Professional Documents
Culture Documents
AHMAD MUJTABA
L1F16MBAM0281
Contents
Topic
Introduction
Return on Assets Net Income How well assets have How well has
(ROA) Average Total Assets been employed by management employed
management. company assets? Does
it pay to borrow?
Managers: Net Income
Net Profit Margin Sales Operating efficiency. Are profits high
The ability to create enough, given the level
sufficient profits from of sales?
operating activities.
Return on Assets Net Income x Sales Earning power on all How well has
Sales Total assets; ROA ratio management employed
Assets broken into its logical company assets?
parts: turnover and
margin
.
Average Collection Average A/R x 365 Liquidity of Are receivables coming
Period Annual Credit Sales receivables in terms of in too slowly?
average number of
days receivables are
outstanding.
Inventory Turnover Cost of Goods Sold Liquidity of Is too much cash tied
Expense inventory; the number up in inventories?
Average Inventory of times it turns over
per year.
CHERAT CEMENT COMPANY LIMITED
Average Age of Average A/P x 365 Approximate length of How quickly does a
Payables Net Purchases time a firm takes to prospective customer
pay its bills for trade pay its bills?
purchases.
Short-Term
Creditors Current Assets – Short-term debt- Does this customer
Working Capital Current Liabilities paying ability. have sufficient cash or
other liquid assets to
cover its short-term
obligations?
Times Interest Net Ability to pay fixed Are earnings and cash
Earned Income+(Interest+Taxes) charges for interest flows sufficient to
Interest Expense from operating profits. cover interest payments
and some principal
repayments?
Cash Flow to Operating Cash Flow Total debt coverage. Are earnings and cash
Liabilities Total Liabilities General debt-paying flows sufficient to
ability. cover interest payments
and some principal
repayments
CHERAT CEMENT COMPANY LIMITED
Executive Summary:
The main purpose of this project was to analyze the financial position of the selected companies
in terms of profitability. In this project, the researcher tried to show the actual profitability
position of the companies. Mostly investors firstly see the how the performance of company in
terms of profit and net earnings. They also want to know that whether company can fulfill their
requirement or not in term of money, profits and in the form of dividend. The researcher used the
companies’ Profit and loss statement, Balance sheet, equity statement; and cash flow statement
to extract the required result and to implement different type of profitability ratios.
Introduction:
After carefully searching and analyzing all the topics related to finance project, the researcher
selected “Profitability Ratio analysis”. There are lot of topics who have great significance in
finance and great value but Profitability Ratio analysis is more valuable and interesting in so
many ways e.g. these ratios are helpful in determining the financial strength and weaknesses of
industry, there ratios are helpful to administration of the business by providing sparkler clear
picture regarding important aspects like, financial health net profit margins, gross profit margins,
expense ratio, ROA, ROE, ROCE, Total shareholder equity, EPS, DPS, and P/E ratio etc.
of company s financial performance against past years’ performance and against the other
Without the profitability, the businesses go declines and are not able to perform in long run
Profitability ratios are very useful to assess business performance and its ability to generate
earning as compared to all other cost and expenses incurred during a specific period.
CHERAT CEMENT COMPANY LIMITED
This project is all about performing profitability ratio analysis by using the available financial
data in the annual reports of the selected companies for the last three years i.e. 2015,
2016 and 2017. The main purpose to select the topic of profitability ratio analysis is that it tells
the profitability strength of the company as compare to its competitors in cement industry, which
company is more profitable, which company s income is exceeding to expenses and the result
will helpful for investors, shareholders, debtor and for creditors to assess the overall profitability
performance view which company it returning more as compare to its competitors. Profitability
ratios are mostly use in financial analysis and its main aim to compare current performance with
past. These ratios measure management overall effectiveness of earning and investing to cost and
expenses.
The south of Pakistan is Baluchistan and Sindh, while North is Punjab, KPK, FATA, PATA,
Gilgit and Baltistan. Total cement industry of Pakistan is about 43 Million tons of annualized
clinker production and about 45.6 Million Tons of annualized cement production.
