INTRODUCTION TO

BUSINESS FINANCE (IBF)

RATIO ANALYSIS: PAKISTAN STATE OIL (PSO)

Assignment 1
Analysis Period: (2012-2016)

Submitted To:
Ma’am Tahira Maryam Jaffery

Submitted By:

Tuesday/Thursday; 3rd Slot

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Table of Contents
LIQUIDITY RATIOS ..................................................................................................................... 3
Current Ratio .............................................................................................................................. 3
Quick Ratio ................................................................................................................................. 4
ASSET MANAGEMENT RATIOS ............................................................................................... 6
Inventory Turnover (times) and Days Sales of Inventory .......................................................... 6
Receivables Turnover (times) and Days Sales Outstanding ....................................................... 7
Payables Turnover (times) and Days Payable Outstanding...................................................... 10
Operating Cycle and Cash Conversion Cycle .......................................................................... 12
Total Asset Turnover (times) .................................................................................................... 14
Fixed Asset Turnover ............................................................................................................... 15
DEBT MANAGEMENT RATIOS ............................................................................................... 16
Debt to Asset Ratio ................................................................................................................... 16
Debt to Equity Ratio ................................................................................................................. 17
Long term debt ratio ................................................................................................................. 18
Times Interest Earned ............................................................................................................... 19
PROFITABILITY RATIOS ......................................................................................................... 20
Gross Profit Margin .................................................................................................................. 20
Operating Profit Margin ........................................................................................................... 21
Net Profit Margin...................................................................................................................... 22
Return on total assets ................................................................................................................ 23
Return on Common Equity ....................................................................................................... 24
MARKET VALUE RATIOS ........................................................................................................ 25
Price to Earnings Ratio (times)/ PE Multiple ........................................................................... 25
Market to Book ratio (times) .................................................................................................... 26
Dividend Yields Ratio .............................................................................................................. 27
Dividend Payout Ratio.............................................................................................................. 28
Dividend cover (times) ............................................................................................................. 30
SOLVENCY RATIO .................................................................................................................... 31
REFERENCES ............................................................................................................................. 33
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LIQUIDITY RATIOS

Current Ratio

Current ratio studies the short term liquidity position of the company and illustrates as to whether
the company has the ability to pay its short term debts with its short term assets.

Over the financial years 2012 to 2016, PSO’s current ratio had an overall decrease from 1.15 to
1.12, which is a nominal difference. However, in FY 2013 the current ratio had plunged from
1.15 to 1.04, and this was because in 2013 current liabilities fell by 26.6 % but the decrease in
current assets was even more: they fell by 33.6% therefore current ratio fell in 2013 (trade debts
fell by 65%, loans and advances fell by 6.7%, deposits and short term prepayments fell by
4.8%and tax net fell by 13.7%). Immediately, PSO tried to increase its current ratio and was
successful in doing so till 2016, though it couldn’t arrive at the original level of 1.15.

Interestingly, while PSO’s current ratio was falling sharply in the FY 2013, the industry’s current
ratio rose from 0.97 to 1.05. This is because current ratios of Shell Petroleum Limited (SPL),
Attock Petroleum Limited (APL), Byco Petroleum (BP) and Hascol Petroleum Limited (HPL) all
increased during FY 2013. The largest increase was observed in APL where the ratio increased
from 1.58 to 1.75, and in BP whose current ratio increased from 0.39 to 0.7 during FY 2013.
APL achieved this increase by increasing its competitiveness in the market by increasing its
expense on storage, decanting facilities and construction of retail outlets, which led to the
property plant and equipment value to increase by 16%. For BP in 2013, there was increase in
stock in trade of 92% due to better inventory holding policy and more uniform supply from Oil
Refinery business.
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In FY 2014, PSO’s current ratio was aligned with and rose at nearly the same rate as the
industry’s current ratio. The industry current ratio increased despite a fall in the current ratio of
APL and SPL during FY 2014, and this was because of aggressive liquidity improvement tactics
by BP. In 2014, the company had decided to sell the isomerization unit which was included in
current asset held for sale, until the sale of the unit was finally complete. It comprised of about
44% of the total current assets for that year.

