Name: ALI IRFAN SHAH (01-111192-006)

Type of Ratio under analysis: Profitability Ratios

Submitted to: Sir Abdullah Hafeez
 RATIO ANALYSIS – NATIONAL FOODS LTD.

Table of Contents
1. Brief Overview of the company .......................................................................................................... 2
2. Financial Ratios of the company........................................................................................................ 2
3. Financial Statements ............................................................................................................................. 3
i) Balance sheet .......................................................................................................................................... 3
ii) Income Statement ................................................................................................................................. 4
4. Profitability Ratios .................................................................................................................................. 5
i) Gross Profit Margin ........................................................................................................................... 5
a. Calculation .......................................................................................................................................... 5
b. Favorable/Unfavorable .................................................................................................................... 5
c. Causes (Micro and Macro factors) .................................................................................................. 6
d. Ways to improve the ratio. ............................................................................................................... 6
ii) Net Profit Margin ............................................................................................................................... 7
a. Calculation .......................................................................................................................................... 7
b. Favorable/Unfavorable .................................................................................................................... 7
c. Causes (Micro/Macro Factors) ....................................................................................................... 7
d. Ways to improve Net Profit Margin............................................................................................... 8
iii) Return on Investment (ROI)/Return On Assets .................................................................. 9
a. Calculation .......................................................................................................................................... 9
b. Favorable/Unfavorable .................................................................................................................... 9
c. Causes (Micro\Macro factors) ......................................................................................................10
d. Ways to improve ROI ....................................................................................................................10
iv) Return on Equity (ROE) ............................................................................................................11
a. Calculation ........................................................................................................................................11
b. Favorable\Unfavorable ..................................................................................................................11
c. Causes (Micro/Macro factors) ......................................................................................................12
d. Ways to Improve the ROE ............................................................................................................12

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 RATIO ANALYSIS – NATIONAL FOODS LTD.

1. Brief Overview of the company

Founded in 1970, it is one of Pakistan’s leading multi-category food manufacturing about 250
different products. Currently they are renowned in about 30 countries across 5 continents. It is one
of Pakistan’s oldest conglomerate. Its product range includes Recipe mixes, Plain Spices, Masalas,
Salt, Ketchups, Mayo, Chinese Sauces, Jelly, Custard, Desserts, Jams, Pickles, Snack foods, and
Rice. They are committed to serving the nation and its households by keeping traditions alive.
Since food plays an important role in culture, they aim to provide their customers with new and
inventive recipes to make everyday meals a treat for the taste buds. Through their initiatives they
are also committed to serve the society at large with their wide range of Corporate Social
Responsibility (CSR) programs. The company believes in performing its operations with strong
ethical and moral standards, and it has been doing so in the past decades.

2. Financial Ratios of the company

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RATIO ANALYSIS – NATIONAL FOODS LTD.

3. Financial Statements
i) Balance sheet

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RATIO ANALYSIS – NATIONAL FOODS LTD.

ii) Income Statement

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 RATIO ANALYSIS – NATIONAL FOODS LTD.

4. Profitability Ratios
Significance: Profitability ratios show us the profitability of a company. They are a metric of a
firm’s ability to generate profit relative to revenue. Profitability ratios determine the efficiency of
a company in generating profits i.e. how effectively and efficiently a company is managing its
assets and give value to shareholders. They help the company in setting its goals and steering itself
into the right direction. These ratios are also important for the investors in determining the
performance of the company. The Profit margins are useful for the creditors, investors and business
itself, for determining the financial health, management skills and growth prospects of a company.
i) Gross Profit Margin
It compares the gross profit to net sales. This ratio tells us how well a company is controlling its
costs in the manufacturing and generating profits. It shows how much a business is earning by
accounting in the cost of goods that are being sold, & it also gives an indication of pricing strategy.