Pakistani cement industry is playing vital role in economic development sector. Pakistani cement
industry is now recognizing as a major player in regional market. The government is taking
concrete step to revive the national economy and it has positive effects on the cement sector.
Greater spending by private sector is also increasing demand of cement domestic level, which
needs more production to fulfill the need of customers. During the year, the cement industry
recorded growth from last year. While domestic demand was strong because of low inflation,
lower interest rates, which leads to higher investment, while exports declined in this year mainly
In future prospect the industry will boost from improving law and order situation of Pakistan and
the neighbor countries which increase and foreign demand. Pak – china economic corridor is also
expected to stabilize which may increase the reconstruction activates in the country.
It was incorporated in 1981 and listed in Islamabad, Lahore and Karachi Stock Exchanges and it
is situated near Nowshera, Khyber Pakhtunkhwa. It has the premier name in the field of cement
manufacturing. It uses the latest and advanced equipment for the production and has a
Cherat Cement Company Limited is a Ghulam Faruque Group (GFG) Company. It’s main
Business activity is manufacturing, marketing and sale of Ordinary Portland Cement. The
Company is amongst the pioneers of cement industry in Pakistan and is the number 1 cement in
its region. Quality is our business; therefore, there are no compromises on Quality. The
Company’s annual installed capacity is 1 million tons of clinker. The plant is located at
Village Lakrai, District Nowshera, and Khyber Pakhtunkhwa (KPK) province. Due to
To cater the local market needs in the KPK, FATA, Punjab and Azad Kashmir. The Company is
Registered on Karachi, Lahore and Islamabad stock exchanges and is also ISO 9001 and
14001 certified. The Company is in the process of installing another cement line at the same
location with an annual clinker capacity of more than 1.3 million tons.
Plant Expansion:
In view of strong projected growth for cement and noticeable improvement in business climate in
the country, the installation of new production line with clinker production capacity of 4,200 tons
CHERAT CEMENT COMPANY LIMITED
per day at the same location is believed to earn fruitful benefits in the near and long-term future
The work on the expansion project is in full swing and progressing on schedule. Major shipment
of machinery has reached Pakistan and rest will arrive in a couple of months. The contracts for
fabrication and erection works awarded and the civil work has gained momentum.
The project is benefiting from recent decline in discount rates and stable foreign currency
exchange rates.
The overall progress of the project is satisfactory and the plant is expected to be commissioned
by January 2017. The management has ordered a Waste Heat Recovery System for this new
cement line, which is planned to be commissioned along with commissioning of line II.
It is one of the leading producers and suppliers of cement in Khyber Pakhtunkhwa and Punjab
and enjoys strong brand loyalty amongst its exporters. Cherat has also become Afghanistan’s
Leading brand.
Vision:
For the benefit of all stakeholders, Growth through the best value creation
Mission:
• Invest in projects that will optimize the risk-return profile of the Company.
Core Values:
Financial Period:
Profitability ratio analysis has been performed by using the available financial data in the annual
reports of the selected companies for the recent three financial years. FY2015, FY2016 &
FY2017.
The major objectives of the resent study are to know about financial strengths and weakness of
To evaluate the profitability of cement industries of Pakistan by using ratio analysis, this
To evaluate and analyze various facts of the financial performance of the company. To
To study the present financial health of Major Player of cement industry and to determine
To analyze the capital structure of the company with the help of ratios.
Profitability ratios measure the operating efficiency of the firm and its ability to ensure
past years’ performance and against the other companies in same industries.
CHERAT CEMENT COMPANY LIMITED
Significance of Project
Result of financial ratio analysis has great significance and provides more benefits to
various stakeholders whom directly or indirectly linked with the company, like investor,
regarding important aspects like, financial health net profit margins, gross profit margins,
expense ratio, ROA, ROCE, Total shareholder equity, EPS, DPS, and P/E ratio etc.