In FY 2015, while PSO’s current ratio improved, the industry ratio fell from 1.09 to 1. This is
because while SPL and HPL’s current ratio also reduced during this year, BP’s current ratio fell
from 1.02 to 0.52, reduced by almost half. BP suffered this sudden reduction in liquidity because
the sale of isomerization unit was made, and the amount of current assets was reduced as the unit
was not BP's asset anymore. This led to decrease in current ratio to its normal state.

In FY 2016, both PSO and the industry current ratio rose at the same rate.

Quick Ratio

Quick ratio, like current ratio, studies the liquidity position of the company however, the ratio
excludes inventory and spare parts since these tend to be less liquid. The company’s ability to
pay its short term liabilities with its liquid assets is analyzed.

Over FY 2012-16, PSO’s quick ratio saw an overall increase from 0.85 to 0.91, because
inventory levels fell by 21.9%. However, just like in the current ratio case, the quick ratio fell
sharply in FY 2013 from 0.85 to 0.55. The ratio increased at a steady rate in FY 2015 and 2016,
In fact, PSO was able to surpass its original 0.85 benchmark by 2016 despite the plunge in FY
2013; the same could not be said for the current ratio.
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In FY 2013, the industry quick ratio decreased at a lower rate than did PSO, due to an increase in
the quick ratios of APL and BP, which increased by 0.07 and 0.19 respectively. In 2013, APL
increased its competitiveness in the market by increasing its expense on storage, decanting
facilities and construction of retail outlets. Hence its property plant and equipment indicated a
16% raise while Current assets observed a decrease of 3% which represented a fall in the
receivables owing to clearance of circular debts. As a result, they observed a corresponding fall
in their current liabilities hence the quick ratio and current ratio increased drastically in 2013.

PSO started the year with a quick ratio higher than the industry average, and ended the year with
a quick ratio lower than the industry. This is because even though HPL’s and SPL’s quick ratios
decreased this year too, they decreased at a lower rate than PSO’s.

In FY 2014, the situation reversed. PSO started the year with a quick ratio lower than the
industry, and ended it with a ratio higher than the industry, although industry ratio had increased
too. This is because PSO’s rate of increase of quick ratio was higher than the industry’s rate.
Even though BP’s quick ratio increased by 0.38 points, the industry rate of increase was reduced
due to the decrease in quick ratios of APL and HPL by 0.2 points and 0.16 points respectively.

In FY 2015, PSO’s quick ratio increased but the industry ratio actually decreased. This can be
attributed almost entirely to BP whose quick ratio in this year reduced by 0.4 points. Byco’s
quick ratio fell by such a large amount because the Isomerization unit being held as current asset
while it was sold was removed from current assets after being sold to a wholly owned subsidiary
company. This caused the current assets to almost be halved while on the other hand, trade
payables section of current liabilities increased by 13% causing a major reduction in Byco’s
quick ratio.

In FY 2016, both PSO’s and the industry’s quick ratios increased at the same rate. Although
BP’s quick ratio fell during the year, its effect on the industry ratio was offset by the increase in
SPL’s quick ratio which had the highest rate of increase in FY 2016 among all firms.
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ASSET MANAGEMENT RATIOS

Inventory Turnover (times) and Days Sales of Inventory

PSO’s inventory turnover had an overall increase from 10.77 to 11.98 times. The highest rate of
increase was in FY 2014, when stock in trade fell by 18.65%.The inventory turnover decreased
in FY 2016 from 12.29 to 11.98 because of the decrease in sales by 19% which partly offset by
the decrease in stock-in-trade balance by 13%.

The overall increase in PSO’s inventory turnover resulted in a decrease in PSO’s days sales of
inventory.

While PSO’s inventory turnover saw an overall increase, the industry inventory turnover acted
completely differently and dropped from 22.73 in FY 2012 to 12.9 in FY 2016. It decreased by
 7

6% because of the decrease in sales by 19% which is partly offset by the decrease in stock-in-
trade balance by 13%.

In FY 2013, PSO, SPL, BP and APL all saw an increase in inventory turnover, but the industry
average still reduced from 22.73 to 19.94 because of the huge decrease in inventory turnover of
HPL, where HPL’s inventory turnover reduced from 53.85 to 25.73 times. This drastic decrease
in HPL occurred because an abrupt fall in the international crude oil prices resulted in shrinking
FO margins and higher inventory losses. Similarly in FY 2014, HPL was almost single-handedly
responsible for pulling down the industry average.

