Professional Documents
Culture Documents
ANALYSIS OF RATIOS
For the analysis of the financial statements of the Fauji Fertilizer Company private
limited we use the ratio analysis in order to get a clear vision about the financial
position with simple interpretation. For this purpose we can analysis the financial
statements through the followings ratios:
1 LIQUIDITY RATIOS
2 DEBT RATIOS
3 ACTIVITY RATIOS
4 MARKETABILITY RATIONS
5 PROFITABILITY RATIOS
LIQUIDITY RATIOS
The liquidity of a business firm is measured by its ability to satisfy its short-term
obligations as they came due. Liquidity refers to the solvency of the firm’s overall
financial position__ the ease with which it can pay its bills. Basic measures of
liquidity are:
(1) Net working capital
(2) Current ratio
(3) Quick ratio
(4) Cash ratio
By putting the values taken from the annual report of “Fauji Fertilizer
Company Limited” in the formulas of above ratios the results are shown in the
following table.
LIQUIDITY RATIOS 2002 2001
Net working capital 395860 5585658
Current ratio (times) 1.04 2.34
Quick ratio (times) 0.79 1.90
Cash ratio (% age) 6.73% 16.25%
1
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Net working capital, although not actually a ratio, is commonly used to measure a
firm’s overall liquidity. This requirement is intended to force the firm to maintain
sufficient operating liquidity and helps to protect the creditor. Fauji Fertilizer
Company shows a sufficient amount of working capital in all the years of its
performance. NWC has been gradually increasing by the year 2001.But it has
decreased from 5585658 in the year 2001 to 395860 in the year 2002. This
positive NWC shows good liquidity position of the firm.
CURRENT RATIO
QUICK RATIO
The quick ratio is similar to the current ratio except that it excludes
inventory, which is generally the least liquid current asset. Quick ratio is an
extended version of current ratio in which only very quick assets (which can be
quickly liquidated) are considered. A rule of thumb is that figure of
2222Hh228222€h2242he short-term liquidity position of the firm is very
healthy because of the following points:
2
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
1. Current ratio of the firm is 1.08 times which shows that the firm has more
current assets as compared to the current liabilities.
2. Net Working capital of the firm is positive
3. Quick ratio of the company is .79 times which is also good.
4. Cash ratio of the company is also very good which is 6.73% of total assets
ACTIVITY RATIOS
Activity ratios are used to measure the speed with which various accounts are
converted into sales or cash. With regard to current accounts, measures of liquidity
are generally inadequate Basic measures of activity are:
(1) Inventory turnover
(2) Fixed assets turnover
(3) Total asset turnover
(4) Average age of inventory
(5) Average collection period
(6) Accounts receivable turnover
(7) Operating cycle
(8) Account payable turnover
(9) Average payment period.
Activity ratios 2002 2001
Inventory turnover 4.49 3.35
Average age of inventory 80.10 104.33
Account receivable turnover 11.98 13.61
Average collection period 30.04 26.45
A/c payable turnover 6.40 5.26
Avg.payment period 56 68
Operating cycle 92 118
Fix asset turnover 1.76 7.85
Total asset turnover .60 .86
3
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Total assets turnover indicates the efficiency with which the firm uses all its assets
to generate sales. Generally, the higher a firm’s total asset turnover, the more
efficiently its assets have been used. This measure is probably of greatest interest
to management, because it indicates whether the firm’s operations have been
financially efficient. Fauji Fertilizer Company turns its asset over in 2002 by .6
times and it was .86 times in the year 2001 This shows that the total assets
turnover has been very low. Thus it shows inefficiency of the management of the
firm to use assets to generate revenuers.
Net fixed assets turnover of the company is 1.76 times in the year 2002 which has
significantly decreased as compared to the last year’ s turnover of 7.85 times. This
is not a good sign for the company..
Gross fixed assets turnover of the company 0.8 times has decreased from the last
year figure of 1.02 times that is not in the favor of the company.
