THE FINANCIAL PERFORMANCE OF PADMA OIL COMPANY LIMITED AND MEGHNA PETROLEUM LIMITED: A COMPARATIVE STUDY
The Financial Performance of Padma Oil Company Limited and Meghna Petroleum Limited: A Comparative Study (Submitted as a partial requirement for MBA program)
Submitted to:
Submitted by:
Prof. Sowkatul Meher
Mohammed Khairul Bashar
Dean
ID 777-G10-15
Business Administration Southern University Chittagong
Date of Submission: December 30, 2010
Letter of transmittal To Prof. Sowkatul Meher Dean Business Administration Southern University Bangladesh. Subject: Submission of Report Sir, With great pleasure & humble submission, I am submitting my report about the comparative Financial Performance of Padma Oil Company Limited and Meghna Petroleum Limited. While making this report I came across many obstacles and difficulties but at the same time it was my great pleasure to experience many interesting and important things about the oil sector. I take great pleasure in informing you that I have completed my report on the topic “The Financial Performance of Padma Oil Company Limited and Meghna Petroleum Limited: A Comparative Study” that was assigned to me as an essential requirement for the completion of Masters in Business administration degree.
I hope you will accept this report and oblige me thereby. Sincerely yours.
Mohammed Khairul Bashar Id: 777-G10-15
Acknowledgement First of all I would like to thank Allah, the supreme authority of the universe. In the process of preparing this report I came across many obstacles. However I was very fortunate to get the help of some individuals to overcome them. I would like to thank my colleagues and seniors of Padma Oil Co. Ltd. for their selfless support and help. I would specially acknowledge the help of Mr. Mohammed Hashem, Deputy Manager of Padma Oil Company Ltd. Moreover, I would like to thank Mr. Mohammed Sadek, Deputy Manager of Meghna Petroleum Ltd. for providing me with specific information which was necessary for the report. Last but not least, I sincerely offer my gratitude to my supervisor Mr. Prof. Sowkatul Meher, Dean, Business Administration, Southern University, for his generous supervision and guidance without which it would not be possible for me to prepare this report.
Table of Contents Executive Summary 1.0 Introduction
02
1.1 Origin of the report
03
1.2 Objective of the study
04
1.3 Scope of the study
04
1.4 Methodology
04
1.4.1 Research design
04
1.4.2 Data collection
05
1.4.3 Data analysis and interpretation
05
1.5 Limitation
07
2.0 Company overview 2.1 Padma Oil Company Limited
09 09
2.1.1 Company Profile
09
2.1.2 Company History
10
2.2 Meghna Petroleum Limited
11
2.2.1 Company Profile
11
2.2.2 History
12
3.0 Literature Review
14
4.0 Financial Statement Analysis
16
4.1 Financial statements 4.1.1 Balance sheet
16 17
4.1.1.1 Padma Oil Company Limited
17
4.1.1.2 Meghna Petroleum Limited
18
4.1.2 Income Statement
19
4.1.2.1 Padma Oil Company Limited
19
4.1.2.2 Meghna Petroleum Limited
20
4.1.3 Cash Flow Statement
21
4.1.3.1 Padma Oil Company Limited
21
4.1.3.2 Meghna Petroleum Limited
22
4.2 Findings and Analysis 4.2.1 Comparative Trend and Ratio Analysis
23 23
4.2.1.1 Liquidity Ratios
23
4.2.1.2 Profitability Ratios
26
4.2.1.3 Market Measures
30
4.2.1.4 Capital Structure & Solvency
33
4.2.2 Cash flow Analysis
34
5.0 Conclusion
38
Bibliography
39
List of Figures Figure 01: Current Ratio
24
Figure 02: Quick Ratio
25
Figure 03: Net working Capital
26
Figure 04: Gross Earnings of POCL and MPL (in 000s)
27
Figure 05: Net Profit Margin
27
Figure 06: Return on Assets
28
Figure 07: Net Profit Amount (in 000s)
29
Figure 08: Total assets (in 000s)
29
Figure 09: ROE
30
Figure 10: EPS
31
Figure 11: P/E ratio
32
Figure 12: Dividend Yield
32
Figure 13: Debt to Equity Ratio
33
Figure 14: Closing Balance (in 000s)
34
Figure 15: Net cash Flow (in 000s)
34
Figure 16: Net cash outflow in investing activities
35
Figure 17: Operating expense payment without income tax
36
Executive Summary
Padma Oil Company Limited (POCL) and Meghna Petroleum Limited (MPL) are two big oil marketing companies of Bangladesh. This report offers a comparative analysis of the financial performance between these two companies. Financial statement analysis was done through ratio and trend analysis which present some fine scope for comparison. Comparison is done on matters like profitability, liquidity and other financial aspects. Profitability condition analysis surely speaks in favor of MPL as it has higher average net profit, net profit margin, ROA and ROE for last few years. On the other hand POCL, in spite of having comparatively higher total assets performs lower. So MPL is more profitable. Current and quick ratios for both the companies are poor. Though MPL has a higher current ratio, POCL has a higher average quick ratio suggesting its better liquidity condition. However a more deep analysis on the cash flow statements suggests that MPL has a more stable but lower liquidity position. POCL on the other hand, is having some cash crisis recently. Both the companies have no considerable long term debt which makes them less prone to financial risk and dependant on equity. In terms of market presence, MPL is newbie as it was listed in 2007, which makes it difficult to compare it with more established listed company POCL in terms of market measures. However POCL has a healthy and increasing EPS but declining P\E ratio; whereas MPL shows good performance over its short life on stock market. Higher debt-to-equity risk suggests POCL has more dependency on debt. Overall MPL is performing better than POCL financially.
