SUBMITTED BY TUNGEENA WASEEM

SUBMITTED TO MA’AM ATIA ALAM

COURCE ANALYSIS OF FINANCIAL STATEMENTS
MAJOR ACCOUNTING AND FINANCE
SEMESTER 7
DATE -10-2019
SUI NORTHERN GAS PIPELINE
Sui Northern Gas Pipelines Limited (SNGPL) was incorporated as a private limited company in
1963 and converted into a public limited company in January 1964 under the Companies Act
1913, now the Companies Act, 2017 and is listed on Pakistan Stock Exchange Limited.
SNGPL is the largest integrated gas company serving more than 6.296 million consumers in
North Central Pakistan through an extensive network in Punjab, Khyber Pakhtunkhwa and Azad
Jamu & Kashmir. The Company has over 55 years of experience in operation and maintenance
of high-pressure gas transmission and distribution system. It has also expanded its activities as
Engineering, Procurement and Construction (EPC) Contractor to undertake the planning,
designing and construction of pipeline.
The prime objective of the Company is to protect the interest of all stakeholders through fair,
ethical and transparent business practices. The Board has ensured compliance to Code of
Corporate Governance by adopting transparent procedures and methodologies which are
constantly being monitored and reviewed through better internal controls. The Company also
ensures compliance to the Companies Act, 2017, Public Sector Companies (Corporate
Governance ) Rules, 2013, Listed Companies (Code of Corporate Governance) Regulations,
2017 of Pakistan Stock Exchange Limited.
Good business is all about good corporate governance. This is the main philosophy based on
which the Company’s business has been successfully operated since 1964. The prime objective
of the Company is to protect the interest of all stakeholders through fair, ethical and transparent
business practices. The Board has ensured compliance to Code of Corporate Governance by
adopting transparent procedures and methodologies which are constantly being monitored and
reviewed through better internal controls. The Company also ensures compliance to the
Companies Act, 2017, Public Sector Companies (Corporate Governance ) Rules, 2013, Listed
Companies (Code of Corporate Governance) Regulations, 2017 of Pakistan Stock Exchange
Limited and Financial Reporting BOARD OF DIRECTORS

CASH HOLDINGS

Cash and bank balances

Cash and bank balances generally includes following:

 Cash in hand
 Balances available with banks
 Demand deposits (funds kept in bank account which can be withdrawn at any time
without prior notice);
  Any other short term highly liquid investments that are readily convertible to known
amount of cash e.g. term deposits, prize bonds etc.

2016 2017 2018

1780793 3647182 7075033

Cash and Cash Equivalents under the current assets section of a balance sheet represents the
amount of money the company has in the bank, whether in the form of cash, savings bonds,
certificates of deposit, and money invested in money market funds. It tells you how much money
is available to the business immediately.
Sui northern has excess of the cash which means its liquidity is high in 2017 as compared to the
year 2016 and then again it increases in year 2018.
Company pays its payments through cash that’s why company have the higher amount of cash
not through accounts payables.
Motives for Holding Cash
Majorly there are three motives for which the firm holds cash.

1. Transaction Motive: The transaction motive refers to the cash required by a firm to meet
the day to day needs of its business operations. In an ordinary course of business, the firm
requires cash to make the payments in the form of salaries, wages, interests, dividends, goods
purchased, etc.
2. Precautionary Motive: The precautionary motive refers to the tendency of a firm to hold
cash, to meet the contingencies or unforeseen circumstances arising in the course of business.
3. Speculative Motive: The firms hold cash for the speculative purposes to avail the benefit
of bargain purchases that may arise in the future. For example, if the firm feels the prices of raw
material are likely to fall in the future, it will hold cash and wait till the prices actually fall.