From FY 2015 onwards, APL also became a major reason why the industry average was
reducing. APL’s inventory turnover reduced from 33.36 in FY 2014 to 19.88 times in FY
2016.In 2016, the inventory turnover fell by 26%, receivables turnover by 12% and payables
turnover by 30% because the net sales had a decrease of 36%, however number of days increased
in each case. In 2016, the inventory turnover fell by 19%, receivables turnover by 18% and
payables turnover by 17% because the net sales had a decrease of 16%.

However, HPL (Hascol) is observed to be the major outlier pulling down the industry average:
HPL’s inventory turnover was higher than all its competitors in FY 2012 but by FY 2016, it had
become the lowest among all the firms.

Receivables Turnover (times) and Days Sales Outstanding

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PSO’s receivables turnover reduced from 5.98 to 3.78 times over FY 2012 to 2016.Their
turnover mainly reduced because of the falling global oil prices which eventually improved
PSO's receivable condition from the IPPs. Although it is expected that the oil prices will rise to
around $55 USD per barrel around the fiscal year 2021 and the piled up receivables will not
disappear abruptly. Furthermore, government has reiterated to keep control checks on it due to
the involvement of Qatar Gas. Hence, PSO has opted for a conservative strategy which demands
for advanced payments before the provision of services. As expected, the Days Sales
Outstanding (Average Collection Period) increased from 61.06 to 96.65 days over FY 2012 to
2016. However, in FY 2013 and 2014, PSO’s receivables turnover increased as trade debts fell
down by 64.86% due to payments collected from unsecured and secured debts from customers.
In FY 2015 and 2016, the receivables turnover decreased from 9.43 to 3.78 times. This decrease
in receivables turnover resulted in the average collection period rising from around 40 to around
100 days.

In FY 2013, the industry average receivables turnover increased at a higher rate than PSO. This
was because of the outlier Shell Pakistan Limited whose receivables turnover increased by 23%
in this year. SPL’s receivables turnover is an outlier both in terms of the rate at which it increases
and its absolute value which is around 66 days more than the industry in FY 2012, and maintains
that difference throughout. SPL is the reason why the industry average is so much higher than
PSO’s receivables turnover. The following graph clarifies the outlier position of SPL regarding
receivables turnover.
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In FY 2014, PSO’s receivables turnover increased while the industry average decreased. This is
again attributable to SPL because while nearly all firms saw an increase in their receivables
turnover ratio, SPL’s decrease in receivables turnover of 12 % offset the effects of the other
companies and reduced the industry average.

In FY 2015 and 2016, both the industry average and PSO’s receivables turnover reduced at the
same rate, suggesting that all competitors suffered increases in their average collection period.
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Payables Turnover (times) and Days Payable Outstanding

Over the financial years 2012 and 2016, PSO’s payables turnover overall increased from 5.7 to
8.41. This automatically resulted in the days purchases outstanding to reduce from 63.99 to 43.39
days. PSO’s payables turnover had the fastest rate of increase in FY 2014.

In FY 2013, the industry average increased at a much higher rate than PSO’s payables turnover.
This was because of the outlier behavior of Shell Pakistan shown in the graph below. SPL single-
handedly pulled up the industry payables turnover.
 11

In FY 2014, PSO’s payables turnover increased but the industry average decreased. This was
again due to the behavior of outlier Shell Pakistan, which was the only company whose payables
turnover decreased, and decreased greatly.

In FY 2015, both PSO and the industry saw decreasing payables turnover, but the industry
average decreased at a higher rate than did PSO. This was mainly because of the higher rate of
decrease of payable turnover in HPL, where this turnover reduced by approx. 50% during the
year. Hascol's sales are mainly reliant on the supplies to non government entities such as Nishat
group and Liberty mills which keep the company away from debts. Moreover, Hascol follows a
stringent payments mechanism where the company requires irrevocable bank guarantees from
the buyer’s bank before their supply. The possibility of Hascol getting into a circular debt trap in
the future has been ruled out because the management isn't interested to tie up with any
government operated IPPs without unconditional bank guarantees but it could also mean a slow
FO sales growth for the company in the future.

In FY 2016, PSO’s payables turnover increased while the industry average decreased. Here, PSO
was the outlier since it was the only company in the entire industry whose payables turnover
increased this year as it was able to reduce the local creditors, mostly suppliers by 44.12%
availing the opportunity to not pay interest on the amount paid early.
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Operating Cycle and Cash Conversion Cycle

The operating cycles and cash conversion cycles are explained by days sales outstanding, days
sales inventory and days payable outstanding, which are in turn explained by the receivables
turnover, payables turnover and inventory turnover.

