Cross-sectional analysis with Nishat Power

Liquidity analysis
Current Ratio: - The Current ratio of HUBCO is 0.96 while that of Nishat Power is 2.17 times -more than

twice that of HUBCO. HUBCO’s ratio suggests that it does not have enough to pay for its short term

obligations. This can be because of delay in payment from CPPA-G and other accounts receivables and

Nishat’s ratio is better because, it collects receivables more efficiently than HUBCO and holds more

currents assets than fixed assets while the opposite is true for HUBCO. Hence, the liquidity position is

better for Nishat.

Acid Test: - This ratio excludes inventory from the calculation to determine if the company can pay off

its current liabilities from its quick assets. Even though Nishat’s quick ratio is still better, its current ratio

decreased more than that of HUBCO showing Nishat is more dependent on its inventories to pay off its

liabilities than HUBCO. However, HUBCO is in a dangerous position with such a low quick ratio meaning

it will have to rely on its capital assets to pay for its current liabilities which in turn will hurt the

company.

Solvency Analysis

Debt Ratio: - HUBCO’s debt ratio is higher than Nishat Power mainly because of higher long term

borrowing for investments in growth project CPHGC (via HPHL), TEL and SECMC as well as financing

required due to delay in collection of debts. This shows that HUBCO is using more leverage. The

difference however is not very drastic between the two ratios but still creditors prefer a low ratio, like

that of Nishat, to cushion against losses in case of liquidation.

Debt to equity: - A debt to equity ratio of 1 shows creditors that the investors contribute equally to

finance the assets. In this case, HUBCO’s ratio of 5.89, is almost 6 times greater than Nishat, owing to
the fact that HUBCO has a lot of long term debts as discussed previously. Nishat’s ratio of 0.64 on the

other hand is very low meaning that investors are financing more of the assets than creditors which

reflects that the company has a better performance than HUBCO.

Asset Utilization Analysis

Inventory Turnover: - HUBCO has the upper hand here with a ratio of 15.78 while Nishat has 10.79. This

shows that HUBCO’s inventory is more efficiently managed as compared to Nishat and is more liquid

hence easily sold and converted to cash.

Days Sales Outstanding; - HUBCO collects its accounts receivables in 388 days while Nishat does so in

262 days. This shows that Nishat’s creditors are paying on time while there is a delay in payment from

HUBCO’s creditors such has CPPA-G. This leads to cash flow problems as HUBCO will have to finance this

delay by loan.

Fixed Asset Turnover: This ratio shows how efficiently a company uses its fixed assets to generate sales.

HUBCO’s ratio of 4.98 is higher than Nishat’s ratio of 1.59. This is because HUBCO invests a lot in fixed

assets rather than current assets- also attributing to its weak liquidity position- while the opposite holds

true for Nishat. Nishat should however work on improving this ratio as fixed assets generally produce

higher return.

Total Asset Turnover: - The turnover rate suggests that Nishat’s revenue per asset is higher as compared

to HUBCO- this is mainly because of its efficiently managed current assets like trade debts and cash

balances which ensure a smooth cash flow. It could also be due to a higher revenue as compared to

2017. On the other hand, HUBCO has a dip in sales of 2.44% which could attribute to an overall lower

asset turnover ratio.

 Profitability Analysis

Gross Profit Margin:- The GPM for Nishat is higher than HUBCO meaning they have high percentage of

profits. This shows that Nishat has a better control over it Cost of goods sold.

EBIT Margin:- HUBCO’s margin increased to 14.3% while Nishat’s fell to 23.05%. This indicates that

HUBCO gained from its Other income more than it incurred operational expenses thus has a better EBIT

margin than Nishat.

Net Profit Margin:- Nishat has a better NPM of 18.97% while HUBCO has of 11.17%. The reason for this

is that even though HUBCO had a higher EBIT margin, it incurred more finance costs than Nishat because

of long term borrowing.

Return on Assets:- A higher return of assets suggests that Nishat’s management is using its assets to

generate income more efficiently than HUBCO. HUBCO’s low ratio could be because its having difficulty

collecting payments from creditors on time which disrupts the cash flow.

Return on Equity:- HUBCO has a higher ROE than Nishat showing they are using investor’s money

efficiently to produce profits.

Market Value Ratios

Price Earning ratio:- This ratio shows how much investors are willing to pay per dollar of reported

profits. This ratio is higher for HUBCO by almost 3 times than that of Nishat, showing investors are

interested in spending their money on this company owing to its operational efficiency.

Market Book Ratio:- In this case, the lower M/B ratio of 0.79 for Nishat shows that its stock is

undervalued. HUBCO’s ratio is better than Nishat showing investors value its stock more.
DuPont Analysis:-

The DuPont Analysis suggests that even though the net profit margin for Nishat Power is higher, which

shows better control on costs and expenses, as well as the total asset turnover, HUBCO’s equity

multiplier is 6 times greater than Nishat. This suggests that HUBCO is operating at a higher leverage

because of its long-term debts, because of which it has to be more risk aversive than Nishat which has a

stable position in terms of using leverage