4
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Average age of inventory tells that for how many days on average the inventory is
held .The greater the number of days, the inefficient will be the management.
Average age of inventory of the company has reduced to 80 days in the year 2002
from 104 days in 2001 This shows inventory is kept for less number of days as
compared to the last year.
Average collection period indicates that how many days are required to collect
amount from the trade debts. The earlier the cash is received from the debtors; the
better will be for the company. Average collection period of the company has
increased to 30 days in the year 2002 from the year 2001 figure of 27 days. This
shows inefficiency in the collection of Accounts receivable
Account receivable turnover indicates that how many times accounts receivable is
converted into cash a high turnover indicates the efficiency of the management.
Accounts receivable turnover has decreased to 11.98 times in 2002 from 13.61
times in the year 2001. This is not a good sign for the company.
5
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
OPERATION CYCLE
Operating cycle of any company shows the number of days lapsed from the
acquisition of raw material till the receipt of cash from the sale of finished goods.
Operating cycle of the company is 92.08 days in 2002 and is 117.94 in 2001.This
is a good sign for the company.
Accounts payable turnover indicates that how many times accounts payable
converted into cash payments. It should be maximum one. Accounts payable has
increased to 6.4 times in 2002 from 5.26 times in 2001 that is not a good sign for
the company.
Average payment period indicates that after how many days the payment to
creditors is made. This time period should be maximum one. Average payment
period of the company has decreased to 56 days from 68 days in 2001. This is not
good sign for the company.
DECISION
Activity ratio shows that the management of the firm is quite active in utilizing its
assets to generate sales for the business. Thus we can say that operating efficiency
of the business is very good due to the following reasons:
1. Inventory turnover of the company is good
2. Average age of inventory of the company is also acceptable
3. Accounts receivable turnover of the company has been excellent
6
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
DEBT RATIOS
The debt position of a firm indicates the amount of other people’s money being
used in attempting to generate profits. In general, the financial analyst is most
concerned with long-term benefits, because these commit the firm to paying
interest over the long rum as well as eventually repaying the principally borrowed.
Because the creditors claims must be satisfied before, the distribution of earnings
to share holders. Basic measures of debt are:
(1) Debt ratio
(2) Debt-equity ratio
(3) Interest coverage ratio
(4) Fixed assets to long term debts
(5) Operating cash flow/total debts
The debt ratio measures the proportion of total assets financed by the firm’s
creditors. The higher this ratio, the greater the amount of other people’s money
being used in an attempt to generate profits. FFC’s debt ratio has increased to
61.79% in the year 2002 from 32% in the year 2001. This shows that the company
has increased its dependence on the outsider’s sources of finances. This ratio is
7
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
slightly high than the acceptable limit of 60%. This shows that there is a
significant increase in the debts of the company.
The debt-equity ratio indicates the relationship between the long-term funds
provided by creditors and those provided by the firm’s owners. It is commonly
used to measure the degree of financial leverage of the firm. FFC’s debt equity
ratio is 161.69% in the year 2002 and has increased significantly from 47.05% in
the year 2001. This shows that debts are more as compared to shareholders equity
So this shows risk for the investors.
Interest coverage ration tells that how many times the firm is able to pay its
financial charges out of its profit .A high ratio is desirable. This ratio for the
company is 8.24 times in the year 2002 and has significantly decreased from 19.14
times in the year 2001. This shows not good sign for the company. It shows that
due to high debts financial charges of the company has increased.
Fixed assets of the firm are almost 2.24 times its long-term debts in the year 2002.
There is a significantly decrease 11.44 times in this ratio in this year This shows
that the firm has got more LTD in this year.
Operating cash flow of the company is 27.51% of the amount of total debts of the
company. This shows good sign for the firm. This ratio has decreased as compared
to the ratio of 41.09% in the year 2001.This shows that the firm has earned less
from its operations in this year as compared to the pervious year.
8
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Long-term solvency of the company is also very good because their profitability
ratios are very high and the firm is using debts. Interest coverage of the company
is also very good. And fixed assets to net worth is 1.74 times.
