Financial Ratio Analysis

Subject: Financial Ratio Analysis

Participants Hafiz Muhammad Nadeem (2113202) Adnan Ashraf (2113101) Imran Mushtaq (2113001) ( )

Submitted to: Sir Athar Ikram

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Financial Ratio Analysis

Acknowledgement
First of all we are thankful to Allah who gave us courage to grape this report then we would like to record our heart full thanks to our respected Teacher Mr. Athar Ikram and advisor Mr. Ammar Qasim Jaffari credit Manager at Bank Alfalah & to all Friends of Banking department who helped us in Endeavour of making this report.

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Financial Ratio Analysis

Synopsis
Topic: The topic of our research report is to study financial Ratio analysis. Purpose: The purpose of writing this report is to choose the best company for investment between Pakistan Telecommunication (PTCL) and Wateen Telecommunication. Scope: Pakistan Telecommunication (PTCL) and Wateen Telecommunication are telecom services providers in Pakistan both are playing very important role in earning GDP of Pakistan. .

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Financial Ratio Analysis

Executive Summary:
Ratio analysis is one of the techniques of financial analysis to evaluate the financial condition and performance of a business concern. Simply, ratio means the comparison of one figure to other relevant figure or figures. Ratio analysis is an important tool to compare financial performance of different companies. Ratio analysis is widely used to gauge profitability, liquidity, solvency etc. of a company. We have selected telecom sector for project assigned to us by our worthy teacher Mr. Athar Ikram in subject Financial Accounting. M/s PTCL & M/s Wateen Telecom are the two main companies in the telecom sector of Pakistan. We are briefly describing each company before discussing financial statements of respective companies.

About PTCL: PTCL is all set to redefine the established boundaries of the telecommunication market and is shifting the productivity frontier to new heights. Today, for millions of people, PTCL demand instant access to new products and ideas. PTCL is setting free the spirit of innovation. PTCL is going to be customers first choice in the future as well, just as it has been over the past six decades. For clear communication the first choice of business circles is PTCL telephone for local, nationwide and international calling. Today businesses can have 10-100 lines with modern day services to meet their needs. Different options like Caller-ID, call-forwarding, call-waiting, Call Barring etc are on PTCLs board. Business specific services of PTCL include 0800-Toll free number, 0900-Preminum rate services, VPN-Virtual Private Network, Audio Conference Service, Digital Cross Connect (DXX), ISDN (Policy), Tele plus (ISDN/BRI), Digital Phone Facilities/ Modification Charges, UAN, UIN. PTCL has the largest Copper infrastructure spread over every city, town and village of Pakistan with over million installed lines. The network of PTCL has over 6 million PSTN lines installed across Pakistan with more than 3 million working. Furthermore installed capacity of broadband is more than 0.6 million ports spread across 605 cities and towns of the country. PTCL has over 10,400 km fully redundant, fiber optics DWDM backbone network. It connects over 840 cities and towns with 270G bandwidth. PTCL also provides carrier services. As carriers-carrier, PTCL provides the core infrastructure services to the cellular, LDIs, Local Loop operators, ISPs, Call Centers and pay phone operators. PTCL provides all carrier services, right from interconnects and Tele housing to DPLC and IPLC connectivity. Its interconnect services are provided from its 3200 exchange locations that connect carriers networks domestically, in addition to providing IPLC bandwidths to connect internationally through its four international gateways and SEA-ME-WE3 and SEA-ME-WE4 international submarine. Furthermore to provide connectivity to operators in the extreme remote areas of the country, PTCL launched its state of the art satellite service (Skylink). PTCL satellite service (Skylink) is provided using the Intelsat Satellite System, an undisputed leader in satellite communications.

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Financial Ratio Analysis

About Wateen Telecom:
Wateen Telecom is a converged communication services provider that fulfills connectivity requirements for organizations and individuals in Pakistan. Wateen Telecom delivers complete solutions for Internet, Voice, Multimedia and Enterprise Solutions that make it the most comprehensive provider for all of Pakistans communication necessities. An Abu Dhabi Group venture, Wateens vision is to take Pakistan into the digital revolution of the 21st Century and to make Pakistan a regional communications hub, connecting the East with the West and Central Asia with the Middle East.

