Group Member:

Yasir Malik
Ikram Bajwa
Hammad Sohail
Arabi Tiwana
Contents
Introduction ..................................................................................................................................... 4
Mission of Engro Foods Limited: ................................................................................................... 4
Methodology: .................................................................................................................................. 4
Liquidity Ratios .............................................................................................................................. 5
..................................................................................................................................................... 5
Current ratio: ............................................................................................................................... 5
Quick ratio: ................................................................................................................................. 6
Analysis................................................................................................................................... 6
Absolute Cash Ratio ................................................................................................................... 6
Management Efficiency Ratios ....................................................................................................... 7
Debtors Collection Period ........................................................................................................... 7
Analysis: ................................................................................................................................. 7
Debtors turnover ratio: ................................................................................................................ 7
Creditor turnover ratio: ............................................................................................................... 8
Formula: .................................................................................................................................. 8
Analysis: ................................................................................................................................. 8
Inventory Conversion Period ...................................................................................................... 9
Formula: .................................................................................................................................. 9
Analysis: ................................................................................................................................. 9
Creditors Payment Period ........................................................................................................... 9
Inventory turnover: ................................................................................................................... 10
Formula: ................................................................................................................................ 10
Analysis: ............................................................................................................................... 10
Cash Conversion Cycle ............................................................................................................. 11
PROFITABILITY RATIOS: ........................................................................................................ 11
................................................................................................................................................... 12
Net Profit Ratio ......................................................................................................................... 12
Gross Profit Ratio ..................................................................................................................... 13
CGS Ratio ................................................................................................................................. 13
Operating Expense Ratio .......................................................................................................... 13
Return On Asset ........................................................................................................................ 13
Long Term Solvency ratio ............................................................................................................ 14
Debt to Equity Ratio ..................................................................................................................... 14
Significance........................................................................................................................... 15
For 2018 ................................................................................................................................ 15
For 2017 ................................................................................................................................ 15
Interest Coverage Ratio............................................................................................................. 15
Debt to Total Asset Ratio .......................................................................................................... 16
Conclusion ................................................................................................................................ 16
Equity To Total Asset ............................................................................................................... 17
Investement Ratio ......................................................................................................................... 17
Earnings Per Share (EPS): ........................................................................................................ 17
FORMULA: .......................................................................................................................... 17
CALCULATION: ................................................................................................................. 17
Analysis: ............................................................................................................................... 18
Price/Earnings ratio:.................................................................................................................. 18
FORMULA: .......................................................................................................................... 18
CALCULATION: ................................................................................................................. 18
ANALYSIS: .......................................................................................................................... 19
Dividend Per Share ................................................................................................................... 19
Conclusion: ................................................................................................................................... 19
Introduction
Engro Foods Limited (EFL) being the 2nd largest dairy company of Pakistan was established in
2005 with a view to cater the local needs with products in conformity with the global food safety
standard. In December 2016, it became subsidiary of the world 6th largest dairy cooperative in the
world when Friesland Campina acquired 51% of its shareholding.

Mission of Engro Foods Limited:

Safer, healthier, happier, more prosperous lives for Pakistanis.

Methodology:
We have compared the financial performance and financial position of the Year 2018 with the
corresponding year 2017 by using the ratio analysis approach.

Ratio analysis helps in understanding the plausible relationship between the financial and non-
financial data of a company, hence enabling one to understand whether a company has actually
performed well or not as compared to competitors, industry averages and previous year. Ratio
analysis helps in understanding the following aspects of a company financial and operating
performance:

➢ The Efficiency,
➢ The Liquidity,
➢ The Profitability.
We have compared the ratios to check the trend whether they have actually gotten better or worse
over a period of time.
Liquidity Ratios
Liquidity Ratios
Ratio Formulae 2018 2017
Current Ratio Current Assets/Current Liabilities 1.08 1.2
Quick Ratio Quick Assets/Current Liabilities 0.74 0.83
Absoluete Cash Ratio Cash And Cash Eq/Current Liabilities 0.01 1.2

