Final Project

Accounting II

Mohammad Ali Jinnah University, Islamabad

Final Project of Accounting II

Fauji Cement Company Limited

Submitted By: Usman Nasir BB081020 Muhammad Hasan BB081015 Hasnain Malik BB103002 Submitted To: Sir Shujahat Haider Hashmi

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TABLE OF CONTENTS:

Dedication Acknowledgement Executive Summary

Income statement of Fauji Cement Limitedand Its Vertical Analysis Income statement of Fauji Cement Limited and Its Horizontal Analysis Balance sheet of Fauji Cement Limited and Its Vertical Analysis Balance sheet of Fauji Cement Limited and Its Horizontal Analysis

3 4 5 6 7 8 9 16

Operating Highlights

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Dedication

We dedicate this report to our highly respectable teacher Sir Shujahat Hashmi who was very kind to us and instructed us with much zeal and vigour in order to complete this report.

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Executive Summary:
In this report we are going to interpret the financial ratios of Fauji Cement Limited which is involved in manufacturing of cement. The company sale the cement inside the country and they also export to the foreign countries. First of all we collected five years data of the company. Then we collected five year data about the balance sheet of the company and then the five year data of the profit and loss statement of the company. After the collection of data we are going to do analysis of the data in vertical form and also in horizontal form and after that we are going to do the ratio analysis of the company and this data will be compared with each other through the analysis on the results of the ratios. Finally we do the conclusion of the report and paste the references from where we collect the data for the completion of report.

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INTRODUCTION

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Company Profile:
A longtime leader in the cement manufacturing industry, Fauji Cement Company, headquartered in Rawalpindi, operates cement plants at Jhang Bahtar, Tehsil Fateh Jang, District Attock in the province of Punjab. The Company has a strong and longstanding tradition of service, reliability, and quality that reaches back more than 13 years. Sponsored by Fauji Foundation the Company was incorporated in Rawalpindi in 1992.

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Fauji Cement is operating two lines of Cement Plants, one each from FLS Denmark & POLYSIUS Germany. The plants are well renowned for their high efficiencies, best quality production and are well maintained with annual total production capacity of 3.3 million tons of cement. FAUJI Cement enjoys the reputation of being the Best Quality Cement in the Country and is preferred in the construction of Mega Projects like Dams, Bridges, Highways & Motorways, Commercial & Industrial complexes, Residential Housing Societies, and a myriad of other structures needing speedy strengthening bond, fundamental to Pakistan's economic vitality and quality of life.

In addition to the Pakistan market, Fauji Cement is expanding its promising coverage in the neighboring regions /countries like Sri Lanka, India, Afghanistan, South Africa, Middle East & Africa.

Fauji Cement is ISO certified for its Quality & Environment Management Systems and has won number of awards in its category.

BOARD OF DIRECTORS
Board of Directors Lt Gen Hamid Rab Nawaz, HI (M) (Retired) Chairman Lt Gen Javed Alam Khan, HI (M) (Retired) Chief Executive / MD Mr. Qaiser Javed Director Mr. Riyaz H. Bokhari, IFU Director Brig Rahat Khan, SI (M) (Retired) Director Dr. Nadeem Inayat Director

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Final Project Brig Liaqat Ali , TI (M) (Retired) Director Brig Agha Ali Hassan, SI(M) (Retired) Director

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COMPANY SECRETARY
Brig Sajjad Azam Khan, SI (M), T Bt (Retired)

AUDIT COMMITTEE
Mr. Mohammed Faruque Mr. Iqbal Faruque Mr. Akbarali Pesnani Chairman Member Member

AUDITORS
M/s KPMG Taseer Hadi & Co, Chartered Accountants

BANKERS
ABN Amro Bank Allied Bank of Pakistan Limited Bank Al-Habib Ltd. Citibank, N.A Habib Bank Limited Muslim Commercial Bank Ltd. National Bank of Pakistan NIB - NDLC IFIC Bank Ltd. Standard Chartered Bank Ltd. Mohammad Ali Jinnah University, Islamabad 8

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Main Competitors:
DG Khan Cement Company Limited Best Way Cement Company Limited Attock Cement Company Limited Dandot Cement Company Limited Essa Cement Industries Limited

Main Customers:
IZHAR Group of Companies EMMAR Pakistan Group Of Companies PHA(Pakistan Housing Authority AL-Mujeeb Construction and developers

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HORIZONTAL AND VERTICAL ANALYSIS