Wateen began its operations in Pakistan in 2007, with the deployment of the largest fiber optic network in the country. Moreover, Wateen is the worlds first company to commercially roll out a WiMAX network on a nationwide scale. Wateen currently services over 250,000 WiMAX subscribers, provides enterprise solutions and data services to over 200 leading organizations and its wired (HFC/GPON) network reaches over 15,000 households in Lahore and Multan. With a new strategic vision and management in place, Wateen has steadily improved its service provision and its corporate structure to adequately reflect its corporate motto and beliefs of Enabling Customer Lifestyles. Wateen is aiming to help shape the education, social and economic development in the country using broadbased internet provision

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Financial Ratio Analysis

Ratio Analysis:
1. Liquidity Ratios:

(i)

CURRENT RATIO Current ratio is a popular financial ratio used to test a companys liquidity by deriving the proportion of current assets available to cover current liabilities.

Wateen Telecom Current Ratio = Current Assets Current Liability 8,201,388 24,300,346 0.338 Current Ratio =

PTCL Current Assets Current Liability 45,450,236 30,192,778 1.505

PTCLs liquidity position is far better than wateen. Wateen is facing problems in meeting its current financial obligations as evident from current ratio. On the other hand, PTCL can easily pay off its current liabilities by liquidating its current assets.

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Graphical Representation of Current Ratio

Current Ratio
1.600 1.400 1.200 1.000

0.800
0.600 0.400 0.200 0.000 Wateen PTCL

Current Ratio

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Financial Ratio Analysis

(ii) QUICK RATIO

Quick ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liability.

Quick Ratio

Wateen Telecom =

PTCL Quick Ratio =

Cash & Equivalents+ Short Term Investments+ Account Receivables Current Liability

Cash & Equivalents+ Short Term Investments+ Account Receivables Current Liability

= =

7,096,237 24,300,346 0.292

= =

30,875,172 30,192,778 1.023

Wateen has very little capacity to meet current liabilities through its most liquid assets. PTCL is again in much better position to meet current liabilities even through more liquid assets. Liquidity ratios clearly indicating better liquidity standings of PTCL whereas Wateen is struggling for liquidity.

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Graphical Representation of Quick Ratio:

Quick Ratio
1.200 1.000

0.800 0.600 Quick Ratio 0.400

0.200 0.000 Wateen PTCL

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Financial Ratio Analysis

(iii) Cash Conversion Cycle

The cash conversion cycle (CCC) measures the number of days a company's cash is tied up in the production and sales process of its operations and the benefit it gets from payment terms from its creditors. The shorter this cycle, the more liquid the company's working capital position is. The CCC is also known as the "cash" or "operating" cycle. An often-overlooked metric, the cash conversion cycle is vital for two reasons. First, it's an indicator of the company's efficiency in managing its important working capital assets; second, it provides a clear view of a company's ability to pay off its current liabilities

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Financial Ratio Analysis

Wateen Telecom Cash Conversion Cycle =
Days Inventory Held+ Days A/c Receivables Days A/C Payables

PTCL Cash Conversion Cycle =

Days Inventory Held+ Days A/c Receivables Days A/C Payables

a. Days Inventory Held: Cost of Services per Day = = *Inventory = 6,272,409 365 17,184.68 -

a. Days Inventory Held: Cost of Services per Day = = *Inventory = 38,258,711 365 104,818.40 __ 0____

Days Inventory Outstanding= __ 0____ 17,184.68 = 0 Days b. Days Receivables Revenue per Day= 7,961,103 365 = 21,811.24 = 3,097,982

Days Inventory Outstanding = 104,818.40 = 0 Days b. Days Receivables Revenue per Day = 57,174,527 365 =

156,642.50 Receivables Receivables 10,171,530 =

Days Inventory Outstanding= 3,097,982 21,811.24 = 142 Days c. Days Payables Cost of Services per Day= = Payables = 6,272,409 365 17,184.68 5,922,431 5,922,431 17,184.68 = 345 Days

Days Inventory Outstanding= 10,171,530 156,642.50 = 65 Days c. Days Payables Cost of Services per Day = = Payables = 38,258,711 365 104,818.40 24,922,197 24,922,197 104,818.40