A higher Gross profit is favorable as it reflects that a company is efficient at its operations and can
handle the different expenses, depreciation, dividends and other costs. While a low Gross profit
margin is Unfavorable.
a. Calculation
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠−𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
For year 2019, Gross Profit Margin =
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
24253797−17269476
= = 28.796 ≈ 29%
24253797
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠−𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
For year 2020, Gross Profit Margin =
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
28713146−20345845
= = 29.141 ≈ 29%
28713146

b. Favorable/Unfavorable
This ratio tells us that National Foods has earned Rs.0.29, on every Rs.1 sale as gross profit.
Meaning that the company is effective in selling the goods above cost. The Gross profit ratio has

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 RATIO ANALYSIS – NATIONAL FOODS LTD.

had a negligible increase of 1.1% over the course of a year. The Ratio has mainly stayed in line.
This is favorable in a sense that it has had a slight increase and has not decreased. Indicating that
the company has the same effectiveness it had before.
c. Causes (Micro and Macro factors)
1. The Net sales of National Foods have increase by 18.38% in 2020, and the Cost of Goods
sold has also increased by 17.81%. Due this relative proportional increases, the gross profit
has stayed in line.
2. The increase in the Sales can be attributed to the increasing demand of National Foods
products like Ketchups, Desserts, Packaged Frozen Food, Spices and other goods.
3. The Covid-19 pandemic did certainly have an effect on the net sales and the cost of goods
sold.
4. Due to the rising inflation, the company had to adjust the prices while keeping the prices
in affordable range of consumers, which did have an impact on the sales.
5. The company’s export business did benefit from the exchange devaluation and curtailed
investments as the world economy shrunk, to preserve profitability.
6. In 2020, the whole economy was heavily impacted by the coronavirus, but National Foods
ltd. did manage to continue operations as it was falling under essential services while
following the SOPs, but it certainly did effect the sales as the whole economy suffered.
7. As there are few or no barriers to entry in the market, there can be many competitors in the
market which can for some time dilute the market. This can have an impact on the sales of
National Foods Ltd. as consumers have more options to choose. There could also be some
new cheaper substitutes in the market.
d. Ways to improve the ratio.
1. The pricing strategy is the main component when it comes to improving the ratio. By
charging a higher price while still keeping the customers happy, the company can increase
its revenue (sales) which will increase the ratio.
2. National Foods Ltd. has implemented SAP, a new warehouse management system and POS
management system. This will help in driving down the Costs, while positively impacting
the ratio.
3. The company can review its discount policy and make necessary changes so that it can
attain maximum revenue.
4. The company can work towards getting more discounts from its suppliers & utilizing the
cash discounts from suppliers as it will help decrease the costs.
5. The company did achieve many marketing milestones and also did heavy marketing, which
was successful. The company must continue this course of action, and devise a winning
marketing strategy to add value to the product and create loyal customers.
6. The company must reduce its losses and thefts by implementing a systemic change in the
whole production methods and safety/security.

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 RATIO ANALYSIS – NATIONAL FOODS LTD.

ii) Net Profit Margin

This ratio measures the overall performance and profitability of a company, by taking in account
all the expenses, interest and taxes. It tells us the net income per dollar or rupees of sales. It
basically relates the company’s net income by the total sales revenue. This serves as a more
specific measure of sales profitability than the gross profit margin.

The higher the Net profit margin, the better it is for the company. This ratio helps the investor
know if the company is generating enough profit from its sales.
a. Calculation
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠
For the year 2019, Net Profit Margin =
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
1370515
= = 5.65% ≈ 5.7%
24253797
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠
For the year 2020, Net Profit Margin =
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
1650524
= = 5.75% ≈ 5.7%
28713146

b. Favorable/Unfavorable
This ratio means that the company makes Rs.0.057 for every Rs.1 sale, after all expenses and taxes.
National Foods Ltd. has stayed in line over the course of one year. Though there is a small
negligible increase of 1.77% in the Net Profit Margin from 2019 to 2020. The ratio is favorable as
the company has held its ground during the pandemic and that it has not down sloped, but there is
a minor increase.
c. Causes (Micro/Macro Factors)
1. The factors are same for the Net profit margin as there were in Gross profit margin, but
there are a few new ones.
2. The Net Profit after taxes has increased by 20.4% and the net sales have increased by
18.38% when compared with 2019. So this relative greater proportion of increase in the
numerator has led to an increase in the Net Profit Margin.

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RATIO ANALYSIS – NATIONAL FOODS LTD.

