CHAPTER ONE:

INTRODUCTION

1.1 Introduction to Company Analysis

A company analysis is a thorough study done to ascertain a company's health in any number of
areas. A company analysis is a process through which investors or others evaluate securities,
collecting info related to the company's profile, products and services as well as profitability and
also learn how the company looks on "paper", meaning how sound it is from a fundamental
financial perspective. It answers important questions, such as what are its risks, strengths and
assets. A company analysis gives a comprehensive picture of where a company stands, and
for that reason is also called a “fundamental analysis.”

A company analysis incorporates basic information about the company, like the mission
statement and apparition and the goals and values. During the process of company analysis, an
investor also considers the company's history, focusing on events which have contributed in
shaping the company. Also, a company analysis looks into the goods and services proffered
by the company. If the company is involved in manufacturing activities, the analysis studies
the products produced by the company and also analyzes the demand and quality of these
products. Conversely, if it is a service business, the investor studies the services put forward.

To evaluate a company, core elements, operations and functions are analyzed. The reports
from the analysis of various aspects of the firm put together the big picture of its corporate
quality. Company analysts consider the basic financial variables for the estimation of the
intrinsic value of the company. These variables contain sales, profit margin, tax rate,
depreciation, asset utilization, sources of financing and other factors. The conduction of
further analysis of company include the competitive position of the company in the industry,
technological changes, management, labor relations, foreign competition and so on.

There are a variety of ways to complete company analyses, depending on the areas, but the focus
is typically on feasibility, productivity and an overall view of the corporate financial health.
Ultimately, a company analysis can be used as a snapshot of the company's strengths,
weaknesses and where it's headed.

To get where you're going, you've got to know where you are. You need a map, a plan for getting
there and a means of reaching the destination or goal. And the company analysis helps you figure
out where the company can go, and what it'll take to get there. It establishes where the company's
starting from and what it's got to work with. It illustrates the shortcomings and the strong points
while outlining threats and opportunities, both internal and external.

When taking stock of your company, performing a company analysis positions you to act
more decisively and makes it less likely that there will be surprises or threats. To have a solid
picture of your company's present and future, taking an in-depth look at finances, productivity
and performance on a regular basis gives you a thorough understanding of where you are as you
head toward where you want to be.

1.2 Importance of Company Analysis

Who Uses Company Analysis and Why?

Company analysis, when complete, should be available in a written report and the report
generated from a company analysis is useful in several ways. It could be akin to a “state of the
union” for concerned stakeholders. It's a great tool for investors or financial organizations
looking to provide a company with needed cash flow.

Company analysis is also a terrific way to take stock of where a company is, before
beginning a new phase. Maybe the company wants to diversify its investments and create
new portfolios. Knowing where it stands with the current portfolios and their projections would
be helpful. Perhaps it wants to open a new franchise or buy a new property. Understanding
the present financial commitments and getting a forecast for how they'll mature over coming
years might be advantageous before taking on more risk.
It also allows corporate bosses to determine where there are efficiencies or wastes. It can be a
useful way of understanding where profits and losses are coming from within company
operations and can help companies choose when to hire and when to lay off.

Company analysis helps investors assess the past performance and future prospects of the
firm. It encompasses all aspects of the firm, including market share, profitability, growth
prospects, finances and management structure. The results of a company analysis help
external parties reach business decisions, such as investing or entering a partnership with the
analyzed company. Thorough evaluation is essential in performing a company analysis, as it
provides insight on the value of a company.

The process of company analysis comes with a range of benefits:

 Firstly, it allows you to identify the relationship between various elements of the financial
statements.
 As an investor, by using this process you can assess the liquidity, profitability, financial
strength, and efficiency of an organization. This helps greatly in making good investment
decisions.
 By using the process of trend analysis, you can compare the year on year performance of the
organization.
 Fundamental analysis, takes the broader picture into view by including various economy
and environmental variables into account. This helps the investors in predicting the future
prospects of an organization.
 It helps in determining company's fair value and also helps to decide whether it's
undervalued or overvalued.
 It scans the industry and the economy, thus forecasting the future price movements of the
securities. The fundamental analyst attempts to predict the future stock price based on certain
parameters.
 It helps in evaluating management and also to make internal business decisions.
 It helps in determining company's ability to beat its competitor
 It analyzes company's financial strength and its ability to repay debts
 To organizations, company analysis is a tool for identifying their strengths and
 weaknesses and excelling their growth. For investors, this process is a tool that aids them in
making effective investment decisions.

