BYCO

1.INTRODUCTION:

Mr. Parvez Abbasi, the Byco Group's founder and first Chairman, created the
company in the mid-90s with the aim of pioneering change in Pakistan's energy
sector.

Byco opened its first oil refinery in Mouza Kund, Hub Balochistan, on July1,2004,
and began commercial production of liquefied petroleum gas, light naphtha,
heavy naphtha, high-octane blending part, motor gasoline, kerosene, jet fuels,
high-speed diesel, and furnace oil.

The company entered the petroleum marketing industry in 2008, opening its first
retail store. Since then, the retail network has grown exponentially, with over 400
locations around the country.

Following the success of the first refinery, the company agreed to construct a
120,000- barrel-per-day refinery in 2008 and purchased an aromatic plant for
potential use. In February 2008, a leading private equity firm of the MENASA
region (Middle East North Africa and South Asia), took a significant minority
equity stake in Byco.

Byco completed the commissioning of the country's largest refinery in 2012. This
new refinery, which has a capacity of 120,000 barrels per day, was built near the
existing refinery, taking Byco's total installed refining capacity to 155,000 barrels
per day, the highest in Pakistan today.

In the same year, Byco completed another important milestone by commissioning

Pakistan's first and only Single Point Mooring (SPM). This floating port is situated
13 kilometres off the coast of Charna Island in the Arabian Sea. Byco's SPM can
handle very large petroleum cargo vessels (VLCCs), giving the company a distinct
strategic competitive advantage in Pakistan's petroleum industry. Byco is
Pakistan's only vertically integrated oil company, managing more than a quarter
of all petroleum sold in the country.

1.2.Values:

The guiding principles that determine how Byco does business and what it stands
for as an organization are its values. This includes:
 Setting high environmental, health, and safety standards
 Investing in human resources, providing competitive job terms, and providing a
healthy and pleasant working atmosphere for all employees; and
 Entail human resource development and promotes openness, professionalism,
teamwork and trust.
 Adding value, introducing conservation steps, and upgrading development by
incorporating newer generation technologies.
 Protecting the interests of shareholders and presenting them with a fair return on
equity is an important aspect of our corporate ethics.is an integral part of our
business ethics.
Pakistan State Oil Company (PSO)

2.Company Profile

Pakistan State Oil (PSO), is the nation’s largest

energy company, and is currently engaged in the marketing and distribution of
various POL products including Motor Gasoline (Mogas), High Speed Diesel (HSD),
Furnace Oil (FO), Jet Fuel (JP-1), Kerosene, CNG, LPG, Petrochemicals and
Lubricants.

Pakistan State Oil Company Limited came into existence as a result of merger
between two oil companies name Premier Oil Company Limited and State Oil
Company Limited, which was incorporated on December 1976. PSO has been
considered as the pioneer among all the oil producing companies in Pakistan.
According to various financial reports PSO is currently holding more than 60%
share in the oil market, their customers include government and law enforcement
agencies, independent bodies which produce power and electricity by the help of
oil and petroleum services provided by PSO.

The core services of PSO include marketing and distribution of petroleum, oil and
various lubricants. Various petrochemicals are also being stored, distributed and
imported by PSO, which helps them in terms of improving their financial motives
and records. When it comes to out sourcing their services PSO has the largest
distribution network, total outlets are 3754 in which 3565 are there to serve retail
sector and 189 serving as customer outlets. The vision of the company is to never
compromise on their quality and the kind of services they provide to their
customers, and they make sure the quality of their petroleum services remains
updated according to present market needs. PSO is also being registered as a
public limited company in Pakistan stock exchange and shareholders take great
interest in buying shares of PSO which provides them handsome return on their
investment.

PSO’s membership of Industry Associations and Trade Bodies includes Member

Association of Pakistan (MAP) and World Economic Forum (WEC) globally.
2.1.PSO’s Strategic Objective

• Meeting compliances and legal regulatory requirements in order to maintain

ethical obligations in all aspects of the business

• A comprehensive focus on the soft skill that is HR capital, in their learning and
development

• Optimize and ensure efficient supply chain and pursue long term supply
arrangements.

• To have effective HSE compliance in order to meet sustainability and

environmental friendly carbon emissions.

• Increase market leadership and strategize measures to improve the bottom

line.

