Return on Assets
Ratio
vi rt
ua
2006
li
an
2007
dropped badly in the year 2007 from 5.14 to -0.14%. Company faced losses.
s.
There are variations in net profit margin of KTML since 2006. There is no
Return on Assets
ww w.
2.96%
-0.31%
co
2008
-0.03%
m
241
Figure 58 - Return on Assets (KTML)
alarming situation. ROA of KTML is continuously facing losses since 2007. 2.96%. Currently company is passing from its bad times. iii. Return on Assets
Ratio
vi rt
ua
2006
li
2007 2008 0.026 -0.0027 -0.0026
ww w.
an
The only year with positive ROA is 2006, where companys return on assets is
s.
Similar to net profit margin, return on assets of KTML is also indicating
co
m
242
Figure 59 - DuPont Return on Assets (KTML)
other ratios, DuPont return on assets is also in a bad situation. iv. Operating Income Margin
vi rt
ua
Ratio
2006
li
an
2007 2008 11.63% 8.06% 13.40% 243
Figure 60 - Operating Income Margin (KTML)
ww w.
s.
Companys profitability is continuously falling since 2006. Similar to all
co
In the year 2006 company was earning 11.63% from operations out of its sales. A slump from 11.63 to 8.06% can be seen in the year 2007. However, company increased its operating income margin in the year 2008 with operating income margin of 13.40%. v. Operating Assets Turnover
Ratio
2006
2007
2008
Figure 61 - Operating Assets Turnover (KTML)
Operating assets turnover of KTML is almost consistent but slight variations can be seen over time. In the year 2006 1 rupee invested in operating assets was generating 1.13 rupees of sales. The ratio improved in 2007 from 1.13 to 1.18 and further increased in the year 2008 to 1.26. vi. Return on Operating Assets
ww w.
vi rt
ua
li
an
244
s.
co
1.13
1.18
1.26
Ratio
2006
2007
2008
4.88%
-0.66%
-0.0586%
Figure 62 - Return on Operating Assets (KTML)
negative figures in 2007 to 0.66%. It slight improvement from -0.66 to 0.0586% can be seen in the year 2008, however return on operating assets is still in minus and it needs to be improved.
Ratio
ww w.
vi rt
ua
Return on operating assets in 2006 was 4.88% which declined and gone in
2006
li
an
2007 2008 Sales to Fixed Assets 1.94 1.33 1.33 245
s.
co
Figure 63 - Sales to Fixed Assets (KTML)
the year 2007. The ratio remained intact in 2008. The ratio is still too low to be reasonable. viii. Return on Investment
Ratio
ua
2006
li
2007 2008
vi rt
3.13%
an
-0.21% 1.07%
ww w.
s.
Sales to fixed assets ratio of KTML has been fallen from 1.94 to 1.33 in
co
m
246
Figure 64 - Return on Investment (KTML)
KTML, where return on investment has been decline from 3.13% to -0.21% in alarming position. ix. Return on Total Equity
Ratio
vi rt
ua
2006
li
2007 2008 28.18% -2.74% -0.24%
ww w.
an
the year 2007. It improved a bit with 1.28% in the year 2008 but it is still in
s.
A similar situation can be seen in the Return on Investment (ROI) of
co
m
247
Figure 65 - Return on Total Equity (KTML)
bad times. The ratio was 28.18% in the year 2006 but then fallen to -2.74% in the year 2007. Although, return on total equity improved in 2008 by 2.50 but the
Ratio
vi rt
ua
x. Gross Profit Margin
2006
li
2007 2008 14.80% 14.64% 15.38%
figure is still negative.
Gross Profit Margin
ww w.
an
s.
Similar to other profitability ratios, return on total equity is also signaling
co
m
248
Figure 66 - Gross Profit Margin (KTML)
Gross profit margin of KTML is the only ratio in profitability ratios which is still in positive, but it is too low to bear selling, distribution, administrative 2006, which slightly decreased in the year 2007 to 14.64% but it increased slightly again in the year 2008 to 15.38%. It needs to be improved further until
Ratio
ww w.
vi rt
4) Activity Ratios
ua
the company can cover its other expenses and move in profits.
2006
li
an
2007
and other expenses. Gross profit margin of KTML was 14.80% in the year
s.
9.04
7.32
co
2008
m
6.29 249
Figure 67 - Accounts Receivalbe Turnover (KTML)
credit policy of company for issuance of credit and collection of credit is offering 1 rupee of debt. This ratio is declined to 7.32 in the year 2007 and again declined in 2008 by 6.29. Overall credit policy is poor. However, detailed analysis will be done in the comparisons section.
Ratio
vi rt
ii. Average Collection Period
ua
2006
li
an
2007
declining over time. In the year 2006, company was generating 9.04 rupees by
s.
Analysis of accounts receivable turnover ratio of KTML is indicating that
ww w.
40.39
49.83
co
2008
m
58.02 250
Figure 68 - Average Collection Period (KTML)
average collection period too. Company is continuously increasing its average continuously increasing since 2006. Pace of decline is consistent. Average collection period is consistently falling by about 9 days every year. Overall collection policy of company is poor. iii. Accounts Payable Turnover
Ratio
vi rt
ua
2006
li
an
2007
collection period since 2006. Average collection period of KTML is
s.
Same declining situation of accounts receivable turnover can be seen in
ww w.
3.70
4.18
co
2008
m
4.75 251
Figure 69 - Accounts Payable Turnover (KTML)