1.3 Introduction to Shikhar Insurance Co. Ltd.

Shikhar Insurance Company Ltd. (SICL) is an established General Insurance Company

promoted by a young team of reputed Industrial and Business Houses of Nepal having vast
experience and excellent leadership that has steered their respective companies through the
years. There are seventeen individuals representing diversified fields like Banking, Insurance,
Trading, Manufacturing, Aviation, Tourism, Media Houses etc. Shikhar Insurance Company Ltd.
has been promoted by a young team of reputed Industrial and Business Houses of Nepal having
vast experience and excellent leadership that has steered their respective companies through the
years. The current CEO of the company is Mr.Dip Prakash Pandey. His professional ability
and prudence along with his strong belief in teamwork has helped him acquire experience in
the local as well as in the international market.

1.4 Mission of the company

“Guarantees to provide its policyholders the best available insurance protection and prompt
settlement of claims when needed”
1.5 Vision & Goal of the company
SICL is a company with a vision, geared up to face the every challenge that persists in the
insurance industry. The challenges being developing policies as per the requirement of the
client at an economical price, filling the void of the acute shortage of technical manpower in the
insurance industry, introducing new products at par with international standards, creating
capacities within the markets so that the outflow of the precious convertible currency can be
minimized etc.

SICL believes that the relationship between the insured and the insurers is one of confidence and
trust. Their goal is to set the standard for the insurance industry by providing quality service
that exceeds customers‟ expectation. The company has the right combination of dedicated
service-oriented professionals for which one can always trust for an excellent service.
1.6 Where does SICL stand?

 Among the leading companies in Terms of Premium Collection

 Among the Companies with the highest paid up capital in the country.
 Have allocated Shares of 25,000,000 to the General Public which was oversubscribed by
44 times within a very short span of operation. Total of 13254 Public Shareholders.
 Among the companies having the best available manpower in the Country along with in-
house developed young team of professionals. Trusted by Reinsurers
 Operating with 18 Branches at Thapathali, Ekantakuna, Satdobato, New Road (Ktm),
Biratnagar, Birganj, Pokhara, Nepalgunj, Butwal, Narayangadh, Hetauda, Itahari, Birtamod,
Dhangadhi, Dang and Lahan along with Bancassurance in Kumari Bank and Global IME
Bank, and regional offices at Biratnagar and Hetauda.
 Conducting various public awareness program as part of our Social Responsibility.
 Ready to implement an integrated software first of its kind in the Country.

1.7 Future Plans of SICL

 Mergers and Acquisition

 Product diversification
 To become leading Company
 Bank Assurance
CHAPTER TWO: COMPANY ANALYSIS

2.1 Porter’s Five Forces Model

Since its introduction in 1979, Michael Porter‟s Five Forces has become the de facto
framework for industry analysis. The five forces measure the competitiveness of the market
deriving its attractiveness. The analyst uses conclusions derived from the analysis to determine
the company‟s risk from in its industry (current or potential). The five forces are (1) Threat of
New Entrants, (2) Threat of Substitute Products or Services, (3) Bargaining Power of Buyers,
(4) Bargaining Power of Suppliers, (5) Competitive Rivalry Among Existing Firms. The
following is a Five Forces analysis of Shikhar Insurance Company in relationship to its
insurance business:

Threat of New Entrants: High pressure

Profitable markets that yield high returns will attract new firms. This results in many new
entrants, which eventually will decrease profitability for all firms in the industry. Entry
barriers are relatively higher for the service industry. There is an increasing amount of new
brands appearing in the market with similar schemes and with higher return as insurers in both,
life and non-life insurance business. The following factors can have an effect on how much of a
threat new entrants may pose:
 Government policy
 Capital requirement
 Economies of scale
 Schemes differentiations
 Industry profitability( the more profitable industry attracts more new competitors)

