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CHERAT CEMENT COMPANY LIMITED

AHMAD MUJTABA

L1F16MBAM0281

FINANCIAL REPORTING & ANALYSIS

CHERAT CEMENT COMPANY LIMITED

SUBMITTED TO: Dr. SNOBER JAVID


CHERAT CEMENT COMPANY LIMITED

Financial Reporting Analysis


For
Cherat Cement Company Limited.

Contents

Topic
Introduction

Importance of Financial Reports

Collecting and Managing Data

The Income Statement analysis and Notes

The Cash Flow analysis and Notes


The Balance Sheet analysis and Notes

Other Reports related to management decisions and their


analysis
Trend Analysis
Common size Analysis
Ratio Analysis
Summary Analysis of Financial Ratios
Conclusion (Analysis/industry practices)
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Summary Table of Financial Ratios

Ratio Formula What it measures What it tells you

Owners: Net Income


Return on Average Owners’ Equity Return on owners’ How well is this
Investment (ROI) capital company doing as an
When compared with investment?
return on assets, it
measures the extent to
which financial
leverage is being used
for or against the
owner.

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.

Asset Turnover Sales Relative efficiency in How well are assets


Average Total Assets using total resources being used to generate
to product output. sales revenue?

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.
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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?

Current Ratio Current Assets Short-term debt- Does this customer


Current Liabilities paying ability without have sufficient cash or
regard to the liquidity other liquid assets to
of current assets. cover its short-term
obligations?

Quick Ratio Cash+Mktble Sec.+A/R Short-term debt- Does this customer


Current Liabilities paying ability without have sufficient cash or
having to rely on sale other liquid assets to
of inventory. cover its short-term
obligations?

Long-Term Total Debt Amount of assets Is the company’s debt


Creditors: Total Equity provided by creditors load excessive?
Debt-to-Equity for each dollar of
Ratio assets provided by
owner(s)

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.

Profitability measured often in percentage term, in order to facilitate to making a comparisons s

of company s financial performance against past years’ performance and against the other

companies in same industry.

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.
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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.

Pakistan Cement Industry:

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

due to decline export to Afghanistan. Exports decline by uncertainty of peace.


CHERAT CEMENT COMPANY LIMITED

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.

Below are the selected company for profitability ratio analysis:

Cherat Cement Company Limited:

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

certification of ISO9001:2000 for the high quality grey Portland cement.

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

Plant’s geographical position, it is ideally located to export cement to Afghanistan as well as

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

for all the stakeholders of the Company.

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.

• Achieve excellence in business.

• Maintain competitiveness by leveraging technology.

• Continuously develop our human resource.

• To be regarded by investors as amongst the best blue-chip stocks in the country.

Core Values:

Always deliver the best quality product to our customers.


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• Maintain the highest level of integrity, honesty and ethics.

• Use technology to continuously improve our processes.

• Develop the capability of our work force on an ongoing basis.

• Safeguard the interests of all our stakeholders.

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.

Objective of Profitability Ratio analysis:

The major objectives of the resent study are to know about financial strengths and weakness of

Cement Industries of Pakistan.

 To evaluate the profitability of cement industries of Pakistan by using ratio analysis, this

is key evaluating performance measure of efficiency and financial strength.

 To evaluate and analyze various facts of the financial performance of the company. To

make comparisons between the ratios during different periods.

 To study the present financial health of Major Player of cement industry and to determine

the Profitability Ratios.

 To analyze the capital structure of the company with the help of ratios.

 To offer appropriate suggestions for the better performance of the organization

 Profitability ratios measure the operating efficiency of the firm and its ability to ensure

educate return to its shareholders.

 In Profitability ratio, making a comparisons s of company s financial performance against

past years’ performance and against the other companies in same industries.
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Significance of Project

 After successful completion of project, researcher is able to interpret the profitability of

companies and can be suggest, how to increase profitability of industry.

 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,

creditors, shareholders, tax department, banks and Government etc.

 It is 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, 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

they are contributing for company’s growth and profitability.

 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

not to invest in the company’s shares.

Importance of Financial Reports:

In any industry, whether manufacturing or service, we have multiple departments, which

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

of reporting – Financial reporting for various stakeholders & Management

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.

Objectives of Financial Reporting:

According to International Accounting Standard Board (IASB), the objective of financial

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 –

1. Providing information to management of an organization, which is used for the purpose

of planning, analysis, benchmarking and decision-making.

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

various aspects of an organization.