viii
Chapter 01
1.0
Introduction
Bangladesh Petroleum Corporation is a statutory organization under Petroleum and Mineral Resources Division, Ministry of Power, Energy and Mineral Resources, Government of People's Republic of Bangladesh. This corporation was established in the year 1977 for the purposes of import, refining and processing of crude petroleum, blending of lubricants, export and marketing of petroleum products including by-products and lubricants. At present it has 3 (three) oil marketing companies, 2 (two) blending plants, 1 (one) LPG bottling company and a refinery as its subsidiaries. The position of the corporation in relation to these companies is similar to that of a holding company. BPC has 7 (Seven) subsidiary companies of which there are 3 (three) Oil Marketing Companies, 1 (one) Refinery, 1 (one) LP Gas Plant and 2 (two) Lube Blending Plants. Company-wise share of BPC are as under: Capital (Tk. in crore ) Name of subsidiaries
Ownership Authorized
Paid-up
500.00
33.00
100.00
29.40
300.00
45.00
70% BPC 30% Others
400.00
40.00
100% BPC 30% Others
50.00
10.00
100% BPC
Refinery 1. (a) Eastern Refinery Limited (ERL)
erl.gov.bd
100% BPC
Oil Marketing Companies
2. Padma Oil Company Limited(POCL) pocl.gov.bd 3. Jamuna Oil Company Limited (JOCL)
jamunaoil.gov.bd
4. Meghna Petroleum Limited (MPL) mpl.gov.bd 5. LP Gas Limited (LPG)
50.35% BPC 49.65% Other
Page 2
Lube Blending Plants 6. Eastern Lubricants Blenders Limited (ELBL) 7.Standard Asiatic Oil Company Limited (SAOCL)
1.00
0.99
59.32% BPC 40.68% Others
0.50
0.50
50% BPC 50% Private
saocl.com
1.1 Origin of the report: The report is tilted “The Financial Performance of Padma Oil Company Limited and Meghna Petroleum Limited: A Comparative Study”. The research is done as a part of the MBA internship program of Southern University, Bangladesh. It has been prepared under the supervision of honorable teacher Mr. Prof. Sowkatul Meher. Padma Oil Company Ltd. and Meghna Petroleum Ltd are two oil marketing companies under Bangladesh Petroleum Corporation. Padma Oil Company Limited is not only the biggest but also the oldest with its antecedents stretching well back to the colonial period of British-India. Its ancestral enterprise “ Rangooon Oil Company “ established petroleum business in this part of the world by the middle of nineteenth century. Meghna petroleum Limited has been serving the nation for the last four decades through marketing of petroleum products. It was set up on December 27, 1977 as a private limited company with the objectives of taking over all the physical possession of fixed assets of the erstwhile Meghna Petroleum Marketing Company Limited and Padma Petroleum Limited as on March 31, 1978. Oil sector in Bangladesh is a very unique industry. As part of its operation is government regulated (ex. Selling price) the companies’ operation is a bit different than other companies. A comparative study of the companies’ financial performance can reveal a lot about this unique sector.
Page 3
1.2 Objective of the study: It is mandatory to have few objectives to make a work successful. From the very beginning of the study, I tried to conduct the research with a view to achieve some specific objectives. The objectives of the report are given below: 1. To analyze the financial statements of the companies through the a. Trend analysis b. Ratio analysis 2. Compare the financial performance of two companies based on the analysis.
1.3 Scope of the study: The research provided me a clear idea about implication of financial terms. The scope of the study is limited within the company and its financial data and performance.
1.4 Methodology The chronological selection of methods for a particular research is called research methodology. The methods I selected for my research are given below:
1.4.1 Research design The research done is descriptive research because this research describing the information which is taken from the last 3 years annual reports from the Padma Oil Company Limited and Meghna Petroleum Limited. As the data has been collected from secondary sources like company financial report for that the research is based on observation of the financial data from the annual report. The research is quantitative research as the analyzed data are absolute data (net income, debt, equity, earnings per share, etc.)
Page 4
1.4.2 Data collection For completing my research, describing the reason behind the problem and fulfilling the objectives data has been collected from the secondary sources. The secondary sources information is taken mainly from the last three years’ annual reports of Padma Oil Company Limited and Meghna Petroleum Limited.