PROFITABILITY RATIOS
There are many measures of profitability. Each related the return of the firm to its
sales, assets, equity, or share value. As a group, these measures allow the analyst
to evaluate the firm’s earnings with respect to a given level of sales a certain level
of assets, the owners’ investment, or share value. With out profit, a firm could not
attract outside capital. Basic measures of profitability are:
(1) Gross profit margin
(2) Operating profit margin
(3) Net profit margin
(4) Return on shareholders investment
(5) Return on total assets
(6) Earning per share
Profitability ratios 2002 2001
Gross profit margin 39.78% 46.90%
Operating profit margin 31.09% 38.37%
Net profit margin 18.31% 26.74%
Return on total asset 10.91% 22.93%
Return on SH investment 28.56% 33.72%
Earning per share 11.98 12.49
The gross profit margin measures the percentage of each sales dollar remaining
after the firm has paid for its goods. The higher the gross profit margin, the better
and the lower the relative cost of merchandise sold. Gross profit margin of the
9
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
company has decreased in the year 2002 as compared to last year, which has gross
profit margin of 47%. This decrease is due to increased cost of goods sold.
The operating profit margin measures the percentage of each sales dollar
remaining after all costs and expenses other than interest and taxes are deducted. It
represents the pure profits earned on each sales dollar. A high operating profit
margin is preferred. Operating profit margin of the company has decreased to
31.09% in 2002 as compared to the year 2001(38.37%).
This has increased due to increased selling and administrative expenses.
The net profit margin measures the percentage of each sales dollar remaining after
all costs and expenses, including interest and taxes, have been deducted. The
higher the firm’s net profit margin, the better. The net profit margin is commonly
cited measure of the firm’s success with respect to earnings. Net profit margin of
the company has decreased to 18.31% in the year 2002 against 26.74% in the year
2001. This has just reduced due to the industry crisis.
Return on Total asset of the company has decreased to 10.91% in the year 2002 from
22.93% in the year 2001. It shows inefficiency of the company management to generate
profit on the total assets.
10
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
The firm’s earnings per share (EPS) are generally of interest to present or
prospective stockholders and management. The earnings per share represent the
number of dollars earned on behalf of each outstanding share of common stock.
They are closely watched by the investing public and considered am important
indicator of corporate success. Earning per share of the company has decreased to
11.98 per share in the year 2002 against 12.49 per share in the year 2001. This is
just because of industry crisis.
DECISION
Profitability position of the firm is very good though it has decreased yet it is very
good due to the following points:
1. Gross profit of the company is very good which is 32.59%
2. Operating profit of the company is also good which is 22.04%
3. Net profit, Return on investment, Return on total assets, all are very good
and are 10.40%, 21.26%, 7.93% respectively.
MARKETABILITY RATIOS
Equity investor is more interested in the dividends of the company. It is also
concerned about the profitability positing of the firm. For the purpose of equity
investor we calculated the following ratios:
1. Dividend per share
2. Dividend payout ratio
3. Dividend yield ratio
4. Book value per share
5. Price earning ratio
6. %age of earnings retained
7. Degree of financial leverage
11
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Dividend per share of the company of the company is 9 per share in the year 2002
and it was 8.5 in the year 2001. Company has increased its dividend to a little bit
extent. Dividend per share of 9 is ideally good.
Company is giving maximum dividend to its shareholders. This ratio has increased
to 75.11% in the year 2002 from 68.05% in 2001. It is a good thing for the equity
y investor because he is interested in dividend.
Dividend yield ratio the company is 10.59% in the year 2002 and last year this
ratio was 10%. For those investors who want to earn current profit ,for them this
ratio is good but for those investors who want to earn capital gain low dividend
yield ratio is acceptable.
Company‘s %age of earnings retained are just 31.95% and 24.89 % in both the
current years of 2001 and 2002 respectively. This shows more attractiveness for
the equity investor. There is a decreased in this ratio due to the more distribution
of the dividend as compared to the last year.
