“FINANCIAL STATEMENT ANALYSIS OF SELECTED TEXTILE COMPANIES IN PAKISTAN”
ACKNOWLEDGMENT
Finally by the grace of Al-mighty Allah I did mange to finish my final project. I have have stud studie ied d “ The The Anal Analysi ysis s of Fina Financ ncia iall Stat Statem emen ents ts of Sele Select cted ed Text Textilile e Companies”. Companies”. It was a healthy learning learning experience experience and I ‘m very thankful thankful to my project supervisor Dr Kashif-ur-Rehman for his sincere gratitude and technical guidance through out the project. I am also very thankful to my friends specially Mohsin Rameez Awan, & Ali Abbas Naqvi who supported me through out the project and gave me the moral encouragement.
“This thesis is dedicated to my parents”
TABLE OF CONTENTS ACKNOWLEDGMENT.............. ............................ ............................ ............................ ............................ ............................. ............................. ............................ ............................ ................ I.. TABLE OF CONTENTS............. ........................... ............................. ............................. ............................ ............................ ............................ ............................ ........................... ............. III TABLE OF FIGURES.............. ............................ ............................ ............................. ............................. ............................ ............................ ............................ ...................... ........ ......IV .. TABLE OF TABLES.............. ............................ ............................ ............................ ............................ ............................. ............................. ............................ ............................ .................... ...... V EXECUTIVE SUMMARY............. ........................... ............................ ............................ ............................ ............................ ............................. ............................. ..................... .......... VI ... INTRODUCTION............. ........................... ............................ ............................ ............................. ............................. ............................ ............................ ............................ .................... ...... .... IX
1.1- TEXTILE INDUSTRY IN PAKISTAN...... ............ ............ ............ ............ ........... ........... ............ ........... ......... .... XI 1.2- FINANCIAL STATEMENT AND RATIO ANALYSIS...... ............ ............ ........... ......... ....... ... XIII 1.3- RESEARCH QUESTIONS.................. .............................. ................. ........... ............ ............ ............ ............ ............ ...... XV 1.4- OBJECTIVES.................. ........................ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ .......... .... XVII 1.5- SIGNIFICANCE OF THE STUDY............ .................. ............ ............ ............ ............ ............ ............ ......... ...XVIII 1.6- SCOPE AND LIMITATIONS................... ............................. ................ ............ ............ ............ ............ ............ ........ .. XIX 1.7- DEFINITION OF THE TERMS................. ...................... ........... ............ ............ ............ ............ ............ ........... ....... ..XX LITERATURE REVIEW............... ............................. ............................ ............................ ............................ ............................ ............................. ........................... ................. ......... .... XXI
RESEARCH METHODOLOGY METHODOLOGY AND DESIGN............. ............................ ............................. ............................ ............................ ..................... .......... ... XXIX
3.1- METHOD OF THE STUDY.................. ............................ ................ ............ ............ ............ ............ ............ ......... ... XXIX 3.2- DATA................. .................................... ................................ ................... ............ ............ ............ ............ ............ ............ ............ ......... ... XXIX 3.3- SAMPLING PROCEDURE................. ............................ ................. ............ ............ ............ ........... ........... .......... .... XXX 3.4- RESEARCH INSTRUMENT................. ....................... ............ ........... ........... ............ ............ ............ ............ ........ ..XXX 3.5- FINANCIAL TOOLS TOOLS................. ............................ ................. ............ ............ ........... ........... ............ ............ ............ ......... ... XXX 3.6-TREATMENT OF THE DATA....... ............. ............ ............ ............ ........... ........... ............ ............ ............ .......... .... XXX ANALYSIS AND INTERPRETATION OF DATA............... ............................. ............................ ............................ ......................... ................ ........ ... XXXI
4.1 COMMON-SIZE INCOME I NCOME STATEMENT.................. ........................ ............ ........... ........... ............ ...... XXXI 4.2 COMMON-SIZE BALANCE SHEET......... ............... ............ ........... ........... ............ ............ ........... ..... XXXVIII 4.3 INTERPRETATION OF PROFITABILITY RATIOS...... ............ ............ ............ ............ ........XLIV 4.4 INTERPRETATION OF LEVERAGE RATIOS...... ........... ........... ............ ............ ............ ............ ........LII 4.5 INTERPRETATION OF LIQUIDITY RATIOS................ ..................... ........... ............ ............ .......... .... LVI 4.6 INTERPRETATION OF EFFICIENCY RATIOS...... ........... ........... ............ ............ ............ .......... .... LIX 4.7 INTERPRETATION OF ASSET UTILIZATION RATIOS RATIOS..... ........... .......... ........ ....... ..... LXIII 4.8 CASH FLOW ANALYSIS.............. .................... ............ ............ ............ ........... ........... ............ ............ ............ ......... ... LXVI CONCLUSION AND RECOMMENDATION.............. ............................. ............................. ............................ ............................ ..................... ............. ...... LXIX
5.1 SHORT-TERM LIQUIDITY......... ............... ............ ............ ............ ........... ........... ............ ............ ............ ............ ........LXX 5.2 CASH FLOW ANALYSIS............... ..................... ............ ........... ........... ............ ............ ............ ............ ............ ......... ... LXX 5.3 RETURN ON INVESTED CAPITAL....... ............. ............ ............ ............ ............ ............ ............ ........... ..... LXXI 5.4 ASSET UTILIZATION................. ................................ .................... ........... ............ ............ ............ ............ ............ ......... ... LXXI 5.5 OPERATING PERFORMANCE AND PROFITABILITY...... ............ ............ ........... ..... LXXII BIBLIOGRAPHY............. ........................... ............................ ............................. ............................. ............................ ............................ ............................ ........................... ................ LXXIII ...
TABLE OF FIGURES
FIGURE 4. 1..........................................................................................................................................XXXII FIGURE 4. 2.........................................................................................................................................XXXIV FIGURE 4. 3.......................................................................................................................................XXXVII FIGURE 4. 4 (A)..................................................................................................................................XXXIX FIGURE 4. 4 (B)..................................................................................................................................XXXIX FIGURE 4. 5 (A)........................................................................................................................................XLI FIGURE 4. 5 (B)........................................................................................................................................XLI FIGURE 4. 6 (A).....................................................................................................................................XLIII FIGURE 4.6 (B)......................................................................................................................................XLIV FIGURE 4. 7.............................................................................................................................................XLV FIGURE 4. 8..........................................................................................................................................XLVII
FIGURE 4. 9...................................................................................................................................................L FIGURE 4. 10................................................................................................................................................LI FIGURE 4. 11..............................................................................................................................................LV FIGURE
4.12..............................................................................................................................................LIX
TABLE OF TABLES
TABLE 4.01…………………………………………… 4.01………………………………………………………………………..…………..……..24 …………………………..…………..……..24 TABLE 4.02…………………………………………… 4.02…………………………………………………………………..…..…………………..26 ……………………..…..…………………..26 TABLE 4.03…………………………………………… 4.03………………………………………………………………………………….………..28 …………………………………….………..28 TABLE 4.04…………………………………………… 4.04………………………………………………………………………………...….……..30 …………………………………...….……..30 TABLE 4.05…………………………………………… 4.05…………………………………………………………………………….…………….32 ……………………………….…………….32 TABLE 4.06…………………………………………… 4.06……………………………………………………………………………….………….34 ………………………………….………….34 TABLE 4.07…………………………………………… 4.07………………………………………………………………………………….……….36 …………………………………….……….36 TABLE 4.08…………………………………………… 4.08……………………………………………………………………………….………….38 ………………………………….………….38 TABLE 4.09…………………………………………… 4.09………………………………………………………………...………………………..40 …………………...………………………..40 TABLE 4. 10…………………………………………………………………………………………42 10…………………………………………………………………………………………42 TABLE 4. 11………………………………………………… 11……………………………………………………………………………………....…43 …………………………………....…43 TABLE 4. 12………………………………………………… 12……………………………………………………………………………………....…44 …………………………………....…44 TABLE 4. 13……..………………………………………………… 13……..………………………………………………………………………………..…45 ……………………………..…45
TABLE 4. 14…………………………..…………………………… 14…………………………..…………………………………………………………..…46 ……………………………..…46 TABLE 4. 15………………………………………………… 15………………………………………………………………………………….……...47 ……………………………….……...47 TABLE 4. 16…………………………………………………………………………………………48 16…………………………………………………………………………………………48 TABLE 4. 17…………………………………………………………………………………………48 17…………………………………………………………………………………………48 TABLE 4. 18…………………………………………………………………………………………49 18…………………………………………………………………………………………49 TABLE 4. 19…………………………………………………………………………………………50 19…………………………………………………………………………………………50 TABLE 4. 20…………………………………………………………………………………………51 20…………………………………………………………………………………………51 TABLE 4. 21…………………………………………………………………………………………52 21…………………………………………………………………………………………52 TABLE 4. 22…………………………………………………………………………………………52 22…………………………………………………………………………………………52 TABLE 4. 23…………………………………………………………………………………………53 23…………………………………………………………………………………………53 TABLE 4. 24…………………………………………………………………………………………54 24…………………………………………………………………………………………54 TABLE 4. 25…………………………………………………………………………………………55 25…………………………………………………………………………………………55 TABLE 4. 26…………………………………………………………………………………………56 26…………………………………………………………………………………………56 TABLE 4. 27…………………………………………………………………………………………57 27…………………………………………………………………………………………57 TABLE 4. 28…………………………………………………………………………………………58 28…………………………………………………………………………………………58
EXECUTIVE SUMMARY
Pakistan's garment and textile are two principal industries contributing more than 60 pe perr ce cent nt to to tota tall ex expo port rt ea earn rnin ings gs,, ac acco coun unti ting ng fo forr 46 pe perc rcen entt of to tota tall manufac manu factur turing ing and emp employ loying ing 38 perc percent ent of the man manufa ufactu cturin ring g lab labor-f or-force orce.. Exports Expo rts Acco Accordi rding ng to off offici icial al dat data, a, tex textil tile e man manufa ufactu ctures res exp export orts s inc increas reased ed by 23.31 percent to US$6,417.83 million during the period July-May 2002-03 as compared to the corresponding period of previous year. Their share in overall exports stood at 64.88 percent as against 63.70 63.70 per cent during July-May 200102, thus further reducing the contribution of other categories to exports. So looking to the increasing trend researcher is doing financial statement analysis of selected textile companies in Pakistan. As financial statement analysis provide deep insight to the financial position of a company, which is favorable for present and its future of its existence. Financial ratios are widely used to develop insights into into the the finan financi cial al perfo perform rmanc ance e of comp compan anie ies’ s’ by both both the the eval evalua uato tors rs’’ and and resear research chers ers’. ’. The The firm firm invo involv lves es many many inte interes reste ted d parti parties, es, like like the the owne owners rs,, management, personnel, customers, suppliers, competitors, regulatory agencies, and academics, each having their views in applying financial statement analysis in their evaluations.