Threat of Substitute Products: Medium to high pressure

There are many offers and schemes in product/services of insurance in the market. Shikhar
insurance doesn't really have entirely unique services. The schemes are so indifferent that
common people find difficult to differentiate the product. The existence of products outside of
the realm of the common product boundaries increases the propensity of customers to switch
to alternatives. The Factors are:
 Buyer propensity to substitute
 Relative price performance of substitute
 Ease of substitution
 Number of substitute available in the market
 Buyer Switching costs

The Bargaining Power of Buyers: High pressure

The insurance industry has high pressure while bargaining by buyers. Individual buyer are so
strong due to various other competitors prevailing in the market. The buyer power is high if the
buyer has many alternatives. If a large number of customers will act with each other and rejects
the product, the company will have no other choice because of large number of customer's
pressure. Following are the Potential factors:

 Buyer concentration to firm concentration ratio

 Bargaining leverage, particularly in industries with high fixed costs
 Buyer information availability
 Availability of existing substitute products
 Buyer price sensitivity

The Bargaining Power of Suppliers: High pressure

Shikhar insurance company provides various services on life as well as non-life insurance.
There are 4 different types of plans that offer various premiums to the business. Since
suppliers have other alternative too, suppliers may refuse to work on single plans and charge
excessively high premium in other services. The potential factors are:

 Supplier switching costs relative to firm switching costs

 Presence of substitute inputs
 Strength of distribution channel
 Supplier concentration to firm concentration ratio
 Supplier competition: the ability to forward vertically integrate and cut out the buyer.

Competitive Rivalry among Existing Firms: High Pressure

Currently, there are 25 insurance companies in Nepal. For most industries the intensity of
competitive rivalry is the major determinant of the competitiveness of the industry. And with that
number of rivals in industry, we can surely conclude that Shikhar Insurance is serving in the
edge of the competition. Other companies might not have reached to the market share that of
Shikhar insurance, many competitors (new/old) are prevailing in the industry.
Following are the factors:

 Sustainable competitive advantage through innovation

 Level of advertising expense
 Powerful competitive strategy
 Firm concentration ratio
 Degree of transparency

2.2 BCG Matrix of Shikhar Insurance

In the 21st century, sustainable improvement of business faces various challenges for the
global economic competition. But, these challenges can be overcome by the efficient business
strategies. The Boston Consulting Group (BCG) helps the business organizations to develop their
efficiency for the successful operation of their business activities. To develop the efficiency of
marketing decision making, the BCG Matrix plays an effective tool for strategic planning of
product performance in industry and company level. It analyses to identify which strategic
business units to invest in, which to sell off, and which to shut down. It helps a company to
distribute their available resources through the efficient business management. It is one of the
most popular and helpful consulting firms. The paper tries to provide a guideline to the business
organizations to choose the best business policies by the use of BCG matrix. To help businesses
further analyze its assets, the BCG matrix divides the business products into four categories as:
i) "Question Marks" indicates the products in high growth markets, and with low market share.
ii) "Stars" shows that both, the growth markets and market share are in the highest position.
iii) "Cash Cows" predicts that the products are in low growth markets, and market share is in
high.
iv) "Dogs" displays that both growth and market share are in low position.

Along the top of the entire box is market share or cash generation, while running down the
left hand side of it is growth rate or cash use. If one goes to the left of the top of the box,
he/she sees high market share and low market share. He/she also sees high cash use at the top
and low cash growth rate at the bottom of the box.

Figure: BCG Matrix

The above 4 different quadrants of BCG Matrix are described as follows:

 Dogs: These are the products with low growth or market share. These are low growth or low
market share products and have very few chances of showing any growth. The investment
strategy for these products has to be very well thought through by the management as
there are chances that these businesses might not yield any profit for the organization. These
business units or products are cash traps and therefore are not seen as a useful source of
earning.

 Cash Cows: These are the products which are in low growth markets with high market
share. Products which are market leaders in their specific industry and their industry is not
expected to see any major growth in the future are considered as Cash Cows. These products
are the money churners for the company and require very low investments to sustain their
leadership and profitability in the market.

