Assignment No.

: 04

Date: 11.06.2016

Subject: Financial Statement Analysis and Valuation

Submitted By:

Aqsa Iram
Reg. # FA13-BAF-002/SWL
BAF-B1
Submitted To:

Mr. Qamar Uz Zaman Malik

COMSATS Institute of Information Technology, Sahiwal

 Lucky Cement Pvt. Ltd

Financial Analysis
Liquidity Ratio:

Liquidity ratios are the ratios that measure the ability of a firm to meet their current obligations. These
ratios are shows the number of times a firm pay their current obligations from their current assets. If the
value is 1 thats means company fully covered their current obligation. Liquidity ratios greater than 1
shows that firm is in good financial position and it have a low chance of falling into financial difficulties.

Liquidity ratio can be measure by using three liquidity ratios:

Current ratio
Acid test ratio
Working capital ratio

Current Ratio:

Definition:

Current ratio indicates a firm ability to repay their short term debts from current assets. This ratio
measures whether a firm has enough assets to pay their current obligations over one year time period.

Explanation:

Bench mark of current ratio is 1.5 to 2. A ratio under 1 show that an organization's liabilities are higher
than its current assets and organization is not able to meet their current obligations. Ratio less than 1
demonstrates that the organization is not having enough money. Ratio greater than 2 indicates that firm
has excess assets but not invest them properly. This ratio varies industry to industry. For some industries 2
is a good sign but for some industries 1.5 is a good ratio.

Conclusion:

The current ratio of the company is not shows a good performance. In previous two years in 2011 and
2012 company performance is better but in 2014 company have excess assets manager not efficiently
invest excess assets. Current ratio of lucky cement indicates that the company managers not efficiently
manage their liquidity.
Acid Test Ratio:

Definition:

The term "Acid test ratio" is generally called quick ratio. This ratio indicates that how much a company
has most liquid assets other than inventory. This ratio measures a firm short term debt paying ability by
using most liquid assets.

Explanation:

Quick ratio standard bench mark is 1 to 1.5. Ratio under 1, shows that companys current assets have a
large part of inventory other than most liquid assets. Ratio greater than 1 shows a good performance and
healthy position of most liquid assets that a firm has.

Conclusion:

Quick ratio of lucky cement shows that in 2011 and 2012 company mostly relay on their inventory. In
2013 company have a good ratio but in next two years company have surplus assets in their stock and
manager did not invest excess assets in the business. Cash is surplus in the hand but not invested by the
manager very well.

Working Capital:

Definition:

Working capital shows that how much amount a firm has left from current assets after paying their current
liabilities. This ratio is based on current obligations that a firm have.

Explanation:

The number of this ratio can be positive and also negative. Standard bench mark of this ratio is 1.2 to
2.00. Ratio less than 1 indicate that company has excess liabilities but not enough cash in hand after
paying liabilities. This ratio depends upon the proportion of current obligations. Ratio exceeding 2 shows
that company did not invest excess assets and ratio less than 1 indicates a negative working capital.

Conclusion:

Basically working capital indicates a company ability to cover their short term debts. Working capital of
lucky cements shows a negative trend in last 5 years. In 2013 this ratio is very low because of energy
crises and due to high tariff and taxes are imposed by the government on cement sector. Due to this
working capital shows a negative trend.
Activity Ratios:
The second type of ratios is known as the Activity Ratios. Activity ratios shows that how son a company
convert their operating assets into cash. Activity Ratios show how much an organization has put resources
into a specific kind of advantage (or gathering of benefits), in respect to the income the advantage is
creating.

Account Receivable Turnover/ Average Collection Period:

Definition:

This ratio shows the average collection period in days of payments from accounts receivable and from
those customer of the business who purchase goods on credit.

Explanation:

Accounts receivable should always be greater than accounts payable. The company will receive its
money faster from its customer when the average collection period is low and on the other side the higher
the average collection period the customer will take longer time to pay their payments. In this situation
the company will be less stable.

Conclusion:

Account receivables ratio shows that how many times a company recover their debts. A company must
receivables turnover is higher as compare to payables turnover. In lucky cements company pay early but
receive later. This is not a god sign for the company. In 2011 and 2012 this ratio is very low and accounts
payables times is much higher. But in next 3years in 2013 to 2015 company increase the number and try
to decrease the number of payables times.