This study is about the financial statements analysis of the selected companies in the textile industry in Pakistan. The study is descriptive in nature. The researcher has utilized the descriptive method in acquiring information for evaluating the financial performance of the selected textile companies. The research data is secondary in nature as for this particular research. The data is collected for the consecutive consecutive five years i.e. from 1998 to 2002, in the form of annual reports from the registrar office, containing; balance sheet, income statement and profit & loss account. The sample for this particular research is three different companies; (Colony) Sarhad Textile Mills LTD, D.M. Textile Mills LTD, Al- Qadir Textile Mills
LTD. This research is based on secondary source of data and consists of annual reports, articles, web sites, and books. By analyzing financial statements the findings are really interesting that Al-Qadir Textile Company is performing much better than the industry norms, where it has faced several problems in 1998 and 1999. Al-Qadir has the highest ROA and ROE for the year 2000. The results and data show that Al-Qadir is highly financed through debt and has improved the debt position, but still it is high the company needs to increase its shareholders equity. D.M have a negative netprofit margin for 1998 and 1999. D.M shows a good ROA for the year 2001 and over the years company has reduced its debt burden from 93% to 64%. D.M’s current ratio is below one, which means on average 0.46 is its current ratio showing that company has 0.45 paisas in current assets for every Rs.1 in current liabilities. D.M has continuous negative ratio due to high credit sales. D.M are enjoying high inventory turnover where (Colony) Sarhad is below the industry average. (Colony) Sarhad is having negative results for the consecutive five years; high cost of sales is being the reason for this result. (Colony) Sarhad has debt of average average 72%. (Colony) (Colony) Sarhad shows shows variabil variability ity in its current current ratio. ratio. Whereas (Colony) Sarhad has positive ratio of net working capital to total assets, this is because of more assets. (Colony) (Colony) Sarhad is in a critical critical situation situation where it should try to increase its sales or reduce its cost of sales.
INTRODUCTION Financial Statements are useful because they provide information that allows investors investors and creditors creditors to make better decisions. However, However, because of selective reporting of economic events as well as non-comparable accounting methods and estima estimates tes,, financ financial ial statem statement ents s are only an approx approxima imatio tion n of reality reality.. In additio addition, n, because because of the tenden tendency cy to delay delay account accounting ing recogni recognitio tion, n, financ financial ial statements also tend to lag reality. A primary objective of financial analysis is to determine comparable risk and return of companies and their securities. Financial statements include the
•
Balance Sheet
•
Income Statement
•
Cash Flow Statement
The financ financial ial statem statement ents s are interre interrelat lated ed and should should be used used and analyz analyzed ed toget together her.. Meth Methods ods of finan financi cial al stat statem ement ent analy analysi sis s may may be divid divided ed into into two two general categories, internal analysis and comparative or external analysis. Internal analysis uses figures from the financial statements of any one date or period to gain an understanding of the customer. Comparative analysis may be used to determine trends when two or more successive sets of figures are reviewed, or may be used to evaluate a given company's financial statement against industry standards.
These methods may be used separately or in combination. They are part of the tools that enable experienced credit professionals to reach a credit decision. Financial statements should be spread and analyzed, with appropriate ratios and flows calculated as an aid in the customer evaluation. As an important first step in internal analysis, the financial statement should be examined for validity and genera generall correc correctn tness ess.. Afte Afterr the the stat statem ement ent has been been accept accepted ed as vali valid d and and reasona reasonably bly accurat accurate, e, ratios ratios should should be calcul calculate ated d and the figures figures analyzed analyzed.. Interna Internall analys analysis is calls calls for an examin examinati ation on of items items within within a single single financ financial ial statement for the purpose of judging their significance in relation to the capital of the the compa company, ny, its its meth method od of opera operati tion on and condi conditi tion ons s prev prevai aililing ng with within in the the industry. The major tools for internal analysis are balance sheet ratios and a working knowledge of the line of business including the method of operation and seasonal influences. Rati Ratios os are are math mathem emat atic ical al aids aids for for appr apprai aisa sall and and comp compar aris ison on of fina financ ncia iall stat statem emen ents ts.. They They are used used to supp supplem lement ent curr currenc ency y amou amount nt inspe inspect ctio ion, n, to exam examin ine e inte interr-it item em rela relati tion onsh ship ips s and and to comp compar are e a spec specif ific ic comp compan any' y's s performance against its industry standard. The use of ratios reduces the influence influence of currency size on analysis since these compa compari rison sons s are expre express ssed ed as a perc percent entage age,, fract fractio ion, n, deci decima mal, l, or rates rates of turnover. Only the combinations that could be made of the items appearing in both schedules limit the number of ratios that can be developed from the balance sheet and income statement. The type of operation represented by the account and the nature of the risk has an important bearing on what ratios are to be computed and studied. This analysis compares financial information generated for five periods.
1.1- TEXTILE INDUSTRY IN PAKISTAN
Since its creation in 1947, the Pakistan Textile Industry has grown into the largest and most signif significant icant economic sector in the country. The texti textile le indust industry ry now contributes 65% of the total exports to the national economy, 46% of its total manufacturing, and 38% of its total employment. The Textile Industry will continue to play an important role in the economy of Pakistan as the country is one of the four largest cotton growers in the world and availability of large quantity (around 10 million bales per annum) of reasonable quality is the basis of the development and sustenance of the local Textile Industry. The Pakistan Textile Industry is also very labor intensive with low costs of manufacturing and raw materials. Textile products are a basic human requirement next only to food. In spite of the government’s efforts to diversify export as well as industrial base, the textile remai remains ns the the backb backbon one e of indus industr tria iall acti activi vity ty in the the count country. ry. Its Its share share in the the economy, in terms of GDP, exports, employment, foreign exchange earnings, investment and contribution to the value added in industry; make it the single largest determinant determinant of the growth in manufacturing manufacturing sector with 46 percent share in overall manufacturing activity. The demand for textiles in the world is around $18 trillion. Pakistan has emerged as one of the major cotton textile product supplier in the world market and its share in world yarn trade is about 30 percent while its share in cotton cloth trade is about 8 percent. However, overall share of textile exports from Pakistan is around one percent. The share of textile in Pakistan’s exports earnings is 68 percent at its present worth of exports is around $ 7 billion. The value addition in the sector account for 9 percent of GDP
and it employ 38 percent of industrial workers. During the last three years, Pakistan’s textile sector is preparing itself to face the challenges of the postquota regime in 2005. The Government of Pakistan has adopted special steps to boost the country's cotto cotton n indu indust stry ry and and mark market et throu through gh a series series of amen amendm dmen ents ts.. A stan standa dard rd committ committee ee has been appointe appointed d to look into ways ways to increas increase e qualit quality y cotton cotton production, to provide better crop knowledge to growers and to upgrade grading, ginning, and pressing systems to international standards. Pakistan's cotton production in 2001-02 was 10.6 million bales. Cotton production in 2002-03, declined to 10 million bales. The industry was not a major player in the global arena and fiber textile producers from India were large producers. The Central Board of Revenue (CBR) has extended the compensatory duty drawback on the export of blended fabrics, garments, and blended yarn from June 30, 2003 to June 30, 2004. Textile industry is now preparing itself to survive the challenges of new textile market in 2005. The focus is on value addition, quality, and pricing. A huge investment of US $2 billion has been made on balancing, modernization, and replacement, which would help the textile sector to position it in order to survive after 2005. The industry exports one billion dollars worth of bed wear, knitwear, knitwear, and readymade readymade garments. In addition, addition, steps are underway underway to increase the exports of synthetic textiles. Pakis Pakista tan' n's s text textilile e indus industr try y will will have have to face face toug tough h compe competi titi tion, on, both both in the the domestic and international markets. China will be the biggest competitor, which after its accession to the WTO, will corner a very high percentage, which is estimated to be from 40 per cent to 50 per cent of the global textile market. Quality, Quality, delivery schedules, and price will be the high marks for all textile goods in the global markets. Increase in productivity will be vital for our textile industry. Pakistan along with China and India will have advantages, because all these
countries have a plentiful supply of the vital raw material i.e. cotton. ( The NEWS, 14th,July 2003)
1.2- FINANCIAL STATEMENT AND RATIO ANALYSIS
Financial ratios are a popular way for users of financial statements to develop insights into the financial performance of companies. By controlling for the effect of firm size on the level of performance, ratios enable financial statement users to examine how a firm has performed relative to its peers and relative to its own historical performance. A firm’s ratios can differ from its peers or its own historical performance because it has selected a different product market strategy, because its management team has become more effective effective at implementi implementing ng its strategy, strategy, or because it has selected a different financial strategy. Sometimes firms can appear to perform differently because they have selected different accounting methods for reporting the same underlying economic events. For this reason, a pioneer to effective financial ratio analysis is the development of a clear understanding of how a firm’s accounting decisions compare with those of its competitors, or with its own decisions in prior years. In assessing the significance of various financial data, managers often engage in ratio rati o anal analysi ysis, s, the proc process ess of det determ ermini ining ng and eva evalua luatin ting g fin financ ancial ial rati ratios. os. A financ fin ancial ial rat ratio io is a rel relati ations onship hip tha thatt ind indica icates tes som someth ething ing abo about ut a com compan pany's y's activities, such as the ratio between the company's current assets and current liabilities or between its accounts receivable and its annual sales. The basic source for these ratios is the company's financial statements that contain figures
on asse assets, ts, lia liabil biliti ities, es, pro profit fits, s, and los losses ses.. Rat Ratios ios are onl only y mea meanin ningfu gfull whe when n compared with other information. Since they are often compared with industry data, ratios help managers understand their company's performance relative to that of competitors and are often used to trace performance over time. Ratio analysis can reveal much about a company and its operations. However, there are several points to keep in mind about ratios. First, a ratio is just one number divided by another. Financial ratios are only "flags" indicating areas of strength or weakness. One or even several ratios might be misleading, but when combined with other knowledge of a company's management and economic circumstances, ratio analysis can tell much about a corporation. Second, there is no single correct value for a ratio. The observation that the value of a particular ratio is too high, too low, or just right depends on the perspective of the analyst and on the company's competitive strategy. Third, a financial ratio is meaningful only when it is compared with some standard, such as an industry trend, ratio trend tr end,, a ra rati tio o tr trend end fo forr th the e sp spec ecif ific ic com compa pany ny be bein ing g ana analy lyzed zed,, or a st stat ated ed management objective. Financial ratios can also give mixed signals about a company's financial health, and can vary significantly among companies, industries, and over time. Other factors factors should also be considered considered such as a company's products, management, management, competitors, and vision for the future.
