SHS Income Statements: 2015-2018

(PKR millions) 2015 2016 2017 2018

Sales 1,120 1,400 1,740 2,200
Opening Inventory 172 215 265 340
Purchases 906 1,131 1,416 1,773
Closing Inventory 215 265 340 418
COGS 863 1,081 1,341 1,695
Gross Profit 257 319 399 505
Operating expenses 171 210 267 344
EBIT 86 109 132 161
Interest Expense 30 31 32 34
EBT 56 78 100 127
Income Tax@35% 20 27 35 44
Net Earnings 36 51 65 83

SHS Balance Sheets: 2015-2018

(PKR millions) 2015 2016 2017 2018
Cash 35 40 40 45
Accounts receivable 110 135 165 211
Inventory 215 265 340 418
Prepaid expenses 30 30 30 28
Current assets 390 470 575 702
Property, plant & equipment 300 310 325 350
Total assets 690 780 900 1052
Current portion of LT Debt 10 10 10 10
Bank loan 300 325 350 350
Accounts payable 80 109 144 223
Accruals 25 20 25 25
Current liabilities 415 464 529 608
Long-term debt 120 110 100 90
Total liabilities 535 574 629 698
Contributed capital 75 75 75 75
Retained earnings 80 131 196 279
Total debt and equity 690 780 900 1052
 SHS Cash Conversion Cycle (2017-2018)
Purchase and collection
Days held in inventory
Days held in receivables
Total days: from receipt of inventory until cash collection
Payment and financing
Days in payables
Days of other financing
Total days
018)
Days

X
Question : 1
YoY Growth Rate in Sales
2015 2016 2017 2018
- 25.00% 24.29% 26.44%

Average Annual Growth Rate 18.39%

Sources & Uses Worksheet
(PKR millions) 2017 2018 Source Use
Cash 40 45 5
Accounts receivable 165 211 46
Inventory 340 418 78
Prepaid expenses 30 28 2
Current assets 575 702
Property, plant & equipment 325 350 25
Total assets 900 1052
Current portion of LT Debt 10 10
Bank loan 350 350
Accounts payable 144 223 79
Accruals 25 25
Current liabilities 529 608
Long-term debt 100 90 10
Total liabilities 629 698
Contributed capital 75 75
Retained earnings 196 279 83
Total debt and equity 900 1052 164 164

Sources & Uses of Funds Statement 2018

(PKR millions)
Sources of Funds:
Increase in prepaid expenses 2
Increase in accounts receivable 79
Profits retained 83
Total sources of funds 164
Uses of Funds
Increase in cash 5
Increase in accounts receivable 46
In crease in inventory 78
Increase in PPE 25
Decrease in LT debt 10
Total Uses of Funds 164
Interpretation
Why are we computing the Sources and Uses of Funds? To determine what areas of
the Balance Sheet to focus on.
Where are the main uses of funds for SHS?
The largest use items are accounts receivables of Rs 46,000 and inventory of Rs 78,000.
Increase in cash is minor and its increase in PP&E 0f RS 25,000 seems reasonable for a
a growing business. Do these uses of funds make sense?
Do these uses of funds make sense?
Yes, they do. SHS has increased sales by 25% a year, and to do so, it has had to extend more
credit and carry more inventory.
What are SHS's primary sources of funds?
Accounts payable of Rs 79,000 and retained profits of Rs 83,000.

The Sources and Uses Statement shows that SHS put most of its funds last year toward receivables and inventory.
And, it is getting most of its funds from trade creditors and retained profits.