Account Payable Turnover:

Definition:

It is a short term liquidity ratio. This shows the rate at which company will pay to its suppliers. It is
calculated by taking the total purchases made from suppliers and dividing it by the average accounts
payable amount during the same period.

Explanation:

This ratio shows the time period to the investor, in which the company pay its average payable amount.
Alternately, a lower creditor liabilities turnover proportion as a rule means that an organization is
moderate in paying its suppliers. Be that as it may, a high records payable turnover proportion is not
generally to the greatest advantage of an organization. Numerous organizations develop the time of credit
turnover (i.e. lower creditor liabilities turnover proportions) getting additional liquidity.

Conclusion:

Accounts payables turnover ratio means how many times a company payout their current liabilities in a
year. This ratio of lucky cement is very high that means they pay more early than they receive money.
This is not a good sign for the company. Company must decrease the number of their payouts and
increase the number of receivables times.

Inventory Turnover:

Definition:

Average inventory ratio shows the efficiency of a company to complete the operating cycle in a year. It
shows how efficiently the inventory is managed by comparing the CGS with average inventory for a
period.

Explanation:

Stock turnover proportion is utilized to evaluate how proficiently a business is dealing with its inventories
so it is important to have high turn. When all is said in done, a high stock turnover shows proficient
operations. This also shows the liquidity of the inventory. And how easily a company turns its inventory
into cash.

Conclusion:

Inventory turnover shows that how many times a company covert their raw material into finished goods
and sell out. Lucky cements inventory turnover is very well and according to industry average. In 2011
they complete their cycle 26 times in a year but in next 4 years this ratio is low but not much low. Average
ratio is approximately equal to 23 times in a year .

Long Term Debt Paying Ability:

Times Interest Earned Ratio / Coverage Ratio:

Definition:

Times interest ratio used to measure the firms long term debt paying ability. Coverage ratios are designs
to relate the financial charges of a firm to the firms ability to service or to cover them.
Explanation:

A high proportion demonstrates that a firm has a good record of paying their obligations. A low and
fluctuating scope from year to year demonstrates a poor period. In speculation a deeply stable business a
moderately low scheme scope proportion might be fitting, where as it may not be suitable in an
exceedingly repetitive business.

Conclusion:

Times interest earned ratio shows that how many times a firm pays interest on debts which they borrow.
Lucky cement pays their debt holders 9 times a year in 2011 and in 2012 they pay 33.87 times. This ratio
gradually in increasing trend and in last in 2015 this ratio reaches 618.93 times a year. This is a good sign
for the company in creditors point of view. But in investors point of view this is not good because they
receive a low return as compare to debt holders.

Debt Ratio:

Definition:

A financial ratio that measures the extent of a companys or consumers leverage. The debt ratio is
defined as the ratio of total long-term and short-term debt to total assets, expressed as a decimal or
percentage. It can be interpreted as the proportion of a companys assets that are financed by debt .

Explanation:

A measure of an association's total commitment to its total assets. A lower debt ratio shows a more stable
business and longevity of the business. A higher ratio shows that when they need more money no one
agree to give them. Companies with higher debt ratios are better off looking to equity financing to grow
their operations.

Conclusion:

Debt ratio of a company shows that how many part of capital is covered by debt. This ratio is good as this
ratio is low. In lucky cement in 2011 only 0.18 portion of capital is covered by debt and remaining all
portion is covered by equity. This is a god sign for the company. In next all years this ratio is equal to 0.
That shows all of the capital is covered by the equity.

Debt To Equity Ratio:

Definition:

This shows that how much part of the firms capital is covered with equity. This ratio should be higher.
Its a leverage ratio.
Explanation:

A lower debt ratio is favorable for the company it seems to be less risky. A higher debt ratio is
unfavorable because it shows that company is rely most on its external lenders which seems to be high
risk.

Conclusion:

Debt to equity ratio shows that how many part of capital is covered by the equity. This ratio is good as
much high this ratio. In lucky cement this ratio is 0.22 in 2011 and 0.65 in 2014 that shows a negative
trend. In 2014 this ratio is high but not much high. In industry ratios of lucky cement is according t
industry trend.

Profitability Ratio:

Profitability ratios are used to measure the ability of a business to generate earnings as compares to their
expenses and other costs are incurred during the accounting year. These ratios are good as these ratios are
high. Sometimes these ratios are compares with the competitors and with industry average.