1.2
Liquidity Ratios 1.2
1.08

0.83
0.74

0.01

CURRENT ASSETS/CURRENT QUICK ASSETS/CURRENT CASH AND CASH

LIABILITIES LIABILITIES EQ/CURRENT LIABILITIES
CURRENT RATIO QUICK RATIO ABSOLUETE CASH RATIO

2018 2017

Current ratio:
The current ratio measures a firm’s ability to pay off its current liabilities with its current assets.
Formula = current assets/current liabilities
Calculation 2018 = 9577519/8810993
= 1.0869
Calculation 2017 = 8531721/7088648
= 1.2035
Analysis:
This ratio expresses the firm’s current debt in terms of current assets. The higher the ratio the
more easily the firm is able to meet its current liabilities. The ratio has decreased by 0.12 since
2017.This means the company is losing cash and not making collections effectively.
Quick ratio:
This ratio measures the liquidity of a firm by calculating how well current assets can cover
current liabilities.
Formula = current assets-inventory/current liabilities
Calculation 2018 = 9577519-3020190/8810993
= 0.7442
Calculation 2017 = 8531721-2645994/7088648
= 0.8303
Analysis:
The acid test measures the ability of a firm to pay off its current liabilities with current assets.
Higher ratio is preferred because it means there are more current assets than liabilities. The ratio
has decreased from previous year. It means the liquidity of firm has decreased. This is a bad sign
for investors and lenders.

Absolute Cash Ratio

Absolute Liquid Assets take into account cash in hand, cash at bank, and marketable
securities or temporary investments. The most favourable and optimum value for this ratio
should be 1: 2. It indicates the adequacy of the 50% worth absolute liquid assets to pay the
100% worth current liabilities in times

Formula=Cash and Cash eq/Current Liabilities

Calculation 2018=9,577,519/8,810,993

=0.011

Calculation 2017=8,531,721/7088648

=1.203

As ratio decreases in 2018 which means there is not enough cash.

Management Efficiency Ratios
Management Efficiency Ratios
Sr Ratio Formulae 2018 2017
No.
1 Debtors Collection Period Average Debtors/Annual Credit Sales*360 3.2 Days 1.3 Days
2 Debtors Turnover Ratio Annual Credit Sales/Average Debtors 113.6 288.45
3 Creditor Turnover Ratio Net Credit Purchases/Average Creditors 4.24 5.6
4 Creditors Payment Period Average Creditors/Net Credit 84.88 63.59
Days Days
5 Inventory Conversion Average Inventory/CGS*360 37.9 40.3
Period Days Days
6 Inventory Turnover CGS/Average Inventory 9.6 9.1
7 Cash Conversion Cycle DCP + ICP – Creditors Payment Period -43.76 -21.99

Debtors Collection Period

This ratio measures the number of days it takes a firm to collect cash from its credit sales.
Formula = Avg Debtors/annual credit sales*360
Calculation 2018 = 285476/32439451*360
= 3.2 days
Calculation 2017 = 120146/34653486*360
= 1.3 days

Analysis:
The ratio has increased from 1.3 to 3.2 from 2017 to 2018.Higher ratio means poor collection
procedures and bad customers who are unwilling to pay cash. A lower ratio is preferred because
it means the company can collect cash from customers and use it for operations. It also means the
customers are good and won’t turn into bad debts.

Debtors turnover ratio:

This ratio measures how many times a firm can turn its accounts receivables into cash.
Formula = annual credit sales/avg debtors
Calculation 2018 = 32439451/285476
= 113.6
Calculation 2017 =34653486/120146
 = 288.4S
Analysis:
The ratio has decreased from 2017 to 2018.Higher ratio is preferred because it means the
company is able to frequently collect from receivables. It is also an indication of quality of
customers (receivables).

Creditor turnover ratio:

The Creditor turnover ratio is a ratio that shows a company's ability to pay off its accounts
payable by comparing net credit purchases to the average accounts payable during a period. In
other words, creditor turnover ratio is how many times a company can pay off its average
accounts payable balance during the course of a year.
This ratio helps creditors analyze the liquidity of a company by gauging how easily a company
can pay off its current suppliers and vendors. Companies that can pay off supplies frequently
throughout the year indicate to creditor that they will be able to make regular interest and
principle payments as well.

Formula:
Creditor turnover ratio =net credit purchases/ Avg Creditors

2017:

=29,017,336 / 5,125,725

= 5.6.

2018:

=27,285,392/ 6,427,662

=4.24.

