BZU, BAHADUR SUB-CAMPUS LAYYAH

DEPARTMENT OF BUSINESS ADMINISTRATION MBA 2009-12, SEMESTER 6 FINAL TERM REPORT SEMINAR IN FINANCE

ANALYSIS OF FINANCIAL STATEMENTS OF SHADAB TEXTILE MILLS

SUBMITTED TO: Mr. MUHAMMAD SALEEM

STUDENT GROUP
MUBESHRAH TAHSEEN SANIA FAROOQ MUHAMMAD IHSAN UL HAQ ADNAN ASLAM KHAN (MB-09-10) (MB-09-07) (MB-09-02) (MB-09-28)

AKHTAR HUSSAIN CHUGHTAI

(MB-09-22) April 02, 2012

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ACKNOWLEDGE MENT

irst of all we are grateful to ALLAH ALMIGHTY who gave us ability to work significantly on this report. We are

thankful to our teacher Mr. Muhammad Saleem who gave us keen knowledge on Finance. We admire the group members who work together all the time and available when they were called. Undoubtedly our group is a responsible group and help each others during study before mid term exams. After a long term discussion of group, we finalized the report. This is the whole credit goes to only Mr. Muhammad Saleem who gave us opportunity to select members for our group as a mental satisfaction.

HAQ CHUGHTAI

MUBESHRAH TAHSEEN SANIA FAROOQ MUHAMMAD IHSAN UL ADNAN ASLAM KHAN AKHTAR HUSSAIN

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DEDICATION
This Report Is Dedicated To

Who are always a source of love, affection and inspiration for us.
Whose love and prayers always accompanied us and guide us like a shining star whenever we were in darkness and enable us to reach this stage.

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INTRODUCTION
The company was incorporated on 19th August, 1979 as a Public Limited Company and obtained certificate of commencement of Business on 18th November, 1979 . The company is engaged in the business of manufacturing, selling, buying and dealing in Yarn of all types. The company listed on Stock Exchanges in 1985. The paid-up capital of the Company is Rs.30.000 Million divided into Rs.3.000 Million ordinary shares of Rs.10/- each. The company has set up a spinning plant at Shahkot, District Sheikhupura in the province of Punjab and went into production in February, 1982. The machinery is of excellent and renowned quality. Being project installed under PAYE Scheme the company had exported a large quantity of its production to meet the requirement of repayments of machinery loan and has earned a good reputation in the Industrial markets for its quality products. Capacity of the project is Appx. 11.000 million Kgs. of 20/s Yarn. The capacity of the unit has increased from 14400 spindles to 24960 spindles by installing 10560 additional spindles with necessary back process machinery during the year 2001, 2002 & 2004. The management is expanding capacity of the unit by installing additional spindles with necessary back process machinery and BMR the existing facilities to make the project more viable and to compete with the other spinning units equipped with the latest machinery.

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VISION STATEMENT
To Strive for excellence through commitments, integrity, honesty and team work.

MISSION STATEMENT
To be a model amongst the textile spinning, capable of producing high quality blended and hundred percent cotton yarn both for knitting and weaving.

Complete satisfaction of Buyers/Consumers is our Motto. Manufacturing of blended and hundred percent cotton yarn as per the customers' requirements and market demand. Keeping pace with the rapidly changing technology by continuously balancing, modernization and replacement (BMR) of plant and machinery. Enhancing the profitability by improved efficiency and cost controls. Betterment of Mills Employees as quality policy. Protecting the environment and contributing towards the economic strength of the country and function as a good corporate citizen.