• Sustained growth and leadership in the market.

• Focus on responsible corporate citizenship with active CSR initiatives in health,

education, community development and support for special persons.

2.2.Values

PSO has identifies these values that it aims to provide to the industry,
stakeholders, customers and suppliers.

• Innovation to be redefined in building agile and focused company

• Integrity to be intact in the company by showing transparency in every service

• Teamwork in order to foster collaborations and growth through mentoring and

coaching

• Caring and Giving to all the stakeholders with priority to employees and
customers
• Inclusive Leadership among management to encourage healthy interactions
across our organization.
Ratio Analysis &
Interpretation
(Individual Company
Analysis)
 BYCO Ratios Calculated

The ratios of Byco are calculated using balance sheet and incomestatement with
other values. Below are the particulars used to calculate these ratios with
interpretation and possible solutions (Trend Analysis)

Liquidity Ratios BYCO

Formulas 2019 Industry

Liquidity Ratio 2020
Average

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡
Current Ratio (Times) 0.51 0.56 1.28
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Quick Ratio (Times) 0.19 1.06
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 0.17

17. Trend Analysis:

17.1. Liquidity Ratio

• Current Ratio: The current ratio is a liquidity ratio that is thought to measure a
company's ability to pay off its short-term liabilities with current assets. In 2019
the current ratio of Byco was 0.56 as compared to the 2020 which is 0.51. Also
compared to the industry average that is 1.28, the current ratio of Byco for the
year 2020 that is 0.51 is declining. The possible reasons of decline with solutions
are:
Reasons:

1. Excessive current liabilities

2. Inefficient loan utilization

3. Short-term loan for long-term assets

4. Default probability is higher

Possible Solutions:

1. Pay off liabilities or suppliers as soon as possible

2. Improved loan-to-loan matching

3. Fast collection of debts

4. Must sell unused fixed assets

5. Cut down hard cash and use bank accounts (sweeping)

• Quick or Acid Test Ratio: The acid test ratio is a measure of a company's ability
to meet its short-term obligations with its quick liquid assets. It is an indicator of
an organization's short-term liquidity position. In case of Byco, comparing the
quick ratio 0f 2019 and 2020, the ratios is increased with minute effect in 2019
and 2020 but with a very low cost, which is concerning for the company since the
ratio is less than one, implying that they will be unable to cover their current
liabilities. Also compared to the industry average that is 1.06, the acid test ratio of
Byco of 2020 that is 0.19 is decreasing. The possible reasons of decline with
solutions are:

Reasons:

1.Excessive stock investment

2.Excessive reliance on current liabilities

3.Sales are difficult to sustain or expand.

4.Slowly collecting receivables

5.Paying bills as soon as possible

Possible Solutions:

1.Pay off liabilities or pay suppliers sooner

2.Better matching loans and utilization of loans

3.Increase sales and inventory turnover

4.The payment period for accounts receivables must be shortened.

Activity Ratios BYCO

Industry
Activity Ratio Formula 2020 2019
Average

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒

Inventory turnover (Times) 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 6.56 6.68 9.94

365
54.65
Inventory turnover (Days) 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑖𝑚𝑒𝑠 55.64 41.66

𝑁𝑒𝑡 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 36.63

Receivable Turnover 35.88 22.97
(Times) 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑎𝑏𝑙𝑒𝑠

365
Receivable Turnover (days) 10.17 9.96 157.65
𝑅𝑇

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
Total Asset Turnover Ratio
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 1.38 1.52 2.12
(Times)

Trend Analysis

Activity Ratio

• Inventory Turnover Ratio (Times): It is an activity ratio which shows how many
times a company's inventory has been sold and replaced during a given time span.
This ratio helps a company in effective decision making regarding the
manufacturing, making of products and use of inventory in an effective manner.
In terms of Byco, the inventory turnover ratio (times) is decreasing at slow pace.
Comparing the industry average which is 9.94, the inventory turnover ratio
(times) is very less and is decreasing at an alarming pace. The possible reasons of
decline with solutions are:

Reasons:

1.Indicates decreasing sales

2.Surplus inventory (over stocking)

3.Company is doing little marketing or there is an issue in the company products

Possible Solution:
1.To increase the inventory turnover ratio, effective marketing should be used.

