ANALYSIS OF FINANCIAL

STATMENTS
Pre-mid Assignment
Question: Select a company/ firm (of your own choice). Refer to the financial statements of the company.

a. Determine the net change in long-term debt during Year 2019 & 2020.

b. Analyze and discuss the relative mix of debt financing for your selected company. Do you think
Company has any solvency or liquidity problems? Do you think the company should have more or less
debt relative to equity (or is its current financing strategy proper)? Do you think that the company would
encounter difficulty if they wanted to issue additional debt to fund an especially attractive business
opportunity? (Use supportive ratios to answer your questions)

Answer:

I am selecting Nishat Mills Limited for this assignment. Nishat Mills Limited is the flagship company of
Nishat Group. It was established in 1951.

It is one of the most modern, largest vertically integrated textile companies in Pakistan. Nishat Mills Limited
has 227,640 spindles, 805 Toyota air jet looms. The Company also has the most modern textile dyeing and
processing units, 2 stitching units for home textile, Two stitching units for garments and Power Generation
facilities with a capacity of 120 MW. The Company’s total export for the year 2016 was Rs. 35.931 billion
(US$ 344.744 million). Due to the application of prudent management policies, consolidation of operations, a
strong balance sheet and an effective marketing strategy, the growth trend is expected to continue in the years to
come. The Company’s production facilities comprise of spinning, weaving, processing, stitching and power
generation.

a. Determine the net change in long-term debt during Year 2019 & 2020.

Total Long Term Debt in year 2020 is 10727.35 million rupees and in year 2019 it is 10989.38 million
rupees.
Net change of the total long term debt is 262.03 million.
 The amount of the long term debt is decreased by 262.03 million rupees in year 2020 which means
Nishat Mills Ltd have matured some of its long term debt which got retired. It is positive and healthy
sign for its financing position that company is paying off its long term debts.

The changes in the long term debt of Nishat mills Limited reported in financing activities by issuance
and reduction in long term debt is as follows of year 2020 and 2019 respectively in million rupees:

b. Analyze and discuss the relative mix of debt financing for your selected company.

Debt instruments Subsequent measurement of debt instruments depends on the Company’s business
model for managing the asset and the cash flow characteristics of the asset. Nishat Mills have debt
instruments in year 2019 but in year 2020 the company having no debt instrument rather than capital
lease have been applied.

The long term debt is divided into two categories:

Year 2020(Million rupee) 2019(Million Rupee)

Long term debt 9240.12 9340.12
Capital lease Obligations 1487.23 1610.26

Therefore, the capital lease obligations show that Nishat Mills Limited is using mix of debt financing.
A lease liability is recognized at the commencement date of a lease. The lease liability is initially
recognized at the present value of the lease payments to be made over the term of the lease, discounted
using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's
incremental borrowing rate. Lease payments comprise of fixed payments less any lease incentives
receivable, variable lease payments that depend on an index or a rate, amounts expected to be paid
under residual value guarantees, exercise price of a purchase option when the exercise of the option is
reasonably certain to occur, and any anticipated termination penalties.

Do you think Company has any solvency or liquidity problems?

I can see the liquidity and solvency problem by analyzing the financial ratios and the effectiveness of
long term assets and liabilities.

 Current Ratio is in year 2020 is 1.36 and in year 2019 it is 1.26, it is showing positive effect of
range specially in year 2020 which means the company have strong liquidity power and enough
cash in form of liquidity.
 Quick Ratio in year 2020 is 0.59 and in year 2019 it is 0.55. It is near to 1 which means it can
pay off its current liabilities in year 2020 more efficiently than in year 2019.
These ratios identify the liquidity position of the Nishat mills limited which is favor of the organization
and efficient.
 Debt to Equity Ratio for the year 2020 is 12.91% and for year 2019 it is 7.90%.
The debt-to-equity ratio is used to evaluate a company's financial leverage and is calculated by dividing
a company's total liabilities by its shareholder equity. It is more better in year 2019 but the ratio is 0.12
in year 2020 which is also good and shows the company can easily fulfill the total liabilities.
 Financial Leverage Ratio is 40.96% in year 2020 and in year 2019 it is 37.57%. This shows it
was less in year 2019 and increase little bit in year 2020 but still in a good position.
 Gearing Ratio in year 2020 is 29.06% and in year 2019 it is 27.31%. In both years the gearing
ratio is normal which indicates how much a company is funded by debt versus how much is
financed by equity, often called the net gearing ratio.