1.4.3 Data analysis and interpretation Data has been analyzed and interpreted using the financial indicators, financial ratios, references and personal judgment. I also used some graph to analyze my findings. To complete this research paper however the selected indicators are given below: Current ratio: The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities. Quick ratio: An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio betters the position of the company. Net working capital ratio: A measure of both a company's efficiency and its short-term financial health. Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its shortterm liabilities with its current assets (cash, accounts receivable and inventory). Return on Assets: Return on assets measures a company’s earnings in relation to all of the resources it had at its disposal (the shareholders’ capital plus short and long-term borrowed funds). Thus, it is the most stringent and excessive test of return to shareholders. If a company has no debt, the return on assets and return on equity figures will be the same. Return on Equity: The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
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Earnings per share: The earnings per share ratio are mainly useful for companies with publicly traded shares. Most companies will quote the earnings per share in their financial statements saving you from having to calculate it yourself. By itself, EPS doesn't really tell you a whole lot. But if you compare it to the EPS from a previous quarter or year it indicates the rate of growth a company’s earnings are growing (on a per share basis). P/E ratio: a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects. Dividend yield: The dividend yield ratio allows investors to compare the latest dividend they received with the current market value of the share as an indicator of the return they are earning on their shares. Net asset per share: An expression for net asset value that represents a fund's (mutual, exchange-traded, and closed-end) or a company's value per share. It is calculated by dividing the total net asset value of the fund or company by the number of shares outstanding. Dividend: A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Return on shareholders’ fund: The Return on Shareholders’ Funds (ROSF) ratio has historically been used by industry investors as a measure of the profit for the period which is available to the owner’s stake in a business. The Return on Shareholders’ Funds ratio is therefore a measure of profitability.
Page 6
Report Methodology Diagram: Collecting Financial Statements
Balance Sheet
P&L Statement
Ratio & Trend Analysis
Cash Flow Statement
Cash Flow Analysis
Comparing the financial performance
1.5 Limitation: I came across certain limitation while preparing this internship report. They are stated below: It was impossible for me to collect some data because of the confidential issue. I had to depend on the data of the head office. As I am a full time working employee, it was not possible for me to prepare the report as I intended due to time shortness. As Meghna Petroleum Ltd. was listed as a public company in 2007, I had only two years’ data on this company on market measures. Poor online presence of both the companies.
Page 7
Chapter 02
2.0 Company overview 2.1 Padma Oil Company Limited 2.1.1 Company Profile The main headquarter of Padma Oil Company Limited is situated at Strand Road in Chittagong city of Bangladesh. It distributes petroleum products to whole Bangladesh from its main installation, which situated in Chittagong at Guptahal, Patenga. Here is the company summary, which will help anyone to introduce about the company in a short time.
Corporate Headquarter
Padma Bhaban, Strand road Chittagong - 4000, Bangladesh.
Resident Office
6 Paribagh Dhaka, Bangladesh
Main Installation
Guptahal, Patenga, Chittagong, Bangladesh.
Year of Incorporation
27 April 1965
Business Line
Procuring, Storage and marketing of petroleum products, lubricants and greases, bitumen and LPG. Manufacturing and Marketing of Agro chemicals. Dhaka Stock Exchange.
Stock Exchange Listing
Chittagong stock Exchange.
Authorized capital
100 million taka
Paid up capital
49 million taka
Number of shares
4,900,000
Number of shareholders
2,188
Number of employee
949
Page 9
2.1.2 Company History Like every successful company, this company also has a glorious history to establish itself as a leading oil company. Here is the history of Padma Oil Company limited. Padma oil company Limited is not only the biggest but also the oldest company from the colonial period of British-India. In 1871, “Rangoon Oil Company” was registered as joint stock Company in Scotland having its main business activities in Burma. In 1881, the name was changed to Burma Oil Company. Burma Oil Company established their “ Moheshkhali Oil Installation” at Chittagong in the year 1903. M/S Bullock brothers (A major distributor of Burma Oil Company) established their trading office at Shadar ghat in Chittagong, Bangladesh. In the 1929, Burma Oil Company took over the office of Bullock Brothers at Sadargat, Chittagong and established it as their head office. In 1947, Burma Oil Company & Burma Shell oil storage & Distribution Company were operating
Petroleum
business
in
the
area
what
now
comprise
Bangladesh.
Burma shell established Aviation depot was at Tejgaon Airport in 1948. In 1965, Burma shell transferred their share to BOC and “Burma Eastern Limited” was formed with 49% share of BOC. The rest portion of ht e share was issued to public & private individual of Pakistan. In 1977, it became a subsidiary of Bangladesh Petroleum Corporation. In 1985 BOC transfer their share to BPC and the company name was changed as “Padma Oil Company limited”. The name was changed to Padma Oil Company limited from 3rd September 1988 and its shares are listed with both the Chittagong and Dhaka stock exchange.
Page 10
2.2 Meghna Petroleum Limited 2.2.1 Company Profile Meghna Petroleum Limited started its journey with an Authorized Capital and Paid-up capital of Tk. 100 million and Tk. 50 million respectively. The company was converted to Public limited company from private limited company on 29 May, 2007 and its authorized capital was increased to Tk. 4000 million. On 27 August, 2007 the paid-up capital of the company was increased to Tk. 400 million by issuing Bonus Share. The company was enlisted with DSE and CSE on 14 November 2007 and 2nd December 2007 respectively with a view of off-load of 1.2 crore shares under direct listing procedure. On 14 January 2008 the shares of the company were off-loaded in the two capital market. At present there is a Board of Directors comprising of 9 members to run the company. The overall activities of the company are performed with the approval of the Board of Directors. Corporate Headquarter
58-59, Agrabad C/A, Chittagong-4100, Bangladesh
Resident Office
Meghna Bhaban, 131, Motijheel C/A, Dhaka, Bangladesh
Main Installation
Guptahal, Patenga, Chittagong, Bangladesh.
