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FINAL PROJECT

TOPIC:

OF

**FINANCIALRATIO ANALYSIS MR. DENIM (PVT.)
**

LTD.

SUBMITTED SUBMITTED

098

TO:

MR. UMAR SAFDAR KAYANI

BY:

WAQAS SHABBIR SP08-MBAZOHAIB AFTAB SP08-MBA-

100

SUBMISSION DATE:

MAY29, 2009

SECTION

“B”

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RATIO ANALYSIS

Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. In some cases, ratio analysis can predict future bankruptcy. Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used: LIQUIDITY RATIOS Current Ratio Quick Ratio Absolute Quick Ratio Net Working Capital Ratio Defensive Interval Current Assets/Current Liabilities Quick Assets/Current Liabilities Cash/Current Liabilities

Current Assets-Current Liabilities Cash/One Year Projected Expenditure

ACTIVITY RATIOS Inventory Turn Over Inventory Turn Over In Cost of Good Sold/Inventory 360*Inventory/Cost of Good Sold 2

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Days Debtor Turnover Collection Period Working Capital Turnover Fixed Asset Turnover Total Asset Turnover Payment Period Sales/Trade Debtor 360*Receivable/Sale

Sales/Working Capital Sales/Fixed Assets Sales/Total Assets 360*Creditor/Purchase Inventory Turn Over in Days + Receivable Turn Over in Days

Operating Cycle

SOLVENCY RATIOS Times Interest Earned Debt Ratio Equity Ratio Debt to Equity Debt To tangible net worth PROFITABILITY RATIOS Net Profit Ratio Operating Profit Ratio Net Profit/Sale Operating Profit/Sales 3 EBIT/Interest Total Debts/Total Assets Equity/Total Assets Long term debts/Equity

Total Debts/(Equity-Intangible Assets)

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Gross Profit Ratio Operating Ratio Return on Total Assets Return on Equity Return on Fixed Assets

Gross Profit/Sale Operating Expense/Sale Net Profit/Total Assets Net Profit/Equity Net Profit/Fixed Assets Net Profit/Total Assets-Investments-Deferred Cost

Return on Investment

MARKET ANALYSIS Degree of Financial Leverage Price Earning Ratio Earning Per Share Book Value Per Share Dividend Yield Ratio Dividend Payout Ratio EBIT/EBT Market Price per share/Earning Per share Net Profit/Number of Share issued Total Equity/Number of Share issued Dividend Per Share/Market Value Per Share Dividend Per Share/Earning Per Share

Diluted Earning Per Share Percentage of Retained Earnings

Stock Dividend Per Share/Diluted Earning Per Share

(Total Income-Dividend)/Total Income

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LIQUIDITY RATIOS

Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio. Items Required in Liquidity Ratio: Current Assets Current Liabilities Inventory Cash Marketable Securities

CURRENT RATIO

Current Assets Current Liabilities

Current Ratio =

QUICK RATIO

Current Assets - Inventory Current Liabilities

Quick Ratio =

CASH RATIO/ ABSOLUTE LIQUID RATIO

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Cash Ratio =

Cash + Marketable Securities Current Liabilities

WORKING CAPITAL RATIO

Net Working capital Ratio=Working Capital/Total Assets

LIQUDITY ANALYSIS

RATIOS YEARS 2007 1.12 2006 1.03 RESULTS REASON OF CHANGE CURRENT RATIO Favorable Increase in Book Debts, A/R and QUICK RATIO 0.86 0.68 Favorable Cash. Increase in Book Debts, A/R and ABSOLUTE RATIO WORKING CAPITAL NEW WORKING CAPITAL RATIO 0.05 76,852,450 0.067 0.012 Favorable 12,523,260 Favorable 0.01367 Favorable Cash. Increase in Cash Increase in current assets Increase in working capital by 513.67 %.

INTERPRETATION OF LIQUIDITY RATIOS

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After the Liquidity Ratio Analysis of MR. Denim I considered the liquidity of Denim is improved as compare to its previous year and it gives favorable results. Short-term creditors prefer a high current ratio since it reduces their risk because less the current liabilities and higher the current ratio which means less the accounts payables and short term liabilities hence short term creditors will be paid soon. Liquidity analysis of MR. Denim shows positive results. The contribution of highly liquid assets is very much encouraging because increase in cash is 422.5%. Increase in cash will also helpful for the company to maintain the business operations effectively by paying the supplier in time and get benefits of discounts. It will also enhance the credibility of the company, which further helpful for the suppliers and customer’s attraction Inventories are decreased by 2.05%. Decrease in inventory means there are less produced goods for satisfying the customers, which ultimately cause of decrease in sales of company. Account Receivables and Book Debts are increased by 48% and 78 %, which means the net sales of the company this year is increased because of that cash in hand, is increased 422.5 % compared to last year. One drawback of the current ratio is that it includes inventory is difficult to liquidate quickly and that have uncertain liquidation values. The quick ratio is an alternative measure of liquidity that does not include inventory in the current assets. Finally, the cash/Absolute Liquid ratio is the most conservative liquidity ratio and the cash ratio of MR. Denim is improved very much as compared to base year. The reason is sufficient increase in cash in 7

