Financial Statement Analysis of Fauji Fertilizer Company FFC vs Engro Corporation

Analysis of annual reports 2018

PREPARED BY

QURBAN ALI

REG# 47329

COURSE MBA

ANALYSIS OF FINANCIAL STATEMENT

TEAACHER NAME # KHURRAM ALI MUBASHAR

Financial Statement Analysis: Financial Statement Analysis involves gaining an understanding of an

organization’s financial situation by reviewing its financial reports. The result can be used to make
investment decision and lending decision. Financial statement analysis involves identifying the
trends and portfolio analysis for company’s financial statement over a series of reporting trends.

Users of Financial Statement Analysis:

1. Creditors. Anyone who has lent funds to a company is interested in its ability to payback the
debt and so will focus on various cash flow measures.
2. Investors. Both current and prospective investors examine financial statement to learn
about company’s ability issuing dividends or to generate cash flow.
3. Management. The company controller prepares an ongoing analysis of the company’s
financial results, particularly in relation to a number of operational metrics that are not seen
by outside entities (such as cost per delivery, cost per distribution channel, profit by product
and so forth).

Why to conduct Financial statement Analysis:

Typically financial statement analysis is use to analyse whether an entity is stable, solvent,
liquidity or profitable enough to warrant a monetary investment. When looking at a specific
company, a financial analyst conducts analysis by focusing on the income statement, balance
sheet, and cash flow statement.

Types of Financial statement Analysis:

 There are four main types of financial statement analysis.

1. Balance sheet
2. Income statement
3. Cash flow statement
4. Statement of shareholder’s equity

Techniques of financial statement Analysis:

1. Horizontal/vertical analysis
2. Dupont analysis
3. Ratio Analysis

In this report our main focus will be on ratio analysis as it is considered as the one of
important technique of Financial statement analysis.

Ratio analysis is used to evaluate a number of issues with an entity such as its liquidity,
efficiency of operations and profitability.

Importance of Ratio Analysis:

The purpose and importance of ratio analysis are to evaluate or analyse the financial
performance of the firm in terms of risk, profitability, solvency and efficiency. It helps us to
compare the trends of two or more company over a period of time.

Types of Ratio Analysis:

There are 3 types of ratio analysis,

1. Profitability ratio
2. Solvency ratio
3. Liquidity Ratio

Profitability Ratio:

Profitability Ratios are a class of financial metrics that are used to assess a business ability to
generate earnings relative to its revenue, operating costs, balance sheet assets, and shareholder’s
equity over time using data from a specific point in time. Profitability ratio shows how well
companies use their existing assets to generate profit and value for shareholder.

Importance of profitability Ratio:

Every firm is most concerned with its profitability. Profitability measures are important to its
investors. If a small business has outside investors who have put their own money into the company
the primary owner certainly has to show profitability to those equity investors. Profitability ratios
shows overall performance of company.

Profitability Ratio analysis of FFC Company:

The Company achieved all its major targets for 2018 in terms of production, sales, revenues, finance
cost and investment income, thus attaining a profitability of Rs 14.44 billion as compared to Rs 10.71
billion earned last year.

Gross profit of the Company improved by 55% to Rs 27.98 billion compared to Rs 18.09 billion last
year. the Company achieved net profitability of Rs 14.44 billion during 2018, translating into an
earnings per share of Rs 11.35, higher by 35% as compared to Rs 8.42 per share earned last year.
Company overall return on equity has been increased to Rs. 64.95 from last years Rs. 53.63.

FFC achieved a new benchmark in terms of highest ever sales revenue, which exceeded Rs 100
billion mark for the very first time and stood at Rs 105.96 billion, 17% higher than last year. The
revival of urea selling prices after two years of depressed market conditions resulted in increased
Sona urea revenue of Rs 73.86 billion. Revenue from imported fertilizers stood at Rs 32.10 billion
registering an increase of 27% over last year due to better selling prices.

2018 2017 2016

Profitability Ratio

Gross profit ratio % 26.40 19.95 24.77

Gross profit ratio (Including Subsidy) % 28.03 25.38 31.34
Net profit to sales % 13.63 11.81 16.17
Return on equity (Profit before tax) % 64.95 53.63 61.66
Growth in Operating revenue % 16.81 24.48 14.09

Profitability Ratio of Engro Corporation (Annual Repot):

During 2018 under challenging economic environment Engro Corporation has performed very well.
The Company’s consolidated revenue grew by 33%, from PKR 128,593 million during 2017 to PKR
171,568 million with major contribution from Fertilizers and Petrochemicals businesses due to
improved market fundamentals. The corporation’s profit-after-tax (PAT) of PKR 23,632 million as
opposed to PKR 16,290 million during 2017 representing an increase of 45%. , the Company posted a
PAT of PKR 12,720 million against PKR 11,400 million for the comparative year, translating into an
EPS of PKR 24.28 per share. The Company posted a PAT of PKR 12,720 million against PKR 11,400
million for the comparative year, translating into an EPS of PKR 24.28 per share. Increase in
standalone profitability is primarily on account of one-off capital gain on the divestment of 24%
shares in Elengy Terminal Pakistan Ltd to Vopak LNG Holding B.V. (VOPAK). The Group has reversed
impairment charge amounting to Rs. 314,846, consequent to the profitability of Rice Processing
Plant in the current year and increasing exports for the coming years particularly substantiated by
locking export commitments worth USD 8,524 of finished product for the Financial Year 2019.