Year of Incorporation
27 December 1977
Business Line
Procuring, Storage and marketing of petroleum products, lubricants, Bitumen, LPG & Battery Water. Dhaka Stock Exchange.
Stock Exchange Listing
Chittagong stock Exchange.
Authorized capital
400 Crore taka
Paid up capital
44 Crore taka
Number of employee
411
Page 11
2.2.2 History Meghna petroleum Limited has been serving the nation for the last four decades through marketing of petroleum products. It was set up on December 27, 1977 as a private limited company with the objectives of taking over all the physical possession of fixed assets of the erstwhile Meghna Petroleum Marketing Company Limited and Padma Petroleum Limited as on March 31, 1978. Meghna Petroleum Marketing Company Limited was created after acquiring the operation of the then ESSO Eastern Inc. (1962) of America in 1975 and Padma Petroleum Limited was created in 1972 after acquiring the operation of the then Dawood Petroleum Limited (1968). In the year 1976 the assets and liability of the company were transferred and handed over to Bangladesh Petroleum Corporation (BPC) as per BPC Ordinance no. LXXXVIII. Since then Meghna Petroleum Limited has been functioning as a subsidiary of BPC.
Page 12
Chapter 03
3.0 Literature Review Peeler J. Patsula, on January 23, 2006 in his article “successful business analysis” tries to define that, a sound business analysis tells others a lot about good sense and understanding of the difficulties that a company will face. We have to make sure that people know exactly how we arrived to the final financial positions. We have to show the calculation but we have to avoid anything that is too mathematical. A business performance analysis indicates the further growth and the expansion. It gives a physiological advantage to the employees and also a planning advantage. Chidambaram Rameshkumar, Dr. N. Anbumani on February 2, 2006 in his article “An overview on financial statements and ratio analysis” argue that Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry. To do this compare your ratios with the average of businesses similar to yours and compare your own ratios for several successive years, watching especially for any unfavorable trends that may be starting. Ratio analysis may provide the all-important early warning indications that allow you to solve your business problems before your business is destroyed by them. Susan Ward on May 1, 2008 in his article “Financial Ratio Analysis for Performance Check” emphasis that financial analysis using ratios between key values help investors cope with the massive amount of numbers in company financial statements. For example, they can compute the percentage of net profit a company is generating on the funds it has deployed. All other things remaining the same, a company that earns a higher percentage of profit compared to other companies is a better investment option. Jonas Elmerraji on April 2005 in his article “Analyze Investments Quickly With Ratios” tries to say that ratios can be an invaluable tool for making an investment decision. Even so, many new investors would rather leave their decisions to fate than try to deal with the intimidation of financial ratios. The truth is that ratios aren't that intimidating, even if you don't have a degree in business or finance. Using ratios to make informed decisions about an investment makes a lot of sense, once you know how use them. `
Page 14
Chapter 04
4.0 Financial Statement Analysis As both the companies are oil marketing companies their operations and activities are quite similar. Financial statements are always great or sometimes the only tools to analyze or measure the performance of an organization. In my report I tried to analyze the performance of these two companies through the analysis of their balance sheet, profit & loss account or income statement and cash flow statements of last 3 years. These statements were used to do some trend and ratio analysis which revealed the comparative performance of the two.
4.1 Financial statements For our convenience at first we have to have a look at the statements. All the three financial statements offer different significance. The balance sheet or financial position of the company at particular date is like a snapshot of the company’s financial position. It is a very important tool as it holds a lot of important information about the company. The income statement is the financial statement of significant importance to the shareholders or owners because it shows the profitability condition of the company. Cash flow statement as its name suggests stands as a tool to show the liquidity condition of the company. A mix of trends and ratios can be brought up from these statements which are essential for the report. First, let us have a quick peep at the statements.
Page 16
4.1.1 Balance sheets 4.1.1.1 Padma Oil Company Limited
Sources of Fund Shareholders’ Funds Share capital Reserves and surplus Deferred Tax Total Funds Uses of Fund Fixed Asset- At cost Less accumulated depreciation Capital work in progress Current Asset Inventories Debtors Due from affiliated companies Advance deposit and pre-payments Income tax receivable Cash and Bank Balance Less: Current Liabilities Liabilities for trading supplies and services Liabilities for supplies and expenses Due from affiliated companies Liabilities for other finance Other Liabilities Liabilities for dividend Provision for income tax Net current assets
30-Jun-09
Taka in 000 30-Jun-08
30-Jun-07
98,000 1,671,931 1,769,931 47,369 1,817,300
49,000 1,293,957 1,342,957 42,263 1,385,220
49,000 1,059,772 1,108,772 40,917 1,149,689
889,957 461,211 428,746 48,693
748,493 419,124 329,369 99,221
709,092 382,618 326,474 112,394
5,245,777 957,264 16,972,006 110,212 154,640 3,360,084 26,799,983
3,547,217 6,793,459 12,784,821 102,611 154,640 3,466,826 26,849,574
5,646,558 8,193,653 13,425,807 89,064 137,795 2,091,817 29,584,694