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hand. This healthy increase in ratio result will assure that MR. Denim can be paid its suppliers any time if needed urgently. Working Capital of MR. Denim is also increased by 513.67 % as compare to base year, which is also a good sign, and show that company has enough capital to maintain its business operations. This will also produce the credibility among suppliers and customers of the company. Overall Company has a good strong current asset ratio and also maintained quick ratio along with the healthy working capital so liquidity of MR. Denim (PVT) Limited is in better position.

ACTIVITY RATIOS

Activity ratios indicate of how efficiently the firm utilizes its assets. They sometimes are referred to as efficiency ratios, asset utilization ratios, or asset management ratios.

Items Required in Activity Ratios: Annual Sales Purchases Accounts Receivable Accounts Payable Net Fixed Assets Total Assets

**ACCOUNT RECEIVABLES TURNOVER
**

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Receivables Turnover

=

Annual Credit Sales Accounts Receivable

AVERAGE COLLECTION PERIOD

Average Collection Period =

360 Accounts Receivable Turnover

ACCOUNT PAYABLE TURNOVER

Account Payables Turnover

=

Purchases Accounts Payables

AVERAGE PAYMENT PERIOD

Average Payment Period =

360 Accounts Payable Turnover

FIXED ASSET TURNOVER

Fixed Asset Turnover =

Sale Net Fixed Asset

**TOTAL ASSET TURNOVER
**

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Total Asset Turnover

=

Sale Total Assets

ACTIVITY ANALYSIS

RATIOS YEARS RESULTS REASON CHANGE OF

2007

INVENTORY TURNOVER INVENTORY TURNOVER IN DAYS DOBTORS TURNOVER COLLECTION PERIOD CREDITORS TURNOVER PAYMENT PERIOD FIXED 6.20 Times 58 Days 4.32 84 Days 32 11

2006

4.68 Times 77 Days 6.03 58 Days 20.03 18 Days 2.18 0.88 65 Times Unfavorable Favorable Favorable Decrease compare to CGS Decrease in Inventory more as in

Inventory more as compare to CGS Increase in sales by

27.10% Unfavorable Increase in sales by Favorable Favorable Favorable Favorable Unfavorable 27.10% Creditors decreased by 20.82. Creditors decreased by 20.82. Increase in Fixed

Days ASSETS 2.58

TURNOVER TOTAL ASSETS 0.90 TURNOVER WORKING CAPITAL 13.43 TURNOVER RATIO Times

Assets by 4.02% Increase in Total Assets by 24.41%. Working capital increased 513.67% 10 by

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OPERATING CYCLE

142 Days

135 Days

Unfavorable

High

average

collection period.

INTERPRETATION OF ACTIVITY RATIOS

Activity ratios are also known as efficiency or turnover ratios, measure how effectively and efficiently the firm is utilizing its assets. Activity ratios are also known as management ratios. Some of the aspects of activity analysis are closely related to liquidity analysis. In this session we will primarily focus on how effectively the firm is managing two specific groups receivables and inventories and its total assets in general. Management of MR. Denim Limited is very efficient to operate its fixed assets and overall efficiency of management has gone better as compared with base year. Total assets, current assets, fixed assets; working capital and cash all are increased with decent percentage, which gives the proof of efficient management. Overall management has been very successful in deploying its resources for the best of company, which will definitely contribute to higher profits for company. Also management is very much efficient to pay its payables because average collection period is higher than average payment periods which mean management can use idle funds. Higher collection period shows too liberal and inefficient credit collection performance and a lower payment period shows in time payments to various stakeholders and 11

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built repute about the company among its stakeholders. Less inventory period will also helpful for the company to increase its sales volume.