Days Inventory Outstanding=

Days Inventory Outstanding=

= 238 Days Cash Conversion Cycle = (a+b) c = (0+142) 345 = -203 Cash Conversion Cycle = (a+b) c *Since its a service concern it doesnt hold = (0+65) 238 inventory. = -173 *Since its a service concern it doesnt hold inventory. NATIONAL COLLEGE OF BUSINESS ADMINISTRATIO&ECONOMICS Page 11

Financial Ratio Analysis

Cash Conversion cycle of PTCL is better than Wateen. Clearly PTCL is recovering receivables in shorter period of time and paying to its creditors with fewer days as compared to Wateen which CCC is not so liquid. The CCC is also exhibiting good liquidity position of PTCL.

2. Profitability Ratios

(i) Gross Profit to Revenue Ratio A telecom service oriented companys cost of services includes salaries, allowances, annual license fee to regulatory authority, repairs & maintenance costs, communication charges etc. This expense is deducted from the company revenue which results in companys first level of profit, or gross profit.

Wateen Telecom Gross Profit to Revenue Ratio = ____ GP_____ Revenue = = 2,043,302 7,961,103 = = 25.66%

PTCL Gross Profit to Revenue Ratio = ____ GP_____ Revenue 18,915,816 57,174,527 33.10%

PTCLs is effective is controlling cost of services which is evident from GP Ratio. GP Ratio is healthy and it is depicting that a good portion of profit is available for admin, selling and general expenses. Wateens GP Margin is lower than PTCL which indicates that its cost of services is high as compared to PTCL and its cushion for selling, admin and other expenses is little as compared to PTCL.

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Financial Ratio Analysis

Graphical Representation of Gross Profit Ratio:

Gross Profit
40.000 35.000 30.000 25.000

20.000
15.000 10.000 5.000 0.000 Wateen PTCL

Gross Profit

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Financial Ratio Analysis

(ii) Net Profit to Revenue Ratio

Net Profit Ratio shows the relationship between Net Profit of the concern and its Net Sales. In order to work out overall efficiency of the concern net profit ratio is calculated. This ratio is helpful to determine the operational ability of the concern. While comparing the ratio to previous years ratios, the increment shows the efficiency of the concern.

Wateen Telecom Net Profit to Revenue Ratio = ____ NP_____ Revenue = (2,020,513) 7,961,103 -25.4%

PTCL Net Profit to Revenue Ratio = ____ NP_____ Revenue = 9,294,152 57,174,527 16.26%

PTCL is generating reasonable profitability and NP is in line with industry average. NP is showing PTCLs strong operational ability as figure is good. Figure also suggests that investors are getting reasonable return on their investments. On the other hand, Wateen Telecom is incurring loss and figure is putting question mark on its operational viability.

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Graphical Representation of Net Profit Ratio:

Net Profit
20.000

15.000
10.000

5.000
0.000

-5.000
-10.000

Wateen

PTCL

Net Profit

-15.000
-20.000

-25.000
-30.000

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Financial Ratio Analysis

(iii)

Return on Assets

Return on Assets ratio illustrates how well a management is employing the companys total assets to make a profit. The higher the return, the more efficiently management is utilizing its asset base.

Wateen Telecom Return on Assets = ____ NP_____ Total Assets (2,020,513) 29,710,392 -0.068 Return on Assets =

PTCL ____ NP_____ Total Assets 9,294,152 150,767,727 0.062

From the above ratio it has been noted that PTCL is generating small income from utilized assets. This figure should be better. But on the other side, Wateen is incurring loss which is alarming situation. Company management must take corrective measures to better the position.

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Financial Ratio Analysis

Graphical Representation of Return on Asset Ratio:

Return on Assets
0.080 0.060 0.040 0.020

0.000 -0.020
-0.040 -0.060 -0.080 Wateen PTCL

Return on Assets

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Financial Ratio Analysis

(iv)

Return on Equity

Return on equity is also known as return on shareholders investment. The ratio establishes relationship between profit available to equity shareholders with equity shareholders funds. Return on Equity judges the profitability from the point of view of equity shareholders. This ratio has great interest to equity shareholders. The return on equity measures the profitability of equity funds invested in the firm. The investors favour the company with higher ROE.