1,498,462 3,539,902 19,691,811 651,106 50,723 6,646 21,472 25,460,122 1,339,861 1,817,300
1,222,574 2,001,577 21,958,676 674,170 30,207 5,740
1,494,108 23,181,250 563,380 24,248 5,157
25,892,944 956,630 1,385,220
28,873,873 710,821 1,149,689
3,605,730
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4.1.1.2 Meghna Petroleum Limited
Sources of Fund Shareholders’ Funds Share capital Proposed issue of bonus share Reserves and surplus Employees' gratuity Deferred Tax Total Funds Uses of Fund Fixed Asset- At cost Less accumulated depreciation Capital work in progress Investment Current Asset Inventories Debtors Advance deposit and pre-payments Cash and Bank Balance Less: Current Liabilities Creditors workers' profit participation fund & WF Liabilities for dividend Provision for income tax Net current assets
30-Jun-09
Taka in 000 30-Jun-08
30-Jun-07
440,000 22,000 763,995 1,225,995
400,000 40,000 580,913 1,020,913
104,500 295,500 339,531 739,531
151,935 35,560 1,413,490
145,828 31,527 1,198,268
117,684 27,367 884,581
370,618 2,356 372,974 4,585
365,342 13,974 379,316 4,585
299,102 49,832 348,934 4,585
5,762,046 5,333,329 176,462 1,071,800 12,343,637
3,442,173 7,042,123 231,052 789,954 11,505,302
5,267,737 4,578,569 160,903 723,686 10,730,896
11,047,272 26,938 276,000 -42,504 11,307,706 1,035,932 1,413,491
10,448,893 27,992 180,000 34,050 10,690,935 814,367 1,198,268
10,032,718 17,977 108,500 40,638 10,199,833 531,062 884,581
Page 18
4.1.2 Income Statement 4.1.2.1 Padma Oil Company Limited
Earning on petroleum products Cost on Petroleum Products Packing Charges Handling Charges
Net Operational gain Net earnings on petroleum products Overheads Administrative, selling and distribution expanse Interest-through BPC Trading Profit on Petroleum Add: Other operating income Operating Profit on petroleum trading Add: Operating profit on Agro-chemical trading Total Operating Profit Add: Other Non-operating Income Net profit Less: Contribution to workers Profit Participation and welfare fund @5% on net profit Net profit before income tax Less: Provision for income tax Current tax Deferred tax Net profit after tax transferred to Reserve and surplus Earnings per Share (EPS)
Taka in 000 30-Jun-09 30-Jun-08 977,866 820,849
30-Jun-07 729,322
(36,172) (5,246) (41,418) 936,448 46,199 982,647
(26,089) (6,238) (32,327) 788,522 67,330 855,852
(18,315) (5,881) (24,196) 705,126
(550,040) (80,034) (630,074) 352,573 205,940 558,513 95,497 654,010 285 654,295
(590,753) (85,360) (676,113) 179,739 73,440 253,179 107,500 360,679 3,038 363,717
(450,627) (83,592) (534,219) 170,907 51,825 222,732 42,374 265,106 42 265,148
32,715 621,580
18,186 345,531
(13,255) 251,893
165,000 5,106 170,106
110,000 1,346 111,346
(66,670) (8,897) (75,567)
451,474 234,185 46.0687755 47.7928571
176,326 35.98
705,126
Page 19
4.1.2.2 Meghna Petroleum Limited
Earning on petroleum products Expenses Selling, Distribution and Administration Interest / Financing Charges Depriciation / Amortization Net Operational gain Total Operational expenses Trading Profit / (Loss) Other Income Net profit Less: Contribution to workers Profit Participation and welfare fund Net profit before income tax Less: Provision for income tax Current Tax Deferred Tax Net profit after tax transferred to Reserve and surplus Earnings per Share (EPS)
Taka in 000 30-Jun-09 30-Jun-08 583,468 775,835
30-Jun-07 566,897
(246,046) (81,403) (44,927) (372,376) 37,690 (334,686) 248,782 289,972 538,754
(257,472) (71,496) (41,783) (370,751) 43,900 (326,851) 448,984 110,849 559,833
(239,750) (85,207) (34,614) (359,571) 23,413 (336,158) 230,739 128,800 359,539
(26,938) 511,816
(27,992) 531,841
(17,977) 341,562
(126,700) (4,033) (130,733)
(146,300) (4,160) (150,460)
(102,469) (27,367) (129,836)
381,083 8.66
381,381 9.53
211,726 20.26
Page 20
4.1.3 Cash Flow Statement 4.1.3.1 Padma Oil Company Limited Taka in 000 30-Jun-09 A. Cash Flow From Operating Activities Collection from Gross Earnings and Other Income Payment for cost and Other Expenses Income tax paid Net cash inflow from operating activities B. Cash flow from investing activities Capital Expenditure Net cash used in Investing activities C. Cash Flow From Financing Activities Dividend Paid Net cash used in Financing Activities Total (A+B+C) Opening cash and bank balances closing cash and bank balances
30-Jun-08
30-Jun-07
76,053,093 (75,901,695) (143,528) 7,870
2,322,749 (761,768) (126,845) 1,434,136
1,037,067 (600,231) (75,097) 361,739
(91,017) (91,017)
(30,310) (30,310)
(48,651) (48,651)
(23,595) (23,595) (106,742) 3,466,826 3,360,084 (106,742)
(28,817) (28,817) 1,375,099 2,091,817 3,466,826 1,375,009
(28,913) (28,913) 284,175 1,807,642 2,091,817 284,175
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4.1.3.2 Meghna Petroleum Limited Taka in 000 30-Jun-09 A. Cash Flow From Operating Activities Collection from Gross Earnings and Other Income Payment for cost and Other Expenses Income tax paid Net cash inflow from operating activities B. Cash flow from investing activities Capital Expenditure Net cash used in Investing activities C. Cash Flow From Financing Activities Dividend Paid Interest Received Net cash used in Financing Activities Total (A+B+C) Opening cash and bank balances closing cash and bank balances
30-Jun-08
30-Jun-07
751,614 (294,744) (203,254) 253,616
676,946 (388,949) (152,889) 135,108
340,030 (277,065) (64,495) (1,530)
(38,586) (38,586)
(72,164) (72,164)
(76,285) (76,285)
(80,000) 146,816 66,816 281,846 789,954 1,071,800 281,846
(28,500) 31,824 3,324 66,268 723,686 789,954 66,268
31,624 31,624 (46,191) 769,877 723,686 (46,191)
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4.2 Findings and Analysis Now that we have the financial statements we can start analyzing them for our purpose. We should not discuss any trend or ratio in isolation rather their effects on the other aspects of the organizations. As I have been instructed I will only discuss the financial aspect of their performance and ignore the non-financial indicators.