Income Statement of Fauji Cement Company Limited last 4 year in (Rupees000)

FOR YEAR 2005:

Rupees 5,683,455,513 (1,397,317,143) 4,286,138,370 (2,095,027,136) 2,191,111,234 43,323,458 2,234,434,692 Distribution cost Administrative expenses (31,694,769) (66,628,627)

000 SALES Less: Government levies NET SALES Less: Cost of sales GROSS PROFIT Other operating income

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Other operating expenses PROFIT FROM OPERATIONS Finance cost NET PROFIT BEFORE TAXATION Taxation - Current - Deferred

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(94,127,471) 2,041,983,825 (264,296,874) 1,777,686,951

(21,430,692) (552,520,926) (573,951,618)

NET PROFIT AFTER TAXATION

1,203,735,333

FOR YEAR 2006:

Rupees 4,780,036 (1,316,753) 3,463,283 (2,371,788) 1,091,495 73,835 1,165,330 Distribution cost Administrative expenses Other operating expenses PROFIT FROM OPERATIONS Finance cost NET PROFIT BEFORE TAXATION Taxation (40,645) (71,302) (58,098) 995,285 (207,105) 788,180

('000) SALES Less: Government levies NET SALES Less: Cost of sales GROSS PROFIT Other operating income

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- Current - Deferred

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(17,320) (124,537) (141,857)

NET PROFIT AFTER TAXATION

646,323

FOR YEAR 2007:

Rupees'000 SALES Less: Government levies NET SALES Less: Cost of sales GROSS PROFIT Other income Distribution cost Administrative expenses Other operating expenses Finance cost NET PROFIT BEFORE TAXATION Taxation NET PROFIT AFTER TAXATION 6,953,323 (1,638,785) 5,314,538 (3,627,110) 1,687,428 190,424 (50,260) (103,186) (78,173) (224,716) 1,421,517 (413,894) 1,007,623

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FOR THE YEAR 2008:

SALES Less: Government levies NET SALES Less: Cost of sales GROSS PROFIT Other income Distribution cost Administrative expenses Other operating expenses Finance cost NET PROFIT BEFORE TAXATION Taxation NET PROFIT AFTER TAXATION

7,956,823 (2,456,785) 6,314,542 (4,439,110) 2,687,982 202,465 (89,340) (123,120) (89,140) (439,349) 2,453,271 (539,235) 11,546,875

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Vertical Analysis of Income Statements of the Fauji Cement Company:

2005 100 36.86% 80.1% 65% 79.3% 83% 2006 100 49.6% 83.2% 66.6% 75.3% 82.3% 2007 100 60.8% 80% 68.3% 76.3% 88% 2008 100 67.1% 82% 69.4% 79.3% 84.6%

Sales Cost of Goods Sold Gross Profit Operating Expenses Profit before Tax Profit after Tax

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COMMENTS ON VERTICAL ANALYSIS OF INCOME STATEMENT

As we analyze the income statement vertically we can see that the sales are steadily increasing from year to year. The COGS is also steadily increasing due to shortage of electricity and increase in fuel prices. Profit After Tax is hovering around 80 to 85% showing that Fauji Cement is performing strongly in relation to its competitors.

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Horizontal Analysis of Income Statements of the Fauji Cement Company

2005 100 100 100 100 100 100 2006 78.4% 62.3%% 82.3% 56.2% 98.3% 94.4% 2007 81.3% 65.6% 80.4% 58.3% 54.3% 87% 2008 86.3% 72.4% 81.4% 60% 65.3% 83%

Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Net Profit

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COMMENTS ON HORIZONTAL ANALYSIS OF INCOME STATEMENT

After we conduct a horizontal analysis of the income statement we can see that the sales are steadily increasing from year 2006 onwards. This shows that the Fauji Cement has an effective marketing policy and its customer base is increasing year to year. Unfortunately, the Cost Of Goods Sold (COGS) has increased considerabely in the year 2007 to 2008. This increase is due to the rising inflation in the economy and deflation of the Pakistani Rupee in the Internation market. The rising fuel costs and severe electricity shortage has also increased the cost of production. Due to increase in COGS the groos profit figure has also been effected. In the year 2007 the gross profit reduced 82.3% to 80.4%, due to increase in the COGS during these years. As we do furthur analysis we can see that other operating expenses have also increased due to the rising cost of electricity and inflation. The net profit of Fauji Cement was very good in the year 2006 but due to increase in operating expenses and COGS the increased profitability could not be maintained and thus the figure is hovering at around 80 to 85%.