2.Company should have pricing approach that works

3.It must encourage the selling of out-of-date inventory

4.Company must forecast efficiently

• Inventory Turnover Ratio (Days): The inventory turnover ratio (times)

demonstrates how effectively inventory is managed by comparing cost of goods
sold to average inventory over a period of time. The days can then be calculated
by multiplying the number of days by the inventory turnover formula which is
known as inventory turnover ratio (days). In terms of Byco, the inventory turnover
is high at an increasing pace which means that Byco is in demand in market. Byco
has increased the inventory turnover ratio from 2019 and in 2020 it is 55.64.
Comparing with the industry average which is 41.66, the ratio of Byco is higher
which means that on average Byco is approximately 13 days slower than the
industry average. This means that Byco sell the products within 1 to 2 months and
then restock inventory within this time frame.

Reason:

1.Low inventory turnover ratio (times)

2.Drop or decrease in sales causing inventory to increase

3.Company is unable to convert inventory into sales

4.It has a lot of idle inventory which is unsellable

Possible Solutions:

1. The company must improve sales

2.Reducing the price of product is also a way to increase inventory turnover times
and reduce inventory turnover days

3.The most important solution is to eliminate old stock or unusable inventory

• Receivable Turnover (Times): it is an activity ratio which measures company’s
efficiency in collecting accounts receivable owned by clienteles. It also deals how
quickly the short- term debt is paid. In the case of Byco, after 2019 the receivables
turnover is declining. But keeping in view the comparison with industry average
that is 22.97, the ratio of Byco is higher and performing well in collecting Accounts
Receivable in 2020 which is 35.88.

Reason:

1.Adequate collection process of receivables

2.The company has good quality of customers

3.Customers are paying their debts quickly

4.It also indicates that the company is running on cash basis

5.When it comes to extending credit to clients, the company is cautious, and its
collection activities are either effective or hostile

• Receivable Turnover (Days): It is the activity ratio, which shows how many days
per year the company needs on average to collect accounts receivable, that is
well-organized, and the company has a great amount of quality clienteles who
pay debts on time. In terms of Byco the receivable turnover (days) is increasing in
2020 as compared to 2019. But if we compare to the industry average which is
way higher than the Byco ratio that is 157.65 (industry average) and 10.17 (Byco
ratio). It shows that the company has very low average collection which is not
good in terms of company’s policies.

Reason:

1.Company policy of collecting receivables is with strict restrictions

2.The company has bad credit policy

3.Even if the few receivables available are of excellent quality, sales can be
severely hampered.
4.Owing to the strict issuance of credit to consumers, profits are lower than they
should be.

Possible Solutions:

1. Though the rate of collecting receivables is increasing compared to the

previous years but the gap is huge between industry average and the Byco
receivables. Therefore, the company must revamp their policies and should make
it reasonable for the customer to pay in a rational amount of time.

• Total Asset Turnover: this ratio examines the value of a company’s sales relative
to its assets. In terms of Byco, total asset turnover is declining and is less
compared to the industry average which is 2.12 and Byco 2020 ratio is 1.38. As a
result, it is apparent that Byco generates lower sales revenue per dollar invested
in assets than the industry as a whole.

Reason:

1.Inefficient use of assets to generate sales.

2.A substantial part of the problem is due to excessive expenditures in receivables

and inventories

Possible Solutions:

1.Should use assets to generate more revenue

2.Increase the performance of the company

3.With less capital spent in receivables and inventories, Byco should be able to
produce more sales.
 Financial Leverage Ratios BYCO

Industry
Financial Leverage Ratio Formula 2020 2019
Average

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
Debt to Equity Ratio (Times) 2.09 1.78 -16.78
𝑆h𝑎𝑟𝑒h𝑜𝑙𝑑𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

𝐸𝐵𝐼𝑇
Interest Coverage Ratio (Times) 0.39 0.27 16.27
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
Debt to Total Asset 0.43 0.39 0.62
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡

Trend Analysis

Financial Leverage Ratios

• Debt to Equity Ratio: this ratio is financial leverage ratio, that shows the amount
of equity and debt a firm is using to finance its assets. Usually, a good debt to
equity ratio is less than 1.0. A ratio of 2.09 or greater is usually considered
uncertain. In case of Byco, the debt to equity ratio declined 2019 and then
increased in 2020. But as compared to the industry average of debt to equity ratio
which is -16.78 (negative), the Byco has more liabilities than assets. Byco has a
very risky pace of debt to equity ratio. It means that creditors are providing 2
cents of financing for each amount being provided by shareholders, as industry
average is showing high risk. It also means that the debt of Byco is 209 percent of
its equity which indicates that the company is in high risk.