SOLVENCY RATIOS

The solvency ratios measure business risk, which shows the ability if the business to pay its long term debts. Investors are very interested in these ratios because they indicate the amount of debt your company can handle. They also indicate the amount of investment you have in your company Items Required in Solvency Ratio: EBIT Interest Expense Total Debts Total Assets Net Profit Equity

**TIMES INTEREST EARNED
**

EBIT Interest Expense

Times Interest Earned =

DEBT RATIO

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Debt Ratio =

Total Debts Total Assets

EQUITY RATIO

Equity Ratio =

Equity Total Assets

DEBT TO EQUITY RATIO

Debt to Equity Ratio =

Total Debt Equity

SOLVENCY ANALYSIS

RATIOS YEARS 2007 INTEREST 1.61 0.626 2006 1.01 0.636 RESULTS REASON CHANGE TIME Favorable Favorable Increase margin Increase in in profit total OF

EARNED DEBT RATIO PROPERITY/EQUITY RATIO DEBT RATIO TO

37.35% 36.1% Favorable

assets by 24.41 % Increase in equity by 28.7% & Total Assets by 24.41% Increase in Equity by 28.7%

EQUITY 1.678

1.76

Favorable

**INTERPRETATION ON SOLVENCY RATIOS
**

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Solvency Analysis of MR. Denim (PVT) Limited is favorable because all the ratios provided the favorable result which is a good strong and positive indication towards firm’s ability to fulfill its long-term debts. Time interest earned ratio shows that although financial cost is increased but Earning before interest and tax increased by 28.58% which means management has utilized the debt funds efficiently which produced high profits and hence percentage of earnings through debts are more than percentage of financial cost (interest payable) which is 14.8%. Debt ratio is also decreased which is favorable for the company because it means less contribution of external debts in business and ultimately less interest will be paid and hence more profits will be achieved. Result also shows that total equity of the company has increased with 28.7% and total debts reduced by 4.3% which is also a good sign for the company and it means that most of the working of the company is done by equity rather than to use of external debts which also reduced the fixed cost and financial burden on company. It also indicates that more percentage of the assets is being financed by owner’s equity. Company’s current liabilities also increased by 32.7 % but long term liabilities (loans) has decreased by 28.7% which is a major contribution and because of this financial cost of business is decreased. Company should try to reduce its current liabilities. Although current year debt ratio result is favorable but this is because of increase in current liabilities. Company’s Long Term debts paying worth/ability is also improved. 14

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PROFITABILITY RATIOS

Profitability ratios offer several different measures of the success of the firm at generating profits.

Items Required In Profitability Ratios: Sales Cost of Goods Sold Net Profit Total Assets Shareholder’s Equity

GROSS PROFIT MARGIN

Gross Profit Margin =

Sales - Cost of Goods Sold Sales

OPERATING PROFIT MARGIN

Operating Profit Margin =

Operating Profit Sales

NET PROFIT MARGIN

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Net Profit Margin =

Net Profit After Tax Sales

OPERATING RATIO

Operating Ratio =

Operating Expenses Sales

RETURN ON ASSETS

Return on Assets =

Net Income Total Assets

RETURN ON EQUITY

Return on Equity =

Net Income Shareholder Equity

RETURN ON INVESTMENT

Net Income Investment

Return on Investment =

**RETURN ON FIXED ASSET
**

Net Income Fixed Assets 16

Return on Fixed Asset =

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PRIFITABILITY ANALYSIS

RATIOS YEARS 2007 9.18% 2006 9.4% RESULTS REASON CHANGE NET PROFIT RATIO Unfavorable N.P increased OF

with less % as GROSSPROFIT RATIO 22.12% 22.8% compare to sales Unfavorable G.P increased with less % as OPERATING RATIO OPERATING RATIO RETURN TOTALASSETS 12.88% 13.02% Favorable ON 8.32% 8.33% PROFIT 9.23% 9.77% compare to sales Unfavorable O.P increased with less % as compare to sales Increase in sales

by 27.10%. Unfavorable N.P increased with less % as compare to Total Assets Unfavorable N.P increased with less % as compare to Equity Increase in fixed assets by 4.02%

RETURN ON EQUITY

22.3%

23%

RETURN ASSETS

ON

FIXED 23.76% 19.88

Favorable

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**INTERPRETATION ON PROFITABILITY RATIOS
**

After calculating all the ratios of Profitability of MR. Denim I considered that profitability of the company is in unfavorable condition. Profitability is a tool to check the final outcome of the firm. As ratios include in Profitability are calculated by use of Sales and profits also it includes ROA, ROI and ROE ratios that’s why potential customers, investors, creditors, Govt., owner and even all of the stakeholders of the company have shown their deep interest in Profitability analysis. The company’s profitability analysis shows the Unfavorable result. The main reason of favorable condition is Increase in GP, NP, and OP with less percentage as compare to sales in the comparative years. Company also earns profit but comparing to its base year this profit is decreased. This decrease in ratios is also because of increase in admin and selling expenses. Inefficient utilization of resources is also one reason of unfavorable results. Return on equity and total asset is also decreased which may damage the credibility of the company.