Liquidity Ratios

 Current ratio
 Quick ratio
 Cash holdings ratio

Current Ratio =

Total current assets/ total current liabilities

Total current assets/ total current liabilities

Year 2016 = 112,225,717/128,939,602 = 0.87

Year 2017 = 157,105,429/163,310,619 = 0.96

Year 2018= 267,094,224/280,714,218 = 0.95

2016 2017 2018

0.87 0.96 0.95

In year 2016 company has current ratio of 0.87 and in year 2017 it is 0.96 which means sui
northern company liabilities are increasing which increases the current ratio but in year 2018
company quick ratio is 0.95 which means with high current ratio may not always be able to pay
its current liabilities as they become due if a large portion of its current assets consists of slow
moving inventories.

On the other hand, a company with low current ratio may be able to pay its current obligations
as they become due if a large portion of its current assets consists of highly liquid assets i.e.,
cash, bank balance, marketable securities and fast moving inventories.

Increase in current ratio over a period of time suggest improved liquidity of the company or a
more conservative approach to working capital management. A decreasing trend in the current
ratio may suggest a deteriorating liquidity position of the business or a leaner working capital

Quick Ratio =

Current assets - Inventory/ current liabilities

Current assets - Inventory/ current liabilities

Year 2016 = 112,225,717-967,110/128,939,602= 0.8628

Year 2017 = 157,105,429-10,270,890/163,310,619= 0.8991

Year 2018 = 267,094,224-31,404,569/280,714,218= 0.8396

2016 2017 2018

0.86 0.89 0.83
In year 2016 companys quick ratio is 0.86 but in comparison to year 2017 it is 0.89 which
means it is higher in year 2017 but low in 2018 which is 0.83 low or decreasing quick ratios
shows that a company is over-leveraged, struggling to maintain or grow sales, paying bills too
quickly or collecting receivables too slowly. On the other hand, a high or increasing quick ratio
generally indicates that a company is experiencing solid growth, quickly converting receivables
into cash, and easily able to cover its financial obligations.

Sui northern company increases the quick ratio by Increasing sales which can improve inventory
turnover, which can increase a company’s cash on hand. And because cash is the most liquid
asset, the better the company is at increasing its sales or improving inventory turnover, and by
keeping the company’s liabilities under controlled is essential to improving the quick ratio, and
keeping them low will put company in a better position.

Cash holding ratios = Cash/ Total assets

2016 2017 2018
0.16 0.14 0.10

The cash ratio or cash coverage ratio is a liquidity ratio that measures a firm’s ability to pay off
its current liabilities with only cash and cash equivalents. The cash ratio is much more restrictive
than the current ratio or quick ratio because no other current assets can be used to pay off current
debt–only cash.
A ratio of 1 means that the company has the same amount of cash and equivalents as it has
current debt. In other words, in order to pay off its current debt, the company would have
to use all of its cash and equivalents. A ratio above 1 means that all the current liabilities
can be paid with cash and equivalents. A ratio below 1 means that the company needs more
than just its cash reserves to pay off its current debt.

In 2016, the Cash Ratio of the company is 0.16 which represent the company’s most liquid
assets to pay its current assets. In 2017, the Cash Ratio of the company has decreased as
compared to the base year 2016 which shows that the company’s ability to pay its current
liabilities and current assets has also decreased. In 2018, the Cash Ratio of the company has
decreased by 0.10 as compared to the base year 2016 which shows that the company’s ability to
pay its current liabilities and assets has also decreased. The Cash Ratio of the company has
fluctuations which represents that during the three years’ analysis the company’s ability to pay
for its current liabilities from its most liquid assets has increased and the company is not ideally
liquid to pay for its current liabilities. Therefore, company should increase its cash by increasing
sales and by selling and increasing outstanding number of shares.
WORKING CAPITAL MANAGEMENT
2016 2017 2018
-16713885 -6205190 -13619994