4.2.1 Comparative Trend and Ratio Analysis 4.2.1.1 Liquidity Ratios Current Ratio: Current Ratio
POCL
Current Assets Current Liabilities
=
2006 2007 2008 2009
MPL 1.03 1.02 1.04 1.053
1.08 1.05 1.08 1.09
The Current Ratio expresses the relationship between the firm’s current assets and its current liabilities. Current assets normally include cash, marketable securities, accounts receivable and inventories. Current liabilities consist of accounts payable, short term notes payable, short-term loans, current maturities of long term debt, accrued income taxes and other accrued expenses (wages). 1.1 1.08 1.06 1.04
POCL
1.02
MPL
1 0.98 2006
2007
2008
2009
Figure 01: Current Ratio Page 23
The rule says that the current ratio should be at least 2 that mean the current assets should meet current liabilities at least twice though this rule can change according to industry. Both the companies have a current ratio just over one. From my research I can assume that it is the industry average. In our Figure 01 we see that MPL has a better condition than POCL in terms of current ratio. Current ratio of both the companies shows a slightly increasing trend.
Quick Ratio: Quick Ratio =
POCL
Quick Assets
2006 2007 2008 2009
Current Liabilities
MPL 0.88 0.83 0.9 0.85
0.57 0.54 0.75 0.58
Measures assets that are quickly converted into cash and they are compared with current liabilities. This ratio realizes that some of current assets are not easily convertible to cash e.g. inventories. The quick ratio, also referred to as acid test ratio, examines the ability of the business to cover its short-term obligations from its “quick” assets only (i.e. it ignores stock). 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
POCL MPL
2006
2007
2008
2009
Figure 02: Quick Ratio Generally a quick ratio less than 1.00 suggests an alarming liquidity condition for any organization. But low current and quick ratio for both the companies led me to think that the industry suits low liquidity ratios. However we can clearly notice from the figure that POCL has Page 24
a far better quick ratio than MPL which means POCL can repay its current debts better. It also suggests that POCL has more liquid assets than MPL.
Net Working Capital: Net working capital ratio =
POCL
Net Working Capital Total Assets
2006 2007 2008 2009
MPL 0.037 0.024 0.035 0.049
0.066 0.048 0.069 0.081
0.09 0.08 0.07 0.06 0.05 POCL
0.04
MPL
0.03 0.02 0.01 0 2006
2007
2008
2009
Figure 03: Net working Capital Many believe that increasing sales can solve any business problem. Often, they are correct. However, sales must be built upon sound policies concerning other current assets and should be supported by sufficient working capital. There are two types of working capital: gross working capital, which is all current assets, and net working capital, which are current assets less current liabilities. The net working capital ratio is increased at healthy rate for both the companies. I personally believe that as both the companies are well established reducing sales should not be considered rather increasing assets is a solution to low net working capital. In comparison MPL
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clearly shows a better position in net working capital as it has higher current asset. However from the quick ratio analysis (figure 02) we know that most of them are not liquid enough.
4.2.1.2 Profitability Ratios Gross Earnings Trend: POCL MPL 2006 668,029 525,382 2007 729,322 566,897 2008 820,849 775,835 2009 977,866 583,468
1,200,000 1,000,000 800,000 600,000
POCL MPL
400,000 200,000 2006
2007
2008
2009
Figure 04: Gross Earnings of POCL and MPL (in 000s) The first indicator is the gross earnings before any expenses every year. It shows a very healthy and growing trend in case of POCL. From my research I got to know that POCL is one of the biggest companies of Bangladesh in terms of gross revenue. On the other hand though MPL had an increasing trend of gross earnings till 2008 but it had a significant fall last year.
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Net Profit Margin: 70% 60% 50% 40% POCL
30%
MPL
20%
POCL 2006 2007 2008 2009
10% 0% 2006
2007
2008
2009
MPL 21% 24% 29% 46%
Figure 05: Net Profit Margin Gross earning is not an indicator of the actual performance of a company. Net profit margin shows how the company is controlling its costs. Net profit margins of both the companies are pretty good. However MPL’s net profit margin is increasing at a great rate.