So what do these increases in accounts receivables and inventories mean? Can receivables
ever be too high? Yes. SHS could be giving credit to customers who are not paying or
are taking too long to pay. Remember, these receivables are being partially funded by bank
borrowings, on which SHS has to pay interest. Can receivables be too low? All else being
equal, SHS would certainly prefer them to be lower. However, to get receivables lower,
SHS would have to restrict credit to customers, which may cause them to shop somewhere else
that provides more lenient credit. As noted above, extending credit is a service provided by
SHS and is part of what makes the firm competitive in the product market.
Can inventories ever be too high? What does it mean if inventory is too high?
Does it mean SHS has ordered too much product, which is sitting on the shelves, incurring
unnecessary storage, insurance, and financing costs. It could mean SHS has been ordering the
wrong inventory—products that people don’t want and are not buying, which it may
eventually have to scrap at a loss.
Can inventory be too low?
If the product customers are looking for is not in stock, they go elsewhere. SHS must balance having
sufficient quantity of inventory that customers want with the cost of having too much inventory.
The firm must have the right level and kind of inventory and be willing to extend credit to its customers.
ward receivables and inventory.

mewhere else

ordering the

ust balance having

uch inventory.
redit to its customers.
 SHS Balance Sheets: 2015-2018 Common-Size
(PKR millions) 2015 2016 2017 2018 2015 2016
Cash 35 40 40 45 5.1% 5.1%
Accounts receivable 110 135 165 211 15.9% 17.3%
Inventory 215 265 340 418 31.2% 34.0%
Prepaid expenses 30 30 30 28 4.3% 3.8%
Current assets 390 470 575 702 56.5% 60.3%
Property, plant & equipment 300 310 325 350 43.5% 39.7%
Total assets 690 780 900 1052 100.0% 100.0%
Current portion of LT Debt 10 10 10 10 1.4% 1.3%
Bank loan 300 325 350 350 43.5% 41.7%
Accounts payable 80 109 144 223 11.6% 14.0%
Accruals 25 20 25 25 3.6% 2.6%
Current liabilities 415 464 529 608 60.1% 59.5%
Long-term debt 120 110 100 90 17.4% 14.1%
Total liabilities 535 574 629 698 77.5% 73.6%
Contributed capital 75 75 75 75 10.9% 9.6%
Retained earnings 80 131 196 279 11.6% 16.8%
Total debt and equity 690 780 900 1052 100.0% 100.0%

INTREPRETATION
Common-Size Common Base-Year Combined: Common-Size & Common Base
2017 2018
### 2016 2017 2018 2016 2017 2018
4.4% 4.3% 1.14 1.14 1.29 1.0 0.9 0.8
18.3% 20.1% 1.23 1.50 1.92 1.1 1.2 1.3
37.8% 39.7% 1.23 1.58 1.94 1.1 1.2 1.3
3.3% 2.7% 1.00 1.00 0.93 0.9 0.8 0.6
63.9% 66.7% 1.21 1.47 1.80 1.1 1.1 1.2
36.1% 33.3% 1.03 1.08 1.17 0.9 0.8 0.8
100.0% 100.0% 1.13 1.30 1.52 1.0 1.0 1.0
1.1% 1.0% 1.00 1.00 1.00 0.9 0.8 0.7
38.9% 33.3% 1.08 1.17 1.17 1.0 0.9 0.8
16.0% 21.2% 1.36 1.80 2.79 1.2 1.4 1.8
2.8% 2.4% 0.80 1.00 1.00 0.7 0.8 0.7
58.8% 57.8% 1.12 1.27 1.47 1.0 1.0 1.0
11.1% 8.6% 0.92 0.83 0.75 0.8 0.6 0.5
69.9% 66.3% 1.07 1.18 1.30 0.9 0.9 0.9
8.3% 7.1% 1.00 1.00 1.00 0.9 0.8 0.7
21.8% 26.5% 1.64 2.45 3.49 1.4 1.9 2.3
100.0% 100.0% 1.13 1.30 1.52 1.0 1.0 1.0
Comprehensive Ratio analysis