In 2016 ratio decreases and in 2017 it increases again in 2018 ratio decreases. When a company
makes more money on each product it sells, it has a higher gross profit margin. If it starts to get
less per product sold, its gross profit margin decreases.
If increase in net working capital indicates that the business has either increased current assets
(that it has increased its receivables or other current assets) or has decreased current liabilities—
for example has paid off some short-term creditors, or a combination of both.
In 2016, the Net Working Capital to Assets is - 16713885which represents the company’s un-
potential reservoir of cash with proportion to the asset. Therefore, company’s cash reservoir is
negative in response to its assets. In 2017, the Net Working Capital to Assets has decreased to a
great extent by -6205190 as compared to the base year 2016 and it has become negative which
shows that the company’s cash reservoir too negative that is not even backed by the company’s
total assets. In 2018, the Net Working Capital to Assets has decreased to a great extent in
comparison with the base year 2016 and it remained negative. Therefore, company’s cash
reservoir is not able to be backed by company’s total assets. The Net Working Capital to Assets
of the company has fluctuations during the three years’ analysis which was negative at the start
and then remained negative for the following years. However, it is highly recommended to
increase the company’s Current Assets by increasing its accounts receivables & selling and
increasing outstanding number of shares to make the company’s cash reservoir positive so that
the Net Working Capital can also be increased.

Cash in hand

2016 2017 2018

1780793 2000,000 4270,000

Cash on hand in accounting often represents more than what's in a cash register or a petty cash
drawer. Generally called cash and cash equivalents, or CCE, it's comprised of any assets that can
be converted into cash immediately, including physical cash, money in the bank, securities,
money market funds, short-term bonds. The amount of cash you have at the end of an accounting
period will be the same as the amount that you have at the beginning of the next period. If the
amount of cash on hand that you have at the end of December is $5,000, then you should have
$5,000 at the beginning of January.
Cash holdings are the holdings that a person or company keeps available to spend rather than
investing. Low cash holdings take away the freedom of managers to react to the market.
In 2016, the holding of cash of the company is 1780,000 which represent the company has
holdings of cash to meet any need when they want the cash. In 2017, the holding of cash of the
company has increased by 2000,000 as compared to the base year 2016 which shows that the
company’s ability to pay its current liabilities and current assets and any short term need has also
decreased. In 2018, the holdings of cash of the company has increased by 4270,000 as compared
to the base year 2016 which shows that the company’s ability to pay its current liabilities and
assets and to meet the needs of liquid has also increased.

SECTORIAL ANALYSIS
SUI NORTHERN GAS SECTORIAL ANALYSIS
Cash and bank balances 7075033 69,436,523
Current ratio 0.95 4.35
Quick ratio 0.83 3.41
Cash holding ratio 0.15 0.81
Cash at hand 4270 57,507.00

Sui northern In 2018, the holding of cash of the company is 4270 which represent the company
has holdings of cash to meet any need when they want the cash. In sector, the holding of cash of
the company is high that is 57,507.00 as compared to the sui northern which shows that the
company’s ability to pay its current liabilities and current assets and any short term need has also
increased.
Assets size of the sector inclined to Rs 69,436,523 and for sui northern it is Rs 7075033.
Current ratio increased by 4.35 percent in sector and it is 0.95 percent company. A significant
increase in current ratio is so high to be considered as ideal as the value and sector’s ability to
pay off current creditors out of current assets becomes greater as the ratio becomes higher. In
sector, the Quick Ratio of the company is increased to 3.41 percent as compared to the sui
northern that is 0.83 which shows that the company’s ability to pay its current assets and current
liabilities has decreased because of the low percentage of quick ratio. Therefore, the company
possesses low liquidity because of its low quick ratio. However, the company can increase its
liquidity by increasing sales to increase its accounts receivables and by selling and increasing
outstanding number of shares.
Sector has the Cash Ratio of the 0.81 which represent the company’s most liquid assets to pay
its current assets. In 2018, the Cash Ratio of the sui northern has decreased by 0.15 as compared
to the sector which shows that the company’s ability to pay its current liabilities and current
assets has decreased. Therefore, company should increase its cash by increasing sales and by
selling and increasing outstanding number of shares.