1.3- RESEARCH QUESTIONS
1- What are the profitability ratios of the textile companies with respect to: a)
Return on Assets
b)
Return on equity
c)
Net profit margin
d)
Gross profit margin
e)
Operating pr profit ma margin
2- What are the leverage ratios of textile companies with respect to: a)
Total debt ratio
b)
Debt- equity ratio
c)
Long-term debt ratio
d)
Times interest earned
3-What are the liquidity ratios of textile companies with respect to: a)
Current ratio
b)
Quick ratio
c)
Cash ratio
d)
Net working capital to assets
4-What are the efficiency ratios of textile companies with respect to: a)
Total asset turnover
b)
Fixed asset turnover
c)
Inventory turnover
d)
Receivable turnover
e)
Payable turnover
5-What is the performance of the textile companies in term of: a)
Common-size an analysis
6-What are the cash flows generated from different activities a)
Operating ac activities
b)
Investing ac activities
c)
Financing ac activities
1.4- OBJECTIVES
The following are the objectives of this research: 1. To analyze analyze and interpret interpret the financial financial reports reports of selected selected textile textile companies. companies. 2. To appraise appraise the the financial financial positi position on using using the ratio ratio analysis. analysis. 3. To accompl accomplish ish the the common common size size analys analysis. is. 4. Inte Interpr rpret et postpost-ret retir irem emen entt obli obliga gati tions ons and and fund fundin ing g impl implic icat atio ions ns for for futu future re performance. 5. To determ determine ine the the level level of profit profit genera generated ted.. 6. To determine determine the expense expense and and investmen investments ts of the company. company.
1.5- SIGNIFICANCE OF THE STUDY
Financial statement analysis is of interest to shareholders, creditors, and the firm firm’s ’s own own mana managem gement ent.. Both Both prese present nt and and prosp prospect ectiv ive e share shareho hold lders ers are are interested in the firm’s current and future level of risk and return. These two dimensions directly affect share price. The firm’s creditors are primarily interested in the short-term liquidity of the company and in its ability to make interest and principal payments. A secondary concern of creditors is the firm’s profitability; they they want want assur assuran ance ce that that the the busin business ess is heal health thy y and will will cont contin inue ue to be successful. successful. Management, Management, like stockholders, stockholders, must be concerned concerned with all aspects aspects of the firm’s financial financial situation. situation. Thus, this study attempts to operate in a manner that will be favorable to both owners and creditors.
In addition, management management uses ratios to monitor monitor the firm’s financial performance performance from period to period. It will also help management to make decisions regarding dividend policies, investments, lending, borrowings etc. Sofie Vander Meulen in his study in 2003 states that, investors as well as other
stakeholders heavily rely on a company’s financial statements. It is an important source of information that is readily available to them at a relatively low cost. The quality of those statements however is highly variable (aggressive reporting or not, disclosure or not). Therefore, this research would also be obliging for the company’s investors and stakeholders. Through this research many of the society members will be benefited and it will be adva advant ntag ageou eous s for for the the econo economy my.. Like Like inve invest stors ors,, resea research rchers ers,, credi credito tors, rs, management, management, employees, lenders, lenders, suppliers, suppliers, customers, customers, auditors, auditors, and analysts analysts will equally be able to take assistance from this research.
1.6- SCOPE AND LIMITATIONS
The sample of this research is basically three textile companies companies in Pakistan Pakistan and five year data has been taken for the analysis. The selected textile companies are: 1. (Colony (Colony)) Sarhad Sarhad Text Textile ile Mill Mills s LTD. LTD. 2. D.M. D.M. Text Textilile e Mill Mills s LTD. LTD. 3. Al- Qadir Qadir Text Textile ile Mills Mills LTD. LTD.
LIMITATIONS:
1. There There is a limita limitatio tion n related related to the analysis analysis of the result result,, as researcher researcher doesn’t have modern software available to analyze the findings so the result is based on manual work. 2. The The avai availa labi bilility ty of fund funds s is the one one of the limi limita tati tions ons while while doing doing this this research as a student it is difficult for the researcher to manage the funds. 3. The The time time period period for the the resea research rch is very very short short beca because use it is diffic difficul ultt to conduct a full time research for a student.
1.7- DEFINITION OF THE TERMS
1. Income Statement: Financial statement that shows the revenues, expenses,
and net income of a firm over a period of time. 2. Balance Sheet: Financial statement that shows the value of the firm’s assets
and liabilities at a particular time.
3. Liquidity: Ability of an asset to be converted to cash Quickly at low cost.
4. Shareholders: Any one with a financial interest in the firm.
5.Cash Flow Statement: Financial statement that shows the firm’s cash receipts
and cash payments over a period of time. 6. Ratio Analysis: Analysis: Involves the methods of calculating and interpreting financial
ratios to assess the firm’s performance and status. 7. Current assets: The sum of a firm’s cash, account receivable, inventory,
prepaid expenses and marketable securities which can be converted to cash with in a single operating cycle. 8. Curren Currentt Liabilit Liabilities: ies: Measu Measura rabl ble e debt debt owned owned with within in one one year, year, incl includ uding ing
accounts payable, accrued liabilities, taxes due, and notes payable.
LITERATURE REVIEW
Ratios are a valuable analytical tool when used as part of a thorough financial analysis. They can show the standing of a particular company, within a particular industry. However, ratios alone can sometimes be misleading. Ratios are just one piece of the financial jigsaw puzzle that makes up a complete analysis. (Leslie Rogers, 1997)
Financial ratios are widely used to develop insights into the financial performance of companies’ by both the evaluators’ and researchers’. The firm involves many intere interest sted ed part partie ies, s, like like the the owne owners, rs, manag managem emen ent, t, perso personne nnel, l, cust custom omers ers,, suppliers, competitors, regulatory agencies, and academics, each having their views in applying financial statement analysis in their evaluations. Evaluators’ use financial ratios, for instance, to forecast the future success of companies, while the researchers' main interest has been to develop models exploiting these rati ratios os.. Many Many dist distin inct ct area areas s of rese resear arch ch invo involv lvin ing g fina financ ncia iall rati ratios os can can be differentiated. ( Barne, Barne, 1986) Financial ratios can be divided into several, sometimes overlapping categories. A financial ratio is of the form X/Y, where X and Y are figures derived derived from the financ financial ial statem statement ents s or other other sources sources of financ financial ial inform informati ation. on. One-way One-way of categorizing the ratio is on the basis where X and Y come from. In traditional financial ratio analysis both the X and the Y are based on financial statements. If both or one of them comes from the income statement the ratio can be called dynamic while if both come from the balance sheet it can be called static. The conce concept pt of finan financi cial al rati ratios os can can be exte extende nded d by using using other other than than fina financ ncia iall stat statem emen entt info inform rmat atio ion n as X or Y in the the X/Y X/Y ratio ratio.. For For exam exampl ple, e, fina financ ncia iall statement items and market-based figures can be combined to constitute the ratio. (Salmi, Vitanen, and Olli, 1990) In trend analysis, ratios are compared over time, typically years. Year-to-year compa compari rison sons s can high highlilight ght trend trends s and and poin pointt up the the need need for for acti action on.. Trend Trend analysis works best with three to five years of ratios. The second type of ratio analysis, cross-sectional analysis, compares the ratios of two or more companies in similar lines of business. One of the most popular forms of cross-sectional analysis compares a company's ratios to industry averages. These averages are devel develop oped ed by stat statis isti tica call servi service ces s and and trade trade assoc associa iati tions ons and and are are updat updated ed annually. (Ezzamel, Mar-Molinero and Beecher, 1987)
Financial ratios can also give mixed signals about a company's financial health, and can vary significantly among companies, industries, and over time. Other factors factors should also be considered considered such as a company's products, management, management, competitors, and vision for the future. (Fieldsend, Longford and McLeay, 1987) There are many different ratios and models used today to analyze companies. The most common is the price earnings (P/E) ratio. It is published published daily with the transactions of the New York Stock Exchange, American Stock Exchange, and NASDAQ. These quotations show not only the most recent price but also the highest and lowest price paid for the stock during the previous fifty-two weeks, the annual dividend, the dividend yield, the price/earnings ratio, the day's trading volume, high and low prices for the day, the changes from the previous day's closing price. The price to earnings (P/E) ratio is calculated by dividing the current market price per share by current earnings per share. It represents a multiplier applied to current earnings to determine the value of a share of the stock in the market. The price-earnings ratio is influenced by the earnings and sales growth of the company, the risk (or volatility in performance), the debtequity structure of the company, the dividend policy, the quality of management, and a number of other factors. A company's P/E ratio should be compared to those of other companies in the same industry. (Garcia-Ayuso, 1994)
Several accounting and finance textbooks present a subjective classification of financial ratios based on the practical experience or views of the authors. It is common that the classifications and the ratios in the different categories differ between the authors. In very general terms three categories of financial ratios are more or less common: profitability, long-term solvency (capital structure) and short-term solvency (liquidity). (Courtis, 1978 )
Finan Financi cial al ratios ratios can can be divi divided ded for for conve conveni nienc ence e into into four four basic basic group groups s or categor categories: ies: liquid liquidity ity ratios ratios,, activi activity ty ratios, ratios, debt debt ratios ratios,, and profita profitabil bility ity ratios ratios.. Liquid Liquidity ity,, activi activity, ty, and debt debt ratios ratios primar primarily ily measure measure risk; risk; profit profitabi abilit lity y ratios ratios measure return. (Owens and Epstein, 1995) The following is a listing of some of the ratios to be aware of in analyzing a company company's 's balanc balance e sheet sheet and income income statem statement ent.. These These ratios ratios fall fall into into four four categor categories ies — liquid liquidity ity,, profita profitabil bility ity,, asset asset managem management ent (effici (efficienc ency), y), and debt debt management (leverage). (Perttunen and Martikainen, 1990) When a firm borrows money, it promises to make a series of interest payments and then to repay the amount that it has borrowed. If profits rise, the debt holders continue to receive a fixed interest payment, so that all the gains go to the share sharehol holder ders. s. Of cours course, e, the the revers reverse e happ happen ens s if prof profit its s fall fall.. In this this case case shareholders bear all the pain. If times are sufficiently hard, a firm that has borrowed heavily may not be able to pay its debts. The firm is then bankrupt and shareholders lose their entire investment. Because debt increases returns to shareholders in good times and reduces them in bad times, it is said to create financial leverage. Leverage ratios measure how much financial leverage the firm has taken on. (Brealey, Myers, and Marcus, 2001) If you are extending credit to a customer or making a short-term bank loan, you are interested in more than the company’s leverage. You want to know whether it will be able to lay its hands on the cash to repay you. That is why credit analysts and bankers look at several measures of liquidity. Liquid assets can be converted into cash quickly and cheaply. (McLeay and Fieldsend, 1987) Once you have selected and calculated the important ratios, you still need some way of judging whether they are high or low. A good starting point is to compare them with the equivalent figures for the same company in earlier years. Also known as benchmarking or cross-sectional analysis in which the firm’s ratio