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Balance Sheet of Fauji Cement Company last 4 year in (Rupees000)

2008 2005
(000) (000)

2007

2006

(000)

(000)

Assets
Cash and bank balances 2623588 5763710 5644028 5897394

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Final Project Due from financial institutions 18108000 8850000 3700000

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Investments 1429053

14286949

10535186

2877554

Operating fixed assets

1880515

1032963

531262

204737

Other assets 1349184

4123441

2810494

2266522

Total assets 19697390

85276070

67178559

46438623

Liabilities

Bills payable

1057017

1192160

563228

196145

Due to other institutions 2862139

4008496

2415606

4285212

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Deferred tax liabilities

453038430377398304

769631

Other liabilities 286

3548666

2851407

1979079

Net assets 2098382

5974978

5706656

4763359

Presented by:

Share capital 1346017

4925961

3779897

3779897

Reserves

845022720785528085

256578

Unappropriated profits5701141219228

448427

258325

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Horizontal Analysis on Balance Sheets of the Fauji Cement Company:

2008 2004
(%) (%)

2007

2006

(%)

(%)

Assets

Cash and bank balances 100

207

204

208

Investments 100

999

737

204

Operating fixed assets 100

922

506

260

Other assets 100

307

210

169

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Liabilities

Due to other institutions 100

140

84

150

Deferred tax liabilities 100

59

56

52

Other liabilities 000

242

195

135

Net assets 100

286

273

228

Presented by:

Share capital 100

367

281

281

Reserves 100

330

281

206

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Unappropriated profits221

472

174

100

COMMENTS ON HORIZONTAL ANALYSIS OF BALANCE SHEET

Horizontal analysis of balance sheet shows that the cash and bank balances of Fauji Cement increased in year 2005 and then to year 2006 but in the year 2007 and year 2008 these balances remain almost stable.

The figure of investments also show remarkable increase from year to year which shows that Fauji Cement is trying not to keep its funds idle. The amount of financing also increased from the year 2005 to year 2008 continuously which is a healthy sign.

The amount of operating fixed assets is increased continuously which is the evidence that Fauji Cement is increasing its current output capacity in order to produce more cement so that greater demand is accomodated.

Other assets of the Fauji Cement are increasing at a regular pace from year 2005 to year 2008 which shows that the management is fully aware of the emerging requirements of its business and is expanding accordingly.

The amounts due to other institutions is increased up to year 2006 but in the year 2007 this amount is decreased to 84 % of that of year 2004 but in year 2008 this amount is increased

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again to 140 %. Overall this situation shows that Fauji Cement is relying on its own funds rather than borrowing from other institutions.

The amount of net assets i.e. total assets less liabilities, on the whole is satisfactory because this figure is increased from year 2005 to year 2008. in year 2008 this figure is 286 % to that of year 2005 which shows that the net assets have satisfactorily increased.

During all these years, Fauji Cement arranged capital by issuing extra shares from time to time. The situation of reserves and unappropriated profits is also satisfactory and shows that Fuji Cement has saved sufficent amount of reserves for future invesment in infastructure.

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Vertical Analysis on Balance Sheets of the Fauji Cement Company:

2008 2005
(%) (%)

2007

2006

(%)

(%)

Assets
Cash and bank balances 13.31 6.75 8.40 12.68

Investments 7.21

16.74

15.68

6.18

Operating fixed assets 1.02

2.20

1.53

1.14

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Final Project Other assets 6.80 4.83 4.18 4.86

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Liabilities

Due to other institutions 14.53

4.69

3.59

9.22

Deferred tax liabilities 3.86

0.53

0.64

0.84

Other liabilities 0.00

4.15

4.24

4.24

Net assets 10.65

7.00

8.50

10.26

Presented by:
Share capital 6.81 5.77 5.61 8.12

Reserves 1.27

0.98

1.07

1.12

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Unappropriated profits0.67

1.80

0.95

1.27

Total Assets 100

100

100

100

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COMMENTS ON VERTICAL ANALYSIS OF BALANCE SHEET

In the year 2005, the cash and bank balances were 13.3 percent of the total assets. Similarly the amount of investments was 7.21 percent, operating fixed assets were 1.02 percent and the other assets were only 6.80 percent..

The balance due to other institutions was 14.53 percent and the deferred tax liability was 3.86 percent.

In the year 2005, the cash and bank balances, investments, operating fixed assets, and other assets show a little improvement on the whole but the amount of financing could not be improved very much.