The operating cycle should be as small as possible, and up to FY 2014, PSO was successful in
reducing it. However, in FY 2015 and 2016, its operating cycle rose quite high. PSO’s operating
cycle was always higher than the industry average which suggests that other firms were more
successful in debt collection and inventory management. This suggestion can be backed by
evidence (see graph below) because SPL, HPL, BP and APL all have operating cycles below that
of PSO’s during 2012-2016. An exception is BP whose operating cycle was 216.58 days in FY
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2012 while PSO’s was just 94.96 days in the same year. However, immediately in the next year
(FY 2013), BP’s operating cycle fell to the same level as PSO’s and subsequently went lower.

With respect to operating cycle, the most successful firm was SPL, since its operating cycle was
lowest averaging 30.83 over the 5 year period, while the industry averaged 62.03 over the same
period which is approx. double.

The cash conversion cycle is also supposed to be as small as possible, so in this case as well, the
industry seems to be better off than PSO as the industry’s cash conversion cycle is negative
while PSO’s is positive. This suggestion can be backed by evidence (see graph below) since all
firms’ cash conversion cycle is less than that of PSO.
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The most successful firm with respect to cash conversion cycle seems to be Byco Petroleum,
since its cash conversion cycle is lower than that of all other firms.

Total Asset Turnover (times)

Overall there was a decrease in PSO’s total asset turnover from 3.36 to 1.98. However, in FY
2013 and 2014, this turnover increased. In FY 2015 and 2016, there was a decline in this
turnover because of reduction in sales by 21%.

The industry average is always higher than PSO’s total asset turnover, but changes in the same
direction as PSO. Though the industry average is higher than PSO’s total asset turnover, BP is an
outlier firm whose asset turnover is lower than PSO during the entire period. This is because
Byco is a new firm whose sales are low, resulting in a low asset turnover. A positive observation
regarding Byco Petroleum is that although it has the lowest asset turnover among all the
competitors, it is the ONLY firm in the industry which was able to increase its total asset
turnover over 2012-16 (from 0.52 to 1.43). All other firms saw their total asset turnover falling
over the 5-year period.
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Fixed Asset Turnover

PSO’s fixed asset turnover saw a major decrease over FY 2012-16, as this turnover decreased
from 105.12 to 10.15. The reasons for this were that total asset and fixed asset turnover
decreased by 15% and 23% respectively due to decrease in sales by 19%. The decline was
sharpest in FY 2013.

The industry average started out as less than PSO’s fixed asset turnover, but although it reduced
over the 5 years, its rate of reduction was less than PSO’s and therefore the industry average
emerged higher than PSO’s fixed asset turnover in FY 2016.

The industry average would have lain below PSO’s fixed asset turnover in all years, if not for the
outlier APL which is responsible for pulling up the industry average. APL is the only firm whose
fixed asset turnover is higher than PSO’s. APL’s fixed asset turnover averages 55.99 times over
the 5 years, while the industry averages 26.33 over the same years. Although the industry
average falls over the FY 2012 – 2016, it did increase in FY 2014. This was also because APL’s
fixed asset turnover increased during that year by 17%. This increase was because in 2014,
Attock Petroleum Ltd's plant and property rose by 3.6% with a stable increase in their long term
investment. However, there was a drastic increase in their net sales which rose by 24.5% in one
year.
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DEBT MANAGEMENT RATIOS

Debt to Asset Ratio

PSO’s debt to asset ratio reduced from 0.86 to 0.73 between FY 2012 and 2016. In FY 2014,
however, this ratio increased from 0.78 to 0.79.