accounts receivable and accounts payable turnover we can see that company is purchasing stock of about 5 rupees by availing 1 rupee of credit. Both turnovers need to be improved. iv. Average Payment Period
Ratio
vi rt
ua
2006
li
2007 2008 98.72 87.30 76.76
ww w.
an
selling stock of about 6 rupees by offering 1 rupee of debt whereas company is
s.
Accounts payable turnover is also consistent over time. By comparing
co
m
252
Figure 70 - Average Payment Period (KTML)
Average payment period of KTML is consistently falling by about 11 days every year since 2006. By comparing average payment period with average after 76 days and collecting its debt in 58 days. Collection and payment periods collection period we can see that in the year 2008, company is paying its credit
v. Inventory Turnover
Ratio
vi rt
ua
are satisfactory while compared with each other.
2006
li
an
2007
s.
Average payment period of KTML is consistently dropping since 2006.
ww w.
3.19
2.94
co
2008
m
3.20 253
Figure 71 - Inventory Turnover (KTML)
years under consideration. A slump can be seen in year 2007 where inventory at 3.20 in the year 2008. vi. Average Age of Inventory
Ratio
vi rt
ua
2006
li
2007 2008 114.40 124.27 114.24
ww w.
an
turnover has been dropped by 0.25. However, company restored its status back
s.
Inventory turnover ratio of KTML has been remained consistent over three
co
m
254
Figure 72 - Average Age of Inventory (KTML)
ratio in the year 2007 can also be seen in average age of inventory. Average age back to 114.24 in the year 2008. vii. Operating Cycle
Ratio
vi rt
ua
2006
li
2007 2008 56.07 86.80 95.49
Operating Cycle
ww w.
an
of inventory was 114.40 in 2006, which increased in 2007 and restored its status
s.
Average age of inventory is too long. Same slump of inventory turnover
co
m
255
Figure 73 - Operating Cycle (KTML)
not a good sign. In the year 2006, operating cycle of KTML was about 56 days which increased to 87 days in the year 2007 and further increased in the year 2008 by 8 days. viii. Total Assets Turnover
Ratio
vi rt
ua
2006
li
2007 2008 0.61 0.49 0.56
ww w.
an
s.
Operating cycle of KTML is continuously increasing since 2006. This is
co
m
256
Figure 74 - Total Assets Turnover (KTML)
assets turnover of KTML has been declined in the year 2007 from 0.61 to 0.49 and then increased to 0.56 in the year 2008. Total assets turnover seems to be satisfactory; however it needs to be compared with some industry standards.
Ratio
vi rt
ua
5) Market Ratios
2006
li
an
2007
s.
Same slump can be seen in total assets turnover of KTML too, where total
Dividend Per Share
ww w.
0.0019
0.0001
co
2008
0.000006
m
257
Figure 75 - Dividend Per Share (KTML)
Position of dividend per share is very disappointing from investors point of
Ratio
ua
2006
li
2007 2008
Earnings Per Share
vi rt
2.82
an
-0.32 -0.02
view.
ww w.
s.
There are almost no dividends paid by KTLM to its ordinary shareholders.
co
m
258
Figure 76 - Earnings Per Share (KTML)
earnings are continuously dropping over time. In the year 2006 earnings per share were 2.82 which declined to -0.32 in the year 2007. Although earnings improved. iii. Price / Earning Ratio then moved up from -0.02, however it is still negative and it needs to be
Ratio
vi rt
ua
2006
li
an
2007
s.
History of earnings per share of KTML is also very disappointing because
ww w.
13.12
-73.13
co
2008
-662.50
m
259
Figure 77 - Price/ Earnings Ratio (KTML)
KTML. In the year 2006 P/E ratio of KTML was 13.12 which then declined far below to -73.13 in the year 2007 and further moved down at the end of 2008 to 662.50. Reasons are variations in share price as well as earnings of KTML. iv. Percentage of Earnings Retained
Ratio
vi rt
ua
2006
li
an
2007
s.
There are a lot of variations in the price earning ratio (P/E Ratio) of
99.93%
100.04%
ww w.
co
2008
100.02%
m
260
Figure 78 - Percentage of Earnings Retained (KTML)
KTML. The company is almost holding 100% of its earnings to its own hands. question of dividends. It is a poor security to invest from investors point of view. v. Dividend Payout Ratio
Ratio
vi rt
ua
2006
li
2007 2008
ww w.
0.07%
an
We can see that company is continuously going into losses. So, there is no
-0.04%
s.
There are very little variations in percentage of earnings retained of
co
-0.03%
m
261
Figure 79 - Dividend Payout (KTML)
distributable to its shareholders as dividends. As we have seen that retained
vi. Dividend Yield
Ratio
ua
2006
li
2007 2008
Dividend Yield
vi rt
an
earnings ratio is about 100%. So, there are no dividends since last three years.
s.
0
Dividend payout ratio is the amount left after retained earnings
co
ww w.
m
0 262
Figure 80 - Dividend Yield (KTML)
dividend yield is also about zero since 2006. vii. Book Value Per Share
vi rt
ua
Ratio
2006
li
an
2007 2008 44.48 49.17 25.58 263
Figure 81 - Book Value Per Share (KTML)
ww w.
s.
The company has declared almost no dividends since 2006. Hence,
co
Same disappointing situation can be seen while calculating book value per share. Book value per share has been declined by 23.59 since 2008.
6) Cash Flow Ratios

