FINANCIAL ANALYSIS OF UNILEVER PAKISTAN

INTRODUCTION

What is financial analysis?

Financial analysis refers to an assessment of the viability, stability, and profitability of a business, sub-business or
project. It is performed by professionals who prepare reports using ratios that make use of information taken from
financial statements and other reports

What is the purpose of financial analysis?

Financial analysis is used to ascertain the investment value of a business, stock or other asset. Income, balance, and
cash flow statements are typically used to extract ratios that divulge information such as solvency, price to earnings
and return on equity.

What is the importance of financial analysis?

Financial analysis is required to determine the financial health and stability of a company. It helps in determining the
current financial position and upcoming financial requirement. In order to assess the financial health and
performance of a company, a financial analyst is required.

The purpose and importance of ratio analysis are to evaluate or analyze 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.

Unilever
Unilever is a British-Dutch transnational consumer goods company co-headquartered in London, United Kingdom,
and Rotterdam, Netherlands. Its products include food and beverages (about 40 percent of its revenue), cleaning
agents, beauty products, and personal care products. It is Europe’s seventh most valuable company. Unilever is one
of the oldest multinational companies; its products are available in around 190 countries. Unilever owns over 400
brands, with a turnover in 2017 of 53.7 billion Euros, and thirteen brands with sales of over one billion
Euros Axe/Lynx, Dove, Omro, Heart brand ice
creams, Hellmann's, Knorr, Lipton, Lux, Magnum, Rexene/Degree, Sun silk and Surf. It is a dual-listed
company consisting of Unilever N.V., based in Rotterdam, and Unilever plc, based in London. The two companies
operate as a single business, with a common board of directors.

Unilever is organized into four main divisions Foods, Refreshment (beverages and ice cream), Home Care, and
Beauty & Personal Care. It has research and development facilities in the Netherlands, the United Kingdom, China,
India and the United States. The Unilever Pakistan Limited (UPL), formerly Lever Brothers Pakistan Limited was
established in Pakistan in 1948.The town of Rahim Yar Khan was the site chosen for setting up a vegetable oil
factory. Unilever Pakistan is the largest fast-moving consumer goods (FMCG) company in Pakistan, as well as one
of the largest multinationals operating in the country. Now operating six factories at different locations around the
country. The Unilever's head office was shifted to Karachi from the Rahim Yar Khan site in the mid 1960s. Unilever
was founded on September 2, 1929, by the merger of the Dutch margarine producer Margarine Unit and
the British soap maker Lever Brothers. During the second half of the 20th century the company increasingly
diversified from being a maker of products made of oils and fats, and expanded its operations worldwide. It has
made numerous corporate acquisitions, including Lipton (1971), Brooke Bond (1984), Chesebrough-Ponds
(1987), Best Foods (2000), Ben & Jerry's (2000), Alberto-Culver (2010), Dollar Shave Club (2016) and Pokka
Herbs (2017). Unilever divested its specialty chemicals businesses to ICI in 1997. In the 2010s, under leadership
of Paul Polman, the company gradually shifted its focus towards health and beauty brands and away from food
brands showing slow growth.

Profitability ratios
A profitability ratio is a measure of profitability, which is a way to measure a company's
performance. Profitability is simply the capacity to make a profit, and a profit is what is left over from income
earned after you have deducted all costs and expenses related to earning the income.

What Do Profitability Ratios Tell You?

For most profitability ratios, having a higher value relative to a competitor's ratio or relative to the same ratio from a
previous period indicates that the company is doing well. Ratios are most informative and useful when used to
compare a subject company to other, similar companies, the company's own history, or average ratios for the
company's industry as a whole .there are two types of profitability ratio

1. Margin Ratios

Margin ratios represent the company’s ability to convert sales into profits at various degrees of measurement.
Examples are gross profit margin, operating profit margin, net profit margin, cash flow margin, EBIT, EBITDA,
EBITDAR, NOPAT, operating expense ratio, and overhead ratio.

2. Return Ratios

Return ratios represent the company’s ability to generate returns to its shareholders. Examples include return on
assets, return on equity, cash return on assets, return on debt, return on retained earnings, return on revenue, risk-
adjusted return, return on invested capital, and return on capital employed.

Types of profitability ratios

Gross profit ratio

The gross profit margin (also known as gross profit rate or gross profit ratio) is a profitability measure that shows
the percentage of gross profit in comparison to sales. In other words, it calculates the ratio of profit left of sales after
deducting cost of sale
Gross Profit Margin Formula and Explanation
Gross profit margin is calculated using the following basic formula:
Gross profit ÷ Sales
Gross profit is equal to sales minus cost of sales. If there are sales returns and allowances, and sales discounts, make
sure that they are removed from sales so as not to inflate the gross profit margin. A more accurate formula is:

Gross profit ÷ Net sales

year 2015 2016 2017 2018

3,832,293,000/ 4,202,215000/ 4,833,564,000/ 5359342000/
857109000 9,466,836,000 10,745,260,000 11,898,430,000
ratio 44.71% 44.38% 44.98% 45.04%

Interpretation:

Generally, the higher the gross profit margin the better. A high gross profit margin means that the company did well
in managing its cost of sales. The year 2015 gross profit ratio is exceeding the year 2016 ratio that means that sales
must have been less and must have been high as compared to in 2015 .on the other hand in year 2017 and 2018 the
gross profit margin is increasing by the difference of 0.6 and 0.06 respectively.
 45.50%

45.00%

44.50%

44.00%

43.50%

43.00%

42.50%
2015 2016 2017 2018

Net profit margin

Net profit margin (also known as “return on sales”) is a profitability ratio that measures the percentage of net income
to sales. Comparing net income of two different periods or two different companies using the dollar values can
sometimes be inappropriate because of size differences. The use of net profit margin negates the effect of size for
better analysis of an entity’s performance.