PSO’s ratio has been quite close to the industry average, but this does not mean its debt to asset
ratio is close to its competitors. It is definitely close to that of SPL and HPL, but BP and APL are
quite different to PSO’s. PSO’s debt to asset ratio averages 0.78 over the 5 years, while BP’s
debt to asset ratio averages 0.97 and APL’s averages 0.56. On the other hand, SPL and HPL’s
debt to asset ratio averages 0.82 and 0.81 respectively that lie much closer to PSO’s average.
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1.20

1.00

Debt to Asset Ratio

0.80 PSO
Industry
0.60
Shell
0.40 Byco
APL
0.20
Hascol
0.00
2011 2012 2013 2014 2015 2016 2017
Year

What is interesting to notice here is that BP’s Debt to Asset ratio for 2012 and 2013 is greater
than 1. This is due to increasing accumulated losses in the share capital and reserves section, and
losses made individually each year, leading to BP not paying much of its liabilities which also
kept on increasing while on the other hand, the assets were almost stagnant as there was no
capacity to invest more, as one mega project, SPM was already underway. This caused BP’s ratio
to rise more than 1 meaning that at this point, even selling all of the company’s assets would not
have completely paid the liabilities of the company.

Debt to Equity Ratio

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PSO’s debt to equity ratio decreased from 5.95 to 2.74 over the years 2012-2016. The sharpest
decrease was in FY 2012 which improved in 2013 when PSO implemented circular debt
settlement plan. The industry average was negative initially because of BP which had a negative
equity in FY 2012 and 2013 as international oil prices were very volatile, and BP itself was not
operating efficiently in terms of inventory management and sales due to much of the focus on
SPM project. The industry average became positive FY 2013 onwards as Byco improved its
performance and became much more efficient as SPM became functional. In FY 2014, PSO’s
debt to equity ratio remained relatively stable, but the industry average increased sharply owing
to BP’s influence and much improving performance in the market. The ratio follows a stable
decreasing trend thereafter, and PSO follows the same trend, though its ratio is slightly lesser
than the average industry ratio.

Long term debt ratio

PSO’s long term debt ratio increased overall from 0.01 to 0.02 over the 5 years. The increase was
sharpest in FY 2015 when PSO acquired a new long term loan. In FY 2016, PSO’s long term
debt ratio decreased.

The industry average was a lot higher than PSO’s ratio, due to the outlier Byco which averaged
0.25 over the 5 years (while the industry averaged just 0.068 over the same period). The sharp
rise and then sharp fall in industry average in FY 2013 and 2014 respectively was also due to
Byco. In FY 2013, Byco’s long term debt ratio increased sharply from 0.07 to 0.47 as its long
term debt borrowed was to be restructured by the syndicate banks, and thus was to be added
anew in the long term liabilities section, increasing this ratio. In contrast, in FY 2014, Byco’s
long term debt ratio plunged from 0.47 to 0.28 as current assets increased due to transfer of
Isomerization unit in the current assets section, reducing the ratio. Even when PSO’s long term
debt ratio increased in FY 2015, the industry average kept falling due to Byco’s efforts.
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Times Interest Earned

PSO’s times interest earned saw an overall increase over the 5 years. In FY 2015, the times
interest earned decreased because finance cost increased by 1.5 bn because of large short term
loans on account of increasing circular debt reducing the number of time the company can cover
its finance cost expense with its income.

PSO’s times interest earned was aligned with the industry average, however in FY 2014, the
industry average shot up to nearly 10 times while PSO was at approx. 3.5 times. This occurred
because APL’s times interest earned shot up from 2.92 in FY 2013 to 40.27 in FY 2014 because
the late interest payment mark-up decreased from 1.6Bn to 133Mn, leading to decreased
financial costs and increased profit after tax and better times interest earned ratio.

In FY 2015, the industry average fell at a lower rate than PSO’s times interest earned. This was
because of the rise in Shell’s times earned interest from 1.01 in FY 2014 to 6.89 in FY 2015.
Similarly in FY 2016, the industry average increased much more sharply than PSO’s times
interest earned due to SPL’s increase in times earned interest from 6.89 to 25.3.
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PROFITABILITY RATIOS

Gross Profit Margin

PSO’s gross profit margin increased only marginally over the 5 years from 3.35% to 3.37%.
However, it reduced in the financial years 2014 and 2015 because of volatility in sales, and
burden of cost of sales causing gross profit margin to form a small part of sales. PSO recovered
in FY 2016 when it’s ratio improved by 22% as compared to last year due to the decrease in
gross sales by 19 % because of price reduction.