values are compared to those of a key competitor or a group of competitors, primarily to isolate areas of opportunity for improvement. impr ovement. (Gitman, 1997) Following are the cautions while doing financial analysis. First, a single ratio does not general generally ly provide provide suffic sufficien ientt inform informati ation on from from which which to judge judge the overal overalll performance and status of the firm. Only when a group of ratios is used can reasonable judgments be made. If an analysis is concerned only with certain specific aspects of a firm’s financial position, one or two ratios may be sufficient. Second, It is preferable to use audited financial statements for ratio analysis. If the statements have not been audited, there may be no reason to believe that the data contained in them reflect the firm’s true financial condition. Third, the financial data being compared should have been developed in the same way. The use of differing accounting treatments, especially relative to inventory and depreciation can distort the results. (Whitis and Keith, 1993) Time-series analysis is applied when a financial analysts evaluates performance over time. time. Compar Comparison ison of current current to past past performa performance, nce, using ratio ratio analysi analysis, s, allows the firm to determine whether it is progressing as planned. Using multiyear comparisons can see developing trends, and knowledge of these trends should assist the firm in planning future operations. As in cross-sectional analysis, any significant year-to-year changes can be evaluated to access whether they are symptomatic of a major problem. Time-series analysis is often helpful in checking the reasonableness of a firm’s projected financial statements. A comparison of curr curren entt and and past past rati ratios os to thos those e resu result ltin ing g from from an anal analys ysis is of proj projec ecte ted d statements may reveal discrepancies. (Gitman, 1997) It is important to analyze trends in ratios as well as their absolute levels, for trends give clues as to whether a firm’s firm’s financial condition condition is likely likely to improve or to deteriorate. Common size analysis and percent change analysis are two other techniques that can be used to identify trends in financial statements. Common size analysis is also useful in comparative analysis. In a common size analysis,
all income statement items are divided by sales, and total assets divide all balance sheet items. Thus, a common size income statement shows each item as a percentage of sales, and a common a common size balance sheet shows each item as a percentage of total assets. (Brigham and Ehrhardt, 2001) Financial Financial statement statement analysis applies applies analytical analytical tools and techniques techniques to generalgeneralpurpose financial statements and relates data to derive estimates and inferences useful in business decisions. It is a screening tool in selecting investment or merger candidates, and is a forecasting tool of future financial conditions and consequ consequenc ences. es. It is a diagnos diagnostic tic tool tool in assess assessing ing financ financing, ing, investing, investing, and operating activities, and is an evaluation tool for managerial and other business decis decisio ions. ns. Fina Financi ncial al stat statem ement ent anal analys ysis is reduc reduces es our relia relianc nce e on hunch hunches, es, guesses, and intuition, and in turn it diminishes our uncertainty in decisionmaking. It does not lessen the need for expert judgment but rather establishes an effect effective ive and systemat systematic ic basis basis for making making busines business s decisio decisions. ns. (Bernst (Bernstein ein and Wild, 1990)
The accounting equation is the basis of the financial reporting system: Assets = Liabilities + shareholder’s equity The left-hand side of this equation relates to the economic resources controlled by a company, or assets. These resources are valuable in representing potential sources of future revenues through operating activities. To engage in operating activities, a company obtains funding to invest in assets. The right-hand side of this equation identifies funding sources. Liabilities are funding from creditors and represe represent nt obliga obligatio tions ns of a compan company y or, altern alternati ativel vely, y, claims claims of credito creditors rs on assets. Shareholder’s equity is a total of (1) funding invested or contributed by shareholders shareholders (contributed (contributed capital) and (2) accumulated accumulated earnings since inception
in exces excess s of dist distri ribut butio ions ns to share shareho holde lders rs (ret (retai aine ned d earn earning ings). s). From From the the shareho shareholde lders rs point point of view, view, these these amount amounts s represe represent nt their their claim claim on compan company y assets. A balance sheet summarizes the financial position of a company at a given point in time. Most companies are required under accepted accounting practices to present a classified balance sheet. In which assets and liabilities are separated into into current current and non-curr non-current ent account accounts. s. Current Currents s assets assets are expecte expected d to be converted converted to cash and used in operations within within one year or the operating cycle, which ever is longer. Current liabilities are obligations that the company must settle in the same time period. The difference between current assets and current liabilities is working capital. (Gitman, 1997) Incom Income e stat statem emen entt measu measures res a comp compan any’ y’s s finan financi cial al perf perfor orma manc nce e betw betwee een n balance sheet dates and hence, reflects a period of time. It lists revenues, expenses, gains, and losses of a company over a time period. Net income, shows the increase (or decrease) in net worth of a company before considering distrib distributi utions ons to and contri contribut bution ions s from from shareho shareholde lders. rs. (Brigh (Brigham am and Ehrhard Ehrhardt, t, 2001) Cross-s Cross-sect ection ional al analys analysis is involv involves es the compari comparison son of differe different nt firms’ firms’ financi financial al ratios at the sane point in time. The typical business is interested in how well it has performed in relation to other firms in the industry. Frequently, a firm will compare its ratio values to those of a key competitor or group of competitors that it wishes to follow. (Judy Ward, 1995) Financial statement users are broadly classified into two groups. Internal users , primarily the managers of a company, are involved in making operating and strategic decisions for the business. As employees, they typically have complete access to a company’s information system. Internally generated financial reports are, therefore, specifically tailored to the unique information needs of an internal
decision maker, such as CEO, CFO, or internal auditor. External users are individuals not directly involved in the company’s operations. These users must rely on information provided by management as part of the financial reporting process. There are many classes of external users of financial statements. Creditors are banke bankers, rs, bondh bondhol olde ders, rs, and and othe otherr indiv individ idua uals ls who who lend lend money money to busin business ess enterprises. Creditors look to financial statements for evidence concerning the ability of the borrower to pay periodic interests payments and repay the principal amount when the loan matures. Equity investors investors include existing and potential shareholders of a company.
Exiting shareholders need financial information in deciding whether to continue holding the stock or sell it. Potential shareholders need financial information to help in choosing among competing alternative investments. Equity investors are generally interested in assessing the future profitability or riskiness of a company. Merger and acquisition analysts are interested in determining the economic
value and assessing the financial and operating compatibility of potential merger candidates. financial al analys analysis is techni technique ques s in determ determini ining ng areas areas warrant warranting ing Auditors use financi special attention during their examination of a client’s financial statements. A company’s board theirr role role as appoi appoint ntee ees s of share sharehol holder ders, s, board of directo directors rs , in thei moni monito tors rs
mana managem gement ent’s ’s
acti actions ons..
Regulat Regulatory ory
agencies agencies
utiliz utilize e
financ financial ial
statements in the exercise of their supervisory functions, including the Securities and Exchan Exchange ge Commis Commissio sion, n, which which watchf watchfull ully y oversees oversees publis published hed financi financial al statements for compliance with federal rites law. Other users include employees , intermediaries , suppliers , and customers . (Bernstein and Wild, 1990)
RESEARCH METHODOLOGY AND DESIGN
This chapter presents the basic methodology and requirements in research. It includes the method of research, source of data, treatment of data, and tools, which were used in the study.
3.1- METHOD OF THE STUDY This study is about the financial statements analysis of the selected companies in the textile industry in Pakistan. The study is descriptive in nature. The researcher has utilized the descriptive method in acquiring information for evaluating the financial performance of the selected companies.
3.2- DATA The research data is secondary in nature as for this particular research. The data is collected for the consecutive five years i.e. from 1998 to 2002, in the form of annual reports from the registrar office, containing:
•
Balance sheet
•
Income statement
•
Profit & Loss account
3.3- SAMPLING PROCEDURE The research, which has been done on the financial analysis of the selected textile companies, the sample procedure for this particular research is three different companies: •
(Colony) Sarhad Textile Mills LTD.
•
D.M. Textile Mills LTD.
•
Al- Qadir Textile Mills LTD.
3.4- RESEARCH INSTRUMENT This research is based on secondary source of data and consists of annual reports, articles, web sites, and books.
3.5- FINANCIAL TOOLS To know the desired results and to get the desired information the researcher has applied many financial tools like trend- analysis, cross-sectional analysis, common-size analysis, ratio analysis etc.
3.6-TREATMENT OF THE DATA The data and information that was gathered was interpreted and analyzed by using different financial tools.
ANALYSIS AND INTERPRETATION OF DATA 4.1 COMMON-SIZE INCOME STATEMENT In common-size income statement, each item is expressed as a percentage of sales, thus enabling the relationship between sales and specific revenues and expenses to be easily evaluated. Three frequently cited ratios of profitability that can be read directly from the common-size income statement are gross-profit margin, operating-profit margin, and the net-profit margin.
Al- Qadir Textile Mills Limited
Common-size Income Statement For Year 1998 – 2002 TABLE 4. 1 2002
2001
2000
1999
1998
Net Sales Cost of Sales Gross Profit Operating Expense
100% 92.93 7.07 3.22
100% 86.70 13.30 2.63
100% 78.89 21.10 4.71
100% 87.14 12.86 4.50
100% 88.89 11.12 4.49
Operating Profit Other Income
3.85 0.19 4.04 (3.38) (0.01) 2.82
10.75 0.11 10.86 (4.79) (0.30) 5.77
16.40 0.02 16.42 (6.89) (0.48) 9.06
8.36 0.11 8.46 (9.30) ___-__ (0.84)
6.62 0.10 6.72 (8.23) ___-__ (1.51)
0.79 0.08 1.95
0.50 0.01 4.21
1.07 7.99
0.63 ___-__ (1.46)
0.23 0.74 (0.97)
Financial Charges Worker’s Participation Fund Profit/Loss Before Taxation Taxation: Current- year Prior-year Profit After Tax
Starting with the cost of sales the company’s average cost of sales for five years are 86.91% for five years, moreover which has changed each year as it depends on many other factors like raw-material consumed, salaries and wages, electricity
used etc. Gross-profit Gross-profit has gradually gradually decreased for the first four years but for the last year it is maximum with respect to previous years. Similar is the case with operating expense; the company has reduced its operating expense, in 2001 these expenses are minimum the attractive thing to note here is company’s sales are highest for this year and that is Rs. 707,050,099. Company has also concentrated its financial obligations by the end of 2002. For the year 1998 and 1999 profit before taxation is negative additionally that makes the company to bear loss and for three years reduction reduction can be seen in the profit both before and after taxation. Al- Qadir Textile Mills Limited
Common-size Income Statement For Year 1998 – 2002 FIGURE 4. 1
AL-QADIR TEXTILE MILL LTD. 120 Net Sales
100 G A T N E C R E P
80
Cost of Sales
60
Gross Profit
40
Operating Expense
20
Operating Profit
0 1998 1999 2000 2001 2002 YEARS
Figure 4.1 shows the common-size analysis of Al-Qadir textile mill, in which sales are shown as 100 percent and other item as a percentage of sales. When cost of goods sold is subtracted from the sales we get gross-profit. The company’s cost of sales is lowest for the year 2000, which is the company’s best performing year; and year 2002 as highest cost of sales leaving lowest operating profit.