The study is also beneficial to employees and offers motivation by showing how actively
The investors who are interested in investing in the company’s shares will also get
benefited by going through the study and can easily take a decision whether to invest or
function day in day out to achieve organizational goals. The functioning of these departments
may or may not be interdependent, but at the end of day, they are linked together by one
common thread – Accounting & Finance department. The accounting & financial aspects of each
department are recorded and are reported to various stakeholders. There are two different types
Reporting for internal Management of an organization. Both these reporting are important and
are integral part of Accounting & reporting system of an organization. However, considering the
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number of stakeholders involved and statutory & other regulatory requirements, Financial
Reporting is very important and critical task of an organization. It is vital part of Corporate
Governance.
reporting is “to provide information about the financial position, performance and changes in
financial position of an enterprise that is useful to a wide range of users in making economic
decisions.”
The following points sum up the objectives & purposes of financial reporting –
2. Providing information to investors, promoters, debt provider and creditors, which is used
to enable them to male rational and prudent decisions regarding investment, credit etc.
3. Providing information to shareholders & public at large in case of listed companies about
resources (liabilities & owner’s equity) and how these resources and claims have
organization as to how diligently & ethically they are discharging their fiduciary duties &
responsibilities.
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8. Enhancing social welfare by looking into the interest of employees, trade union &
Government.
The importance of financial reporting cannot be over emphasized. Every stakeholder for multiple
reasons & purposes requires it. The following points highlights why financial reporting
framework is important.
1. In helps and organization to comply with various statues and regulatory requirements.
Agencies. In case of listed companies, quarterly as well as annual results are required to
2. It facilitates statutory audit. The Statutory auditors are required to audit the financial
3. Financial Reports forms backbone for financial planning, analysis, bench marking and
4. Financial reporting helps organizations to raise capital both domestic as well as overseas.
5. On the basis of financials, the public in large can analyze the performance of the
6. For the purpose of bidding, labor contract, government supplies etc., organizations are
I will use mostly available data on companies’ website and annual financial reports over internet.
Website of selected companies will be use to collect to current financial data for the period of
i. Primary Sources:
Financial Reporting and Analysis Book, website of company, and annual financial reports
over the internet. Secondary source will also use for collecting relevant data, definition of ratios,
formulas, and industry benchmark etc. This data collected from secondary source like websites,
The analysis of the income statement involves comparing the different line items within a
statement, as well as following trend lines of individual line items over multiple periods.
This analysis is used to understand the cost structure of a business, and its ability to earn
a profit. A proper analysis of the income statement requires that the following activities be
Ratio analysis. Several ratios can be extracted from an income statement, each of which
o Gross margin. This is revenues minus the cost of goods sold, divided by revenues. It
indicates the amount of money earned from the sale of goods and services, before selling
CHERAT CEMENT COMPANY LIMITED
o Contribution margin. This is revenues minus all variable expenses, divided by revenues.
This margin is used to construct a break-even analysis, which reveals the revenue level at
which a business earns a profit of zero. The break-even calculation is all fixed costs divided
o Operating margin. This is the profit earned after all operating expenses have been
subtracted from the gross margin, divided by revenues. It reveals the amount that a business
o Net profit margin. This is the profit earned after all operating and non-operating costs have
been subtracted from the gross margin, divided by revenues. This is the ulti mate analysis
item - can a business earn a profit when all deductions are considered?
periods. A good comparison is for every month or quarter in a year. Items to look for in this
Seasonality. Sales may vary markedly by period, and do so in a regular cycle that can be
anticipated. This may result in predictable losses in some periods and outsized profits in
others.
Missing expenses. It can be obvious when an expense is not recorded in one period, since
there is a sharp drop in one period and twice the usual expense in the next period.
Tax rates. The tax rate used should be the expected one for the entire year. If the tax rate
used is a low one early in the year and a higher one later in the year, then the accounting
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staff is not using the full-year anticipated rate, but rather the rate directly applicable to each
reporting period.