 Stars: These are the products which are in high growth markets with a high market share.
Products or Business Units which hold a high market share and are also considered to
grow in the future are positioned as Stars. As a result, companies are interested to invest in
developing these units further to gain a larger market share and attain a stronger position in
the market. These products have the potential of being positioned as cash cows in the future
owing to the industry growth prospects.

 Question Marks: Products in high growth markets with a low market share. Products or
business units of the company that are still in the nascent stage of their product lifecycle
and can either become a revenue generator by taking the position of a Star or can become a
loss-making machine for the company in the future. The industry has high potential to grow
hence giving the room to the products to grow as well only if the pertinent issues are
managed effectively.

Following are the BCG Matrix analysis of Shikhar Insurance and the various product of
insurance company in the 4 quadrants:
Dogs: Dogs are those products that were perceived to have the potential to grow but however
failed to create magic due to the slow market growth. Failure to deliver the expected results
makes the product a source of loss for the organization, propelling the management to
withdraw future investment in the venture. Agri Insurance Policy is the major product that
falls under Dogs Quadrant in the matrix.

Cash Cows: Shikhar Insurance for years has been at top for Health and Vehicle insurance
segment and a major cash generator for the company. Having a presence of more than 20
insurance products, Health and Vehicle insurance policy has been the no.1 choice for huge
consumer base all these years when it comes to choosing a company. Hence, we consider that
Health and Vehicle insurance as Cash Cows for Shikhar Insurance.

Stars: The products or business units that have a high market share in high growth industry are
the stars of the organization. Aviation Insurance and Contractor‟s All Risk (CAR) policy are
Stars for the company. Post-Earthquake period, CAR policy has more focused on designed
to cover all types of civil engineering projects like buildings, dams, flyovers, etc. Safety on
Airways and Condition of Nepalese Aviation has induced Aviation Insurance Policy as Star for
Shikhar Insurance.

Question Marks: There are products that formulate a part of the industry that is still in the phase
of development and the organization is trying to create a significant position in the industry.
Travel Medical Insurance, Household insurance, Public Liability and other few policy are
looking for market penetration in the industry. The small market share obtained by the
organization makes the future outlook for the product uncertain; therefore investing in such
domains is seen as a high-risk decision.
Figure: Shikhar Insurance Product-wise representation

The Graphical representation of different policy indicates the product-wise position of Shikhar
Insurance in the industry. The Straight line on Health and Vehicle insurance suggest that they
have been moved to Cash Cows with high market share but low market growth. Also,
Household insurance and Public liability policy has potentiality to grow but has failed to attend
its market share. Dotted line on Agri Insurance Policy suggests that the policy could become Star
for the company since it has higher market growth rate and high market share potential. As it has
not acquired its space in the industry, it have gained huge potentiality due to increasing interest
and concern towards Agricultural Development.

Following figure shows the actual position of Shikhar Insurance Co. as a whole:
 Figure: BCG Matrix Company as a whole
The overall position of Shikhar Insurance Company as a whole is near question mark, slightly
above dogs. There are new products that are gaining market and are still in the phase of
development and the organization is trying to create a significant position in the industry. The
policies of insurance such as Travel Medical Insurance, Household insurance, Public Liability
and other are looking for market penetration and are emerging in Nepalese Market. Hence,
overall performance of Shikhar Insurance and their studies shows the company is in Question
mark stage. In days to come, Company has shown great trend of gaining success. Proper flexible
management and proactive policy formulations can help the company to gain prosperity and
glorious result.

2.3 Financial statement analysis

Financial statement analysis is a method or process involving specific techniques for

evaluating risks, performance, financial health, and future prospects of an organization. Ratio
Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a
firm's financial performance in several key areas. Ratios are used to measure different aspect
of the organization, for example; profitability, Underwriting ability, market risk of Insurance
Company etc. Ratio Analysis as a tool possesses several important features. The data, which
are provided by financial statements, are readily available. The computation of ratios facilitates
the comparison of firms which differ in size and nature. Ratios can be usedto compare a firm's
financial performance with industry averages. In addition, ratios can be used in a form of trend
analysis to identify areas where performance has improved or deteriorated over time.