D.M Textile Mills Limited
Common-size Income Statement For Year 1998 – 2002 TABLE 4. 2 Net Sales
2002 100%
2001 100%
2000 100%
1999 100%
1998 100%
Cost of Sales
86.60
85.70
86.40
92.20
93.13
Gross Profit
13.4
14.3
13.6
7.8
6.87
Operating Expense
3.5
3.6
3.3
3.4
4.7
Operating Profit
9.8
10.72
10.34
4.40
2.17
Other Income
0.2
0.36
0.10
0.12
0.16
10.00
11.08
10.44
4.52
2.33
Financial Charges
6.05
5.87
7.89
8.36
12.13
Loss on sale of fixed assets
0.01
-
-
-
-
Worker’s Participation Fund
0.19
0.26
0.13
___-__
Profit/Loss Before Taxation
3.75
4.95
2.46
(3.84)
(9.79)
Current- year
0.50
0.50
0.50
0.50
0.50
Prior-year
0.05
0.03
0.42
0.001
-
___-__
___-__
___-__
1.63
__-___
3.21
4.42
1.50
(2.71)
(10.29)
___-___
Taxation:
Deferred Profit/ Loss After Taxation
As it can be seen from the profit & loss account of D.M textile in the appendix section that its sales has always increased but the company has specialized to reduce its cost of sales, it shows like they are properly utilizing the economies of
scale, by lowering the cost of production, which is also proved by the gross profit from 6.87% in 1998 it increased to 14.3% in 2001 and 13.4% in 2002. We can see that there is a reduction in operating expense of a company, which further provides high operating profit. Financial charges are reduced but due to shortterm borrowing it has increased for the last year 2002. Company has incurred loss for two years that is for 1998 and 1999 and for other years is also not making profit after tax of more than 4.42% in 2001.
D.M Textile Mills Limited
Common-size Income Statement For Year 1998 – 2002 FIGURE 4. 2
D.M TEXTILE MILL LTD. 120 100 G A T N E C R E P
Net Sales
80 Cost of Sales
60 Gross Profit
40 Operating Expense
20
Operating Operating Profit
0 1998 1999 2000 2001 2002 YEARS
Figure 4.2 shows D.M textile costs of sales that are high for the first two years and i.e. above 90 % whereas for other three years 2000 to 2002 it is almost 86%. The company’s highest operating profits are for the year 2001.
(Colony) Sarhad Textile Mills Limited
Common-size Income Statement For Year 1998 – 2002
TABLE 4. 3 2002
2001
2000
1999
1998
Net Sales
100%
100%
100%
100%
100%
Cost of Sales
102.71
100.53
112.93
115.75
105.75
Gross Profit/ Loss
(2.71)
(0.53)
(12.93)
(15.75)
(5.75)
Operating Expense
5.54
5.59
10.64
11.43
4.39
(8.25)
(6.12)
(23.57)
(27.18)
(10.14)
2.88
0.49
14.22
0.99
0.16
(5.37)
(5.63)
(9.35)
(26.19)
(9.98)
3.60
2.69
11.19
11.22
3.13
-
-
-
6.52
-
2.65
3.79
17.76
20.81
2.74
(11.62)
(12.11)
(37.70)
(64.74)
(15.85)
0.50
0.50
0.50
0.50
0.50
(12.12)
(12.61)
(38.20)
(65.24)
(16.35)
Operating Profit/ Loss Other Income
Financial Charges Loss on sale of fixed assets Other charges Profit/Loss Before Taxation Taxation: Current- year Profit After Tax
Company’s common-size income statement depicts its poor performance. The sales of the company are not even the 50% of the sales of other companies included in the research. Moreover its cost of sales is higher than its sales, which on the very first step takes the company into loss. As gross profit of the company shows on average its cost of sales are 7.5% more than its sales. The company is also incurring high operating expenses that further more adds to the loss incurred by the company. For the year 1999 it’s loss after taxation is 65.24% of the sales.
(Colony) Sarhad Textile Mills Limited
Common-size Income Statement For Year 1998 – 2002 FIGURE 4. 3
(COLONY) SARHAD TEXTILE MILL LTD. 140 120 Net Sales
100 E G A T N E C R E P
80
Cost of Sales
60 40
Gross Profit/ Loss
20 Operating Expense
0 -20
1998 1999 2000 2001 2002
-40
Operating Operating Profit/ Loss
YEARS
The unusual company performance can be observed by the figure 4.3. Costs of sales are even higher than its sales. The company is bearing loss for five years. Supreme gross-loss is for the year 1999 and an operating loss of 27.18%.
4.2 COMMON-SIZE BALANCE SHEET Common-size analysis of financial statements is expressing each item as a percentage of its major item. As in common-size balance sheet each component is expressed as a percentage of current assets and current liabilities. Commonsize analysis is especially useful in comparing the performance for a particular year with that for current year. Following are the results of the analysis of the companies’ common-size balance sheet. Al- Qadir Textile Mills Limited
Common-size Balance Sheet For Year 1998 – 2002 TABLE 4. 4 2002
2001
2000
1999
1998
Current Assets: Inventory
2.86%
3.14%
4.78%
6.08%
5.67%
Stock in trade
47.67
50.16
58.64
65.28
53.54
Trade Debts
12.05
7.97
1.59
5.47
9.69
Advances, Deposits, prepayments and other receivables Cash & Bank Balances
10.43
4.64
9.38
19.89
24.58
26.90
34.09
25.60
3.28
6.52
Total current assets
100%
100%
100%
100%
100%
Current portion of Long-term Liabilities Short-term borrowings
14.42
15.16
25.85
12.27
29.58
-
-
-
57.09
34.30
Creditors, accrued & other liabilities
82.95
79.46
65.68
28.24
35.15
Provision for Tax
2.23
1.76
0.48
2.40
1.11
Proposed Dividends
-
1.96
7.99
-
-
Unclaimed Dividend
0.40
1.66
__-__
__-__
__-__
100%
100%
100%
100%
100%
Current Liabilities:
Total current liabilities
Al-Qadir textiles current assets have increased over the years as can be seen from the balance sheet in the appendix. The company has reduced its inventory
from 5.67% in 1998 to 2.86% in 2002, which is good in a sense as inventory is the most illiquid form of current assets. Stock in trade is almost 50% of the current assets for all five years. Trade debts are considerably low as compared with the industry, but have gradually increased in the year 2002. Advances, deposits, prepayments, and other receivables show a variation in the data. Last cash and bank balances have increased for the last three years. Current liabilities were low in the year 2001 and 2000 of Rs.95, 039,484 and Rs.94, 565,386 respectively and for other years it has been above Rs. 10 million. Short-term borrowings are only for two years i.e. 1998 and 1999. Creditors, accrued, and other liabilities constitute the major portion of current liabilities. The same data is depicted in the figure 4.4 (a) and figure 4.4 (b). Al- Qadir Textile Mills Limited
Common-size Balance Sheet For Year 1998 – 2002 FIGURE 4. 4 (a)
CURRENT ASSETS Cash & Bank Balances 100% E G A T N E C R E P
Advances, Deposits, prepayments and other receivables Trade Debts
80% 60% 40% 20%
Stock in trade
0% 1998
1999
2000
2001
YEARS
FIGURE 4. 4 (b)
2002
Inventory
CURRE CURRENT NT LIABILIT LIA BILITIES IES Unclaimed Dividend
100%
Propos ed Dividends
80%
Provision for Tax
60% 40%
Creditors, Creditors, acc rued & other liabilities
20%
Short-term borrow ings ings
0% 1998
1999
2000
2001
2002
Current Current portion of Long-term Liabilities
YEARS
D.M Textile Mills Limited
Common-size Balance Sheet For Year 1998 – 2002 TABLE 4. 5 2002
2001
2000
1999
1998
Inventory
3.68%
6.21%
4.43%
6.35%
9.29%
Stock in trade
44.51
36.57
57.25
54.93
30.96
Trade Debts
7.45
10.02
6.21
-
-
Advances, Deposits, prepayments and other receivables
39.26
41.13
22.70
36.08
55.42
Cash & Bank Balances
5.10
6.07
9.41
2.63
4.32
100%
100%
100%
100%
100%
Current portion of Long-term Liabilities
22.12
23.41
23.07
39.75
42.66
Short-term borrowings
19.03
21.09
28.39
20.29
14.79
Creditors, accrued & other liabilities
54.02
48.24
46.50
37.24
38.38
Provision for Tax
4.82
7.26
2.04
2.72
4.17
Proposed Dividends
-
-
-
-
-
Unclaimed Dividend
0.14
__-__
__-__
__-__
__-__
100%
100%
100%
100%
100%
Current Assets:
Total current assets
Current Liabilities:
Total current liabilities
D.M textile has also increased its current assets for five years. Inventory of the company shows a decreasing trend as can be seen from the table 4.5, starting from 9.29% in 1998 it has reduced to 3.68% in 2002, although high in year 2001. Stoc Stock k in trad trade e repr repres esen entt the the majo majorr port portio ion n of curr curren entt asse assets ts and and show show dissimilarity over the years. There are no trade debtors in 1998 and 1999. Compan Company y has has reduce reduced d the the advan advances ces,, depo deposi sits ts,, prepa prepaym yment ents, s, and other other receivab receivables les,, which which is also also the major major compone component nt of current current assets assets.. Average Average current liabilities are almost equal to Rs. 80 million for five years and there is less fluctuation in it.
D.M Textile Mills Limited
Common-size Balance Sheet For Year 1998 – 2002 FIGURE 4. 5 (a) Cash & Bank Balances
CURRENT ASSETS G A T N E C R E P
Advances, Deposits, prepayments and other receivables Trade Debts
100%
50% Stock in trade
0% 1998
1999
2 000
20 01
2002
Inventory
YEARS
The above figure shows the current assets for D.M textile. Where major portion of current assets is in stock in trade and in advances, deposits, prepayments and other receivables. In addition, inventory is almost less than 10% for five years. FIGURE 4. 5 (b)
Unclaimed Dividend
CURRENT LIABILITIES
Proposed Dividends
G A T N E C R E P
100% 80% 60% 40% 20% 0%
Provision for Tax Creditors, accrued & other liabilities liabilities Short-term borrow ings ings
1998
1999
2000
2001
2002
Current portion of Long-ter m Liabilities Liabilities
YEARS
The current liabilities are more due to creditors, accrued and other liabilities. The company is also liable to pay current portion of long term liabilities which has reduced
(Colony) Sarhad Textile Mills Limited
Common-size Balance Sheet For Year 1998 – 2002 TABLE 4. 6 2002
2001
2000
1999
1998
49.15%
50.08%
50.01%
48.28%
42.78%
Trade Debts
1.32
0.06
-
2.61
26.83
Advances, Deposits, prepayments and other receivables Cash & Bank Balances
49.25
49.45
49.69
49.12
30.07
0.28
0.41
0.30
0.13
0.32
Total current assets
100%
100%
100%
100%
100%
-
-
-
-
1.04
55.35
55.07
59.32
44.74
15.94
41.99
42.44
38.28
52.86
83.02
2.66
2.49
2.40
2.40
__-__
Current Assets: Inventory
Current Liabilities: Current portion of Long-term Liabilities Short-term borrowings Creditors, accrued & other liabilities Provision for Tax
100%
Total current liabilities
100%
100%
100%
100%
Poor perform performance ance can be reveale revealed d throug through h its common-s common-size ize balance balance sheet sheet analysis, as the company has not made respectable sales to cover its cost of production so its inventory is almost 50% of its current assets, trade debts are very low. Advances, deposits, prepayments, and other receivables are 49% of current assets. Further more the company cash and bank balances remains less than 1% for all the years. There are no current portions of long-term liabilities except for the year 1998. The company have more of the short-term short-term borrowings for all the five years which are almost of average 46% of current liabilities and 51% of average are creditors, accrued, and other liabilities.