i. Operating Cash Flow/ Current Maturities of Long Term Debt and Current Notes Payable
Ratio
2006
2007
2008
-0.15
-0.15
Figure 82 - Operating Cash Flow / Current Maturities of Long term Debt and Current Notes Payable (KTML)
Net cash generated from operating is negative since 2006 and it is still falling. It needs to be stopped and improved. ii. Operating Cash Flow / Total Debt
ww w.
vi rt
ua
li
an
264
s.
co
-0.00004
Ratio
2006
2007
2008
-0.03
-0.03
-0.000006
Figure 83 - Operating Cash Flow/ Total Debt (KTML)
notes payable, operating cash flow to total debt is also negative since year 2006 but it has been slightly improved in 2008 but it is still negative and pace of improvement is not satisfactory.
Ratio
ww w.
iii. Operating Cash Flow Per Share
vi rt
ua
Same like operating cash flow to current maturities of long term debt and
2006
li
an
2007 2008 Operating Cash Flow Per Share -2.14 -1.76 -0.0003 265
s.
co
Figure 84 - Operating Cash Flow Per Share (KTML)
Limited is also very disappointing. Although Operating cash flow per share is consistently improving since 2006 but it is still negative and pace of
Ratio
vi rt
ua
2006
li
2007 2008 -1089.90 -14,377.27 -51.00
improvement is too low.
ww w.
an
s.
History of operating cash flow per share of Kohinoor Textile Mills
co
m
266
Figure 85 - Operagint Cash Flow/ Cash Dividends (KTML)
going quite disappointing over time. The ratio has declined badly in 2007 from improvement is too low.
ww w.
vi rt
ua
li
an
1089 to 14377. It improved in 2008 to -51 but it is still negative and pace of
s.
Proportion of operating cash flows to cash dividends of KTML Limited is
co
m
267
Comparison with Industry Averages and Competitors Note: Due to shortage of time there may be left some discrepancies in this portion of the project.
1) Liquidity Ratios
i. Current Ratio ii. You have not described how you have taken industry averages
Formatted: Bullets and Numbering
Ratio
2006
2007
Kohinoor Textile Mills Limited
1.02
li
an
Nishat Mills Limited
1.38
1.74
s.
1.07
Industry Averages
ua
1.36
2.12
ww w.
vi rt
co
2008 1.19 1.05 3.00 268
Figure 86 Current Ratio (Consolidated)
It can be seen from above table and graph that current ratio of NML has been increased in 2007 and then reduced in 2008. Current ratio of KTML is consistently increasing but pace is very low and ratio is still below NML. ii.iii. Acid Test Ratio (Quick Ratio)
vi rt
ua
li
an
s.
Ratio
ww w.
2006
2007
0.89
1.28
co
2008 0.80
0.47
0.59
m
0.69
Industry Averages
0.70
1.33
2.24
269
Figure 87 - Acid Test Ratio (Consolidated)
From above table and graph it can be seen that quick ratio of NML has been increased in 2007 and then reduced in 2008. Quick ratio of KTML is consistently increasing but pace is very low and ratio is still below NML. iii.iv. Working Capital
vi rt
ua
li
an
s.
co
Ratio
m ww w.
Formatted Table
2006
2007
2008
2,692,287
5,659,714
2,207,913
83,821
316,016
279,649
Industry Averages
619,957
1,255,306
377,056
270
Figure 88 - Working Capital (Consolidated)
Working capital of NML is far high than KTML and industry leaders. Higher be noticed by management. Working capital should be just sufficient enough. From above graph it can be seen that working capital of NML is moving down in 2008 but it is still much higher than its competitors. Working capital of KTML is much lower than industry averages, which is also a bad signal. iv.v. Sales to Working Capital Ratio
Ratio
ww w.
vi rt
ua
2006
li
working capital is not a good sign; even it is wastage of resources, which should
an
2007
s.
2008 Nishat Mills Limited 6.19 3.04 8.73 Kohinoor Textile Mills Limited 82.36 22.59 27.03 271
co
Industry Averages
170.01
-10.58
-1.26
Figure 89 - Sales to Working Capital Ratio (Consolidated)
ratio.
2) Leverage Ratios
Ratio
ww w.
vi rt
ua
Same trend of working capital is being followed in sales to working capital
2006
li
an
2007 2008 Nishat Mills Limited 3.33 2.66 8.05 Kohinoor Textile Mills Limited 1.79 0.95 1.15 272
s.
co
Industry Averages
3.26
1.74
-186.04
Figure 90 - Times Interest Earned (Consolidated)
Times interest earned or interest coverage ratio of NML is much higher and good, whereas interest coverage ratio of KTML is just satisfactory. There is losses of Dawood Lawrencepur Limited in the year 2008. ii. Fixed Charge Coverage Ratio negative variation in interest coverage ratio of industry averages. The reason is
Ratio
ww w.
vi rt
ua
2006
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2007 2008 Nishat Mills Limited 2.62 2.18 6.86
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1.55
0.97
1.11
Industry Averages
2.29
1.51
-9.86
Figure 91 - Fixed Charge Coverage (Consolidated)
and 2007, however it has variations in 2008. Fixed charge coverage of NML has been gone up in 2008 due to increase in gain on sale of investment. Fixed charge coverage of KTML is declining consistently and maintaining its trend. Fixed charge coverage of industry leaders has been declined in 2008 a lot due to losses of Dawood Lawrencepur Limited in 2008. iii. Debt Ratio
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Fixed charge coverage of KTML, NML and industry leaders was fair in 2006
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Ratio
2006
2007
2008
0.33
0.24
0.34
0.58
0.50
0.63
Industry Averages
0.51
0.49
0.51
Figure 92 - Debt Ratio (Consolidated)
Debt ratio of industry averages has been consistent and stable since last three years. Ratio of KTML is much higher than industry averages, which is not a good sign for lenders. However, the ratio of NML is much lower, this again is not a good sign from leverage point of view. NML must add some leverage to attain economies of leverage. 275
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iv. Debt / Equity Ratio
Ratio
2006
2007
2008
0.49
0.31
0.51
1.41
1.19
2.29
Figure 93 - Debt/ Equity Ratio (Consolidated)
Debt equity ratio of KTML is mounting higher in 2008, whereas KTML is consistent and much lower than standards. NML needs to borrow more funds and debt. These additional funds may be used to start new projects. 276
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Industry Averages
1.68
1.47
1.77
Ratio
2006
2007
2008
0.49
0.31
0.51
1.41
0.99
1.71
Figure 94 - Debt to Tangible Net Worth Ratio (Consolidated)
Debt to tangible net worth of NML is below standards due to low level of liabilities. It needs to be improved by adding leverage to capital structure of
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277
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Industry Averages
1.69
1.47
1.77
firm whereas, in terms of KTML, the ratio is much higher and it needs to be reduced by paying off debts and reducing liabilities. vi. Current Worth / Net Worth Ratio
Ratio
2006
2007
2008
0.13
0.19
0.09
Industry Averages
0.10
0.22
s.
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Figure 95 - Current Worth/ Net Worth Ratio (Consolidated)
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0.02
0.04
0.06
0.16
Current worth to net worth of all companies has been declined in 2008 which may be due to economic or industry factors. However, ratio of KTML is far below standards. vii. Total Capitalization Ratio
Ratio
2006
2007
2008
0.37
0.31
Industry Averages
0.29
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0.28
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0.29
Figure 96 - Total Capitalization Ratio (Consolidated)
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0.13
0.06
0.04
0.41
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Total capitalization ratio of KTML is far more higher than NML and industry leaders. This is due to high level of debts, which is not good. Situation is opposite for NML but it is too lower and that much is lower capitalization is also not desirable. viii. Fixed Assets Ratio / Equity Ratio
Ratio
2006
2007
2008
4.98
3.88
s.
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Industry Averages
5.10
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3.31
1.61
1.65
3.96
11.15
280
Figure 97 - Fixed Assets Ratio/ Equity Ratio (Consolidated)
Fixed assets ratio/ equity ratio of NML is much lower which may be called wastage of resources whereas, KTML maintaining high ratio which is also not variation in Dawood Lawrencepur Limiteds ratio in 2008. ix. Long Term Assets Versus Long Term Debt desirable. Industry averages are showing the highest ratio which is due to
Ratio