Trend Analysis

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**“The analysis of the changes in a given item of information
**

over a period of time or a comparative analysis of a company's financial ratios over time”

Trend analysis is basically used to determine the trend of the firm. It provides trend of items involved in Income statement and Balance Sheet. E.g. how much percentage of sales is increased this year comparing to base year. Considering these trends in mind management takes the future decisions. Trend analysis is not only useful for management but also for potential investors of the company who can evaluate the performance of the company by comparing with previous years performance. Basically there are two types of Trend analysis, which are:

1. Horizontal Analysis 2. Vertical Analysis Statement) (Common size Financial

Horizontal Analysis

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Horizontal analysis is basically compares horizontally the items of income statement and balance sheet with previous years keeping one base year as 100%. At least four years data is required for conducting Horizontal Trend Analysis. When an analyst compares financial information more than three years for a single company, the process is referred to as HORIZONTAL ANALYSIS.

In Horizontal Trend Analysis the analyst computes percentage changes from year to year for all financial statement items, such as cash and inventory. Trend analysis involves calculating each year's financial statement balances as percentages of the first year, also known as the Base year. When expressed as percentages, the base year figures are always 100 percent, and percentage changes from the base year can be determined.

As we know that minimum four years data is required to conduct the Horizontal Trend Analysis of a company, so here this analysis could not be performed due to unavailability of financial data.

Vertical Analysis

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Vertical Analysis is basically vertically analyze or compare the items include in Income Statement and Balance Sheet. Mainly one of the item is consider as base and keep that item equal to 100 all the remaining items are divided by that base and evaluating the answers.

In VERTICAL ANALYSIS analyst uses base of income statement is net sales revenue, while in balance sheet it is total assets. This approach to financial statement analysis, also known as component percentages, produces common-size financial statements. Common-size balance sheets and income statements can be more easily compared, whether across the years for a single company or across different companies. Vertical Analysis requires minimum two years data.

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**Vertical Analysis of MR. Denim’s INCOME STATEMENT
**

FACTOR

Sales C.G.S Gross Profit Selling Expense Admin Expense Operating Profit Other Operating Income Profit Before Interest & Tax Financial Cost Profit Before Tax

Tax

2006

100 77.2 22.8 3.98 3.18 9.78 0.41 15.63 5.85 10.2 0.8 9.4

2007

100 77.88 22.12 4.04 2.77 9.23 0.86 15.3 6.07 10.1 0.91 9.12

SPEED

DIRECTION

RESULT

(0.68) (0.67) 0.066 (0.40) (0.54) 0.45 (0.33) 0.22 (0.1) 0.11 (0.21)

Upward Downward Upward Downward Downward Upward Downward Upward Downward Upward Downward

Unfavorable Unfavorable Unfavorable Favorable Unfavorable Favorable Unfavorable Unfavorable Unfavorable Unfavorable Unfavorable

Net Income

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Vertical Analysis of MR. Denim’s BALANCE SHEET

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ITEMS

2006

2007

SPEED DIRECTION

RESULT

CURRENT ASSETS

Cash Prepayments, Advances and Deposits Book Debts Stock in Trade Stores and Spares Total Current Assets 0.65 20.8 14.71 14.61 3.63 54.41 2.73 24.81 21 11.50 3.3 63.33 2.08 4.01 6.28 (14.05) (0.33) 8.92 Upward Upward Upward Downward Downward Upward Favorable Favorable Favorable Unfavorable Unfavorable Favorable

FIXED ASSETS

Property, Plant and 41.11 32.81 Equipment Fixed Assets Subject To Finance 0.76 2.21 Lease Capital Work in 2.45 1.46 Progress Total Fixed 44.33 36.49 Assets Long Term 1.24 0.17 Deposits TOTAL ASSETS 100 100 Unfavorable (0.83) 1.45 (0.98) (7.84) (1.07) Downward Favorable Upward Downward Downward Downward Unfavorable Unfavorable Unfavorable -

EQUITY

Share Capital Un-appropriated Profit 1.91 34.18 1.54 35.8 (0.37) 1.62 Downward Upward Unfavorable Favorable

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Total Equity

36.1

37.34

1.24

Upward

Favorable

**NON CURRENT LIABILITIES
**

Long term Loans 10.58 6.08 (4.52) Downward Favorable

CURRENT LIABILITIES

Short term Borrowings Long term financing Trade & Other payables Current Liabilities 46.61 4.01 2.41 53.04 55.05 0 1.53 56.6 8.44 (4.01) (0.87) 3.55 Upward Downward Downward Upward Unfavorable Favorable Favorable Unfavorable

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