Investments
Short-term investments and long-term investments on the balance sheet are both assets, but they
aren't recorded together on the balance sheet. Investments can include stocks, bonds, real estate
held for sale and part ownership of other businesses.
Capital investments are sums of money you put into your business to generate profits down the
road. You probably hope all the money you invest will generate profits, but accountants separate
paying day-to-day bills from the capital investments like:
 Land
 Buildings and building upgrades
 Cash invested in stocks or just an interest-bearing account
 Buying up a smaller company
 Cash on investments
Provide liquidity to the company. If company do not do any investment and cash is in large
amount then it means that the company keeps the cash in ideal form. The company should invest
that cash in long term or short form so that the company could gain the profit.

Accounts receivable
 Bad debts
 Aging
 Benefits
 Credit policies
 Working capital management
 Average collection period
 Operating cycle
 Cash conversion cycle

Trade debts
2016 2017 2018
57879916 57817321 66314600

A trade debt in the business world is an account payable. It is the money one company owes
another for a good or service received but not yet paid for. These obligations are usually paid
between 10 and 90 days, and in accounting, are considered current liabilities for the purchasing
company.

Bad debts
2016 2017 2018
 (2290) 7,973 92,873

A bad debt is an account receivable that has been clearly identified as not being collectible.
This means that a specific account receivable is removed from the accounts receivable account,
usually by creating a credit memo in the billing software and then matching the credit memo
against the original invoice; doing so removes both the credit memo and the invoice from the
accounts receivable report.
When you create the credit, credit the accounts receivable account and debit either the bad debt
expense account (if there is no reserve set up for bad debts) or the allowance for doubtful
accounts (which is a reserve account that is set up in anticipation of bad debts). The first
alternative for creating a credit memo is called the direct write off method, while the second
alternative is called the allowance method for doubtful accounts.

METHODS TO ACCOUNT FOR BAD DEBT

 Direct Write-off Method: When a receivable is considered not collectible, it is directly
expensed in the Income Statement.
 Allowance Method: This is an estimate of the receivable made at the end of each fiscal
year. These amounts are then accumulated in a provision account. The specific
receivables are reduced every year by these amounts as per the requirement.

Pre payments
2016 2017 2018
113541 160909 226212

A prepayment is the settlement of a debt or installment loan before its official due date. A
prepayment is simply the payment of a bill, operating expense, or non-operating expense that
settles an account before it becomes due. It might be made by a single individual, a corporation,
or another type of organization.
In 2016, prepayments of sui northern is 113541 and it increases in 2017 and again increase by
226212. Prepayments are advance payments for services to suppliers

KEY TAKEAWAYS
 Many types of debts and obligations can be settled in advance through prepayment, but
there's sometimes a financial penalty for doing this, particularly with mortgages.
 Tax withholding from pay is a form of prepayment of taxes that will ultimately due.
 Consumers can prepay credit card charges before they actually receive statements, often
avoiding interest.

Receivable turnover
 2016 2017 2018
22.78 15.98 32.66

The Receivable Turnover of the company has minor fluctuations during the analysis of three
years’ which shows that the receivable turnover has decreased which is not a good remark. But
to be a great competitor in the market, sui northern has changed its CREDIT POLICY. It is also
recommended, company should increase its Cash sales which will decrease the risk of bad debts
which will lead to a better collection policy.
Accounts Receivable Turnover= net credit sales/Average Accounts Receivable

In 2016, the Receivable Turnover of the company is 22.78 which represent company received
36.74 times its outstanding & reloaned it. In 2017, the Receivable Turnover of the company has
decreased as compared to the base year 2016 which shows they company’s ability to collect its
outstanding has decreased. In 2018, the Receivable Turnover of the company has decreased to a
large extent as compared to the base year 2016 which shows that the company’s ability to collect
its outstanding has decreased to a large extent.