12
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Operating cash flow to cash dividend compares operations cash flow to cash
dividend paid by the firm. A high ratio is desirable .The company is generating
sufficient cash from its operations to declare cash divided This ratio has improved
to 2.17 times in the year 2002 against the last year figure of .76 times. It shows
that the firm has sufficient cash available for the distribution of dividend.
The stocks of the company are being traded 7.1 times its earnings. This shows
investor’s confidence on the firm’s ability to generate earnings and growth
opportunities for the firm. Price earning ratio of 7.1 times shows that to earn one
rupees the investor is willing to invest 7.1 rupees in business.
Book value per share is good one if it is below the market price of its shares. Book
value per share of the company is 41.96 per share, which shows investor’s
confidence on the firm’s ability to generate profits.
DECISION
From the point of view of equity investor the firm is very much attractive because
of the following s points:
13
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
1. Dividend per share of the company is 9 per share, which is very much
attractive for the investor.
2. Dividend payout ratio of the company is also very high i.e. 75% of the
earning per share
3. Earring per share of the company is also very high whichsi11.98 per share.
4. operating cash flow /cash dividend of the firm is 2.17 times of the cash
dividend.
CONCLUSION
From our analysis we might conclude that the liquidity position of the firm is
good, operating performance is also well as compared to the past year. The firm is
operating in a good manner, but from the last year the firm has obtained loans
from the outside sources. As the firm is a levered firm so this debt will increase the
profits of the firm very much.
14
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
15
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
16
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Asset side
17
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
LIABILITY SIDE
18
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
19
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
LIABILITY SIDE
20
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
FORMULAS OF RATIOS:
RATIO ANALYSIS:
Basically ratio analysis is the instruments used for evaluating and interpreting the
financial health/position of the company. Ratio analysis allows present and
prospective investor and lender along with the firm’s management to evaluate the
firm’s financial position or performance.
LIQUIDITY RATIOS:
Liquidity ratio’s refers the ability of firm to pay its short-term obligation on time.
Current ratio
Current assets
Current ratio = ------------------------
Current liabilities
Quick Ratio:
Current assets- inventories
Quick ratio= ---------------------------------
Current liabilities
Cash Ratio:
Cash + Marketable Securities (M/S)
Cash ratio = -------------------------------------------------- x 100
Total assets
21
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Activity Ratio
Basically used to measured stream with which current account convert into cash/sale.
That how productivity management is utilizing the assets of business to generate the
desired rate.
Inventory Turnover:
Cost of good sold
Inventory turnover = -----------------------
Ending stock
22
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Account receivable
Average collection period = ------------------------------------
Average credit sale per day
No of working days
A.R.T.O = ---------------------------
ACP
Accounts payable
APP = --------------------------------------------
Average credit purchase per day
Accounts payable
APP = --------------------------------------------
Average credit purchase per day
No of working days
Account Payable Turnover = ----------------------------
APP
Operating Cycle:
23
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Net sale
TA.T.O= -------------------
Total assets
Debt Ratio’s
Debt ratios for the sake of two purposes
Measure the degree of indebt ness (how much we are in lose).
Ability to pay the debts (to check that the company will pay the interest or lease
payment on time or not)
Debt Ratio:
Total debt
Debt ratio = --------------- x 100
Total assets
24
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Profitability Ratio:
With the help of this ratio’s the analyst can evaluate the firm earning with respect to
given level of sale at certain level of assets, the owner’s investment or share value.
Return On Assets
N.P.A.T
R.O.A = -----------------
Total Assets
Return On Equity:
N.P.A.T
R.O.E =------------ x 100
S.H.E
25
FINANCIAL MANAGEMENT FAUJI FERTILIZER COMPANY (PVT) LTD.
Marketability Ratio’s :
These ratios refer to the market value of company’s stock towards profitability.
Dividend yield:
Dividend per share
Dividend yield = ------------------------------- x 100
Market price of share
26