 The Company's objectives when managing capital are to safeguard the Company's ability to
continue as a going concern in order to provide returns for shareholders and benefits for other
stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to
maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to
shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry
and the requirements of the lenders, the Company monitors the capital structure on the basis of
gearing ratio. This ratio is calculated as borrowings divided by total capital employed.
Borrowings represent long term financing and short term borrowings obtained by the Company

Non-Current Assets:
 Property, Plant and Equipment
Year 2020=31,292,722,000
Year 2019 = 28,968,219,000

 Long Term Investments

Year 2020=37,979,074,000
Year 2019= 34,930,333,000
 Other Non-Current Assets
Year 2020=865,591,000
Year 2019= 849,580,000

Total non-current assets of year 2020= 70,137,387,000

Non-Current liabilities
 Long Term Financing
Year 2020= 9,222,781,000
Year 2019= 5,259,927,000
 Deferred Tax
Year 2020=302,672,000
Year 2019=215,440,000

Total non current liabilities of year 2020= 9,525,453,000

Current Portion of Long Term Liabilities

Year 2020=703,032,000
Year 2019=1,784,470,000

Non-current assets expanded and non-current liabilities also got increased still the long term liabilities
are lesser in year 2020 which shows company is paying the debts efficiently. Also the non-current assets
are much higher than the non-current liabilities therefore no SOLVENCY ISSUE can be seen.

 The liquidity risk is at the minimum due to the availability of enough funds through committed
credit facilities from the Banks and Financial institutions.
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated
with financial liabilities. The Company manages liquidity risk by maintaining sufficient cash and the
availability of funding through an adequate amount of committed credit facilities. At 30 June 2020,
the Company had Rupees 25,956.148 million (2019: Rupees 21,722.738 million) available
borrowing limits from financial institutions and Rupees 128.241 million (2019: Rupees 576.625
million) cash and bank balances. The management believes the liquidity risk to be low.
Do you think the company should have more or less debt relative to equity (or is its current
financing strategy proper)?

The Company maintains low leveraged capital structure. We monitor the capital structure on
the basis of the gearing ratio. Our strategy is to keep the gearing ratio at the maximum of 40%
equity and 60% debt.

The liquidity ratios and the capital structure ratio shows that Nishat mills company have a healthy and
positive structure of the debt and equity as the company is paying its short term and long term debts and
still have good liquidity and solvency ratios.

Finance cost of the Company decreased by 9.94% due to reduction in average bank borrowing rate and
decrease in average short term borrowings as a result of improvements in cash flows from operations.
Overall finance cost of the Company also decreased despite investment in many new projects to
diversify the business lines and expand the existing production facilities.
The Company’s credit exposure to credit risk and impairment losses relates to its trade debts. This risk is
mitigated by the fact that majority of our customers have a strong financial standing and we have a long-
standing business relationship with all our customers. We do not expect nonperformance by our
customers; hence, the credit risk is minimal.

Total non-current assets of year 2020= 70,137,387,000

Total non current liabilities of year 2020= 9,525,453,000
Nishat mills have far great amount of non-current assets than the non-current liabilities. Therefore, no
solvency issue occurs.
The financial strategy seems to be healthy and positive.
Do you think that the company would encounter difficulty if they wanted to issue additional debt
to fund an especially attractive business opportunity?

Nishat Mills Limited takes risks and creates opportunities in the normal course of business. Taking risk
is important to remain competitive and ensure sustainable success.

As the leading textile company of the country, the Company is in a position to avail and exploit a
number of opportunities.
The amount of the total assets of Nishat mills limited is much higher than the total liabilities. Also all
the capital structure and liquidity ratios are in favor of the organization. It is not difficult for company to
issue additional debt to fund a business because their risk and opportunity management encompass an
effective framework to conduct business in a well-controlled environment where risk is mitigated and
opportunities are availed. Each risk and opportunity are properly weighted and considered before
making any choice. Decisions are formulated only if opportunities outweigh risks.

REFERENCES:
https://nishatmillsltd.com/wp-content/uploads/2020/10/Annual-Report-2020.pdf
https://www.wsj.com/market-data/quotes/PK/NML/financials/annual/cash-flow
https://www.investing.com/equities/nishat-mills-ratios