(Colony) Sarhad Textile Mills Limited
Common-size Balance Sheet For Year 1998 – 2002 FIGURE 4. 6 (a)
CURRENT ASSETS
Cash & Bank Balances
100% G A T N E C R E P
Advances, Deposits, prepayments prepayments and other receivables
80% 60%
Trade Debts
40% 20%
Inventory
0% 2002 2001 2000 1999 1998 YEARS
Current Assets:
The company’s current assets can only be seen in two colors in the figure 4.6 (a) reflecting inventory and advances, deposits, prepayments and other receivables. Moreover some portion of trade debt can be seen in 1998 and 1999. FIGURE 4.6 (b)
CURRENT LIABILITIES Provision for Tax
G A T N E C R E P
100% 80%
Creditors, accrued & other liabilities Short-term borrowings
60% 40% 20% 0%
Current portion of Long-term Liabilities Current Liabilities:
2002 2002 2001 2001 2000 2000 1999 1999 1998 1998 YEARS
The same is the case for current liabilities there are more of the short-term borrowings and creditors, accrued and other liabilities.
4.3 INTERPRETATION OF PROFITABILITY RATIOS Profitability ratios focus on the firm’s earnings. Each relates the returns of the firm firm to its its sale sales, s, equi equity ty,, asse assets ts,, or shar share e valu value. e. Owne Owners rs,, cred credit itor ors, s, and and management pay close attention to boosting profits due to great importance placed on earnings in the market place. Al- Qadir Textile Mills Limited
Profitability Ratios For Year 1998 – 2002 TABLE 4. 7
2002
2001
2000
1999
1998
7.07%
13.30%
21.10%
12.86%
11.12%
Operating Profit Margin
3.85
10.75
16.40
8.36
6.62
Net Profit margin
1.95
4.21
7.99
(1.46)
(0.97)
Return on Assets
2.24
5.42
10.12
(2.38)
(2.18)
Return on equity
16.64
39.38
72.03
(10.18)
(16.15)
Gross Profit Margin
To know the proportion of revenue that finds its way into profits, we look at profit margin. margin. Gross-pr Gross-profi ofit, t, operati operating-p ng-prof rofit it and net-pro net-profit fit margin margin reveals reveals the same same trend. Naturally Naturally a firm prefers a high profit margin. margin. A high-price high-price and high-margin strategy typically results in lower sales, whereas a low-margin but high-volume strategy can be quite successful. Al-Qadi Al-Qadir’s r’s profit profit margin margin is greate greaterr than than its compet competito itors. rs. Company Company’s ’s greater greater returns are for the year 2000 in which its gross-margin is 21.10%, operating-profit of 16.40% and the net-profit margin of 7.99%. Additionally, return on assets (ROA) and return on equity (ROE) are also high fro the year 2000 but decreases for the next two years.
Al- Qadir Textile Mills Limited
Profitability Ratios For Year 1998 – 2002 FIGURE 4. 7
PROFITABILITY RATIOS 80
Gross Profit Margin
70
Operating Profit Margin
60
Net Profit margin 50 Return on Assets
40 G A T N E C R E P
Return on equity
30 20 10 0 1998 -10
1999
2000
2001
2002
-20 -30 YEARS
The above figure shows the profitability ratio of the company over the years. It can be clearly observed that gross-profit, operating-profit and net-profit margin is on the same trend. Return on equity is at its peak in year 2000.
Managers often often measure the performance of a firm by the ratio of net-income net-income to total total assets assets.. Howeve However, r, becaus because e net-inc net-income ome measure measures s profit profit net of interes interestt expense, this practice makes the apparent profitability of the firm a function of its capital structure. D.M Textile Mills Limited
Profitability Ratios For Year 1998 – 2002 TABLE 4. 8
2002
2001
2000
1999
1998
13.4%
14.3%
13.6%
7.8%
6.87%
Operating Profit Margin
9.8
10.72
10.34
4.40
2.17
Net Profit margin
3.21
4.42
1.50
(2.71)
(10.29)
Return on Assets
3.05
5.35
1.73
(2.92)
(10.62)
Return on equity
38.6
50.2
15.74
(24.52)
(91.09)
Gross Profit Margin
D.M D.M text textilile e gross gross-pr -prof ofit it marg margin in is show showin ing g an escal escalat atin ing g proce process ss and and so is operating-profit margin. However the company’s net-profit margin is negative and a company bears loss for the first two years. The highest net-profit is received for the year 2001 of 4.42%.
D.M Textile Mills Limited
Profitability Ratios For Year 1998 – 2002 FIGURE 4. 8
PROFITABILITY RATIO R ATIOS S 60 40 Gross Profit Margin
20 G A T N E C R E P
0 1998 -20
1999
2000
2001
2002
Operating Profit Margin Net Profit margin
-40 Return on Assets -60 Return on equity
-80 -100 YEARS
The above figure shows the profitability performance of D.M textile mill. The company did improve its gross-profit over the years. Net-profit margin is going from negative to positive in the mid of year 1999. Return on equity did also increased in the same time period giving highest return in the year 2001.
(COLONY) SARHAD Textile Mills Limited
Profitability Ratios For Year 1998 – 2002 TABLE 4. 9
2002
2001
2000
1999
1998
(2.71%)
(0.53%)
(12.93%)
(15.75%)
(5.75%)
Operating Profit Margin
(8.25)
(6.12)
(23.57)
(27.18)
(10.14)
Net Profit margin
(12.12)
(12.61)
(38.20)
(65.24)
(16.35)
Return on Assets
(1.63)
(2.28)
(3.70)
(5.58)
(4.77)
Return on Equity
(25.41)
(35.73)
(58.24)
(89.39)
(76.30)
Gross Profit Margin
The company starting starting from negative negative gross-profit margin continues its impact on profitabilit profitability y ratios. The company is not at all profitable, profitable, thus the return on assets and return on equity are also negative for this reason.
(COLONY) SARHAD Textile Mills Limited
Profitability Ratios For Year 1998 – 2002 FIGURE 4. 9
PROFITABILITY RATIO R ATIOS S
10 0 1998 -10
1999
2000
-20
2001
2002
Gross Profit Margin
Operating Profit Margin
-30 G A T N E C R E P
Net Profit margin
-40 -50
Return on Assets
-60 -70
Return on Equity -80 -90 -100 YEARS
The above figure shows the profitability performance of (Colony) Sarhad mill. The company remains below the zero percent line, which can be very evidently observed from the figure the highest loss incurred is in the year 1999.
INDUSTRY AVE (COLONY)
RAG E
AL-QADIR
D.M
SARHAD
13.09
11.194
-7.534
5.58
9.196
7.486
-15.052
0.54
2.344
-0.774
-28.904
-9.11
2.644
-0.682
-3.592
-0.54
20.344
-2.214
-57.014
-12.96
Gross Profit Margin Operating Profit Margin Net Profit margin Return on Assets Return on Equity
FIVE-YEAR COMPANY’S AVERAGE (PROFITABILITY RATIOS) TABLE 4.10
FIGURE 4. 10
FIVE YEAR'S AVERAGE (PROFITABILITY RATIOS) RATIOS) 30 20 10
AL-QADIR
0 S -10 O I T -20 A R -30
D.M (COLONY) SARHAD
-40 -50
AVERAGE
-60 -70 COMPANIES
The above given table and figure shows the industry average of profitability ratios for five years. It clearly depicts Al-Qadir textile above the industry average, D.M textile on the second position but still enjoying being above the industrial norms, whereas (Colony) Sarhad is the company below the industry average.
4.4 INTERPRETATION OF LEVERAGE RATIOS
When a firm borrows money, it promises to make a series of interest payments and than to repay the amount that it has borrowed. If profits rise, the debt holders cont co ntin inue ue to re rece ceiv ive e a fi fixe xed d in inte tere rest st pa paym ymen ent, t, so th that at al alll th the e ga gain ins s go to shareholders, whereas if the reverse happen and profits fall shareholders bear all the pain.
Al- Qadir Textile Mills Limited
Leverage Ratios For Year 1998 – 2002 TABLE 4. 11
2002
2001
2000
1999
1998
Total Debt Ratio
0.86
0.86
0.85
0.87
0.87
Long-term Debt Ratio
2.17
2.37
2.66
3.25
2.77
Debt-equity ratio
3.72
3.67
3.94
4.75
4.70
Times Interest ratio
1.73
1.30
2.32
0.91
1.18
The company’s data shows it is highly financed through debt that is of average 86%. Its total debt ratio is almost stable. The highest long-term debt ratio is 3.25 for year 1999. The company’s TIE-ratio has eventually improved in 2000 and then reduced to 1.73. Banks prefer to lend to those firms whose earnings are far in excess of interest payments. The regular interest payment is a hurdle that companies must keep jumping if they are to avoid default. This ratio measures how much clear air there is between hurdle and hurdler.
D.M Textile Mills Limited
Leverage Ratios For Year 1998 – 2002 TABLE 4. 12
2002
2001
2000
1999
1998
Total Debt Ratio
0.64
0.89
0.86
0.88
0.93
Long-term Debt Ratio
0.78
0.64
0.70
1.16
1.01
Debt-equity ratio
8.17
7.89
8.66
8.13
8.06
Times Interest ratio
1.65
1.83
1.31
0.54
0.19
The market value of the company finally determines whether the debt holders get their money back, so the ratio is calculated of total debt. D.M textile has reduced its debt burden from 93% to 64%. Long-term Debt includes not just bonds or other borrowings but also the value of long-term leases. Total long-term capital also called total capitalization, is the sum of long-term debt and shareholders’ equity. Thus this means in year 2002 there are 0.73 paisas of every rupee of long-term capital is in the form of long-term debt.
The company’s earnings before interest and taxes are more than 1.00 for three years that means company is earning far in excess than its interest payments. The data for five years shows the company has improved its times interest ratio after facing trouble in 1998 and 1999.