Values used in calculating financial ratios are taken from the balance sheet, income statement,
and statement of cash flows. These comprise the firm's "accounting statements" or financial
statements. The statements' data is based on the accounting method and accounting standards
used by the organization. Financial ratios quantify many aspects of a business and are an
integral part of the financial statement analysis. Financial ratios are categorized according to the
financial aspect of the business which the ratio measures.

Following ratios are used to understand the company's financial position:

a) Liquidity analysis
Current Ratio:
Current ratio is a liquidity ratio that measures a company's ability to pay short-term
obligations. The ratio is mainly used to give an idea of the company's ability to pay back its
short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).
The higher the current ratio, the more capable the company is of paying its obligations.

b) Underwriting ratios

The amount of a company's net premiums that were allocated to underwriting costs, like
commissions to agents and brokers, state and municipal taxes, salaries, benefits and other
operational expenses. This ratio is determined by dividing the underwriting expenses total by
net premiums earned. It is the measure of an insurer's business efficiency to investor, the lower
the Loss rate ratio, which indicates the company is more efficient.

Expense Ratio:
It is a measure of what it costs an investment company to operate a mutual fund. An
expense ratio is determined through an annual calculation, where a fund's operating expenses
are divided by Net premium. The lower the ratio the company.

Combined Ratio: Loss ratio + Expense Ratio

Combined ratio is the addition of loss ratio and expense ratio, which shows in together how an
efficient insurance company is to select the policy as well as control the underwriting expense.
The lower the ratio the better efficiency it indicates.

c) Profitability ratios

Return on Revenue:
It is a measure of a corporation's profitability that compares net income to revenue. Return on
revenue is calculated by dividing net operating income by revenue. This ratio indicates on the
total revenue earned what portion is turning into profit. The higher the ratio the better it is for the
company.

Return on Equity Capital (ROE):

This ratio measures how much profit the shareholder's investment has generated. A higher ROE
percentage indicates that shareholders are receiving a better return on their investment.
Return on Assets (ROA):
This ratio measures how profitable a company is relative to its total assets. A high ROA indicates
that management is effectively utilizing the company's assets to generate profit.

Investment Yield:
It indicates how much the company is earning from investment against its investment.
Company would like earn higher income on lower amount of investment. So, lower the ratio
better investment efficiency it indicates.

d) Leverage ratios
Debt to Equity Ratio:
It measure of a company's financial leverage calculated by dividing its total liabilities by
stockholders' equity. It indicates what proportion of equity and debt the company is using to
finance its assets. A high debt/equity ratio generally means that a company has been aggressive
in financing its growth with debt.
Interpretation:
Current ratio is increasing and it means the company has maintained good liquidity in the
business as it has current ratio at 1.725. In last 5 years, Current ratio has significantly increased
but slightly decreased from 2072/73. It has shown sign of improvement in liquidity.

Interpretation:
Loss ratio has increased slightly from 0.373 in 2072/73 to 0.462 in 2073/74. We can say that the
insurance company has enough efficient to make its judgment but has become riskier in
compared to last 5 years. Higher loss ratios indicate that Shikhar insurance company may need
better risk management policies to guard against future possible insurance payouts.

Interpretation:
From 0.282 in 2069/70 to 0.189 in 2073/74, expense ratio suggests that the company has
become successful in bringing new policies to the company. The lower expense ratio is better
because it means more profits to the insurance company. 2072/73 seems to be better in terms of
underwriting because it has the least expense ratio in compared to last 5 years.

Interpretation:
Combined ratio reflects the impact of loss and expense ratio. It has higher rate than last
year and it seems that the company has suffered because of underpricing or because of
unexpected high claims.
Interpretation:
The profitability of Shikhar insurance company has increased from 0.598 to 0.699 in last 5 years.
It denotes that the company has earned higher profit but slightly lower than the year 2072/73
which was 0.702 as highest in last 5 years.

Interpretation:
Company doesn‟t seem enhancing its returns on existing liquid assets. The ROA has
decreased significantly from 1.247 in 2069/70 to 1.197 in 2073/74. The company has failed
to maintain its profitability on existing investment securities and premiums.