3. There is a 16.15% increase in the Distribution cost which can be attributed to higher fuel
prices and inflation.
4. There is an 86.6% increase in the taxation, which has led to a significant decrease in net
profit after tax.
5. Overheads in light of the pandemic were managed.
6. The interest rate in Pakistan in the last fiscal year 2019 were about 12-12.5% and in 2020
they hover around 6%. This has significantly impacted the demand going forward.
7. There was an increasing Inflationary environment due to increase in the price of fuel, raw
materials, packaging materials and financing costs, which directly impacted the overall
cost of doing business of National Foods Ltd.
8. There is uncertainty over prices due to the adverse climactic changes. Low local output has
led to increase in imports which hurt the prices of raw materials.
9. The sharp devaluation of exchange rates has dented the company’s gross and net margins
due to their impact on the prices of key inputs like tomato and Aloo Bukhara.
10. The devaluation of the Pakistani Currency, the company’s international business
NFDMCC AND A-1 through the exchange gain have positively impacted the profits.
d. Ways to improve Net Profit Margin
1. The company must work towards improving its pricing strategy to attract more customers
and try to decrease its expenses so that there is an increase in the net profit margin.
2. The company can do more marketing and advertising to attract more loyal customers and
increase its revenue.
3. The company can also try to revise its capital structure so that some interest expenses can
be controlled more effectively.
4. The company must effectively manage its assets so that the depreciation expenses and other
related expenses could be controlled.
5. Senior management decisions are crucial for managing the operating expenses and capital
structure.
6. The company should work towards decreasing cost by employing different tactics like Bulk
buying, reducing DL, reducing DM, by making more automated jobs, reduce scrap, make
the employees work in teams rather than as individuals.
7. The company should capitalize on its strengths like it has a wide product line and has
exceptional coverage. The company also has superior marketing skills and is investing
largely in R&D. So by effectively managing its own skillset, the company can improve the
ratio.
8. National Foods Ltd. has employed Inventory and Procurement management systems
coupled with working capital optimization which acts as a driving force in the performance
of the company.
9. The company is also planning for generating sufficient cash flows by considering future
sales volume, pricing decisions, cost reduction strategies, exchange rate impacts and the
availability of funds.

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 RATIO ANALYSIS – NATIONAL FOODS LTD.

iii) Return on Investment (ROI)/Return On Assets

This ratio measures how efficient a company is in managing its assets to generate profits. It relates
the net income of a company to its average total assets. It gives an idea of how much a company
can make from its investment that is in form of deployed assets. The ROA resolves the issues of
the Net Profit margin and Total Asset turnover by taking into account the total assets and
profitability. This ratio tells that if a company is high asset-intensive company or a low asset-
intensive company, its overall efficiency and its utilization of assets.
The higher the ratio, the better it is for the company because it means that company is more
efficient in managing its assets to generate higher profit. While a low ROA ratio is unfavorable.
a. Calculation
For year 2019, ROI (Du Pont approach) = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 × 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
= 5.7 × 2.00
ROI = 11.4 ≈ 11
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥
For year 2020, ROI =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
15175764+13283447
Avg. total Assets (2020 and 2019) = = 14229605.5
2

1650524
ROI =
14229605.5

= 11.60 ≈ 12

b. Favorable/Unfavorable
The ratio is favorable in term when it is compared with last. The ROI has increased by 9.09% in
2020 when compared with last year. So it means that the company is seeing growth in its asset
management effectiveness to generate profits. It means that now the company is more profitable
relative to its total assets, which is favorable.

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RATIO ANALYSIS – NATIONAL FOODS LTD.

c. Causes (Micro\Macro factors)

1. The total assets of the company have increased by 14.24% from 2019 to 2020.
2. Out of the total assets, the non-current assets increased at a rate of 16.46%, but in that the
intangibles and goodwill decreased by 5.29%.
3. The company also for the first time took steps into new non-current accounts namely;
Right-of-use assets and long-term investments.
4. The parent company subscribed 2,999,500 ordinary shares of Rs. 10 in NCMCL company
for Rs.30 million. This is the long term investment that has been classified at fair value
through profit of loss.
5. The net sales of the company have increased by 18.38%. This in turn has a positive effect
on the ratio by significantly increasing the net profit after tax by 20.4%.
6. The significant increase of 86.6% tax has had a major effect on the profit after tax which
has slowed down the growth of the ratio.
7. The working environment of the company was effected due to Covid-19, and inflation
which increased the costs.
8. The volatile monetary policies also slowed down the economic environment with the
increase in the cost of funding.
9. Uncertainty in the local business environment and the political landscape has impacted the
consumer and investor’s confidence especially due to the uncertainty of tax reforms and
revenue collection target gaps.
d. Ways to improve ROI
1. The company can look towards reducing its assets. By eliminating the inefficient assets,
the return on assets with increase significantly.
2. The company can also improve its inefficient and ineffective assets.
3. The company must increase in net income by carefully managing its capital structure.
4. The company must carefully inspect the future returns on the investments it makes to see
if they are profitable in the long-run. Investing in long-term financing plans is optimal
because then the company doesn’t have to incur additional costs of short term financings.
5. Reducing the costs will have a positive effect on the Net profit which will in turn increase
the return on investment. Reducing the cost will mean that the company is now more
efficient with the resources it has available.
6. The company must increase its sales. And the sales can be increased by marketing and
creating a valuable product.
7. The company has a certified and award winning production facility at Port Qasim which
employs the best practices and social development. This facility is a great asset of National
Foods Ltd. which if it manages carefully, it can use to compete with its competitors in the
market. By improving the efficiency of its assets, it can increase its ROI.