Reasons:

1.Taking dividends out

2.Not enough revenue generation

3.Too much reliance on debt vs. equity

4.The company has risk of default and it is unable to pay the debts

5.Company is in financial distress

6.Perceived risk of Byco is high

Possible Solutions:

1.Byco must restructure the debt and must keep an eye on the low market rates
to pay debts

2.Company must pay the interest payments to the lenders quickly

3.Measured development in order to let profits decrease liabilities instead of

purchasing extra assets

4.Company should increase profitability by improving sales revenue and lower the
costs

5.Company must use its inventory effectively and without any wastage
• Interest Coverage Ratio: it is a financial leverage ratio which is used to define
how a firm can pay its interest on its unresolved debt. According to Byco, the
interest coverage ratio declined in 2019 which increased slightly in 2020. But if
compared to the industry average which is 16.27, Byco's interest coverage level is
very low, implying that the company is unable to pay its outstanding debt
interest. As a result, potential borrowings are at high risk in comparison to its
existing debt. In general, the interest coverage ratio should be greater than1.0,
and Byco is having difficulty producing the cash required to meet its interest
obligations, implying that interest payments surpass EBIT.

Reasons:

1.Company has high risk of distress

2.Company is not utilizing the assets efficiently

3.Company has higher debt burden

4.There are fewer operating earnings available to cover debt costs, and the
business is more vulnerable to interest rate volatility.

Problem Solutions:

1.During a certain period of time, the company must pay interest on its debts.

2.Interest can be paid when a corporation successfully uses its money.

3.To cover interest costs, the company's profits would increase, resulting in more
sales.

4.Byco would either have to borrow more money or invest some of its cash
reserves.

• Debt to Total Asset Ratio: Debt to Total Asset is a leverage ratio that equates a
firm’s total debt to its total assets. This ratio showed the company's monetary
steadiness. The more the ratio, the better the degree of leverage (DoL) and, the
bigger the risk of capitalizing in that corporate. In case of Byco the debt to total
asset ratio is fluctuating but increasing from 2019 to 2020. In comparison to the
industry average of 0.62, Byco's debt to total asset ratio is 0.43, implying that
creditors finance 43 percent of assets while investors (shareholders) equity funds
57 percent.

Reasons:

1. Generally, the debt to total asset less than 1.0 indicated that a company is risk
free and can be choose by the lenders and shareholders. Therefore, Byco having
less than 1.0 ratio is a good company which has greater portion of a company’s
assets funded by equity

Profitability Ratios BYCO

Industry
Profitability Ratio Formula 2020 2019
Average

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
Gross Profit (%) 1.67 0.99 16.11
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠 𝑁𝑒𝑡

Net Profit Margin (%) 𝑠𝑎𝑙𝑒𝑠 -1.40 -0.85 6.9

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠

Return on Investment (%) -1.93 -1.29 -0.98
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠

Return on Equity (%) -9.28 -5.97 -66.23
𝑆h𝑎𝑟𝑒h𝑜𝑙𝑑𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
Trend Analysis

Profitability Ratio

• Gross Profit Margin: it is a profitability ratio which measures the percentage of

sales that surpass the cost of goods sold. It also deals how resourcefully a
corporation uses its resources and workforce to yield and sell commodities cost-
effectively. In terms of Byco, it has declined in 2019 and in 2020 it has again
increased slightly. Comparing with the industry average which is 16.11 the gross
profit of Byco is very less in 2020 that is 1.67.

The reasons and

possible solutions are as under: Reasons:

1.One of the most serious problems with Byco is that it does not have a high sales
price in relative to the cost of goods sold (COGS), which is cost of
manufacturing items.

2.It has negative impact on the cash flows

Possible Solutions:

1.Need to raise consumer demand and sales or lower the cost of goods sold
(COGS)

2.Although more marketing is an expense, it has little effect on COGS and can help
drive better sales results.