 The accounts receivable turnover ratio is an accounting measure used to quantify a

company's effectiveness in collecting its receivables or money owed by clients.
 A high receivables turnover ratio can indicate that a company’s collection of accounts
receivable is efficient and that the company has a high proportion of quality customers
that pay their debts quickly.
 A low receivables turnover ratio might be due to a company having a poor collection
process, bad credit policies, or customers that are not financially viable or creditworthy.
 A company’s receivables turnover ratio should be monitored and tracked to determine if
a trend or pattern is developing

Inventory

 Inventory turnover
 Working capital management policy
 Operating cycle
 Conversion cycle

Working capital management

In 2016 ratio decreases and in 2017 it increases again in 2018 ratio decreases. When a company
makes more money on each product it sells, it has a higher gross profit margin. If it starts to get
less per product sold, its gross profit margin decreases.
If increase in net working capital indicates that the business has either increased current assets
(that it has increased its receivables or other current assets) or has decreased current liabilities—
for example has paid off some short-term creditors, or a combination of both.
In 2016, the Net Working Capital to Assets is - 16713885which represents the company’s un-
potential reservoir of cash with proportion to the asset. Therefore, company’s cash reservoir is
negative in response to its assets. In 2017, the Net Working Capital to Assets has decreased to a
great extent by -6205190 as compared to the base year 2016 and it has become negative which
shows that the company’s cash reservoir too negative that is not even backed by the company’s
total assets. In 2018, the Net Working Capital to Assets has decreased to a great extent in
comparison with the base year 2016 and it remained negative. Therefore, company’s cash
reservoir is not able to be backed by company’s total assets. The Net Working Capital to Assets

Average collection period

The average collection period is the average number of days between 1) the dates that credit
sales were made, and 2) the dates that the money was received/collected from the customers. The
average collection period is also referred to as the days' sales in accounts receivable.
Formula for Calculating the Average Collection Period
One formula for calculating the average collection period is:
 365 days in a year divided by the accounts receivable turnover ratio.
 An alternate formula for calculating the average collection period is: the average accounts
receivable balance divided by the average credit sales per day.
The Quick Ratio analysis shows that the company’s present conditions are fair enough but not
the ideal ones because the potential reservoir of cash (net working) capital becomes negative
after meeting the current liabilities. The company’s cash reservoirs appear to be lower than its
assets.
The ratio analysis of sui northern Limited has been extracted and interpreted for three years.
Interpretation has been followed through by considering 2016 as base year. According to the
analysis, sui northern is considered to be highly leveraged because of high long term debt ratio,
high debt equity ratio and high total debt ratio. This indicates the higher risk for the company
especially under the fluctuations of interest rates because the equity and capital and less than the
company’s debt. Furthermore, time interest earned has increased but it is still too minimal to be
considered as ideal. So, the company’s earnings are more than its interest payable but not the
ideal one whereas the company’s ability to pay for its cash has been decreased as compare to the
base year, therefore, little amount is left for other operations. The liquidity ratios for sui northern
show that the company is able to pay for its current liabilities with minor fluctuations over the
years.
A lower average collection period is generally more favorable than a higher average
collection period. A low average collection period indicates the organization collects
payments faster. There is a downside to this, though, as it may indicate its credit terms are
 too strict. Customers may seek suppliers or service providers with more lenient payment
terms.
The average balance of accounts receivable is calculated by adding the opening balance in
accounts receivable (AR) and ending balance in accounts receivable and dividing that total
by two. When calculating the average collection period for an entire year, 365 may be used
as the number of days in one year for simplicity.

Operating cycle
The operating cycle is the average period of time required for a business to make an initial outlay
of cash to produce goods, sell the goods, and receive cash from customers in exchange for the
goods. This is useful for estimating the amount of working capital that a company will need in
order to maintain or grow its business.
The following are all factors that influence the duration of the operating cycle:
 The payment terms extended to the company by its suppliers. Longer payment terms
shorten the operating cycle, since the company can delay paying out cash.
 The order fulfillment policy, since a higher assumed initial fulfillment rate increases the
amount of inventory on hand, which increases the operating cycle.
 The credit policy and related payment terms, since looser credit equates to a longer
interval before customers pay, which extends the operating cycle.

