FINANCIAL ANALYSIS OF FAUJI FERTILIZER COMPANY

LIMITED (FFC)
Few questions will be answered in this short research

Q1. What is good for the opportunities seekers in investing FFC shares?

Q2. Are the following ratios encouraging / discouraging for the investors?

Q3. Compare past financial data to the current year and make conclusion with the help of
difference.

Q4. Evaluate company’s dividend policy and comparing the impact of financing with other
alternatives.

We begin with

Ratio Analysis
Gross Profit Margin= Gross Profit/Net Sales

= (15,648,130/36,163,174) * 100

= 43%

Operating margin=Operating Profit / Net Sales

= (13,057,217/36,163,174) * 100

=36%

Net Income to Sales= Profit after taxation / Net Sales

= (8,823,106/36,163,174) * 100

=24%

COMMENTS:

The Net income to sales ratio was 21% in 2008(verification can be taken from 2008 income
statement) and now it has increased up to 24%.Thus it shows a positive sign for the
investors indicating high yielding dividend and increased share’s worth.

Accounts Receivable Turnover Ratio = Annual Credit Sales / Average Accounts Receivable

=96.07(in times), previous was 27.58

=4(in days), previous was 13

COMMENTS:

A high receivable turnover ratio may indicate sound recovery policies of company and also
indicates increased business. When business of a company increases, we suppose recoveries
will also increase, so general perception of a high increased ratio receivable turnover ratio is
positive. But on the other hand a high account receivable ratio may also suggest rigid
company recovery policy for his debtors.

Recovery (in times) has increased from 27.58 to 96.07 in year

2009 compare to preceding year. We assume the increase come from high productivity,
sales and increased profit compare to preceding year.

Account Payable turnover Ratio= Purchases/Average Accounts Payable

=54.82, previous was 49,

=7 (in days), previous was same

COMMENTS:

The Accounts payable ratio may tell you the repayment capability, duration, and times the
payment is made by the company to its creditors. So FFC has 7 days time period in which it
pays off its debts. A high ratio (in terms of days) is discouraging for the creditors to do
business with the company.7 days is sufficient time to pay off the debts.

Return on Asset (ROA) = [Profit after taxation (PAT)/Total Asset]

=8,823,106/385, 515, 82

=0.22 or 22%

COMMENTS:

This ratio indicates how well company is using its resources to generate profit. This ratio can
also be used by only considering fixed portion of assets or vice versa. Last year ROA of the
company was 20%. It means 2% increase.

Return on Equity (ROE) = [Profit after taxation (PAT)/Total Equity]

=8,823,106/13,082,442

=0.67 or 67%
COMMENTS:

Last year ROE was 53%. Now it has increased.ROE of FFC has been increasing since last five
years. This ratio tells us how effectively company is using its financing from its stock
portfolios. Major shareholders who are earning a lot of profit from any company would be
extremely discouraged if they see more stocks been floated in the market and no increase in
net income occurred. In a way ownership of the company is further distributed, and no
extra profit is generated. This way an investor’s profit ratio also decreases.

Current Ratio= Current Assets-Current Liability

= 14,917,456 – 17,854,574

= (293, 7118)

COMMENTS:

Though current liabilities are exceeding current assets, nevertheless it cannot be taken as
negative sign for the company because FFC is using its borrowing for the productivity and
future increased market for the products. Moreover income statement ends on positive
income.

Quick ratio= Current Asset-(Inventories + Prepaid) / Current Liabilities

= 14,917,456-(2,996,633 + 37,653) / 17,854,574

=0.66

Cash Ratio= (Cash and Marketable Securities)/ Current Liabilities

= (3,849,348+6,768,568) / 17,854,574

= 0.59

COMMENTS:

Quick ratio indicates the liquidity strength of a company. It reveals to creditor the capability
of debtor to pay off his debts in short time period. FFC quick and cash ratio are better and it
has been better since last five years.

Total Asset turnover= Sales / Total Assets

= 36, 163, 174 / 38, 551, 582

= 0.94 or 94%

Fixed Asset Turnover= Sales / Fixed Assets

= 36, 163, 174 / 23, 634, 126

= 1.53 or 153%

COMMENTS:

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue
- the higher the number the better.FFC is maintaining a suitable rate.

Debt to Equity Ratio: Total Liability / Shareholder’s Equity

= 3035,757 / 13,082,442

=23.2%

COMMENTS:

Debt to equity ratio reveals the riskiness, if company fails. High debt ratios indicate debt
burdens and are not a good sign for company especially if default occurs. Companies use
these borrowed money in increasing business, developing more market or purchasing fixed
assets, thus may also indicate good sign of profitability in future. FFC debt ratios aren’t
heavy.

Dividend Payout ratio= Dividend / Net Income

= 6,452,337 / 8,823,106

= 73.12%

COMMENTS:

Dividend payout ratio shows the percentage of dividend to shareholders. When company
offers preferred stock, first dividend goes to its holders. Common stock holders come last.
The dividend after being paid to preferred stock holders are is then distributed to common
stock holders. Thus an investor who is in analyzing process before investment in companies
stock should check out dividend payout ratio.

Dividend Yield Ratio = Annual dividend per share / Market value of Share

= 13.15 / 102

= 12.89%

COMMENTS:

Dividend yield reveals how much investor is getting in return of his investment relative to
stock market price
To better explain the concept, refer to this dividend yield example: If two companies both
pay annual dividends of $1 per share, but ABC Company’s stock is trading at $20 while XYZ
Company’s stock is trading at $40, then ABC has a dividend yield of 5% while XYZ is only
yielding 2.5%

This ratio can help investor putting up small sum of money while receiving better returns.
 CONCLUSION
The Dividend per share of FFC was 13.15rs. It means if XYZ invests in 1000 shares, he would
be getting return 13150rs. Many saving accounts may offer you return around 14% but still
opportunities in financing in FFC share remains better. Because by financing in stock you
may not only receive yielding dividend but also a chance of increasing stock price. At the
end of year 2008 market share price of FFC was 58.73 which has now increased up to
102.93. It means if XYZ has purchased 1000 shares and after receiving a year dividend, he
sells them out gets profit

Share purchased = 58,730

(1000 * 58.73)
Share Sold= 102,930
(1000 * 102.93) ------------
44,200
Dividend 13150
57,350

Return on investment in a year = 58,730

from 2008 to 2009 (102,930 + 13150)

= 0.5095 or 50.95%

So it is quite obvious now with that with 50.95% return (including both share price and
dividend) in an year that financing in FFC proves to be far better choice than receiving
returns from saving accounts. Dividend is received by shareholders four times a year.

Secondly the very obvious and positive aspect to be noticed by investors is increasing profit
ratio compare to other years. Suppose if company tends to curtail its dividend by investing
and to strive to develop other markets, nevertheless future profitability can be predicted.
Another aspect for the investors to be encouraged is that FFC has no such big debt burdens.

NOTE: “Any financial data and ratio can be verified from company’s annual report 2009”