2018 2017 2016

Profitability Ratio:

Gross Profit Ratio 30% 27% 23%

Net Profit to Sales 14% 13% 47%
Gross Profit 51.108 34,.806 35.843
 Profit After Tax 23.632 16.290 73.598
Revenue 171.568 128.593 157.208

Solvency Ratio:

Solvency Ratio is a key matric used to measure an enterprise’s to meet its debt obligations and is
used by prospective business lenders. Solvency ratio indicates whether a company cash flow is
sufficient to meet its short term and long-term liabilities.

Importance of Solvency Ratio:

Solvency ratio can help ensure your company’s fiscal health. In addition to helping business evaluate
their capital structure, solvency ratio may assist owner in determining whether internal and external
equities must be redistributed.

Solvency of Fauji Fertilizer Company FFC:

Financial leverage ratio of 1.33 times was higher than 2017 by 0.17 times owing to higher short-term
borrowings towards the end of the year. Debt to equity ratio improved to 20:80 against 35:65
recorded in 2017 owing to repayment of long -term debt. Low finance cost due to reduced
borrowing improved interest cover ratio to 14.25 times compared to six years’ average of 19.89
times. Long-term debt stood at Rs 8.58 billion, which decreased by Rs 6.99 billion mainly due to
repayment of debt in line with borrowing agreements. All debt obligations, becoming due for
repayments during the year, were retired on timely basis. Current portion of long-term borrowings
increased by 6% due to maturity of long-term borrowings becoming due within next year.

2018 2017 2016

Solvency Ratio:

Financial leverage ratio Times 1.33 1.16 1.60

Weighted average cost of debt % 8.18 6.61 6.53
Debt to equity Ratio 20:80 35:65 37:63
Interest cover ratio / Time interest earned ratio Times 14.25 7.44 8.23

Solvency Ratio of Engro Corporation:

Financial leverage ratio of Engro corporation increased to 0.74 higher than previous year of .54
owing to higher short term borrowing for end of 2018. Weighted average cost of debt decreased to
5% lower then previous year of 6%. Interest coverage also higher by 7.68 of previous year 6.34.
Subsequent to the enactment of Finance Act 2018, the Group has recognized liability for Super Tax
under Section 4B of the Income Tax Ordinance, 2001, relating to tax years 2018 and 2019. - EPTPL
made draw downs from foreign currency debt facilities amounting to Rs. 22,190,528 and local
currency debt facilities amounting to Rs. 11,689,498. - EPQL has entered into a mixed mode regime
as envisioned under the Implementation Agreement (IA) due to depletion of gas field and reduction
in quantity of gas supplied by Sui Northern Gas Pipeline Limited (SNGPL). Under the regime, Capacity
Purchase Payments (CPP) are secured for any shortfall in supply of gas by making the plant available
on High Speed Diesel.

2018 2017 2016

Solvency Ratio

Financial Leverage Ratio 0.74 0.59 0.47

Weighted Average Cost of Debt 5% 6% 8%
Debt to Equity Ratio 0.71 0.53 0.43
Interest Cover Ratio 7.68 6.34 14.57

Liquidity Ratio:

Liquidity ratio are measurement used to examine the ability of an organization to pay off its short -
term obligations. Liquidity ratio are used by prospective lenders and creditors to decide whether to
extend credit to companies.

Importance Liquidity Ratio:

Liquidity ratio are important because they show whether a business will be able to pay off its short -
term debt. They focus on short term debt because liquidity is about daily income and expenses will
not survive very long if it cannot pay its daily expenses.

Liquidity of Fauji Fertilizer Company:

The current ratio of 0.95 times improved over last six years average of 0.85 times owing to increase
in short term investments. Quick ratio of 0.79 times, although higher than the six-year average of
0.70 times, recorded a decline from 2017 by 0.09 times owing to higher closing inventory of DAP.
Cash to current liabilities of 0.03 times declined below the last six-year average owing to retention of
GIDC payments. Long term debt of Rs 6.58 billion was retired on timely basis and in view of
improved liquidity position, no new long-term loan was obtained during the year. Despite increase in
interest rates, finance cost was curtailed by 30% at Rs 2.24 billion as compared to last year mainly
due to better liquidity position and effective cash flow controls.

2018 2017 2016

liquidity Ratio:

Current ratio Times 0.95 0.95 0.91

Quick / Acid test ratio Times 0.79 0.88 0.72
Cash to current liabilities Times 0.03 0.30 (0.15)
Cash flow from operations to sales Times 0.22 0.38 0.10
Long term liabilities / current liabilities % 13.17 34.35 52.24
Liquidity of Engro Corporation:

The current ratio of 2.26 times improved over last six years average of 1.95 times owing to increase
in short term investments. Quick ratio of 2.00 times, although higher than the six year average of
1.30 times. The Company’s activities expose it to a variety of financial risks: market risk (including
currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The Company’s
overall risk management programme focuses on having cost efficient funding as well as to manage
financial risk to minimize earnings volatility and provide maximum return to shareholders.

2018 2017 2016

liquidity Ratio:

Current ratio Times 2.26 2.49 2.92

Quick / Acid test ratio Times 2.00 2.23 2.64