(COLONY) Sarhad Textile Mills Limited
Leverage Ratios For Year 1998 – 2002 TABLE 4. 13
2002
2001
2000
1999
1998
Total Debt Ratio
0.77
0.75
0.73
0.70
0.67
Long-term Debt Ratio
0.83
0.87
0.79
0.82
0.12
Debt-equity ratio
3.46
3.25
2.99
2.69
2.42
Times Interest ratio
-2.29
-2.27
-2.11
-2.43
-2.80
(Colony) Sarhad is financed on average 72 percent with debt, both long-term and short-term and 28 percent with equity. The company could be said to have a debt ratio of 0.83 (the long-term debt ratio) or 0.77 (total debt ratio) for the year 2002. Since company is incurring losses therefore its times interest ratio is negative the company is not in a position to pay the interest payments.
FIVE-YEAR COMPANY’S AVERAGE (LEVERAGE RATIOS) TABLE 4. 14
Total Debt Ratio Long-term Debt Ratio Debt-equity ratio Times Interest ratio
(COLONY)
INDUSTRY
AL-QADIR 0.862 2.644 4.156
D.M 0.84 0.858 8.182
SARHAD 0.724 0.686 2.962
AVERAGE 0.80 1.39 5.1
1.488
1.104
-2.38
0.070
Here is the compiled data for five years. Total debt ratio is 86.2 percent for AlQadir, 84 percent for D.M, and 72.4 percent for (Colony) Sarhad whereas the industry average is 80 percent. FIGURE 4. 11
FIVE YEAR'S AVERAGE( LEVERAGE RATIOS) 10 8 6 S O I T A R
AL-QADIR
4
D.M
2
(COLONY) (COLONY) SARHAD S ARHAD
0
AVERAGE
-2 -4 COMPANIES
Figure 4.11 shows the average leverage ratios of the companies with the industry average. Al-Qadir and D.M textile being above the industry average and (Colony) Sarhad below the industrial average.
4.5 INTERPRETATION OF LIQUIDITY RATIOS Creditors Credit ors extending credit to its custom customer er or making a short short-term -term bank loan, are interested in more than a company’s leverage. They want to know whether the customer will be able to lay its hand on the cash to repay. Liquid assets can be converted into cash quickly and cheaply. Al- Qadir Textile Mills Limited
Liquidity Ratios For Year 1998 – 2002 TABLE 4. 15
Current Ratio
2002 1.38
2001 1.29
2000 0.96
1999 0.89
1998 0.64
Quick Ratio
1.34
1.25
0.71
0.86
0.59
Cash Ratio
0.37
0.44
0.24
0.03
0.04
Net Working Capital To Assets
0.38
0.29
-0.05
-0.11
-0.36
Al-Qadir’s current ratio has improved each year showing for the last year Rs.1.38 in current assets for every Rs. 1.00 in current liabilities. As some assets are closer to cash than others, if there is a trouble inventory may not sell at anything above fire-sale price, thus quick or Acid-test ratio is useful to calculate. The company’s quick ratio has also improved, as there is no much difference after extracting inventory from its current assets. A compa company’ ny’s s most most liqu liquid id asse assets ts are are its its holdi holdings ngs of cash cash and and marke marketa tabl ble e securities, however a low cash ratio may not matter if the firm can borrow on short notice. Al-Qadir’s cash ratio is low as its position is strong in the industry it can easily handle emergency situations by borrowing money on short notice.
D.M Textile Mills Limited
Liquidity Ratios For Year 1998 – 2002 TABLE 4. 16
2002
2001
2000
1999
1998
Current Ratio
0.57
0.52
0.57
0.37
0.30
Quick Ratio
0.53
0.49
0.51
0.36
0.28
Cash Ratio
0.03
0.03
0.05
0.01
0.01
Net Working Capital To Assets
-0.43
-0.48
-0.43
-0.63
-0.69
D.M textile current ratio on average is 0.46, which means the company is having Rs. 0.46 in current assets for every Rs. 1.00 in current liabilities. Company’s Company’s current ratio and quick ratio are also not varied, as its inventory inventory is low in current assets. Net working capital to total assets is negative due to large short-term borrowings. (COLONY) Sarhad Textile Mills Limited
Liquidity Ratios For Year 1998 – 2002 TABLE 4. 17
Current Ratio
2002 2.12
2001 2.33
2000 2.52
1999 3.04
1998 2.59
Quick Ratio
1.07
1.16
1.26
1.57
1.45
Cash Ratio
0.01
0.01
0.01
0.004
0.03
Net Working Capital To Assets
1.12
1.33
1.52
2.04
1.36
This company’s current ratio illustrate that its currents assets are far more than its current current liabil liabiliti ities. es. The decreas decrease e in current current ratio ratio signif signifies ies trouble trouble,, that that company has drag out its payables by delaying payment of its bill that cause increase in its current liabilities and decrease in current ratio. Cash ratio is very poor since company is not having enough money in its current assets.
FIVE-YEAR COMPANY’S AVERAGE FOR LIQUIDITY RATIOS TABLE 4. 18
AL-QADIR
D.M
(COLONY) INDUSTRY SARHAD AVERAGE
1.032
0.466
2.52
1.33
Quick Ratio
0.95
0.434
1.302
0.89
Cash Ratio
0.224
0.026
0.0128
0.08
0.03
-0.532
1.474
0.32
Current Ratio
Net Working Capital To Assets
The above table is about the industry average and average of the companies’ liquidity ratios for five years. FIGURE 4.12
3
FIVE YEAR'S AVERAGE (LIQUIDITY RATIOS) RATIOS) AL-QADIR
2.5 2 S O I T A R
D.M
1.5 1 0.5
(COLONY) SARHAD
0
AVERAGE
-0.5 -1 COMPANIES
The important aspect to note here is that this graph is about liquidity position of the companies the line above the industry average shows bad performance of the company and vice versa.
4.6 INTERPRETATION OF EFFICIENCY RATIOS
Efficiency ratios are to judge how efficiently the firm is using its assets or we can say the speed with which various accounts are converted into sales or cash. Al- Qadir Textile Mills Limited
Efficiency Ratios For Year 1998 – 2002 TABLE 4. 19
2002
2001
2000
1999
1998
Total asset turnover
1.15
1.29
1.27
0.95
0.87
Fixed asset turnover
1.59
1.66
1.52
1.15
1.05
132.68
158.59
139.29
76.60
83.64
39.16
123.88
80.41
89.06
57.64
2.51
2.21
1.81
1.28
1.23
Inventory turnover Receivable turnover Payable turnover
The asset turnover ratio shows how hard the firm’s assets are being put to use. Al-Qadir’s asset turnover has increased over time. For Al-Qadir textile each rupee of assets produce Rs. 1.15 of sales, and each rupee of fixed assets produce Rs. 1.59 of sales in year 2002. Efficient Effic ient firms turn over their inventory inventory rapidly and don’t tie up more capital than they need in raw materials or finished goods. Thus this company is a better performer in this aspect too.
D.M Textile Mills Limited
Efficiency Ratios
For Year 1998 – 2002 TABLE 4. 20
2002
2001
2000
1999
1998
Total asset turnover
0.95
1.21
1.15
1.08
1.03
Fixed asset turnover
1.13
1.62
1.43
1.23
1.13
142.27
110.06
118.26
126.39
125.31
15.39
19.39
26.69
24.32
22.57
1.28
1.23
1.04
1.02
1.02
Inventory turnover Receivable turnover Payable turnover
D.M textile asset turnover was highest in the year 2001 where each rupee of assets produce Rs. 1.21 of sales, and each rupee of fixed assets produce Rs. 1.62 1.6 2 of sal sales. es. Its inv invent entory ory tur turnov nover er is acce accepta ptable ble tha than n the ind indust ustry ry nor norms. ms. Whereas receivable turnover are much better than any other company.
(COLONY) Sarhad Textile Mills Limited
Efficiency Ratios For Year 1998 – 2002 TABLE 4. 21
2002
2001
2000
1999
1998
Total asset turnover
0.13
0.18
0.10
0.09
0.21
Fixed asset turnover
0.21
0.28
0.15
0.13
0.32
Inventory turnover
0.79
1.03
0.62
0.58
1.61
Receivable turnover
0.77
1.04
0.56
0.49
2.21
Payable turnover
0.18
0.24
0.15
0.14
0.33
(Colony) Sarhad Textile Company is much below the average efficiency. The company’s asset turnovers are below 1.00 for all the five years. It shows that they are unable to produce even Rs. 1.00 of sales for each rupee of assets. The company’s inventory turn over is very low due to low sales and very high inventory level. FIVE-YEAR COMPANY’S AVERAGE FOR EFFICIENCY RATIOS TABLE 4. 22
AL-QADIR
D.M
(COLONY) SARHAD
INDUSTRY AVERAGE
1.106
1.084
0.142
0.77
1.394
1.308
0.218
0.97
118.16
124.458
0.926
81.18
78.03
21.672
1.014
33.57
1.808
1.118
0.208
1.04
Total asset turnover Fixed asset turnover Inventory turnover Receivable turnover Payable turnover
The above above table table 4.22 4.22 shows shows the indust industry ry average average and compan companies ies five-y five-year ear average efficiency ratios.
4.7 INTERPRETATION OF ASSET UTILIZATION RATIOS Asset utilization ratio measures asset intensity in generating revenues to reach a sufficient profitability level.
Al- Qadir Textile Mills Limited
Asset Utilization Ratios For Year 1998 – 2002 TABLE 4. 23
2002 15.14
2001 16.86
2000 29.47
1999 162.98
1998 81.81
39.16
123.88
80.41
89.06
57.64
142.78
183.09
157.73
87.91
94.09
Sales Working-Capital
14.91
25.29
-161.96
-42.54
-9.35
Sales to Fixed Assets
1.59
1.66
1.52
1.15
1.05
Sales to Total Assets
1.15
1.29
1.27
0.95
0.87
Sales to Short-term Liabilities
6.78
9.36
10.98
8.31
9.91
Sales to cash & Equivalents Sales to Receivables Sales to Inventories
As Al-Qadir’s asset turnover is escalating over previous five years. Up till now this increase in asset earnings makes major variation in turnover for individual asset components. Cash and equivalents evidence the most significant variability during this period, which is also evidenced from common-size balance sheet. Company Com pany’s ’s acc account ount rec receiv eivabl ables es sho shows ws a sli slight ght imp improv rovemen ementt in yea yearr 200 2001. 1.
Rega Re gard rdin ing g
inve in vent ntor ory y
turn tu rnov over er,,
comp co mpan any y
expr ex pres esse sed d de desi sire re to de decr crea ease se
inventories at every stage of its manufacturing process is revealing itself through an improved turnover ratio. It is important to note that Al-Qadir’s asset and asset component turnover ratios often compare favorable to industry norms.