4. Providing information about the economic resources of an organization claims to those

resources (liabilities & owner’s equity) and how these resources and claims have

undergone change over a period of time.

5. Providing information as to how an organization is procuring & using various resources.

6. Providing information to various stakeholders regarding performance management of an

organization as to how diligently & ethically they are discharging their fiduciary duties &

responsibilities.
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7. Providing information to the statutory auditors, which in turn facilitates audit.

8. Enhancing social welfare by looking into the interest of employees, trade union &

Government.

Now let us discuss few aspects about importance of financial reporting.

Importance of Financial Reporting:

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.

The organizations are required to file financial statements to ROC, Government

Agencies. In case of listed companies, quarterly as well as annual results are required to

be filed to stock exchanges and published.

2. It facilitates statutory audit. The Statutory auditors are required to audit the financial

statements of an organization to express their opinion.

3. Financial Reports forms backbone for financial planning, analysis, bench marking and

decision-making. Various stakeholders use for these above purposes.

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

organization as well as of its management.

6. For the purpose of bidding, labor contract, government supplies etc., organizations are

required to furnish their financial reports & statements.


CHERAT CEMENT COMPANY LIMITED

Collecting and Managing Data:

Data Collection Sources:

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

FY2015, FY2016 & FY2017.

i. Primary Sources:

There are no primary sources of information to get the data.

ii. Secondary 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,

Financial Reporting and Analysis Book.

The Income Statement analysis and Notes:

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

addressed (KENNON, 2018).

 Ratio analysis. Several ratios can be extracted from an income statement, each of which

reveals different types of information about a business. They are as follows:

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
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and administrative charges are considered. In essence, it reveals the ability of an

organization to earn a reasonable return on its offerings.

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

by the contribution margin.

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

has earned before financing and other costs are considered.

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?

o Horizontal analysis. This is a side-by-side comparison of income statements for multiple

periods. A good comparison is for every month or quarter in a year. Items to look for in this

analysis include the following:

 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

following additional line items for more information:

 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

of the year is crushed by a large depreciation expense.

 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

outcome sooner, and recorded them sooner.

 Pay raises. Some organizations give everyone pay raises in the same month, so a bump in

compensation expense is predictable.

The Cash Flow analysis and Notes:

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

means about the value of the overall company (Leibold, 2016).

What Does Cash Flow Analysis Mean?

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).

The Balance Sheet analysis and Notes:

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 formula to compute the current ratio:


CHERAT CEMENT COMPANY LIMITED

Current Ratio = Total Current Assets / Total Current Liabilities

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

accounts receivable or the cash value of inventory.

A current ratio can be improved by either increasing current assets or decreasing current

liabilities.

This can take the form of the following:

• Paying down debt.

• Acquiring a loan (payable in more than one year’s time).

• Selling a fixed asset.

• Putting profits back into the business.

A high current ratio may mean that cash is not being utilized in an optimal way. That is, the cash

might better be invested in equipment.

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.

Here is the formula for the quick ratio:

Quick Ratio = (Current Assets − Inventory) / 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

borrower must maintain.

Working Capital = Total Current Assets − Total Current Liabilities

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.

It shows how much of a business is owned and how much is owed.

The debt/worth ratio is computed as follows:

Debt/Worth Ratio = Total Liabilities / Net Worth

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:

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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Formula for Common Size Analysis:

Common size financial statement analysis is computed using the following formula:

Types of Common Size Analysis:

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

financial managers to analyze financial statements.

Balance Sheet Common Size Analysis:

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

retained on the balance sheet.

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

40% of the total liabilities and stockholder’s equity.

Income Statement Common Size Analysis:

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

essential expenses (Common Size Analysis, 2018).

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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Importance of Common Size Analysis:

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

the company is implementing an expansion or acquisition strategy, making the company

attractive to investors (Common Size Analysis, 2018).

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

sale prices and demand.


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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.

Profit and Loss statement:

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

and depressed demand.

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

materials raised production cost.

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.
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Ratio Analysis:
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Summary Analysis of Financial Ratios:

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

growing needs of working capital requirements.

Activity / Turnover Ratios:

The Company managed to substantiate its financial position by enhanced inventory management

and improved operating cycle.

Investment / Market Ratios:

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

expansion project, hence managed its gearing at desirable level.


CHERAT CEMENT COMPANY LIMITED

Conclusion:

The ratios analysis also showed that the company is good in controlling its profitability and

liquidity and investment ratios.

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.
CHERAT CEMENT COMPANY LIMITED

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

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