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 RATIO ANALYSIS – NATIONAL FOODS LTD.

iv) Return on Equity (ROE)

This ratio measures the financial performance by relating the net income with the Shareholder’s
equity. It basically measures that what return a company is giving to its shareholders, after paying
the mandatory liabilities and reinvesting. It is a measure of profitability that shows how much
profit a company generates with each dollar of the shareholder’s equity. It is useful for investors
to know if they are getting good returns and useful for company to know how efficiently they are
using the firm’s equity, and influence their financial decisions.
A higher ROE is considered as more favorable, as it reflects a company’s acceptance to strong
investment opportunities and effective expense management. It means that the company is more
efficient in utilizing its investments to grow the company’s value. While a low ROE means that
company is mismanages, is less efficient in using its capital and investing in unproductive assets.
It indicates a company is less effective in using equity.
a. Calculation
For year 2019, ROE (Du Pont Approach) = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 × 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 × 𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟

13283447
= 5.7 × 2.0 ×
5029962
= 30.1 ≈ 30 (⇒ 𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑆ℎ𝑎𝑟𝑒𝑜𝑙𝑑𝑒𝑟 𝐸𝑞𝑢𝑖𝑡𝑦
)
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
For year 2020, ROE = 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 (𝐴𝑣𝑔.)

1650524
= 6063516+5029962⁄ = 29.76 ≈ 30
2

b. Favorable\Unfavorable
The ratio is slightly unfavorable in term that it has decreased by 1.9% in 2020. From being 30.34%
in 2019 to 29.76% in 2020. This is suggesting that this year National Foods Ltd. is using a
relatively greater proportion of assets to produce sales. But the company’s official ratios show it
as 30% for both year indicating that it has stayed in-line.

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RATIO ANALYSIS – NATIONAL FOODS LTD.

c. Causes (Micro/Macro factors)

1. The financial leverage plays a big part here. If we take a look at the company’s equity for
2019 and 2020, we can see that the total equity rose significantly by 20.5% in 2020.
2. The shares capital amount also increased by 19.99% in 2020.
3. As 2020 was a tough year for every company, due to the pandemic, the uncertain economic
environment and increasing costs. National Foods Ltd. saw a significantly lower level of
increase in Net profit after tax. The Net profit after tax increased by 20.4% in 2020.
4. This slight decrease in ROE also indicates an ineffective management and company’s
decision making.
5. The government is also favoring National Foods Ltd. as it was allowed to continue its
operation even in the pandemic by following SOPs as it was categorized as essential
services.
6. The governmental actions also include the Refinance Scheme by SBP for payment of
salaries at subsidized rate of borrowing in the pandemic.
d. Ways to Improve the ROE
1. The company can work towards increasing its net income. It can be increased by adapting
different tactics like increasing the price, cutting the costs, reducing labor costs and
operating expenses, using it strengths to capture more customer, better marketing strategy.
As ROE is directly related to Net income, so higher revenues and low cost with boost the
ratio.
2. NFL has a good brand image in Pakistan due to its products and its CSR work. It can use
this positive image to increase its revenue.
3. The company can also lower its cost by lowering its inventory as it will decrease the
expenses related to inventory and increase the profit after tax.
4. The company must also deeply analyze its financial leverage position. By reducing the
equity, the return on equity will increase.
5. Through distribution of cash to the stockholders, the ROE will improve.

Profitability Ratios
35
30.3 29.14 29.76
28.8
30

25

20

15 11.6
11.4
10
5.65 5.75
5

0
2019 2020

Gross Profit Margin Net Profit Margin Return on Asset Return On Equity

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