3.On the cost front, the company can bargain with suppliers for lower prices or
search for lower-cost alternatives of comparable quality.
• Net Profit Margin: After all COGS and fixed costs have been deducted, and all
irregular sales and expenditures have been accounted for, net profits are the real
bottom line earnings in a given period. It is the proportion of income left after all
expenses have been subtracted from the deals. This dimension determines the
quantity of income which the company can excerpt from its total sales. in 2019
and 2020 it is decreased and deteriorated to negative sign. Generally net profit
margin is less than the gross profit as costs are considered. On the other hand, if
we compare the net profit margin of Byco in 2020 which is -1.40 with the industry
average value that is 6.9, there is a huge gap between both values. Hence the net
profit margin ratio of Byco is at declining pace with a negative approach which is
alarming and problematic due to these reasons:

Reasons:

1.Low gross profit margin

2.Overhead too high

3.High production cost and the company has poor pricing strategies.

4.The business has a high cost structure (expenses) and ineffective management.

Possible Solutions:

1. Don’t offer discounts in order to cover the expenses

2.Increase prices

3.Reduce production costs and also fixed costs which includes utility bills,
building, labor and marketing cost etc.

4.Monitor stock more closely

5.Reduce overhead

• Return on Investment (ROI): this profitability ratio is a pointer of how lucrative a

firm is comparative to its total assets. Both current assets, such as cash, inventory,
and accounts receivable, as well as fixed assets, such as plant buildings and
equipment, are included in total assets. Byco faced ups and downs in return on
investment but in 2019 and 2020, Byco has faced deterioration in the return on
investment which became negative ROI which means net loss. Generally, a
negative ROI is ignored by the investors as this is a sign of net loss but as
compared to the industry norm which is also negative that is -0.98, the ROI of
Byco is thus less than the industry average ratio, which means that the investors
have faced loss or company has faced financial loss in investment value during a
specific time span. Therefore, the investors will ignore Byco due to the following
reasons:

Reasons:

1.Negative ROI indicated that the total cost of Byco is greater than the total
returns

2.Poor management and spending very few or nothing on maintenance

3.Not efficient assets and there was not effective use of assets to produce income

4.Not generating profit through assets

5.Not properly usage of assets

6.Turnover rate of the company if high causes on ROI

Possible Solutions:

1.Make a plan for the 5 years for generating revenue with high gross margins

2.Make budget for administrative cost and keep it minimum

3.Profit generation through assets

4.Efficient usage of current assets

5.A company must know the market analysis

6.Reduce turnover ratio.

• Return on Equity Ratio: it is also referred as ROE and is a profitability ratio that
deals with the ability of a firm to create profits through its shareholder’s reserves
in the organization. It is an important ratio for the investors to make sure that
how effectively company will use their investment and will the company be able
to generate profit or not. In case of Byco, in 2019 and 2020, the ROE of Byco is in
negative which means that the company is not in a good condition and is
considered bad on investment. As compared to the industry average which is -
66.23 the ratio of Byco of 2020 is better that is – 9.28. But the ratio of Byco is in
negative which means that no investor is ready to invest in the company.

Reasons:

1.Company is not healthy

2.Involvement and emergence of competitors in the market

3.Low financial leverage

4.Company is not efficiently generating profits

5.No good use of investor’s money

Possible Solution:

1.There should be good utilization of equity capital

2.Efficiently use investor’s money

Pakistan State Oil

• Ratios Calculated
 • Liquidity Ratio PSO

Formulas 2019 Industry

Liquidity Ratio 2020
Average

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
1.32
Current Ratio (Times) 1.35 1.28
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑙𝑖𝑡𝑖𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Quick Ratio (Times) 1.09 1.01 1.06
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑙𝑖𝑡𝑖𝑒𝑠

37. Trend Analysis

37.1. Liquidity Ratio

• Current Ratio: The current ratio is an indication of a firm's liquidity and financial
health of the company. In 2019 and 2020 the current ratio is above the industry
standard of 1 indicating high liquidity. It indicates that the company is more likely
to payback its creditors on time. We can also see that the ratio of PSO is higher
than the industry average which indicates that industry has a norm of high
current ratio and PSO is approximately reaching there.