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2006
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2007 2008 Nishat Mills Limited 6.94 14.81 22.89 Kohinoor Textile Mills Limited 2.72 3.70 3.00 281
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Industry Averages
26.25
18.96
1.65
Figure 98 - Long Term Assets Versus Long Term Debt (Consolidated)
Long term assets of KTML are consistent since 2006 but ratio is too lower. whereas, ratio NML is consistently increasing since 2006. Ratio of industry for Dawood Lawrencepur Limited (DLL) in 2008. x. Debt Coverage Ratio averages is consistently falling down since 2006, which is due to ratio of 23.58
Ratio
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2006
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1.79
0.95
1.15
Industry Averages
1.33
0.15
-271.07
Figure 99 - Debt Coverage Ratio (Consolidated)
due to variations in DLL. However, debt coverage of NML is much higher than KTML because of lower finance cost and lower debts. KTML is much lower and it needs to be improved.
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Debt coverage ratio of industry averages is also not depicting a reasonable trend
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283
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Ratio
2006
2007
2008
10.56%
7.89%
33.20%
5.14%
-0.40%
1.73%
Industry Averages
15.19%
7.23%
-13.06%
Figure 100 - Net Profit Margin (Consolidated)
ii. Return on Assets
Ratio
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2006
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2007 2008
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6.21%
3.45%
15.84%
2.96%
-0.31%
-0.03%
Industry Averages
3.74%
2.27%
-1.65%
Figure 101 - Return on Assets (Consolidated)
iii. DuPont Return on Assets
Ratio
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2006
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285
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0.03
0.00
0.00
Industry Averages
0.03
0.02
-0.02
Figure 102 - DuPont Return on Assets (Consolidated)
Ratio
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iv. Operating Income Margin
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2006
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2007 2008 Nishat Mills Limited 11.92% 12.66% 37.91% Kohinoor Textile Mills Limited 11.63% 8.06% 13.40%
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Industry Averages
15.37%
10.60%
-10.48%
Figure 103 - Operating Income Margin (Consolidated)
v. Operating Assets Turnover
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Ratio
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2006
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2007 2008 1.18 1.21 1.26 Kohinoor Textile Mills Limited 1.13 1.18 1.26 Industry Averages 0.90 1.05 1.02
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Figure 104 - Operating Assets Turnover (Consolidated)
vi. Return on Operating Assets
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Ratio
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2006
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2007 2008 11.55% 8.54% 40.08% 4.88% -0.66% -0.06% 8.10% 4.95% -14.47%
Industry Averages
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Figure 105 - Return on Operating Assets (Consolidated)
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Ratio
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2006
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2007 2008 156.90% 65.43% 80.39% 193.85% 133.32% 132.76% 160.13% 173.22% 271.15%
Industry Averages
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Figure 106 - Sales to Fixed Assets (Consolidated)
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Ratio
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2006
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2007 2008 5.74% 3.43% 16.87% 3.13% -0.20% 0.97% 4.43% 2.77% -1.72%
Industry Averages
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Figure 107 - Return on Investment (Consolidated)
ix. Return on Total Equity
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Ratio
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2006
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2007 2008 112.41% 75.80% 384.20% 28.18% -2.74% -0.24% 27.22% 20.98% -0.05%
Industry Averages
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Figure 108 - Return on Total Equity (Consolidated)
x. Gross Profit Margin
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Ratio
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2006
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2007 2008 17.76 16.56 15.41 14.80 14.64 15.38 14.67 16.61 22.93
Industry Averages
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292
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Figure 109 - Gross Profit Margin (Consolidated)
4) Activity Ratios
Ratio
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2006
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2007 2008
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17.50
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18.49 17.83 Kohinoor Textile Mills Limited 9.04 7.32 6.29 Industry Averages 4.98 4.81 4.69 293
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Figure 110 - Accounts Receivable Turnover (Consolidated)
ii. Average Collection Period
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Ratio
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2006
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2007 2008 20.86 19.74 20.47 40.39 49.83 58.02 75.04 75.97 83.13
Industry Averages
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294
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Figure 111 - Average Collection Period (Consolidated)
iii. Accounts Payable Turnover
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Ratio
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2006
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2007 2008 5.06 5.04 5.86 3.70 4.18 4.75 4.10 3.81 3.44
Industry Averages
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Figure 112 - Accounts Payable Turnover (Consolidated)
iv. Average Payment Period
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Ratio
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2006
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2007 2008 72.08 72.36 62.33 98.72 87.30 76.76 98.68 102.70 144.15
Industry Averages
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Figure 113 - Average Payment Period (Consolidated)
v. Inventory Turnover
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Ratio
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2006
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2007 2008 4.03 4.09 4.01 3.19 2.94 3.20 2.04 2.30 2.05
Industry Averages
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297
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Figure 114 - Inventory Turnover (Consolidated)
vi. Average Age of Inventory
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Ratio
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2006
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2007 2008 90.53 89.16 90.95 114.40 124.27 114.24 88.80 175.55 317.35
Industry Averages
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298
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Figure 115 - Average Age of Inventory (Consolidated)
vii. Operating Cycle
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Ratio
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2006
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2007 2008 39.31 36.54 49.08 56.07 86.80 95.49 65.15 148.82 256.34
Industry Averages
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299
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Figure 116 - Operating Cycle (Consolidated)
viii. Total Assets Turnover
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Ratio
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2006
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2007 2008 0.54 0.43 0.51 0.61 0.49 0.56 0.47 0.59 0.50
Industry Averages
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300
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Figure 117 - Total Assets Turnover (Consolidated)
5) Market Ratios
Ratio
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2006