Interpretation:
ROE has decreased significantly in last 5 years. Overall performance in ROE is not satisfactory
but in last year 2073/74, the company has shown some sign of improvement as it has increased
from 0.859 to 0.956 which is a good growth.

Interpretation:
The return received on an insurance company's assets is in good pace but has decreased from its
last year 2072/73 as it was highest in last 5 years. It seems that the company is mobilizing its
funds in better investments but need to work harder for higher return investment.

Interpretation:
The company's financial leverage is quite risker in the year 2073/74. It seems that the
company is using higher debts and low equity in the ratio of 63.9:36.1 which is of high risk. The
company needs to work on its capital investment to earn better company financial leverage.

The overall performance of Shikhar Insurance suggests that the company is showing sign of
improvement. Trend of last 5 years provides the evidence of company being working on its
productive areas. Post-earthquake phase, insurance business in Nepal has boomed a lot. Also,
public awareness towards insurance and its importance has lead emergence of many
insurance companies in Nepal. It is one of the reasons of Shikhar Insurance's success and
improvement. Slightly, in 2073/74, the company has fallen lower but it is the regular cycle of
business. Considering the fact that liquidity, returns on investment, leverages, risk has been
showing better sign, we can say that the company is in right track of its growth. Better
management policy, flexible management practices, proactive contingency plans and
environment scanning could get the insurance company better market penetration. Overall the
company performance in the last 5 years based on above ratios is good. And company is
showing good direction towards profit and popularities.

CHAPTER THREE: CONCLUSIONS AND RECOMMENDATIONS

3.1 Conclusions
The main objective of this company analysis is to understand the fundamental health
andoverall position of Shikhar Insurance Company Ltd. The study was conducted to explore the
current market penetration of the company and its present scenario of success and profitability.
For this, Porter‟s Five Forces Model analysis, BCG Matrix analysis and Ratio Analysis as a
Financial Statement Analysis are performed to understand financial stability of the business. The
Data are collected from Company annual report and the official website of Shikhar Insurance
Co. Ltd.

From the study conducted, we can see that there is high pressure of new entrants in the
market by emerging insurance companies. Post-Earthquake period, general public are
attracted more towards insurance schemes and new policies. Also, increasing awareness on the
importance of insurance has induced the risk. Porter‟s Five Forces Model suggests thatInsurance
business is riskier business due to frequent market fluctuation. In spite of so many challenges, it
is commendable that Shikhar Insurance is currently operating as one of the major player in
Insurance Business.
BCG Matrix provides the evidence that Agri Insurance and Aviation insurance are the major
contributor and are prospective success tools for Shikhar Insurance. Overall Business of
Shikhar Insurance stands at question mark, i.e. business have good potentiality to grow
ifmanaged well and monitored efficiently. Ratio analysis as Financial Statement Analysis
shows that company has shown good improvement in the recent years. Slightly, last year has
shown deviation than the present but that could also be considered as a good in the context of
present market scenario. Overall ratio analysis shows the trend of the business is commendable
and hence could also be concluded as a good sign for the future success.

3.2 Recommendations

Based on the financial analysis and the observation of study, following recommendation
issuggested to overcome the weakness and inefficiency and to improve the present financial
performance of Shikhar Insurance Co .Ltd. Ratio Analysis shows that liquidity and leverages
ratio has decreased slightly in the current year in comparison to the previous year but it is the
result of business operation. In order increase ROE/ROA, net profit should be increased. Net
profit can be increased by:

 Increasing the service charge, processing charge, bank charge etc.

 Minimizing the expenses and idle fund
 Research and Development should be financed.
Likewise, Five Forces Model suggests that in order to make it favorable there should be:
 Investment in effective portfolio.
 Proper utilization of fund.
 Higher managerial expertise
 Proactive management and flexible governing
As per the analysis, the company's financial performance according to financial data obtained
from the report seems sound and satisfactory. But due to competition and people awareness, the
stable position may be dangerous in long run. Hence, insurance company should focus on Agri
and Aviation Insurance. Current scenario of not only of Shikhar Insurance Co. Ltd, but also all
insurance companies in Nepal are successful, but the still position is not up to the mark. Has
this trend been changed and converted into more meaning full and healthy competition, each
and every Nepalese would have been happier than before.