Although PSO’s gross profit margin was stable in FY 2013, the industry average increased from
1% to approx. 2.75% and this was because of the outlier BP. BP was the only firm that had a
negative gross profit margin in FY 2013, which BP improved and brought up to 0.11% by the
end of FY 2013. BP eliminated its gross loss by making sure that the new Single Point Mooring
project (SPM) was fully functional, and allowed for stability in supply from imports. Also, Byco
followed better inventory holding policies to allow the regular availability of inventory to be
sold, leading to 240% increase in sales compared to last year.

In FY 2015, PSO’s gross profit margin reduced but the industry gross profit margin increased.
This was again due to Byco Petroleum which increased its gross profit margin from 0.45% to
5.13% in FY 2015. BP achieved this by taking advantage of decreasing oil prices in the second
half of the fiscal year to boost their own sales. On the other hand, they were able to make use of
the Isomerization Unit, which was bought by wholly owned subsidiary company, to reduce the
cost of production and cost of raw material by 10.7% while maintaining their production level.
 21

FY 2016 was a good year for all oil and gas marketing firms and each firm saw an increase in its
gross profit margin.

Operating Profit Margin

PSO’s operating profit margin showed an overall increase from 2.43% to 3.37% over the period
2012 to 2016. There was an increase in FY 2014 when there was an increase of more than 1
percentage point in PSO’s operating profit margin, thanks to other income section of the Income
Statement which increased by 228.63% which increased as mark-up on delayed payments rose
by 286.68%, and interest on available-for-sale PIBs - net of amortization rose by 11622.38% .

The industry average has acted quite differently. The overall increase has been much higher
(from 1.5% to 3.5%). But in FY 2013, the industry average decreased at a higher rate than did
PSO’s operating profit margin. This was due to the increasing operating losses of BP (in FY
2013 BP’s operating profit margin reduced from -1% to -3%). It was only in FY 2015 that BP
eliminated its operating losses and increased its operating profit margin from -3% to 3%. This is
the reason why the industry operating profit margin was increasing in FY 2015 even though PSO
and other firms were seeing a decrease in this margin. BP was able to achieve this improvement
by decreasing their cost of sales to improve on their last year's gross profit. they were able to
increase other income section by about 100% while decreasing their other expenses section by
about 26%. Decreased operating expenses along with better gross profit allowed for improved
operating profit margin.
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Net Profit Margin

PSO’s net profit margin saw an overall increase from 0.88% to 1.52% over the 5 years. The
margin continuously increased in FY 2013 and 2014, thanks to increase in Sales by 9% while net
profit rose by 72.64% due to other incomes section increase of 228.63%. In FY 2015, however,
the margin fell because of fall in sales by 23.12%, along with fall in other income section by
28.15%, increase in distribution and marketing expenses by 7.42% and increase in finance costs
by 15.43%, leading to Net profit fall by 96.8%. In FY 2016, PSO recovered and made efforts
such as reduce its other expenses section by 43.46% and finance cost section by 35.101% to pull
its net profit margin back up.

The industry ratio was negative in FY 2013 and 2014 because of the outlier BP whose net profit
margin was negative during those years. BP succeeded in eliminating its losses by improving
refining margin and implementing effective management of inventory. By FY 2015, BP had
changed its net profit margin from -17.05% to 0.08%. These efforts by BP explain why the
industry net profit margin was increasing even when PSO’s margin was falling during FY 2015.
In FY 2016, the industry net profit margin finally surpassed that of PSO, and this is attributed to
SPL (SPL increased its net profit margin from 0.46% in FY 2015 to 4.04% in FY 2016). For
Shell, the tax liability was reversed which is why net profit increased by 626.3% whereas sales
decreased by 14.9 %.
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Return on total assets

PSO’s return on total assets reduced over the 5 year period even though there was a large
increase in FY 2014 due to increase in net profits. But this return declined greatly in FY 2015.
PSO was not able to recover from this huge decline in its return on total assets.

The industry average was stable between 5% and 6%. The most noticeable fluctuation was in FY
2015 and FY 2016. In FY 2015, APL and BP also saw reducing return on total assets, pulling the
industry average down. In FY 2016, the industry average rose at a higher rate than did PSO’s
return because of the sharp increase in return on total assets in SPL (increased from 3.66% to
8.85%).
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Return on Common Equity

PSO’s return on common equity saw an overall decrease although it increased in FY 2013 and
2014. The return then decreased in FY 2015. PSO tried but could not recover from this decline in
FY 2016.