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2007 2008
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2.47
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1.37 2.48 Kohinoor Textile Mills Limited 0.00 0.00 0.00 Industry Averages 1.67 0.44 0.47 301
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Figure 118 - Dividend Per Share (Consolidated)
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Ratio
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2006
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2007 2008 11.24 7.58 38.42 2.82 -0.32 -0.02 1249.67 2.33 0.16
Industry Averages
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Figure 119 - Earnings Per Share (Consolidated)
iii. Price / Earning Ratio
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Ratio
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2006
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2007 2008 9.96 14.65 2.33 13.12 -73.13 -662.50 -20.23 67.89 5.57
Industry Averages
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303
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Figure 120 - Price/ Earnings Ratio (Consolidated)
iv. Percentage of Earnings Retained
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Ratio
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2006
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2007 2008 0.78 0.82 0.94 1.00 1.00 1.00 0.94 0.87 0.83
Industry Averages
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304
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Figure 121 - Percentage of Earnings Retained (Consolidated)
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Ratio
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2006
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2007 2008 21.98% 18.06% 6.45% 0.07% -0.04% -0.03% 0.06% 0.13% 0.17%
Industry Averages
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Figure 122 - Dividend Payout (Consolidated)
vi. Dividend Yield
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Ratio
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2006
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2007 2008 2.21% 1.23% 2.77% 0.00% 0.00% 0.00% 0.02% 0.01% 0.01%
Industry Averages
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Figure 123 - Dividend Yield (Consolidated)
vii. Book Value Per Share
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Ratio
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2006
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2007 2008 141.78 188.78 157.38 44.48 49.17 25.58 21332.98 41.43 38.63
Industry Averages
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Figure 124 - Book Value Per Share (Consolidated)
6) Cash Flow Ratios
Notes Payable
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Ratio
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i. Operating Cash Flow/ Current Maturities of Long Term Debt and Current
ua
2006
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2007 2008 0.74 1.06 2.08 -0.15 -0.15 0.00 0.37 0.67 0.31
Industry Averages
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308
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Figure 125 - Operating Cash Flow/ Current Matutiries of Long Term Debt and Notes Payable (Consolidated)
Ratio
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2006
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2007 2008 Kohinoor Textile Mills Limited
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0.17
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0.26 0.34 -0.03 -0.03 0.00 Industry Averages 0.06 0.23 0.25 309
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Figure 126 - Operating Cash Flow/ Total Debt
iii. Operating Cash Flow Per Share
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Ratio
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2006
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2007 2008 11.73 15.10 26.92 -2.14 -1.76 0.00 521.67 5.06 0.78
Industry Averages
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310
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Figure 127 - Operating Cash Flow Per Share (Consolidated)
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Ratio
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2006
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2007 2008 4.75 11.03 10.86 -1089.90 -14377.20
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-51 Industry Averages 126.96 2857.05 1093.98 311
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Figure 128 - Operating Cash Flow/ Cash Dividends (Consolidated)
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3.
SUMMARY
The purpose of this study was to analyze the financial history of Nishat Mills
Limited (NML) and Kohinoor Textile Mills Limited (KTML) since 2006. NML and KTML are giant industries in textile industry. Data of NML and KTML has been gathered from electronic as well as hard copies of three years annual reports. Data was then processed through using Microsoft Excel. Financial history of NML and KTML has of ratio analysis, horizontal analysis, vertical analysis and trend analysis. Output of the said analysis was then compared with industry averages. There have been found significant variations and differences in financial history of the organizations under standards whereas regarding KTML, several discrepancies have been found during analysis. Being an industry leader, a sense of stability and consistency can seen in the been analyzed by applying various analytical tests and techniques, which mainly consist
analysis.
Liquidity of NML is meeting and maintaining its standards since last three years. Despite of some flaws found in liquidity of NML during analysis, there has been no are not having much impact on the health of NML because strong financials have ability to absorb the impact. From profitabilitys point of view, there has been consistency and NML is constantly profitable since last three years. With regard to liquidity position of KTML is weak and very low level of liquid assets is being maintained to meet short term obligations of the firm. As far as the leverage of KTML is concerned, balance sheet of KTML is showing figures below industry standards. KTML is highly leveraged and this excessive leverage is hampering the operations of KTML by reducing working capital, increasing finance cost and risk. A 313 major deficiency found. Leverage of NML is posing some discrepancies, however these
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operations of NML, whereas in case of KTML, several deficiencies were found during
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discussion. Analysis revealed that overall operations of NML are in accordance with
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slight stability can be seen only in operational performance of KTML. For the sake of investors, market ratios and profitability are far below industry standards and trends are continued to be going since last three years. Cash flows are also falling continuously since 2006 and same downward slopping lines can be seen in various analysis.
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4.
CONCLUSIONS/
Nishat Mills Limited:
FINDINGS
Although the general outlook of Nishat Mills Limited is very impressive, however a few observations have been found and listed hereunder: Long term financing is consistently being decreased by management since 2006, term liabilities have been increased proportionately however, total long term financing of analysts, this could be advantage for NML to reduce the cost of debt financing but this advantage is covered up by forgoing the advantages of leverage into consideration such is deductible expenses for the purpose of taxation. This is also affecting the taxation of company adversely.
Although, the company was highly profitable in 2008, however real earnings are consistently moving towards decline since 2006. This high profit is due to financial redressing i.e. gain on sale of investment has mounted the profitability of NML by about five billion in 2008. In the year 2008, the company earned net earnings of 31.86% of its total sales. If we exclude 26.26% on account of gain on sale of investment, only 5% of total sales would be left as net profit, which is 2% below previous years net profit.
Kohinoor Textile Mills Limited:

Financials history of KTML is portraying very disappointing picture of KTML. There are a lot of discrepancies and deficiencies found during analysis, which are
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as, fixed interest payment, no sharing in profits, limited life and most of all interest paid
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s.
company has been reduced to about 3% of total financing. Even in the view of some of
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which may have negative impact on capital structure of NML. In 2008, though the short
315
discussed in detail as per the requirements of this study. However, a few key observations are being listed below: Despite the fact that liquidity position of KTML have been improved in 2008, however liquidity position is still very week. In 2008, current ratio was about 1:1 which means that the company is holding just sufficient current assets to pay its current liabilities and this declining trend is continuously being followed since 2006. Same disappointing figures can be seen in quick ratio. Quick ratio for 2008 was 0.47 i.e. quick assets are half of the current liabilities of firm. It is too low to avoid to bankruptcy by meeting the day to day obligations of the firm. Working capital is too low to meet the increasing needs, which is hindering the short term as well as long term objectives of the obligations. company. The situation may also lead to insolvency if KTML is failed to pay its
Leverage of KTML is consistently increasing and there are a lot of disadvantages associated with high leverage. Long term as well as short debt is consistently being
total financing, whereas short term financing is contributing 40.53% of total financing. By adding up these both, total debt financing of KTML is contributing about 63% of total financing, while only 27.54% is being contributed by total equity. This has been increasing the liabilities of the company as well as cost of financing and this increased cost of financing will lead to decreased earnings. Moreover, this extra financing is adding nothing towards assets. There is comparatively no substantial increase in assets of the firm. Impact of this increased cost can be seen in earnings of the firm. KTML is earning gross profit of almost 15% of total sales. Out of this 15% gross profit, company has to pay a substantial percentage of 11.67% as cost of debt financing. Only 3.3% is left to bear selling, admin, taxes and other expenses, payment of which will obviously result in losses. This may adversely affect the operations of the company and hinder the objectives and mission of company.
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increased at a high pace. Until 2008, total long term financing is contributing 22.58% of
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316
Operating cash flows of KTML are consistently declining over time since 2006. This means that company is not generating enough cash. In 2008, net cash generated from operations is showing a negative figure. The company may be declared bankrupt if its lenders start claiming their funds back. The situation is continuously getting poorer every year since 2006.
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5.
RECOMMENDATIONS
Following measures are suggested for management to be taken in order to resolve
the issues, as described earlier in conclusions: Nishat Mills Limited:
Although the outlook of financials of NML is very impressive and the above said the objectives of NML in future if corrective measures are not taken by management. So,
their earnings by taking up additional loans and investing them in more profitable opportunities. More units can be deployed by using these or other more profitable add leverage to the firms capital and more profits can be earned and on the other side opportunities may be pursued by management by using these additional funds. This will
expense from profits. Kohinoor Textile Mills Limited:
mentioned in the conclusions. Even though its not too late for management to take corrective measures and restore its position in the industry. In the view of findings mentioned above, it is recommended that the company may tackle the issue of liquidity by issuing more equity capital and using those funds to pay the debts. This will solve the liquidity issues and moreover working capital will be increased, which can be used to meet operational expenditures and to generate sales. On one side it will solve the liquidity issues of company and at the same time finance cost will also be reduced. Savings from reduction of finance cost would lead to increase in earnings and it would be a good sign
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Though the discrepancies mentioned during analysis are much more than
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this will decrease the taxes being paid by firm on its earnings by deducting the interest
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s.
it is recommended that the management of NML may use this low leverage to boost-up
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findings does not look that much dangerous however, the flaws pointed out may hamper
318
for investors and other stakeholders. The earnings may be retained to boost sales and other operational synergies may also be gained by using those funds. This will also help the management to resolve the leverage issues and reduction of leverage can be maintained at some reasonable level by watching over the industry standards and objectives of management.
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6.
INTRODUCTION OF THE STUDENT