Line item review. Once both of the preceding analyses have been completed, look at the
Depreciation. Some organizations only record depreciation expense once a year, for the full
year. This means that many months have an excessive amount of profit, while the last month
Bonuses. The same issue arises for bonuses as for depreciation. They may only be recorded
at the end of the year, even though one could reasonably have anticipated the bonus
Pay raises. Some organizations give everyone pay raises in the same month, so a bump in
Definition: Cash Flow Analysis is the evaluation of a company’s cash inflows and outflows
from operations, financing activities, and investing activities. In other words, this is an
examination of how the company is generating its money, where it is coming from, and what it
Cash Flow Analysis is a technique used by investors and businesses to determine the value of
overall companies as well as the individual branches of large companies by looking at how much
excess cash they produce. They typically use the Statement of Cash Flows, a document that
shows the actual cash that came in and out of the business during a certain period from investing
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activities, financing activities, and operational activities, as well as a few other reports (Leibold,
2016).
Now that you have created a balance sheet for your business, there are some easy calculations
that you can perform that will give you a better understanding of your company. Using data from
your balance sheet, you can calculate liquidity and leverage ratios.
These financial ratios turn the raw financial data from the balance sheet into information that will
help you manage your business and make knowledgeable decisions. A ratio shows the
relationship between two numbers. It is defined as the relative size of two quantities expressed as
the quotient of one divided by the other. Financial ratio analysis is important because it is one
method loan officers use to evaluate the credit worthiness of potential borrowers. Ratio analysis
is a tool to uncover trends in a business as well as allow the comparison between one business
and another.
In the following section, four financial ratios that can be computed from a balance sheet
are examined:
• Current Ratio
• Quick Ratio
• Working Capital
• Debt/Worth Ratio
Current Ratio:
The current ratio (or liquidity ratio) is a measure of financial strength. The number of times
current assets exceed current liabilities is a valuable expression of a business’ solvency. Here is
The current ratio answers the question, “Does my business have enough current assets to meet
the payment schedule of current liabilities with a margin of safety?” A rule-of-thumb puts a
strong current ratio at two. Of course, the adequacy of a current ratio will depend on the nature of
the small business and the character of the current assets and current liabilities. While there is
usually little doubt about debts that are due, there can be considerable doubt about the quality of
A current ratio can be improved by either increasing current assets or decreasing current
liabilities.
A high current ratio may mean that cash is not being utilized in an optimal way. That is, the cash
Quick Ratio:
The quick ratio is also called the “acid test” ratio. It is a measure of a company’s liquidity. The
quick ratio looks only at a company’s most liquid assets and divides them by current liabilities.
The assets considered “quick” assets are cash, stocks and bonds, and accounts receivable (all of
the current assets on the balance sheet, except inventory). The quick ratio is an acid test of
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whether or not a business can meet its obligations if adverse conditions occur. Generally, quick
ratios between .50 and 1 considered satisfactory as long as the collection of receivables is not
expected to slow.
Working Capital:
Working capital should always be a positive number. Lenders to evaluate a company’s ability to
weather hard times use it. Often, loan agreements specify a level of working capital that the
The current ratio, quick ratio and working capital are all measures of a company’s liquidity. In
general, the higher these ratios are the better for the business and the higher degree of liquidity.
Debt/Worth Ratio:
The debt/worth ratio (or leverage ratio) is an indicator of a business’ solvency. It is a measure of
how dependent a company is on debt financing (or borrowings) as compared to owner’s equity.
Step 5: Compute the current ratio, quick ratio, working capital, and debt/worth ratio for your
company.
Trend Analysis:
Trend analysis studies the financial history of a firm for comparison. It is the comparative
analysis of a company's financial ratios over time. This helps to detect problems or observe good
management. Ratios plotted on the graph to see whether the ratios are falling, rising, or
remaining relatively constant. Therefore, trend analysis was also performed to analyze the trends
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in liquidity and leverage position of the selected companies for the recent three years (Bragg,
2018).