SHS Balance Sheets: 2015-2018

2015 2016 2017 2018 INTREPRETATION
Liquidity Ratios CHKD
Current Ratio 94.0% 101.3% 108.7% 115.5%
Quick Ratio 42.2% 44.2% 44.4% 46.7%
Cash Ratio 8.4% 8.6% 7.6% 7.4%
Net Working Capital/Assets -3.6% 0.8% 5.1% 9%
Profitability Ratios CHKD
Net Profit Margin 3.25% 3.62% 3.74% 3.75%
Operating Profit Margin 7.68% 7.79% 7.59% 7.32%
Return on Assets 5.28% 6.50% 7.22% 7.85%
Return on Equity 23.48% 24.61% 23.99% 23.32%
Turnover/Activity Ratios
Receivable Turnover 10.18 10.37 10.55 10.43
Average Collection Period 35.85 35.20 34.61 35.01
Inventory Turnover 4.014 4.079 3.944 4.055
Days sales in Inventory 90.93 89.48 92.54 90.01
Accounts payble Ratio 11.33 10.38 9.83 7.95
Average Payment days 32.23 35.18 37.12 45.91
Operating Cycle 126.78 124.67 127.15 125.02
Cash Conversion Cycle 94.55 89.50 90.04 79.11
Asset Turnover Ratio 1.62 1.79 1.93 2.09
Interest Coverage Ratio 2.87 3.52 4.13 4.74
Long Term Solvency Ratios ADDED
Total Debt Ratio 77.5% 73.6% 69.9% 66.3%
Debt-Equity Ratio 3.45 2.79 2.32 1.97
Equity Multiplier 4.45 3.79 3.32 2.97
Long-term Debt Ratio 43.6% 34.8% 27.0% 20.3%
TIE/Interest Coverage Ratio 2.87 3.52 4.13 4.74
INTREPRETATION
 SHS Cash Conversion Cycle (2018)
Purchase and collection Days
Days held in inventory 90
Days held in receivables 35
Total days: from receipt of inventory until cash collection 125
Payment and financing
Days in payables 46
Days of other financing 79
Total days 125

INTREPRETATION
What happens to the Inventory at SHS?
The inventory goes into a warehouse, sits there for a certain period, and then gets sold.
On average, how long does it take before SHS sells its inventory?
This is Days Inventory Ratio, which is 90 days in 2012.
Given sales on credit, on average, how long does it take for SHS to get paid against sales?
This is Days Held in Receivables, which is 35 days in 2012.
This means it took 125 days on average from the time SHS purchased its inventory until it
was sold and paid for (90 days of inventory and 35 days of accounts receivable).
If on average it takes 125 days to convert purchases back into cash, how does SHS finance its purchases?
SHS takes trade credit from its suppliers. This is represented by accounts payable.
How long does it take SHS to pay off its accounts?
This is Days rec eivables. On average it takes SHS 46 days to pay off its trade creditors.
All in all, then, SHS takes 125 days to sell and collect payment for purchases. However,
it takes 46 days to make payment to its suppliers for purchases, which leaves 79
days of inventory and receivables that must be financed in other ways.
e its purchases?
Question: 2
Sources and Uses of Funds Statement for 2017-2018

Operating Activites:
$
Net Income 82.55
Changes in W.C
Increase in A.P 79
Increase in A.R -46
Increase in Inv. -78
Decrease in P.E 2

Net Changes in Op. Activities 40

Investing Activities
$
Purchase of PPE -25

Net Changes in Inv Activites -25

Financing Activities
$
Decrease in LT Debt -10

Net Changes in Fin. Activities -10

Cash at year beg. 40

Net Cash Increase 5
Cash at year end 45

Sources of Cash Uses of Cash

Inc in AP 79 Inc in AR -46

Inc in R.E 83 Inc in Inv -78
Dec in P.E 2 Inc in PPE -25
Dec in LTL -10
Sources 164 Usages -159
Net Addition to Cash 5

Question: 3
Combined Common Size and Base year Balance Sheet and Income Statement