Last Degree Obtained: B.Com Organizations Name: Agribusiness Development & Diversification
Project (An umbrella project working under administrative control of Ministry of Food and Agriculture, funded by Asian Development Bank) Designation: Experience (Years): Computer Operator 5 Years
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7.
APPENDIX/

APPENDICES
Appendix A Scanned Copies of Financial Statements Appendix B Annual Reports of KTML Appendix C Annual Reports of NML Appendix D Annual Reports of Industry Leaders Appendix E Valuation of Average Market Price of Shares Appendix F Analysis
Note: Attachment of all appendices has increased the size of zip file to 68MB which Financial Statements, Appendix E Valuation of Average Market Price of Shares and Appendix F Analysis.xls is being attached with the final project, while the other
http://www.4shared.com/dir/16516314/7bfa89eb/Appendices.html, downloaded from there when required.
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appendices
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been
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is too large and it is difficult to attach it. So, only Appendix A Scanned Copies of
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8.
BIBLIOGRAPHY
Handouts on Financial Statements Analysis (FIN621), Virtual University of Pakistan Handouts on Corporate Finance (FIN622), Virtual University of Pakistan Handouts on Research Methods (STA630), Virtual University of Pakistan Annual Report 2006, Nishat Mills Limited Annual Report 2007, Nishat Mills Limited Annual Report 2008, Nishat Mills Limited Annual Report 2006, Kohinoor Textile Mills Limited Annual Report 2007, Kohinoor Textile Mills Limited Annual Report 2008, Kohinoor Textile Mills Limited
Available: http://www.textileasia.com.pk/pakistan_textile.htm Ministry of Textile Industry [On line] Available: http://202.83.164.26/wps/portal/Moti Kohinoor Textile Mills Limited [On line]
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Textile Asia 6th International Textile and Machinery Show [On line]
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Available: http://www.kmlg.com Nishat Mills Limited [On line] Available: http://www.nishatmillsltd.com Gul Ahmed Textile Mills [On line] Available: http://www.gulahmed.com Azgard Nine Limited [On line] Available: http://www.azgard9.com Dawood Lawrencepur Limited [On line] Available: http://www.dawoodlawrencepur.com Financial Ratios [On line]
Available: http://www.invest-2win.com
Available: http://www.spireframe.com/docs/financial_statement_welcome.aspx
Available: http://www.universalteacher4u.com/cbse/xii/acctheory/ch11/page2.htm Available: http://www.wikipedia.com Available: http://www.investopedia.com
Financial History and Average Market Prices of Shares [On line] Available: http://www.pkfinance.info
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Karachi Stock Exchange [On line] Available: http://www.kse.com.pk
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9.
INDEX
C
Comparisons ...........................................................187 Activity Ratios ....................................................278 Cash Flow Ratios ................................................293 Leverage Ratios..................................................258 Liquidity Ratios ..................................................255 Market Ratios ....................................................286 Profitability Ratios .............................................268
Market Ratios .................................................... 146 Profitability Ratios ............................................. 111 Ratios Summary ................................................ 162 Trend Analysis ................................................... 221 Vertical Analysis ................................................ 182
Activity Ratios...................................................... 48
Horizontal Analysis ............................................ 167 Data Collection Tools ................................................12 Data Processing and Analysis ....................................12
Liquidity Ratios .................................................... 13
Executive Summary.................................................... iv
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Market Ratios ...................................................... 70 Profitability Ratios ............................................... 34 Ratios Summary .................................................. 86 Trend Analysis ................................................... 187 Vertical Analysis ................................................ 178
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Data Collection Sources ............................................12
Leverage Ratios ................................................... 18
Horizontal Analysis..................................................167 Objectives of the Project .......................................... 10
K
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Activity Ratios ....................................................125 Cash Flow Ratios ................................................157
Ratio Analysis ........................................................... 13
Horizontal Analysis ............................................172 Leverage Ratios....................................................95 Liquidity Ratios ....................................................90 Significance of the Project ........................................ 10 Summary (Processing & Analysis)........................... 298
an
O R S
Cash Flow Ratios ................................................. 81
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325
T
Trend Analysis .........................................................187
V
Vertical Analysis ..................................................... 178
THANK YOU!
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Virtual University of Pakistan