Analysis:
This shows the number of times you pay to supplier. So, in 2017, the company pays more times
as compared to 2018.
Inventory Conversion Period
measures the average number of days the company holds its inventory before selling it. The ratio
measures the number of days funds are tied up in inventory. Inventory levels (measured at cost)
are divided by cost of goods sold per day.
The average inventory is the average of inventory levels at the beginning and end of an
accounting period, and CGS/day is calculated by dividing the total cost of goods sold per year by
360 days.

Formula:
Inventory Conversion Period= Avg Inventory/Cgs*360

2017:

= 3,204,946/ (29,071,336/ 360).

= 40.3 days.

2018:

=2,833,092/ (27,285,392/ 360).

= 37.9 days.

Analysis:
Here, as there are more days in inventory in 2017 than 2018, it indicates that in 2017 the quality
of the inventory is lower as there are more days required as compared to 2018 where less days
are required that tells the quality of inventory is higher and better.

Creditors Payment Period

Formula=AvgCreditors/Net Credit Purchases*360

2018= 6,427,662/27,285,392*360

=84.88 days

2017=5,125,725/29,017,336 *360

=63.59 days
As this is increased from 2107 to 2018 it means company taking more time to pay its debts .

Inventory turnover:
Inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed
by comparing cost of goods sold with average inventory for a period. This measures how many
times average inventory is "turned" or sold during a period. In other words, it measures how
many times a company sold its total average inventory dollar amount during the year.
This ratio is important because total turnover depends on two main components of performance.
The first component is stock purchasing. If larger amounts of inventory are purchased during the
year, the company will have to sell greater amounts of inventory to improve its turnover. If the
company can't sell these greater amounts of inventory, it will incur storage costs and other
holding costs.
The second component is sales. Sales have to match inventory purchases otherwise the inventory
will not turn effectively. That's why the purchasing and sales departments must be in tune with
each other.

Formula:
Inventory turnover= cost of goods sold/ avg inventory.

2017:

= 29,071,336/ 3,204,946.

= 9.1

2018:

= 27,285,392/ 2,833,092.

=9.6

Analysis:
The higher the number, the better the inventory quality. The quality of inventory is better in 2018
as the number is higher as compared to 2017 in which the number is lower and quality is lesser
than 2018’s inventory.
Cash Conversion Cycle
The cash conversion cycle (CCC) is a metric that expresses the time (measured in days) it takes
for a company to convert its investments in inventory and other resources into cash flows from
sales. Also called the Net Operating Cycle or simply Cash Cycle, CCC attempts to measure how
long each net input dollar is tied up in the production and sales process before it gets converted
into cash received.
Formula=Debtors Collection Period + inventory Conversion Period – Creditors Payment Period

2018=3.2+37.9-84.88=-43.76

2017=1.3+40.3-63.59= -21.99

In 2018 company needs more less time to sell its inventory and receive from its customers to pay
to its suppliers.

PROFITABILITY RATIOS:
Profitability ratios consist of the group of ratios that assess a company's ability to generate
revenue relative to its revenue, operating costs, balance sheet assets, and shareholders' equity.
Profitability ratios also show how well companies use their existing assets to generate profit and
value for shareholders.

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.

I have done profitability ratio analysis of Engro industries using their official reports which they
issued for the year 2018 and of previous year 2017. The ratios which I have calculated are as
under:
 Ratios Formulas 2018 2017
1.) Net Profit Ratio Net Profit / Net Sales * 100 0.20% 1.10%
2.) Gross Profit Ratio Gross Profit / Net Sales * 100 15.00% 16.00%
3.) CGS Ratio Cost of Sales / Net Sales * 100 84.00% 83.70%
4.) Operating Expense Ratio Operating Expense / Net Sales * 100 16.00% 14.00%
5.) Return on Assets Ratio Net Profit / Net Capital Employed 0.02 0.26

Profitability Ratios Comaprision

90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Net Profit Gross Profit Operating Return on
CGS Ratio
Ratio Ratio Expense Ratio Assets Ratio
2018 0.20% 15.00% 84.00% 16.00% 0.02
2017 1.10% 16.00% 83.70% 14.00% 0.26