Return on Assets:
Return on Assets (ROA) =
POCL
Net Income Average Total Assets
2007 2008 2009
MPL 0.72% 0.83% 1.70%
2.60% 3.32% 3.10%
Income is earned by using the assets of a business productively. The rate of return on total assets indicates the degree of efficiency with which management has used the assets of the enterprise during an accounting period. This is an important ratio for all readers of financial statements. Investors have placed funds with the managers of the business. The managers used the funds to purchase assets which will be used to generate returns. If the return is not better than the investors can achieve elsewhere, they will instruct the managers to sell the assets and they will invest elsewhere. The managers lose their jobs and the business liquidates.
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27% 37% 49% 65%
3.50% 3.00% 2.50% 2.00%
POCL
1.50%
MPL
1.00% 0.50% 0.00% 2007
2008
2009
Figure 06: Return on Assets The ratio indicates that POCL has a very poor ROA in comparison to MPL. It can be described from two perspectives. A low ROA can be the result of low net profit or high average total assets or both.
500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 -
POCL MPL
2006
2007
2008
2009
Figure 07: Net Profit Amount (in 000s)
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We can clearly notice that except last year MPL had a better net profit amount where in 2008-09 POCL showed better performance. As their net profit amounts do not differ by a huge amount the answer to such low ROA of POCL lies within the total assets of the company.
35,000,000 30,000,000 25,000,000 20,000,000
POCL
15,000,000
MPL
10,000,000 5,000,000 2006
2007
2008
2009
Figure 08: Total assets (in 000s) From the chart it is proven that POCL has a very high total assets contributing to its low ROA. To be specific POCL has very high current assets compared to MPL. So MPL is clearly performing better with a lot less assets than POCL.
Return on Equity: Return on Equity (ROE) =
Net Income Average Stockholders’ Equity
POCL 2007 2008 2009
MPL 17% 19% 29%
31% 43.30% 33.90%
This ratio shows the profit attributable to the amount invested by the owners of the business. It also shows potential investors into the business what they might hope to receive as a return. The stockholders’ equity includes share capital, share premium, distributable and non-distributable reserves.
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60% 40% POCL
20%
2007
MPL
MPL POCL
0% 2008
2009
Figure 09: ROE Again MPL shows a higher ROE over the last few years. However MPL was listed as a public limited company just a few years ago. Which means it still has a long way to go to achieve longterm investor confidence. Right now MPL surely has better position in terms of ROE.
4.2.1.3 Market Measures EPS:
Earning Per Share =
Net Income Number of common Share Outstanding
POCL 2006 2007 2008 2009
MPL 17.7 36 47.8 46.1
14.4 20.3 9.5 8.7
This number represents the profit of the company equally split among each share of the stock. EPS is one of the most popular variables when valuing a company. So important, in fact, analysts are constantly issuing estimates on what future EPS may be. Here EPS of two companies shows a very differing trend. EPS of the POCL in this year is low than the previous period. It can be the result of last year’s stock dividend of 1:2. For that the net profit is divided in twice than the previous period. The earning is nearly twice from the previous period and the company given stock dividend which means that the company is in good position than the past. EPS is also growing assuring investors’ positive outlook for POCL. Page 30
60 50 40 30
POCL
20
MPL
10 0 2006
2007
2008
2009
Figure 10: EPS However MPL’s EPS is declining for last few years. Again there is an explanation. As MPL was listed just a few years back it is too early to perceive something based on this.
P/E: POCL
Market Price of Common Stock Per Share Earning Per share
Price Earning (PE) Ratio =
2007 2008 2009
40 35 30 25 20 15 10 5 0
MPL 38.94 25.68 13.23
22.38 30.32
POCL MPL
2007
2008
2009
Figure 11: P/E ratio
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Essentially, this ratio tells us how much investor is willing to pay for every one dollar of earnings the company pulls in. As we can see POCL has a declining P/E ratio over the last few years. Last year POCL stock price reached its lowest ever. The low P/E ratio is the result of this. Again MPL P/E ratio suggests us literally nothing. I could only have the P/E ratio of last two years as I stated before it became listed in 2007 and it shows an increase.
Dividend Yield:
Dividend Yield =
POCL
Annual Dividends Per Common Share Market Price of Common Stock Per Share
2006 2007 2008 2009
MPL 0.9% 0.42% 0.41% 0.82%
1.29% 1.52%
1.6% 1.4% 1.2% 1.0% 0.8%
POCL
0.6%
MPL
0.4% 0.2% MPL
0.0% 2006
2007
POCL 2008
2009
Figure 12: Dividend Yield The dividend yield ratio indicates the return that investors are obtaining on their investment in the form of dividends. This yield is usually fairly low as the investors are also receiving capital growth on their investment in the form of an increased share price. It is interesting to note that there is strong correlation between dividend yields and market prices. Invariably, the higher the dividend, the higher the market value of the share. Page 32
We can notice from the data that POCL has a U-shape pattern to their dividend yield because of its fluctuating share price. However MPL has higher and increasing pattern.
4.2.1.4 Capital Structure & Solvency Debt to Equity Ratio: Debt to Equity Ratio=
Total Debt Total Debt plus Total Equity
POCL 2006 2007 2008 2009
MPL 19.83 26.08 19.31 14.41
7.5 13.99 10.65 9.38
30 25 20 15
POCL MPL
10 5 0 2006
2007
2008
2009
Figure 13: Debt to Equity Ratio Debt to equity ratio measures a company’s capital structure. It is a great means to know if the company is dependent on debt or shareholders funds. The lower the ratio, the better. Both the companies show a decreasing trend but POCL’s ratio is a lot higher than MPL. However it is noticeable that most of their debts are current debts. So better credit control measures should be introduced.