Cash conversion cycle

CCC=DIO+DSO−DPO
where:
DIO=Days of inventory outstanding
(also known as days sales of inventory)
DSO=Days sales outstanding
DPO=Days payables outstanding

 The cash conversion cycle (CCC) is a metric that expresses the length of time (in days)
that it takes for a company to convert its investments in inventory and other resources
into cash flows from sales.
 This metric takes into account the time needed to sell its inventory, the time required to
collect receivables, and the time the company is allowed to pay its bills without incurring
any penalties.
 CCC will differ by industry sector based on the nature of business operations.

SECTORIAL ANALYSIS
 Hascol Petroleum Sectorial Analysis
Trade Debts 66314660 371,405,706
Bad Debts 212220850 215,434,584
Operating cycle 67 526.8

Overall bad debts of the petroleum sector inclined to Rs 215434584 and for sui northern it is Rs
212220850. Bad debts of sector are high as compared to the company so sector should maintain
their debts. In sector, operating cycle is 526 and that of the sui northern is 67 It is high for the
sector as compared to the company.

Inventory turnover
2016 2017 2018
246.72 58.13 22.88
 
 Inventory turnover is a measure of how efficiently a company can control its
merchandise, so it is important to have a high turn. This shows the company does not
overspend by buying too much inventory and wastes resources by storing non-salable
inventory. It also shows that the company can effectively sell the inventory it buys.
 This measurement also shows investors how liquid a company’s inventory is. Think
about it. Inventory is one of the biggest assets a retailer reports on its balance sheet. If
this inventory can’t be sold, it is worthless to the company. This measurement shows
how easily a company can turn its inventory into cash.
 Creditors are particularly interested in this because inventory is often put up as collateral
for loans. Banks want to know that this inventory will be easy to sell.
 Inventory turns vary with industry. For instance, the apparel industry will have higher
turns than the exotic car industry.

In 2016, the Inventory Turnover of the company has decreased which shows they company’s
ability for turning over its inventory has decreased. In 2017, the Inventory Turnover of the
company has increased to a large extent as compared to the base year 2016 which shows that the
company’s ability for turning over its inventory has increased to a large extent. It increases in
2018 by 10.37 which means the Inventory Turnover of the company has increased to a large
extent. The Inventory Turnover of the company has minor fluctuations during the analysis of
three years’ which shows that the inventory turnover has increased which is a good remark. But
to be a big player in the market, sui northern has increased its inventory to compete maximum in
the market.

Inventory turnover = cost of good sold/average inventory

Sectorial analysis
Sui northern Sectorial analysis
Inventory turnover (in days) 67 393
Inventory turnover (in 22.88 53
times)

In 2018, the Days’ Sales in Inventories is 67 which represents that on average

the company has not sufficient inventory to maintain sales for 35 days. In sector,
the Days’ Sales in Inventories was increased as compared to the company which
represents that the sector had more inventories to maintain its sales. The Days
Sales in Inventories has been analyzed for three years’ which shows that
throughout the analyzed period the company had sufficient inventories to meet
its daily sales. Sui northern has increased its inventory due to frequent strikes of
Petroleum Transport Association. In Future if there is any further strikes, sui
northern will be able to meet its current sale & no shortage will be faced by
them during these strikes.

In 2018, the Inventory Turnover of the company is 22.88 which represent the
rate at which the company is turning over its inventories. The Inventory
Turnover of the sector has increased to a large extent as compared to the sui
northern which shows that the sector’s ability for turning over its inventory
has increased to a large extent. The Inventory Turnover of the company has
minor fluctuations during the analysis of three years’ which shows that the
inventory turnover has decreased which is not a good remark.