The industry average followed the same direction as PSO’s return, except in FY 2014 when
PSO’s return increased but the industry average decreased. This was because of the huge
decrease in return on common equity in SPL (return reduced from 16.2% to -16.3%). SPL’s
return on common equity reduced in this way.

In FY 2016, the industry average increased sharply while PSO’s ROCE was quite stable. This
was because of outlying behavior of BP whose rate of return increased from 0% to 150% in FY
2016. BP went through this major improvement by implementing certain policies and improving
their management structure.
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MARKET VALUE RATIOS

Price to Earnings Ratio (times)/ PE Multiple

Price to earning ratio (times)
90.00
80.00
70.00
60.00
50.00
40.00 PSO
30.00 Industry
20.00
10.00
0.00
-10.002011 2012 2013 2014 2015 2016 2017
Year

PSO’s price to earnings ratio increased from 6.43 to 9.93 times over the 5 years. In FY 2015,
PSO’s PE multiple increased by about 212.19% or roughly 3 times. The increase in PSO’s PE
multiple is because there has been a decline witnessed in the bottom line by about 68%, which
seems not to be reflected and illustrated in the market value that prevails at the end of FY 2015.
On the other hand, the market price per share also decreased hence permitting such an elevation
in PE multiple.

In FY 2016, PE multiple fell by about 35% due to the increase in bottom line by 48%, which is
not reflected in the prevailing market value at year end and since the earnings per share rose by
about 48%.

The PE multiple for the industry moves generally in the same direction as PSO, however in FY
2015, the industry average elevated by a huge value of 102275%. Such a huge variation was
witnessed due to significant changes in the PE multiple of Byco and Shell. Shell’s PE multiple
rose by 2.1 times due to 2 times increase witnessed in the EPS of the company. On the other
hand, Byco has been witnessed an increment of 176 times in the company’s PE multiple for the
company was able to achieve a positive EPS since it was listed as a public limited company. This
was because, in FY 2015, company’s EPS turned positive and the market price doubled.

In FY 2016, PE multiple for the industry declined by about 82% since all the companies with the
exception of Hascol witnessed a decline in their PE multiple for FY 2016. The most significant
 26

difference was witnessed in the case of Byco where the PE multiple fell by 80 times since the
market price fell by 11% and that the company’s EPS elevated 20 times than its EPS in FY 2015.

350.00

300.00

250.00
Price to Earnings Ratio

PSO
200.00 Industry
150.00 Shell
Byco
100.00
APL
50.00
Hascol
0.00
2011 2012 2013 2014 2015 2016 2017
-50.00
Year

Market to Book ratio (times)

PSO’s market to book ratio increased only very nominally over the 5 years as over these years
because the company's market price rose by about 41.92% from 2012 to 2016 whereas the
increase in the book price of the company was of 37.98%.

The industry average acted differently. In FY 2014, it shot up very suddenly and this was
because in this year, Hascol went public and started selling shares in the market. This gave rise
 27

to an approx. 25 times market to book ratio for HPL, which affected the industry average such
that the industry average increased.

In FY 2015, the industry average decreased rapidly the same way it had increased the previous
year, and this can again be attributed to HPL because HPL’s market to book ratio reduced from
approx. 25 times to 8.2 times. This happened because the increase in market prices was lower
than the increase recorded in the Book price per share, that is the total shareholder's equity figure
rose.

In FY 2016, the industry average again shot up due to HPL, where HPL’s market to book ratio
increased by 4.35 points.

30.00

25.00

20.00
Market to Book Ratio

PSO
15.00 Industry
10.00 Shell
Byco
5.00
APL
0.00
2011 2012 2013 2014 2015 2016 2017 Hascol
-5.00

-10.00
Year

Dividend Yields Ratio

 28

PSO’s dividend yield fell during FY 2013 because the earnings were very low, but then up to FY
2016, the yield increased. It was disclosed that the dividends paid were kept low because of the
reinvestment of the major portion of the net income in order to meet the tight working capital
requirements due to the prevailing circular debt situation.

In FY 2013, the industry yield increased while PSO’s yield was decreasing. This was due to SPL
which was the only company whose yield increased in this year. SPL’s yield increased from 0%
to 3% in that year.

In FY 2015, the industry yield decreased when PSO’s yield was falling because of APL whose
yield fell from 8% to 6%.