Common size analysis, also referred as vertical analysis, is a tool that financial managers use to
analyze financial statements. It evaluates financial statements by expressing each line item as a
percentage of the base amount for that period. The analysis helps to understand the impact of
each item in the financial statement and its contribution to the resulting figure (Common Size
Analysis, 2018).
The technique can be used to analyze the three primary financial statements, i.e., balance sheet,
income statement and cash flow statement. In the balance sheet, the common base item to which
other line items are expressed is total assets, while in the income statement, it is total revenues.
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Common size financial statement analysis is computed using the following formula:
Common size analysis can be conducted in two ways, i.e., vertical analysis and horizontal
analysis. Vertical analysis refers to the analysis of specific line items in relation to a base item
within the same financial period. For example, in the balance sheet, we can assess the proportion
of inventory by dividing inventory line using total assets as the base item.
On the other hand, horizontal analysis refers to the analysis of specific line items and comparing
it to a similar line item in the previous or subsequent financial period. Although common size
analysis is not as detailed as trend analysis using ratios, it does provide a simple way for
The balance sheet common size analysis mostly uses the total assets value as the base value. On
the balance sheet, the total assets value equals the value of total liabilities and shareholders’
equity. A financial manager or investor uses the common size analysis to see how a firm’s
capital structure compares to rivals. They can make important observations by analyzing specific
line items in relation to the total assets (Common Size Analysis, 2018).
For example, if the value of long-term debts in relation to the total assets value is too high, it
shows that the company’s debt levels are too high. Similarly, looking at the retained earnings in
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relation to the total assets as the base value can reveal how much of the annual profits are
Let us take the example of ABC Company whose balance sheet for 2017 is as follows:
From the table above, we can deduce that cash represents 14.5% of the total assets while
inventory represents 12% of the total assets. In the liabilities section, we can deduce that
accounts payable represent 15%, salaries 10%, long-term debt 30%, and shareholder’s equity
The base item in the income statement is usually the total sales or total revenues. Common size
analysis is used to calculate net profit margin, as well as gross and operating margins. The ratios
tell investors and finance managers how the company is doing in terms of revenues, and they can
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make predictions of the future revenues. Companies can also use this tool to analyze competitors
to know the proportion of revenues that goes to advertising, research and development and other
We can compute common size income statement analysis for ABC Company for 2017.
By looking at this income statement, we can see that in 2017, the amount of money that the
company invested in research and development (10%) and advertising (3%). The company also
pays interest to the shareholders, which is 2% of the total revenue for the year. The net operating
income or earnings after interest and taxes represent 10% of the total revenues, and it shows the
health of the business’s core operating areas. The net income can be compared to the previous
year’s net income to see how the company’s performance year-on-year (Common Size Analysis,
2018).
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One of the benefits of using common size analysis is that it allows investors to identify drastic
changes in a company’s financial statement. It mainly applies when the financials are compared
over a period of two or three years. Any significant movements in the financials across several
years can help investors decide whether to invest in the company. For example, large drops in the
company’s profits in two or more consecutive years may indicate that the company is going
through financial distress. Similarly, considerable increases in the value of assets may mean that
Common size analysis is also an excellent tool to compare companies of different sizes but in the
same industry. Looking at their financial data can reveal their strategy and their largest expenses
that give them a competitive edge over other comparable companies. For example, some
companies may sacrifice margins to gain a large market share, which increases revenues at the
expense of profit margins. Such a strategy allows the company to grow faster than comparable
companies because they are more preferred by investors (Common Size Analysis, 2018).
Horizontal Analysis:
Balance Sheet
Total equity and liabilities increased in financial year 2017 mainly due to surplus on revaluation
of Property, Plant & Equipment and further issuance of share capital. Equity portion has shown
increasing trend from year 2015 to year 2017 because of increase in profitability due to better
Vertical Analysis
Balance Sheet
Debt equity ratio showed continuous improvement over the years as the Company's equity share
increased over the years due to high profits and reduction in debts.