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4.2.2 Cash flow Analysis Cash flow analysis is primarily used as a tool to evaluate the sources and uses of funds. It provides insights into how a company is obtaining its financing and deploying its resources. It is also used as a part of liquidity analysis. The first things to look are the closing balance and the net cash flow. 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000
POCL
1,500,000
MPL
1,000,000 500,000 2006
2007
2008
2009
Figure 14: Closing Balance (in 000s) 1,600,000 1,400,000 1,200,000 1,000,000 800,000
POCL
600,000
MPL
400,000 200,000 (200,000)
2006
2007
2008
2009
Figure 15: Net cash Flow (in 000s) Page 34
It is clearly evident that POCL has not only more cash in hand than MPL but also it has a growing trend. On the other hand MPL is maintaining a pretty stable but healthy cash in hand. It is to note that high cash balance does not necessarily mean a good sign. Though it suggests a good liquidity position, failure to invest surplus fund may affect future profitability. Net cash flow of MPL shows a lower and more stable trend than POCL. POCL has an alarmingly fluctuating net cash flow and last year it had a significant fall. A closer look at the different cash flows can be helpful to the research. 120,000 100,000 80,000 60,000
POCL MPL
40,000 20,000 2006
2007
2008
2009
Figure 16: Net cash outflow in investing activities Net cash flows in investing activities show an interesting pattern for the companies. Whereas POCL shows a U-shape pattern, MPL shows an inverted U-shape. It unveils the reason for the negative net cash flow of POCL last year resulting from a very high investment. This means MPL and POCL are on very different situations. Whereas MPL is settling down after a high investment previously undertaken and focusing on its liquidity; POCL is expanding its business in exchange of its liquidity. However only ‘investing cash flows’ do not depict a good picture of the real situation. The operating cash flows should be analyzed. We can see from the figure 18 that POCL made an extraordinary amount of payment last year to its creditors which clearly resulted their fall in net cash flows. Page 35
2009
2008
2007
-
10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 MPL
POCL
Figure 17: Operating expense payment without income tax The overall analysis of cash flows suggests that POCL is in a tight position in terms of liquidity because of its investment and huge amount of payment to its creditors. However it is highly unlikely that this will happen again in very near future. So POCL’s future liquidity position is expected to be better. On the other hand MPL shows a stable position in every aspect of their cash flows which is a positive sign. Cash flows from financing activities are rather insignificant in case of both the companies as they do not have any notable interest bearing long-term debt. It is a little surprising for big companies like these. However it led me to think that it’s a norm for this oil marketing industry. Dividend payments are more or less similar which hardly affects the net cash flow. Overall cash flow analysis suggests that MPL has a more stable policy towards expansion and liquidity. Other than last year’s huge payment to the creditors, POCL has a high but somewhat unstable policy.
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Chapter 05
5.0 Conclusion Padma Oil Company Limited and Meghna Petroleum Limited are both profitable companies. They play a great role in the proper marketing of the very important and petroleum products throughout the country. Though there are a lot of government regulations exist, the companies’ managing ability is vital to companies’ success. From this point of view both the companies are performing well enough. The comparative study unveils some important facts about the companies. Though it is somewhat unfair to compare the two companies because of their different history, market capitalization, investment etc. my analysis brought out some important points. In terms of liquidity, MPL is performing better. MPL has a better current ratio and net working capital ratio. Though POCL has better quick ratio, the cash flow analysis surely favors MPL. MPL has a more favorable profitability condition than POCL with higher average net profit margin, ROA, ROE and net profit amount. Not to mention POCL has total assets equals to 2-3 times of what MPL has but MPL beats POCL in net profit amount every year except last year. It is a very impressive performance. As MPL was listed as a public company on 2007, it is too early to comment on its trend on market measures. POCL has a better EPS but declining P/E ratio whereas MPL had a rise in last year in P/E. POCL has a more favorable debt-to-equity ratio than MPL. Ratio, trend and cash flow analysis suggest that MPL perform marginally better than POCL financially.
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Bibliography Annual Reports 2006-07, 2007-08, 2008-2009: Padma Oil Company Ltd. Annual Reports 2006-07, 2007-08, 2008-2009: Meghna Petroleum Ltd. Wild, John J et al. (2001) Financial Statement Analysis- 7th edition. McGraw-Hill Helfert, Erich A. (2001). "The Nature of Financial Statements: The Cash Flow Statement". Financial Analysis - Tools and Techniques - A Guide for Managers. McGraw-Hill. p. 42. doi:10.1036/0071395415. Jonas Elmerraji on April 2005 in his article “Analyze Investments Quickly with Ratios” http://www.investopedia.com/articles/stocks/06/ratios.asp.
Susan Ward on May 1, 2008 “Financial Ratio Analysis for Performance Check” http://sbinfocanada.about.com/od/management/a/3ratios.htm.
Dhaka Stock Exchange website: http://www.dsebd.org/ Padma Oil Company website: http://www.pocl.gov.bd/