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NISHAT MILLS LIMITED

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Submitted By MC070200272 Waseem Asghar

KOHINOOR TEXTILE MILLS LIMITED

FINANCIAL STATEMENTS ANALYSIS OF

Department of Management Sciences, Virtual University of Pakistan

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support and most of all love, the

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suggesting to take on this study and his invaluable comments.

Chughtai and Head of Department of Management Sciences

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Major objective of the study is to apply the knowledge of financial statements

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Kohinoor Textile Mills Limited......................................2 Nishat Mills Limited .......................................................4

OBJECTIVES OF THE PROJECT SIGNIFICANCE OF THE PROJECT

Ratio Analysis ...............................................................98

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Common Size Analysis.........................................167166 Comparisons .........................................................187186

SUMMARY..............................................................................313312 CONCLUSIONS/ FINDINGS ................................................315314

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Figure 9 - Debt to Tangible Net Worth Ratio (NML) ............................ 195194

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Figure 10 - Total Capitalization Ratio (NML) ........................................ 196195

Figure 8 - Debt/ Equity Ratio (NML) ..................................................... 194193

Figure 7 - Debt Ratio (NML) .................................................................. 193192

Figure 6 - Average Collection Period (NML)......................................... 192191

Figure 5 - Times Interest Earned (NML) ................................................ 191190

Figure 4 - Sales to Working Capital (NML) ........................................... 190189

Figure 3 - Working Capital (NML) ........................................................ 189188

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Figure 41 - Operating Cash Flow Per Share (NML)............................... 226225

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Figure 42 - Operating Cash Flow / Cash Dividends (NML) .................. 226225

Figure 40 - Operating Cash Flow / Total Debt (NML) ........................... 225224

Current Notes Payable (NML) ................................................................ 224223

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Figure 89 - Sales to Working Capital Ratio (Consolidated) ................... 272271

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Figure 90 - Times Interest Earned (Consolidated) .................................. 273272

Figure 88 - Working Capital (Consolidated) .......................................... 271270

Figure 87 - Acid Test Ratio (Consolidated) ............................................ 270269