2018 2017

Net Profit Ratio

The net profit percentage is the ratio of after-tax profits to net sales. It reveals the remaining
profit after all costs of production, administration, and financing have been deducted from
sales, and income taxes recognized. As such, it is one of the best measures of the overall
results of a firm, especially when combined with an evaluation of how well it is using its
working capital. The measure is commonly reported on a trend line, to judge performance
over time. It is also used to compare the results of a business with its competitors.
Formula=(Net Profit/Net sales)*100
2018=63783/ 32,439,451*100
=0.2%
This means company have 0.2 RS income with every sale Of 1Rs.
2017=379297/ 34,653,486*100
=1.1%
This means company have 1.1 RS income with every sale Of 1Rs.
As in 2017 company was efficiently converting sales into profit but in 2018 Net Profit Ratio
reduces

Gross Profit Ratio

Formula=Gross Profit/Net sales *100
2018=5,154,059 / 32,439,451*100
=15%
2017=5636150/ 34,653,486 *100
=16%
Company was making higher profit from sales in 2017 but it decreases in 2018.

CGS Ratio
Formula=Cost Of Sales/Net Sales*100
2018=27,285,392/32,439,451*100
=84%
2017=29,017,336/34,653,486*100
=83.7%

Operating Expense Ratio

Operating Expense Ratio is the ratio between the cost of operation to the net revenue ., where
higher Operating Expense ratio means higher operating expense as compared to its property
income and serves as a deterrent and lower operating expense ratio implies lower operating costs
and therefore, preferable and investment-friendly.
Formula=Operating Expense /Net sales *100
2018=5271308/32,439,451*100
=16%
2017=4907217/34,653,486*100
=14%
We can say that expenses are increasing and hence profit margin is decreasing as compared
to previous year

Return On Asset
The return on assets ratio measures how effectively a company can earn a return on its
investment in assets. In other words, ROA shows how efficiently a company can convert the
money used to purchase assets into net income or profits.
Formula=Net Profit/Net Capital Employed
2018=63783/13957473
=0.02
2017=379297/15129682

=0.26

Long Term Solvency ratio

These are the ratios that show the extent to which a firm is financed by debt. Financial Leverage
or borrowing affects the expected rate of return realized by stock holders for two reasons: Paying
interests lowers the firm’s tax bill and (b) usually the firm has healthy operations, it generally
invests the funds it raises at a rate of return greater than the interest rate on its debt.

Long Term Solvency Ratio

Ratio Formulae 2018 2017
Debt To Equity Ratio Total Debt/Total Equity 1.44 1.28
Interest Coverage Ratio Total Interest/PBIT 1.33 0.48
Debt To Total Asset Total Debt/Total Fixed Asset 0.33 0.51
Equity To Total Asset total Equity/Total Fixed Asset 0.7 0.7

Long term Solvency Ratio

1.44
1.28 1.33

0.7 0.7
0.48 0.51
0.33

DEBT TO EQUITY INTEREST COVERAGE DEBT TO TOTAL ASSET EQUITY TO TOTAL

RATIO RATIO ASSET

2018 2017

Debt to Equity Ratio

Debt/Equity Ratio is a debt ratio used to measure a company's financial leverage, calculated by
dividing a company's total liabilities by its stockholders' equity.
Significance
The D/E ratio indicates how much debt a company is using to finance its assets relative to the
amount of value represented in shareholders' equity.

Financial leverage refers to the use of debt to acquire additional assets. Financial leverage is also
known as trading on equity. Below are two examples to illustrate the use of financial leverage, or
simply leverage.

For 2018
TOTAL DEBT/ SHARE HOLDERS EQUITY

13,427,406 / 9,341,060 =1.44 Unfavorable

This ratio tells us that creditors are providing 1.44 rupees of financing for each 1 rupee being
provided by shareholders.

For 2017
TOTAL DEBT/ SHARE HOLDERS EQUITY

12,497,306/ 9,721,024 =1.28 Favorable

This tells us that the creditors are providing 1.28 rupees of financing for each 1 rupee being
provided by shareholders.

Its favorable in 2017 as the debt is less compared to 2018.

In general, a high debt-to-equity ratio indicates that a company may not be able to generate
enough cash to satisfy its debt obligations. However, low debt-to-equity ratios may also indicate
that a company is not taking advantage of the increased profits that financial leverage may bring.