Problems

1. Large ratio near to 2 is not good sign for investor

2. Company not efficiently using short term assets for short term financing

3. Inefficient and underutilization of assets and assets are idle.

Solutions

1. Utilize short term assets efficiently for short term financing

2. Give out some money to creditors’ for financing

• Quick or Acid Test Ratio: The quick ratio is similar to the current ratio, but
provides a more conservative assessment of the liquidity position of firms as it
excludes inventory, which it does not consider as sufficiently liquid. In the case of
PSO the quick ratio for 2019 is 1.01 and 1.09 in 2020 it has meet the standard 1
which means the company has improved. It is more than the industry norm which
is 1.06 as it indicates good liquidity of the company.

Problem:

1. Not much money tied up in the inventory

2. High ratio indicating possibility of good sales and buy in small amount and

3. Not enough investment in the inventory

Solutions

1. lend out some amount to creditors to bring the ratio a little down
2. Buy some more inventory to meet sales
3. Increase inventory turnover

38. Activity Ratios PSO

Industry
Activity Ratio Formula 2020 2019
Average

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒

Inventory turnover (Times) 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 14.93 13.06 9.94

365 27.95
Inventory turnover (Days) 24.45 41.66
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑖𝑚𝑒𝑠
Receivable Turnover Annual 𝑁𝑒𝑡 𝑐𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠
6.25 22.97
(Times) 2.77
𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑎𝑏𝑙𝑒𝑠

Recievables

Receivable Turnover (days) 58.41 63.26 157.65

Annual sales

𝑆𝑎𝑙𝑒𝑠
Total Asset Turnover Ratio
Net 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 3.24 2.77 2.12
(Times)

39. Trend Analysis

39.1. Activity Ratio• Inventory Turnover (times): This measures how many times
average inventory is “turned” or sold during a period. This ratio is important to
both the company and the investors as it clearly reflects the company’s
effectiveness in converting the inventory purchases to final sales. For PSO the
inventory turnover has been increasing in both 2019 and 2020. We can see that in
comparison to the industry the inventory turnover is higher which tells us that the
inventory is readily selling out.

Problems

1. A high ratio, implies strong sales

2. High investment in inventory
3. Shortage of inventory in comparison to sales
Solutions

1. The solution is to make sure inventory is always available else it will be a

loss of sales to the business.
2. Keep inventory and sales management

• Inventory Turnover (days): Inventory turnover ratio determines the number of

times the inventory is purchased and sold during the entire fiscal year. Inventory
turnover of PSO in 2019 is 27.95 and in 2020 24.45. In comparison to industry’s
ratio of 41.66 the PSO’s ratio is lower at 24.45 which indicates that inventory is
being converted into sales readily.

Problems

1. High demand of product

2. High sales

Solutions

1. Increase the quantity of inventory

2. Meet sales timely else loss of sales

• Receivable Turnover (times): This ratio measures how well a company uses and
manages the credit it extends to customers and how quickly that short-term debt
is collected or is paid and how many times a business can turn its accounts
receivable into cash during a period. It has increased from 2019 to 2020 indicating
collection from customers. As comparison to industry’s 22.97 ratio the PSO’s ratio
is 6.25 indicating low collections from customers.

Problems

1. A high receivables turnover ratio can indicate that a company’s collection of

accounts receivable is efficient and the company has a high proportion of
quality customers that pay their debts quickly.
2. A high ratio can also suggest that a company is conservative when it comes
to extending credit to its customers.
Solutions

1. Company should have reduced debtors account.

2. Company should also have proper credit control policies.
3. Offer discounts for immediate collection

• Total Asset Turnover: The asset turnover ratio can be used as an indicator of the
efficiency with which a company is using its assets to generate revenue. The
higher the asset turnover ratio, the more efficient a company is at generating
revenue from its assets. PSO has an increasing asset turn over in the years 2019
and 2020.

Problem

1. A higher ratio implies that management is using its fixed assets more
effectively.

Solution

1. Company should use their assets in affective manner. 2. Company should also
have to reduce their assets.

40. Financial Leverage Ratios PSO

Formulas 2019 Industry

Financial Leverage Ratio 2020
Average

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
Debt to Equity Ratio (Times) 2.50
𝑆h𝑎𝑟𝑒h𝑜𝑙𝑑𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 2.02 -16.78

𝐸𝐵𝐼𝑇 2.94
Interest Coverage Ratio 0.62 16.27
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶h𝑎𝑟𝑔𝑒𝑠
(Times)
41. Trend Analysis

Financial Leverage Ratios

• Debt to Equity Ratio: PSO’s Debt to equity ratio declined from 2.50 in 2019 to
2.50 in 2020 but the decrease in ratio was not that significant. It can be said that
approximately it stayed the same. The ratio stayed less than 1 indicates that a
greater portion of a company's assets is funded by equity. Moreover in
comparison to the industry’s ratio which gave negative value due to extreme
values of the companies in the industry the ratio was better than the industry
performance.