Return On Equity:

Definition:

A profitability ratio which shows the ability of the firm to generate profit from shareholders investment.

Explanation:

Normally the investors like to see the high return on equity because it shows that company is using its
investors funds effectively. Higher ratios are always better then the lower ratios but have to be compared
with the others companys ratio of the industry.

Conclusion:

Return on equity ratio shows that how much investor can gain on their investment. Lucky cements return
on equity ratio in 2011 is 14.39 and in 2015 this ratio is reaches at 20.98. in 2013 this ratio is 23.67 that
shows a positive trend and investors gain a high return on their investment.

Return on Assets:

Definition:

The return on net assets (ROA) is a correlation of net pay with the net resources. A profitability ratio
which measures how efficiently can manage its assets to produce profit during a specific period of time.
Explanation:

This ratio shows that how efficiently a company can earn on its investments in assets. Their ROA will
normally be lower than the ROA of organizations which are low resource coldhearted. The higher ratio
will be most favorable to the company. A positive ROA ratio usually indicates an upward profit
trend as well.

Conclusion:

Return on assets ratio indicates that how much a company can earn through their working assets or from
operating assets. Lucky cement generates profit on their assts 9.63 in 2011. In 2015 this ratio reaches at
17.01. in 2013 this ratio is 19.35 that shows lucky cement generates profit approximately 20% from their
operating assets.

Total Assets Turnover:

Definition:

Assets turnover ratio is the ratio of an organization's deals to its benefits. It is a productivity proportion
which tells how effectively the organization is utilizing its advantages for creates income.

Explanation:

On the off chance that an organization can produce more deals with fewer resources it has a higher
turnover proportion which lets it know is a decent organization since it is utilizing its benefits proficiently.
A lower turnover proportion tells that the organization is not utilizing its advantages ideally.
Conclusion:

Total assets turnover ratio shows that how much a firm utilized their assets effectively for generating
profit. Lucky cement generates profits from their assets 0.63 in 2011. This ratio is gradually fluctuates
during the upcoming years. In 2012 this ratio reaches at 0.82. this ratio is a positive sign for lucky cement.

Gross Profit Margin Ratio:

Definition:

Gross profit proportion is the proportion of gross benefit of a business to its income. It is a gainfulness
proportion measuring what extent of income is changed over into gross benefit (i.e. income less cost of
products sold).
Explanation:

Gross profit margin ratio measures benefit. Higher amount of gross profit shows that firm has a more
amount of revenue to cover their non production costs. In large production and manufacturing business
process gross profit margin measure the efficiency of production plant.

Conclusion:

Gross profit margin ratio indicates that how much a firm gain from their operations. Lucky cement gain a
large part of profit from their operation. In 2011 this ratio is 33.48 and in 2015 this ratio reaches at 45.09.
Continuously this ratio is in increasing trend till now. This is a good sign because they minimize their cost
and gain profits.

Net Profit Margin Ratio:

Definition:

Net profit margin ratio(additionally called net revenue) is the most essential profit ratio that measures the
rate of net wage of a substance to its net deals. It speaks to the extent of offers that is left over after all
significant costs have been balanced.

Explanation:

This ratio compares profitability of competitors in the industry. A high ratio indicates that company
generates more profits from their sales. It also means that company converts their sales into actual profits.

Conclusion:

Net profit margin ratio is a indicator of cost covered through gross profit. Lucky cement net profit margin
ratio is 15.26 in 2011. In 2015 this ratio is 27.77. Continuously this ratio is in increasing trend till now.
That is a very good sign for the company. Company covered all costs from net profit margin and then they
gain a 28% profits from their operations.

Earnings Per Share:

Definition:

Earnings per share is a business sector viewpoint ratio that measures the amount of net earnings per
share of stock outstanding. At the end of the day, this is the measure of cash every offer of stock would
get in the event that the greater part of the benefits were conveyed to the remarkable shares toward the
end of the year
Explanation:

Earnings per share somehow same as profitability ratios. A higher ratio is always better than a lower ratio.
A higher ratio shows that a company has more profitable and distributes profits among shares holders.
Sometimes companies dont pay their attention to EPS but they rise their share value.

Conclusion:

Earnings per share shows that how much value of a share is increase during a year. In 2011 per share
earnings is 12.28 and in upcoming years this value is reaches at 38.44. This means share value
continuously in increasing trend. This ratio also indicates that company did not pay dividend to their
common stock holders.