Current assets were 48.23% of total assets of the company in year 2017 as compared to 21% in
year 2016 and 24% in 2015, which shows better liquidity position of the company.
Debt levels were higher during 2015, 2016 and 2017. Finance cost during these times were less
on average. These loans are of both short term and long term in nature. The company's long-term
debt and short term borrowings has increased by in 2017 year. This huge increment is because of
following reasons: First CHERAT entered into a financing agreement in HBL for a Waste Heat
Recovery Plant worth Rs 1.16 Billion. Second, the payment of tranches of long-term loans.
Horizontal
Turnover has been increased over the years from 2015 to 2017 due to increase in sales prices and
sales quantities except from the previous years where turnover was low due to low sales prices
Gross profit has been remarkably increased in the years 2017 respectively due to increase in
margins because of low coal prices, low power cost due to WHRP installation and increased
sales prices. Profit from operations increased by 28.90% in year 2017 mainly due to increase in
gross profit margins and reduction in distribution cost because of fall in export sales.
Finance cost decreased in 2017 as compared to previous years in 2015 and 2016. It further
decreased in current year mainly due to reduction in KIBOR rates and low gearing of CHERAT.
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Overall profit after taxation improved because of increased margins and decrease in finance and
distribution costs.
The initial years of 2015 2016 and 2017 had less growth as compared to the latter years. Issues
dealt many with costs which out grew sales from 2015 onwards. Overall, falling sales and cost
factors, decline in utilization, international factors and rising cost of coal, fuels and packing
Vertical
Gross profit percentage increased from 23% to 36.54% in 2017 due to consistent growth in sales
prices of cement, effective mix of local and export sales and various cost reduction factors.
Operating profits of the Company has grown from 16% in year 2015 to 28.90% in year 2017 due
to increased GP margins and reduction in distribution costs except the year 2015 and 2016 where
the distribution cost was highest due to huge export dispatches. Net profit of CHERAT has
increased significantly due to above said factors and resulted in strong performance of the
Company.
CHERAT CEMENT COMPANY LIMITED
Ratio Analysis:
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Profitability Ratios:
Profitability ratios of the Company are enhanced due to increase in dispatches. The increase in
sales is mainly due to start of commercial operations of another line during the year and increase
in cost of sales was mainly due to increase in depreciation pertaining to Line II. Resultantly the
Company has managed to improve its profitability during the year 2017.
Liquidity Ratios:
The positivity reflected in the liquidity of the Company owing to healthy profitability and
improved cash flows. In view of expansion, Company’s liquidity position improved to cater the
The Company managed to substantiate its financial position by enhanced inventory management
A considerable increase was witnessed in the earnings per share due to increased profitability of
the Company on account of increased capacity. The investor‘s confidence has been further
strengthened due to stable and improved growth in the financial position of the Company.
Capital Structure:
Capital structure of the Company was significantly improved due to increase in Shareholders’
Equity. The Company managed to obtain financing facilities at very competitive rates to finance
Conclusion:
The ratios analysis also showed that the company is good in controlling its profitability and
Holding up a lot of inventory compared to the industry concluding that the inventory is not being
utilized efficiently. The company is growing rapidly and make profits as well and is able to pay
its liabilities more easily and able to compete well in the market.
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References
Bragg, S. (2018, Feb 04). Trend Analysis. Retrieved from
https://www.accountingtools.com/articles/trend-analysis-definition-and-usage.html
Common Size Analysis. (2018, June 29). Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/finance/common-size-
analysis/
KENNON, J. (2018, Feb 04). Learning How to Analyze an Income Statement. Retrieved from
https://www.thebalance.com/investing-lesson-4-income-statement-analysis-357580
Leibold, K. (2016, November). Understanding Cash Flow Analysis. Retrieved from
https://www.extension.iastate.edu/agdm/wholefarm/html/c3-14.html