Problems

2. Company not able to pay dividends.

3. Insufficient revenue generation
4. High reliance on debt
5. Will not attract lenders and stake holders.

41.1.2. Solutions

3.Pay less dividends and reinvest

4.Generate additional capital

5.Decrease reliance on long term debt

• Interest Coverage Ratio: The interest coverage ratio is used to measure how
well a firm can pay the interest due on outstanding debt. A sudden decrease in
the ratio indicates that the company has not taken any long-term debt this year
2020. A higher ratio in previous years 2019 tells reliance upon long term debt.
And that the higher ratio is better in terms of providing insight to the lenders. The
ratio declined from 2.94 in 2019 to 0.62 in 2020. The ratio of PSO in comparison
to the industry is also very low that is 16.27of industry.

Problems
 1.Company may be unable to pay its debts in the future.

2. Won’t provide enough information lenders and stakeholders to asses’ risk.

3. Insight into financial; health of the company for long term obligations.

Solutions

7.Meet long term obligations with long term assets

8.Adopt policies and lending terms that provide more transparency to the lenders

Profitability Ratios PSO

Industry
Profitability Ratio Formulas 2020 2019
Average

Gross Profit (%) 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 1.10 3.12 16.11

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑁𝑒𝑡

Net Profit Margin (%) 𝑆𝑎𝑙𝑒𝑠 - 0.58 0.92 6.9

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠

Return on Investment (%) 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 - 1.89 2.54 -.98

𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠

Return on Equity (%) - 5.72 8.88 -66.26
𝑆h𝑎𝑟𝑒h𝑜𝑙𝑑𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

43. Trend Analysis

43.1. Profitability Ratios

• Gross profit Margin: It represents how efficiently a company is able to generate
profit through its Cost of sales or COGS. The higher the better is the ratio. PSO’s
gross profit margin had increased in 2019 but a drastic decrease in 2020. There
are numerous factors one of which could by COVID 19 indication slowing down of
economies globally due to lesser production and demand for petroleum causing
increase in cost of goods sold and lover sales revenue. In comparison to industry
PSO’ has a very low gross profit margin.

Problems

1. High cost of sales

2. Low sales revenue
3. High prices of raw materials
4. High direct cost of manufacturing

Solutions

6.Reduce cost of production

7.Less wastage of resources

8.Reduce cost of sales prices

9.Relationship with suppliers which offer discounts

• Net profit margin: Net profit margin helps investors assess if a company's
management is generating enough profit from its sales and whether operating
costs and overhead costs are being contained. PSO suffered a loss in the year
2020 making it a net loss margin indicating high operating expenses with a
percentage of (0.58)%. In comparison to industry the ratio was worse as the
industry average indicated net profit margin of 6.9%.

Problems

5.Declining financial health of the company

6.High operating expenses

7.Uncontrolled overheads

Solutions

5.Company should have to reduce their expenses to overcome this issue.

6.Improve the financial health of the company

7.Control operating expenses

8.Improve taxation and interest

9.Control overheads

• Return on Equity: Return on equity (ROE) is a measure of how efficient a

company is in generating profits. The ratio was 8.88 in 2019 and it declined to a
loss of (5.72) which is conveniently justified as the company made a net loss for
the year 2020. Suggesting a net loss on equity or to the shareholders. As
compared to the industry’s high ratio of (66.26) shows that PSO is performing
better than the industry but is still unable to pay dividends to the shareholders.

Problems

4.Company not generating profits

5.Unable to pay dividends to stakeholders

6.Improper usage of investor’s amount

Solutions

5.Utilize equity efficiently

6.Increase profitability

7.Increase equity holding of shareholders in the company.

COMPARISION OF
BYCO PAKISTAN AND
PAKISTAN STATE OIL