Interest Coverage Ratio

The interest coverage ratio (ICR) is a measure of a company's ability to meet
its interest payments
Formula=Total Interest Expense//PBIT
2018=675340/505020
=1.33
2017=524,497/1,087,474
=0.48
As higher in 2018 it means ompany is more capable to meeting its interest obligations from
operating earnings

Debt to Total Asset Ratio

Debt to Total Asset Ratio is a solvency ratio that evaluates the total liabilities of a company as a
percentage of its total assets. It is calculated by dividing the total debt or liabilities by the total
assets. This ratio aims to measure the ability of a company to pay off its debt with its assets. To
put it simply, it determines how many assets should be sold to pay off the total debt of the
company.

Significance

The debt to total assets ratio is an indicator of financial leverage. It tells you the percentage of total
assets that were financed by creditors, liabilities, debt.

For 2018

TOTAL DEBT/ TOTAL ASSETS

7,563,251/22,768,466 = 0.33 or 33 % (favorable)

This shows the percentage of firm’s assets that is financed by its creditors. Thus, 33% of the assets
are financed with debt (of various types) and remaining 67% of the financing comes from
shareholders equity.

For 2017

11,372,585/ 22,218,330 = 0.51 or 51 % (unfavorable)

This shows that the 51% of the assets are financed with debt and remaining 49% of the financing
comes from the shareholders equity.

Creditors prefer low debt ratios because the lower the ratio, the greater the cushion against creditors
losses in the event of liquidation.

Conclusion
Debt to Total Asset Ratio is an important solvency ratio. The company needs to monitor this ratio
regularly as creditors will always keep an eye on this ratio. The creditors are worried about getting
their money back and a higher debt to total assets ratio will translate into no loans for new projects.
Thus, the company should always aim to keep the ratio in an acceptable range.

Equity To Total Asset

The Equity-To-Asset ratio specifically measures the amount of equity the business or farm has
when compared to the total assets owned by the business or farm
Formula=Total equity/Total Fixed Asset
2018=9,341,060/ 13,190,947
=0.7
2017=9,721,024 /13,686,609
=0.7

Investement Ratio
Investement Ratio
Ratio Formulae 2018 2017
Earning Per Share Net Profit/Total No.s Of Shares 0.08 0.49
Price Earning Ratio Market Price Per Share/EPS 996 162.6
Dividend Per Share Total Dividend Paid/Total No.s Of Shares 0.03 0.009

Earnings Per Share (EPS):

A company’s profit is divided by its number of common outstanding shares. To calculate EPS a
company uses a weighted average of shares outstanding over the reporting term.

FORMULA:
Earnings per share = Net Income/Number of ordinary shares outstanding

CALCULATION:
Earnings per share (2018) = Net Income

Number of ordinary shares outstanding

= 64000000
 766596075

= 0.08

Earnings per share (2017) = Net Income

Number of ordinary shares outstanding

= 379000000

766596075

= 0.49

Analysis:
The EPS of the year 2017 is PKR 0.49 and of the year 2018 is PKR 0.08 so there is a decrease in
EPS of the company from its previous year.

Price/Earnings ratio:
The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current
share price relative to its per-share earnings. The price-earnings ratio is also sometimes known as
the price multiple or the earnings multiple.

FORMULA:
P/E Ratio=Earnings per share/Market value per share

CALCULATION:
Price/Earnings Ratio (2018) = Market price share
 Earnings per share

= 79.68

0.08

= 996

Price/Earnings Ratio (2017) = Market price share

Earnings per share

= 79.85

0.49

= 162.6

ANALYSIS:
The Price earnings ratios of the year 2017 is PKR 162.6 and of the year 2018 is PKR 996 so
there is an increase in price earning of the company from its previous year.

Dividend Per Share

Formula=Total Dividend Paid/Total No.s Of Shares

2018=306311/766,596,075
=0.03
2017=7,656,937/766596075

0.009988

Conclusion:
From comparison of the ratios we have seen that year 2018 was a challenging year for Engro
Foods in terms of financial performance, however its liquidity has improved overtime which
means the company’s ability to pay its obligations have improved. The deteriorating financial
performance of the company resulted in reduction in Earnings per Share which means the
shareholders wealth was not increased with same pace as it was in previous year. Keeping in
view all, it is suggested that Engro Foods may focus on its financial performance while keeping
in view the interest of every stakeholder.