Common Size Income Statement

SHS Income Statements: 2015-2018

(PKR millions) 2015 2016 2017 2018
Sales 1,120 1,400 1,740 2,200
100% 100% 100% 100%
Opening Inventory 172 215 265 340
common size Op. Inv 15% 15% 15% 15%
Purchases 906 1,131 1,416 1,773
common size Purchases 81% 81% 81% 81%
Closing Inventory 215 265 340 418
common size Closing inv. 19% 19% 20% 19%
COGS 863 1,081 1,341 1,695
common size COGS 77% 77% 77% 77%
Gross Profit 257 319 399 505
common size GP 23% 23% 23% 23%
Operating expenses 171 210 267 344
common size Op Exp 15% 15% 15% 16%
EBIT 86 109 132 161
common size EBIT 8% 8% 8% 7%
Interest Expense 30 31 32 34
common size Int Exp 3% 2% 2% 2%
EBT 56 78 100 127
common size EBT 5% 6% 6% 6%
Income Tax@35% 20 27 35 44
common size Inc. Tax 2% 2% 2% 2%
Net Earnings 36 51 65 83
common size Net. Ear. 3% 4% 4% 4%

Common Size Balance Sheet

SHS Balance Sheets: 2015-2018

(PKR millions) 2015 2016 2017 2018
Cash 35 40 40 45
5% 5% 4% 4%
Accounts receivable 110 135 165 211
16% 17% 18% 20%
Inventory 215 265 340 418
 31% 34% 38% 40%
Prepaid expenses 30 30 30 28
4% 4% 3% 3%
Current assets 390 470 575 702
57% 60% 64% 67%
Property, plant & equipment 300 310 325 350
43% 40% 36% 33%
Total assets 690 780 900 1052
100% 100% 100% 100%
Current portion of LT Debt 10 10 10 10
1% 1% 1% 1%
Bank loan 300 325 350 350
43% 42% 39% 33%
Accounts payable 80 109 144 223
12% 14% 16% 21%
Accruals 25 20 25 25
4% 3% 3% 2%
Current liabilities 415 464 529 608
60% 59% 59% 58%
Long-term debt 120 110 100 90
17% 14% 11% 9%
Total liabilities 535 574 629 698
78% 74% 70% 66%
Contributed capital 75 75 75 75
11% 10% 8% 7%
Retained earnings 80 131 196 279
12% 17% 22% 27%
Total debt and equity 690 780 900 1052
100% 100% 100% 100%

Common Size Inc. Statement Base year

SHS Common Size Income Statements: 2015-2018

(PKR millions) 2015 2016
Sales 1,120 100% 1,400 125%
Opening Inventory 172 100% 215 125%
Purchases 906 100% 1,131 125%
Closing Inventory 215 100% 265 123%
COGS 863 100% 1,081 125%
Gross Profit 257 100% 319 124%
Operating expenses 171 100% 210 123%
EBIT 86 100% 109 127%
Interest Expense 30 100% 31 103%
EBT 56 100% 78 139%
Income Tax@35% 20 100% 27 139%
Net Earnings 36 100% 51 139%

Common Size Balance Sheet Base Year

SHS Balance Sheets: 2015-2018
(PKR millions) 2016 2017 2018
Cash 1.01 0.88 0.84
Accounts receivable 9% 15% 26%
Inventory 9% 21% 28%
Prepaid expenses -12% -23% -39%
Current assets 7% 13% 18%
Property, plant & equipment -9% -17% -23%
Total assets 0% 0% 0%
Current portion of LT Debt -12% -23% -34%
Bank loan -4% -11% -23%
Accounts payable 21% 38% 83%
Accruals -29% -23% -34%
Current liabilities -1% -2% -4%
Long-term debt -19% -36% -51%
Total liabilities -5% -10% -14%
Contributed capital -12% -23% -34%
Retained earnings 45% 88% 129%
Total debt and equity 0% 0% 0%

Question 4:
corrected
2015-2018
2017 2018
1,740 155% 2,200 196%
265 154% 340 198%
1,416 156% 1,773 196%
340 158% 418 194%
1,341 155% 1,695 196%
399 155% 505 196%
267 156% 344 201%
132 153% 161 187%
32 107% 34 113%
100 179% 127 227%
35 179% 44 227%
65 179% 83 227%

cash 87
Accounts receivable 89
Inventory 91
Prepaid expenses 93
Current assets 95
Property, plant & equipment 97
Current portion of LT Debt 101
Bank loan 103
Accounts payable 105
Accruals 107
Current liabilities 109
Long-term debt 111
Total liabilities 113
Contributed capital 115
117