14.00%

12.00%
Dividends Yield Ratio

10.00%
PSO
8.00% Industry

6.00% Shell
Byco
4.00%
APL
2.00%
Hascol
0.00%
2011 2012 2013 2014 2015 2016 2017
Year

Dividend Payout Ratio

 29

PSO’s dividend payout increased by nearly 20 percentage points during the 5 years, with the
sharpest increase coming in FY 2015. In FY 2015, the dividend payout percentage has improved
by 3 times due to the increase in dividend payout despite the decline in bottom line. The payout
ratio decreased in FY 2016 because The dividend payout percentage has reduced despite increase
in dividend due to increase in the bottom line by 68.21 %.

Here the industry ratio was being influenced by one very strong outlier, Shell. The graph below
shows how the industry was following the exact shape of the Shell’s curve.

In 2012 Shell announced no dividend. In 2014 EPS was negative therefore this ratio was
negative. In 2015 DPS was more than EPS and in 2016 EPS increased by 642.9% whereas DPS
increased by 240 % hence dividend payout ratio fell in 2016.
 30

Dividend cover (times)

PSO’s dividend cover reduced from around 8.8 times to 3 times, with the greatest decrease
coming in FY 2015, when PSO saw its net profit decreased by 96.8% as sales were already low,
Other incomes fell by 28.15%, Distribution and marketing expenses rose by 7.42% and Finance
Cost rose by 15.43%.

The industry also followed the same trend but industry average was lower than PSO
because all of PSO’s competitors have dividend covers below industry average.

12.00

10.00
Dividend Cover (Times)

8.00 PSO
Industry
6.00
Shell
4.00 Byco

2.00 APL
Hascol
0.00
2011 2012 2013 2014 2015 2016 2017
-2.00
Year
 31

SOLVENCY RATIO

Solvency ratios study the ability of a company as to the potential it carries to meet the long term
debts it is accountable for. The ratio in real terms undertakes a quantifying analysis of the size of
PSO’s earnings after tax has been paid and non-cash expenses such as depreciation and
amortization are excluded, compared to the total obligation held by the company.

PSO witnessed a trend of its solvency ratios around the figure of 0.3 and 0.4 however there was a
significant improvement and enhancement witnessed in the company’s ability to pay off its long-
term debt with the aid of its current earnings in the year of 2013 and 2014. During the FY 2014,
the increase in current liabilities was recorded of 0.89% and the long-term liabilities decreased
by about 165.05% whereas a decrease of 100% was recorded in amortization. In FY 2015,
solvency ratio for PSO decreased by about 57% due to a 68% fall recorded in the profits earned
by PSO. Low Net Profit was recorded in FY 2015, since net sales of PSO had fallen by about
23.12% and that other incomes decreased by 28.15%. In FY 2016, however slight improvement
was recorded in solvency ratio since the net profit increased by 48%, despite the fact that net
sales declined by 25.75%, other incomes decreased by 8.74%, operating costs decreased by
14.04% with a major fall of 43.46% recorded in other operating expenses and that finance cost
diminished by 35.10%.
 32

0.30
0.25
0.20
PSO
Solvency Ratio 0.15
Industry
0.10
Shell
0.05
Byco
-
APL
2011 2012 2013 2014 2015 2016 2017
(0.05) Hascol
(0.10)
(0.15)
Year

As of the industry position, Byco seems to have a negative solvency ratio since the company was
incurring heavy losses. In FY 2015, Byco ensured positive profitability and hence the industry’s
solvency ratio improved, with APL and Shell already taking the lead. APL continues to have an
impressive solvency ratio since the company achieves high net profits.
 33

REFERENCES

Annual Reports - Hascol Petroleum Limited. Hascol Petroleum Limited. Retrieved 15

October 2017, from http://www.hascol.com/investor-information/investor-
information/annual-reports/
Annual Reports & Publications. Shell.com.pk. Retrieved 15 October 2017, from
http://www.shell.com.pk/investors/financial-reporting/annual-reports-
publications.html
Financial Reports. APL. Retrieved 15 October 2017, from
http://www.apl.com.pk/financial-reports/
Financial Reports. Byco.com.pk. Retrieved 15 October 2017, from
http://www.byco.com.pk/index.php?option=com_content&view=article&id=152
&Itemid=37
Financial Reports | Pakistan State Oil. Psopk.com. Retrieved 15 October 2017, from
http://psopk.com/en/investors/results-reporting/financial-reports