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Ratio Analysis:
Key Indicators Operating Gross Profit Margin Operating Profit Margin Pre Tax Margin Performance Return on total assets Total Assets turnover Fixed Assets turnover Return on Paid up Share Capital Leverage Debt Equity Ratio Current Ratio Quick Ratio Valuation Earnings per share (basic) Market Price per share (average) Rs 19.38 20.09 16.06 6.49 Rs 3.21 1.73 0.85 1.43 Times Times Times 0.60 1.25 1.13 0.38 1.35 1.23 0.09 2.16 2.06 0.40 % Times Times % 19.42 0.69 0.97 28.70 10.10 0.54 0.81 15.41 3.32 0.28 0.50 5.57 4.70 0.25 0.28 13.58 % % % 51.12 47.64 60.48 31.52 50.74 54.76 26.7 52.96 50.82 31.75 56.45 53.75 2005 2006 2007 2008

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INTERPRETATION OF RATIO ANALYSIS: GROSS PROFIT MARGIN: Gross profit margin accesses the firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. The analysis shows that the GP is increasing over the years and therefore Fauji Cement has excess revenues for its future operations. OPERATING PROFIT MARGIN: Operating margin is used to measure company's pricing strategy and operating efficiency. It gives an idea of how much a company makes (before interest and taxes) on each dollar of sales. The data shows that the operating margin of Fauji Cement is increasing over the years, therefore the management of the company is operating efficently. PRETAX PROFIT MARGIN: The Pretax Margin measures how well a company can generate before-tax profits at the current level of sales. The analysis of this data shows that the pretax margin of Fauji Cement is decreasing over the years. This is a bad sign for the Fauji Cement because this shows that the operational costs of the company are high. RETURN ON ASSETS (ROA): ROA gives an idea as to how efficient management is at using its assets to generate earnings. The analysis shows that the ROA is decreasing which is not a good sign for the company. It shows that the company is not utilizing its assets (machinery and manufacturing plant) to manage production. DEBT TO EQUITY RATIO: This ratio indicates what proportion of equity and debt the company is using to finance its assets. The analysis shows that this ratio is decreasing. This means that the company is not aggressive in financing its growth with debt. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing.

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CURRENT RATIO: Current Ratio is a liquidity ratio that measures company's ability to pay its debt over the next 12 months or its business cycle. The analysis shows that the current ratio is increasing over the years. A high current ratio indicates safe liquidity. QUICK RATIO: Quick Ratio is an indicator of company's short-term liquidity. It measures the ability to use its quick assets (cash and cash equivalents) to pay its current liabilities. The analysis shows that Fauji Cement has ratio of around 1 for the first two years but in the third year the quick ratio has increased which is a bad sign and shows that Fauji Cement has excess levels of inventory. EARNINGS PER SHARE: The earnings per share is a good measure of profitability and when compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm. The analysis shows that the EPS is decreasing and this is a bad sign for the company. PRICE EARNING RATIO: A valuation ratio of a company's current share price compared to its per-share earnings. The analysis shows that price earnings ratio for the year 2005 and 2006 are higher than 2007 and 2008. This means that investors are losing confidence in the company and they are willing to pay much less for per rupees of earnings.

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GRAPHS OF RATIOS: Gross Profit Margin:

Operating Profit Margin:

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After Tax Margin:

Return on total assets:

Total Assets turnover:

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Return on Paid up:

Current Ratio:

Debt Equity Ratio:

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Earnings per share:

Market Price per share:

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CONCLUSION: After we analyzed the ratios of the company and did a vertical and horizontal analysis of its income statements and balance sheet we conclude that Fauji Cement needs to improve its management because its return on assets show that the company is not utilizing its assets efficently. Although the sales are increasing over the years but other factors such as Operating profit margin plays an important part. In view of the increasing inflation in the economy the COGS of the company is obviously increasing. Fauji Cement needs to lower its COGS by introducing JIT inventory systems and others operations management principles. Fauji Cement has enough resources to pay its debts and the situation is satisfactory. Fauji Cement needs to lower its operating expenses because if these are high than the profits are reduced greately. The debt to equity ratio shows that the firm is not following an aggressive financing policy for its growth. Only in the year 2008 onwards its debt to equity ratio has increased showing that the company is using more debt to finance its growth. In our opinion the company needs to adopt aggressive debt financing policy. To conclude we would advice the company to increase its sales by reducing its COGS and adopting a aggressive debt financing policy.

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