Wateen Telecom Return on Equity = ____ NP_____ Shareholders Equity (2,020,513) 4,209,667 -0.48 Return on Equity =

PTCL ____ NP_____ Shareholders Equity 9,294,152 99,758,711 0.093

PTCL is generating somewhat reasonable return on shareholders equity. Shareholders are getting reasonable return on their investment in PTCL whereas Wateen is not generating return for its shareholders rather incurring loss to their investment. Management has to take revolutionary steps to satisfy its shareholders.

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Financial Ratio Analysis

Graphical Representation of Return on Equity Ratio:

Return on Equity
0.120

0.100
0.080

0.060
0.040

0.020
0.000

Return on Equity Wateen PTCL

-0.020
-0.040

-0.060
-0.080

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Financial Ratio Analysis

3. Solvency Ratios (i) Interest Coverage Ratio Interest coverage ratio is used to determine how easily a company can pay interest expense on outstanding debt.

Wateen Telecom Interest Coverage Ratio = ____ EBIT_____ Interest Expense = = 354,608 1,974,257 = = 0.1796 Interest Coverage Ratio =

PTCL ____ EBIT_____ Interest Expense 14,684,358 403,240 36.42

PTCL holds strong financial health and can pay 36 times more than current interest expense through current level of operating profit. Its a healthy sign and shows companys strong financial position. But Wateen is exhibiting other side of the picture and is not able to meet interest expense through its current level of operating profit. The reason may be the high interest expense due to high debt obtained.

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Graphical Representation of Interest Coverage Ratio:

Interest Coverage
34.300

4.900

Interest Coverage

0.700

Wateen

PTCL

0.100

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Financial Ratio Analysis

(ii)

Debt Ratio

Debt ratio compares a company total debt to its total assets, which is used to gain a general idea as the amount of leverage being used by a company.

Wateen Telecom Debt Ratio = ____ Total Liabilities_____ Total Assets = 25,500,725 29,710,392 0.858 Debt Ratio =

PTCL ____ Total Liabilities_____ Total Assets = 51,009,016 150,767,727 0.338

PTCLs debt ratio states that it has more assets than its liabilities and company may obtain further debt if needed. Wateen has already been highly leveraged as its debt is on higher side and just getting equal to companys assets which is not a positive trend.

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Financial Ratio Analysis

Graphical Representation of Debt Ratio:

Debt Ratio
1.000

0.800
0.600

0.400 0.200
0.000

Debt Ratio

Wateen
PTCL

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(iii)

DEBT to EQUITY RATIO

Debt ratio compares a company total debt to its total assets, which is used to gain a general idea as the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage. The lower the percentage, the less leverage of a company is using and stronger its equity position.

Wateen Telecom Debt to Equity Ratio = ____ Total Liabilities_____ Shareholders Equity = 25,500,725 4,209,667 6.058

PTCL Debt to Equity Ratio = ____ Total Liabilities_____ Shareholders Equity = 51,009,016 99,758,711 0.511

PTCL is being operated at equity and debt accounts fall 50% of equity. Its the evident of better financial health of the company. Wateen is highly leveraged company and is being run on debt which is negative sign. Its liabilities are 6 times higher than assets which is depicting weak financial health of the company.

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Financial Ratio Analysis

Graphical Representation of Debt Equity Ratio:

Debt Equity Ratio

7.000 6.000 5.000 4.000 3.000 2.000 1.000 0.000 Wateen PTCL

Debt Equity Ratio

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Financial Ratio Analysis

Conclusion: It is obvious from above ratio analysis that PTCL is performing well and all financial indicators are showing positive trend. Wateens performance is not up to the mark and financial indicators reflecting negativity in financial health of the company. An investor interested in making investment into some company considers risk and return aspects of that investment. An important tool is ratio analysis of financial statements. Since we are considering only ratios for decision making (although other factors should also be consider e.g. management, market share, stock price, future plans) and on the basis of this result we will invest in PTCL and will not make any investment in Wateen Telecom.

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