D.M Textile Mills Limited
Asset Utilization Ratios For Year 1998 – 2002 TABLE 4. 24
2002 118.57
2001 131.34
2000 64.30
1999 333.09
1998 289.65
Sales to Receivables
15.39
19.39
26.69
24.31
22.57
Sales to Inventories
164.29
128.42
136.89
138.02
134.56
Sales Working-Capital
-7.94
-8.64
-7.94
-5.10
-5.36
Sales to Fixed Assets
1.13
1.62
1.43
1.23
1.13
Sales to Total Assets
0.95
1.21
1.52
1.08
1.03
18.04
19.67
12.11
15.95
25.39
Sales to cash & Equivalents
Sales to Short-term Liabilities
D.M’s asset turnover is fluctuating over the years as it has decreased for the last year year 2002 2002.. Cash Cash and and equi equiva vale lent nts s also also show show a fluct fluctuat uating ing tren trend. d. Accou Account nt receivable turnover has decreased for the last year but was better in the previous years. Inventory turnover ratio has improved continuously for all the years.
(Colony) Sarhad Textile Mills Limited Asset Utilization Ratios For Year 1998 – 2002 TABLE 4. 25
2002
2001
1999
1998
136.94
118.44
92.08
180.54
203.29
0.77
1.04
0.56
0.49
1.14
Sales to Inventories
0.77
1.02
0.55
0.50
1.52
Sales Working-Capital
0.71
0.89
0.46
0.36
1.18
Sales to Fixed Assets
0.21
0.28
0.15
0.13
0.32
Sales to Total Assets
0.13
0.18
0.10
0.09
0.21
Sales to Short-term Liabilities
1.60
2.16
1.17
1.63
9.14
Sales to cash & Equivalents Sales to Receivables
2000
(Colony) Sarhad ‘s asset turnover has decreased. Inventory turnover is much lower than the industry norms, as company’s cost of sales are high and moreover inventory constitutes about 50% of assets. Receivable turnover is also very low as more of their sales are on credit. The depressing blow of sales can be seen throughout the analysis.
4.8 CASH FLOW ANALYSIS Al- Qadir Textile Mills Limited Cash Flows For Year 1998 – 2002 TABLE 4. 26
2002 Rupees 21,969,593
2001 Rupees 52,872,333
2000 Rupees 74,371,921
1999 Rupees 2,966,040
1998 Rupees 14,007,027
Cash Flows from Investing Activities
(3,841,698)
(1,797,925)
(19,922,155)
(12,790,708)
(7,172,889)
Cash Flows from Financing Activities
(17,386,931)
(32,273,166)
(34,542,709)
7,059,934
(6,876,559)
Increase (Decrease) in Cash
740,964
18,801,242
19,907,057
3,228,545
5,993,279
Cash Flows from Operating Activities
Al-Qadir’s operating cash flows is high for the year 2000, reason being low cost of sales, which have resulted resulted in high profit before taxation. taxation. This analysis analysis reveals cash flows are steady source of cash, with a substantial increase in year 2000. The cash down turn in year 1999 is due primarily to financial charges. Investing activities were more in 1999 and 2000, due to major out flow of fixed capital
expen expendit diture ure.. Fina Financi ncing ng out out flows flows are are more more for for the the last last three three years, years, where where dividends are paid in year 2001 and 2002.
D.M Textile Mills Limited Cash Flows For Year 1998 – 2002 TABLE 4. 27
2002 Rupees 28,768,565
2001 Rupees 40,351,744
2000 Rupees 17,315,639
1999 Rupees 22,815,401
1998 Rupees 1,836,244
Cash Flows from Investing Activities
(19,665,511)
(16,354,183)
(17,158,917)
(2,171,480)
(4,924,553)
Cash Flows from Financing Activities
(8,637,153)
(26,333,169)
3,986,573
(20,746,316)
3,198,789
Increase (Decrease) in Cash
465,901
(2,335,608)
4,143,295
(102,395)
110,480
Cash Flows from Operating Activities
D.M have been able to maintain high cash flows from operations even after incurr incurring ing loss loss befo before re taxa taxati tion on for for the the year year 1998 1998 and and 1999 1999.. Cash Cash flow flow has has decreased for the year 2002 because of more payments made to creditors. Investment has increased for 2001 and 2002 by acquiring fixed assets. Whereas
financing out flow is more for the year 2001 as company made a repayment of long-term loan.
Al- Qadir Textile Mills Limited Cash Flows For Year 1998 – 2002 TABLE 4. 28
2002 Rupees (6,098,470)
2001 Rupees 230,093
2000 Rupees (19,908,780)
1999 Rupees (21,881,180)
1998 Rupees (993,496)
Cash Flows from Investing Activities
(5,893)
64,047
10,589
1,893,920
(260,035)
Cash Flows from Financing Activities
5,760,173
127
20,251,705
19,632,506
(535,235)
Increase (Decrease) in Cash
(344,190)
294,267
358,515
(354,754)
(1,788,766)
Cash Flows from Operating Activities
(Colony) Sarhad has incurred losses all the way through the years, which has affected its operating activities. They are not having enough sales even to cover
their production costs. In spite of incurring losses they have an addition to fixed asset in year 1998 and 2002, that shows an out flow.
CONCLUSION AND RECOMMENDATION
Financial statement analysis focuses on one or more elements of a company’s financial condition or operating results. Researcher emphasizes five areas of inquiry, with varying degrees of importance.
•
Short-Term Liquidity. Ability to meet short-term obligations.
•
Cash Flow Analysis. Future availability and disposition of cash.
•
Return on Invested Capital. Ability to provide financial rewards sufficient
to attract and retain financing. •
Asset intens intensity ity in generat generating ing revenu revenues es to reach reach a Asset utilization. utilization. Asset sufficient profitability level.
•
Success ss at mini minimi mizi zing ng Operati Operating ng performa performance nce and Profita Profitabil bility. ity. Succe revenues and minimizing expenses from operating activities over the long run.
5.1 SHORT-TERM LIQUIDITY Important measures of short-term liquidity for the last five years have been analyzed by the use of liquidity ratios. Al-Qadir’s current assets have increased each year except for the year 2000. From 1998 to 2002 its assets have increased by approximately 40%. The company’s current liabilities remained high up till 1999 and did reduced for two years then again increases in 2002, as they have more short-term borrowings for the last year. Al-Qadir’s liquidity position is far much better then the industry average. D.M’s current assets also show an increasing trend, but that is slow with respect to increase in current liabilities. Current liabilities have accelerated for the reason of more creditors, accrued and other liabilities. (Colony (Colony)) Sarhad Sarhad liquid liquidity ity positi position on is not favorab favorable le they they have have increas increased ed their their current assets especially inventories and they are not making enough sales, so if they sell those assets they can’t even recover the cost. And amounts of their liabilities have increased due to excessive short-term borrowings. They are in a trouble to meet their short-term obligations.
5.2 CASH FLOW ANALYSIS Al-Qadir’s operating cash flows is high for the year 2000, reason being low cost of sales, which have resulted resulted in high profit before taxation. taxation. This analysis analysis reveals cash flows are steady source of cash, with a substantial increase in year 2000. The cash down turn in year 1999 is due primarily to financial charges. Investing activities were more in 1999 and 2000, due to major out flow of fixed capital expen expendit diture ure.. Fina Financi ncing ng out out flows flows are are more more for for the the last last three three years, years, where where dividends are paid in year 2001 and 2002.
D.M have been able to maintain high cash flows from operations even after incurr incurring ing loss loss befo before re taxa taxati tion on for for the the year year 1998 1998 and and 1999 1999.. Cash Cash flow flow has has decreased for the year 2002 because of more payments made to creditors. Investment has increased for 2001 and 2002 by acquiring fixed assets. Whereas financing out flow is more for the year 2001 as company made a repayment of long-term loan. (Colony) Sarhad has incurred losses all the way through the years, which has affected its operating activities. They are not having enough sales even to cover their production costs. In spite of incurring losses they have a addition to fixed asset in year 1998 and 2002, that shows an out flow.
5.3 RETURN ON INVESTED CAPITAL Al-Qadir return on assets (ROA) shows a variation due to constant increase in assets and fluctuating net income. Net income is supreme for the year 2000. Return on equity (ROE) similarly shows the same trend as ROA. D.M return on assets (ROA) is also changing according to the net income received. Its return on assets (ROA) is lowest for the year 1998 as the cost of sales and operating expenses are high. (Colony) Sarhad is not having any positive return from its assets for the reason of continuously incurring losses for the successive five years.
5.4 ASSET UTILIZATION
Al-Qadir’s asset turnover is increasing over last five years. Yet this increase is in asset asset turno turnove verr make makes s sign signif ific icant ant chan changes ges in turn turnove overr for for indi indivi vidua duall asset asset compone components nts.. Cash Cash and equival equivalent ents s evidenc evidence e the most most signif significa icant nt variab variabili ility ty during this period, which is also evidenced from common-size balance sheet. Company Company’s ’s account account receiv receivabl ables es shows shows a slight slight improv improvemen ementt in year year 2001. 2001. Rega Regard rdin ing g
inve invent ntor ory y
turn turnov over er,,
comp compan any y
expr expres esse sed d desi desire re to decr decrea ease se
inventories at every stage of its manufacturing process is revealing itself through an improved turnover ratio. It is important to note that Al-Qadir’s asset and asset component turnover ratios often compare favorable to industry norms. D.M’s asset turnover is fluctuating over the years as it has decreased for the last year year 2002 2002.. Cash Cash and and equi equiva vale lent nts s also also show show a fluct fluctuat uating ing tren trend. d. Accou Account nt receivable turnover has decreased for the last year but was better in the previous years. Inventory turnover ratio has improved continuously for all the years.
(Colony) Sarhad ‘s asset turnover has decreased. Inventory turnover is much lower than the industry norms, as company’s cost of sales are high and moreover inventory constitutes about 50% of assets. Receivable turnover is also very low as more of their sales are on credit.
5.5 OPERATING PERFORMANCE AND PROFITABILITY Al-Qadir’s gross-profit margin has increased for the first three years and reduces eventually for the year 2001 and 2002, as cost of sales are highest for the year 2002. Operating-profit margin is following the same trend in spite that over the years they have reduced their operating expenses. expenses. Net-profit margin is negative for year 1998 and 1999 as they have paid the financial charges and reduced their debt burden.
D.M’s gross-profit gross-profit margin is stable for the last three years and was low for 1998 and 1999, as their cost of sales were 93% and 92% respectively. Company’s opera operati ting ng profi profitt show show an incre increas asin ing g trend trend,, excl exclud udin ing g the the year year 2002, 2002, thei their r operating expenses are very much stable for five years. Net-profit margin is highest for the year 2001 due to less cost of sales. (Colony) (Colony) Sarhad starts from the negative negative gross-profit margin as its cost of sales are higher than its net sales. Therefore, operating-profit and net-profit margin are also negative.
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