Net Profit Margin Formula and Explanation

Net profit margin makes use of information presented on the income statement.

Net profit margin (return on sales) is computed using this formula:

Net Income ÷ Net Sales

It is important to note that "net sales" is used in the computation. Net sales are equal to gross sales minus any sales
discounts, returns, and allowances. The use of net sales instead of gross sales makes the computation more accurate
as the "true" sales revenue is reflected.

year 2015 2016 2017 2018

123218000/ 1276089000/ 135563000/ 131570000/
851097000 9466836000 10745260000 11898430000
ratio 14.3% 13.4% 12.61% 14.55%

Interpretation

A 10% profit margin is considered average. Profit margin goes to the heart of whether your business is doing well.

According to the definition the higher the net profit margin (or return on sales), the better. A high percentage means
that the company did well in managing its expenses. It is also useful to compare it to a benchmark, such as industry
average or past performance, to determine the company's standing. In the year 2015 the benchmark was high then in
year 2016 and 2017 but increased by 1.94 margins in 2018 due to increase in sale. And decline in cost of production
 net profit margin
15.00%
14.50%
14.00%
13.50%
13.00% net profit margin

12.50%
12.00%
11.50%
2015 2016 2017 2018

Return on equity
Return on equity, or ROE, is a profitability ratio that measures the rate of return on resources provided for by a
company’s stockholders’ equity. Hence, it is also known as return on stockholders’ equity or ROSHE.

Return on Equity Formula and Explanation

The ROE formula makes use of “net income” obtained from the income statement and “stockholders’ equity” from
the balance sheet. It is computed by dividing the net income generated during the period by the average of
stockholders’ equity employed in that period.

SHE formula

Total asset- Total liabilities

Average she formula

Net Income ÷ Average SHE

The average of stockholders' equity is preferred over simply the ending balance of SHE. This is because the net
income represents activity for a period, while SHE is measured as of a certain date. To fix this mismatch by some
means, the average of the beginning and ending balance of stockholders' equity is used.

Year 2015 2016 2017 2018

1232128000/ 126089000/ 1355673000/ 1731570000/
1678594000 1751756000 993184000 1050677000
ratio 0.73 0.78 1.36 1.64

Interpretation

Return on equity measures profitability using resources provided by investors and company earnings. A high return
on assets shows than the business was able to successfully utilize the resources provided by its equity investors and
the company’s accumulated profits in generating income. Nonetheless, just like any other financial ratio, the ROE is
more useful if it is compared to a benchmark such as the average ROE in the industry where the company operates
or the company's ROE in the past years. As shown the ROI is increasing which a good sign is because it shows that
the unliever is using the equity provided by shareholder in these years to generate more equity.

return on equity
1.8
1.6
1.4
1.2
1
0.8 return on equity
0.6
0.4
0.2
0
2015 2016 2017 2018

Return on asset
Return on assets (ROA) is a profitability ratio that measures the rate of return on resources owned by a business. It is
one of the different variations of return on investment (ROI). It measures the level of net income generated by a
company’s assets.
Return on Assets Formula and Explanation
The return on assets is a cross-financial statement ratio. It makes use of “net income” derived from the income
statement and “total assets” obtained from the balance sheet.
The formula for return on assets is:
Net Income ÷ Average total assets
Take note that it is better to use average total assets instead of simply total assets. This is because the net
income represents activity for a period of time; however, total assets are measured as of a certain date. To somehow
fix this mismatch, the average of the beginning and ending balance of total assets is used.
year 2015 2016 2017 2018
1232128000/ 1276089000/ 1355673000/ 1731570000/
4417293000 4517694000 4349521500 5009960000
ratio 0.27 0.28 0.31 0.34

Interpretation

The ROA is increasing every year that means that the company did great in managing its resources to
generate profit .the roa is increasing every year because of increase in total average asset.
 return on asset
0.4

0.35

0.3

0.25

0.2
return on asset
0.15

0.1

0.05

0
2015 2016 2017 2018

Operating expense ratio:

Earnings per share (EPS) ratio measures how many dollars of net income have been earned by each share of common
stock during a certain time period. It is computed by dividing net income less preferred dividend by the number of shares
of common stock outstanding during the period. It is a popular measure of overall profitability of the company and is
expressed in dollars.

Formula:

Earnings per Share=Net Income − Preferred Dividends÷EndofPeriod Common Shares Outstanding

Year 2015 2016 2017 2018

123218000/6157618 1276089000/61757618 1355673000/6157618 1731570000/6369950
ratio 200.98 206.62 220.16 271.83

Interpretation

The higher the EPS figure, the better it is. A higher EPS is the sign of higher earnings, strong financial position and,
therefore, a reliable company for investors to invest their money.

earning per share

300

200

100

0
2015 2016 2017 2018