Book Value Per Share:

Definition:

Book value per share is a business sector appreciate financial ratio. The incentive behind compute book
value per share is to relate shareholder's value to the quantity of shares of ordinary stock extraordinary.
Since the quantities of shares of preferred stock are not view as, this gives an all the more "genuine"
worth to the ordinary shares outstanding.

Explanation:

This ratio is used to calculate the per share value of a company based on their part of equity covered with
common stock. This ratio determines the level of safety associated with the share holders when a
company has to liquidate.

Conclusion:

This ratio measure how much a share value a investor get in case of liquidity. In 2011this value is 85.88
but in 2015 this value reaches at 183.25. That shows the book value of per share is in increasing trend till
now. As years pass this ratio is high as compare to previous year.

Retention Ratio / Plow Back Ratio:

Definition:

Retention Ratio or Plowback Ratio is the ratio that measures profits have been paid out to the
shareholders. The prime thought behind profit maintenance ratio is that the more the organization holds
the speedier it has chances of developing as a business. This is otherwise called stability standard or
protection ratio.
Explanation:

Manager of a company wants this ratio very high but share holders have a conflict due to this. This ratio a
much high and going towards increase the growth of the business is also increase. As well as price of the
shares also increase. But shares holders want a high ratio of return on their investment.

Conclusion:

Retention ratio shows a firms growth rate or ratio of a year. In 2011 this ratio is 67.42 but in 2015 this
ratio reaches at 76.59. That shows in 5 years lucky cement grow with 9%. This is a good indicator for the
firm.

Comparison with industry 2015 data:

Current ratio:

LCPL ACPL
3.64 2.75
Current ratio shows that ACPL has a better performance as compare to LCPL. Because they somehow
efficiently manage their surplus current assets as compare to LCPL.

Quick Ratio:

LCPL ACPL
2.75 1.97
Quick ratio shows that how much part of current assets is covered with inventory. ACPL have more liquid
assets other than inventory as compare to LCPL. Most of the part of inventory of LCPL is covered
through inventory.

Total Assets Turnover:

LCPL ACPL
0.61 1.07
Total assets turnover shows that how much effectively a firm uses their assets. LCPL have a low ratio as
compare to ACPL. ACPL generates more profits from their productive assets.

Return on Assets:

LCPL ACPL
17.01 18.03
Return on assets shows that how much efficiently a firm uses their productive assets and generates
revenues from sales. LCPL have a bit lower ratio as Compare to ACPL. ACPL generates a bit high profit
from their operations.
Gross Profit Margin:

LCPL ACPL
45.09 33.59
Gross profit margin ratio shows company earnings after cost of goods sold. LCPL gains from their sales
45.09 and ACPL gains 33.59. This ratio is good as this ratio is high in proportion. LCPL gain more profits
as compares to ACPL.

Net Profit Margin:

LCPL ACPL
27.77 16.86
Net profit margin ratio measure a company profit after taxes. It shows that how much a company gain
from its sales. LCPL gain more as compare to ACPL.

Time Interest Earned Ratio:

LCPL ACPL
618.93 124.88
Time interest earned ratio indicates how many times a firm pay interest to their debt holders in a year.
LCPL pays interest to their debt holders 618.93 times in a year while ACPL pays 124.88 times.

Debt to Equity Ratio:

LCPL ACPL
0.65 0.46
Debt to equity ratio shows a firms capital part which is covered by share holders equity. This ratio is
good as this ratio is high. LCPL have a 65%equity based capital and ACPL have a 46% part of capital
which is based on shareholders equity.

Comprehensive Conclusion:

After the conclusion of all ratios and compression with industry I conclude that lucky cement
works very well and according to industry trend. After Activity and liquidity ratio comparison I
conclude that company pays their short term liabilities early but receive their receivables later.
This is not a good sign for the company. They must receive early and pay later. Their inventory
turnover is good but if they manage their payables and receivables than they can generate more
finished goods and their cash level is also increase. Due to their default in payables their working
capital conditions are not good. Managers should manage their payables times.

In long term debt paying Ability Company have a better condition and they pay their debts
according to the industry. Their profitability ratios are also very well and according to industry.
So we can say that lucky cement is a good company and their performance is also very well and
according to industry trend.