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COMPANY INFORMATION
BOARD OF DIRECTORS Mian Aamir Naseem Mian Farrukh Naseem Mian Shahzad Aslam Mst. Nusrat Shamim Mr. Ahmed Ali Tariq Mr. Mazhar Hussain Mr. Tariq Javaid AUDIT COMMITTEE Mian Farrukh Naseem Mian Shahzad Aslam Mr. Ahmed Ali Tariq CHIEF FINANCIAL OFFICER COMPANY SECRETARY Mr. AUDITORS Mr. Mazhar Hussain Mazhar Hussain M/s. Fazal Mahmood & Company Chartered Accountants SHARE REGISTRAR Corplink (Pvt) Limited Wings Arcade, 1-K, Commercial, Model Town, Lahore. Tel: 042-35887262, 35839182 Fax: 042-35869037 National Bank of Pakistan Bank Al-falah Limited A-601/A, City Towers, 6-K Main Boulevard, Gulberg-II, Lahore. Chairman Member Member Chief Executive Officer

BANKERS REGISTERED OFFICE

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Ph: 042-35788714-16 MILLS Nasimabad, Shahkot, District Nankana Sahib

HORIZONTAL VS VERTICAL ANALYSIS OF FINANCIAL STATEMENTS

Sometimes it can be difficult to interpret in a meaningful way all the dollar amounts presented in a set of financial statements. For example, if one company has liabilities of $10,000 and another company has liabilities of $10,000,000; is the first company less risky? Maybe or maybe not, it depends in part on the size of the company [how much in assets does each company have?] and the companys industry. A useful way to analyze financial statements is to perform either a horizontal analysis or a vertical analysis of the statements. These types of analysis help a financial statement reader compare companies of different sizes, which can be difficult to do when the dollar amounts vary significantly, and evaluate the performance of a company over time. The horizontal and vertical analysis approaches are similar in that the dollar amounts reported are converted to percentages. However, the approaches differ in the base used to compute the percentages.

Horizontal Analysis
Horizontal analysis focuses on trends and changes in financial statement items over time. Along with the dollar amounts presented in the financial statements, horizontal analysis can help a financial statement user to see relative changes over time and identify positive or perhaps troubling trends.

Vertical Analysis [Common-size Analysis]

Vertical analysis sometimes is referred to as common-size analysis because all of the amounts for a given year are converted into percentages of a key financial statement component.

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VERTICAL ANALYSIS
SHADAB TEXTILE MILLS LIMTED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED JUNE 30, 2011

2011
Note: Rs. will be in thousand.

2010

1)

Cost of Goods Sold

CGS x 100 Sales 90.85%

87.92%

Interpretation:
In 2011, cost of sales is increasing. In 2011, raw material yarn was purchased and net purchases were more than 2010. Similarly in 2011, more raw material was consumed and salaries, wages and other benefits includes Rs. 2.545 million (2010: Rs. 2.250 million) in respect of staff retirement benefits. Cost of stores and spares, packing material, fuel and power, repair and maintenance and other factory overhead was increased in 2011. So 2011 is unfavorable.

2)

Gross Profit
GP x 100 Sales

9.18%

12.07%

Interpretation:
Rate of GP is decreasing in 2011 because cost of sales is increasing. As GP amount is increasing in 2011 but rate is decreasing, it is due to GP amount is not increasing in proportion of increasing sales. So we can say that GP amount is increasing with decreasing rate. 2011 is unfavorable.

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3)

Operating Expenses
Operating expenses x 100 Sales

1.6%

1.93%

Interpretation:
Expense amount is increasing but expense rate is decreasing. It is because expenses are not increasing with that proportion with which sales is increasing. Expenses like salaries, allowances & benefits including Rs. 17793 (2010: Rs. 16289), travelling & conveyances including Rs. 578 (2010: Rs. 237), vehicle running & maintenance including Rs. 2009 (2010: Rs. 1702), rent rate & taxes including Rs. 780 (2010: Rs. 352), legal & professional including Rs. 600 (2010: Rs. 460), subscription & donation including Rs. 152 (2010: Rs. 104), insurance including Rs. 728 (2010: Rs. 597), entertainment including Rs. 230 (2010: Rs. 185), general including Rs. 233 (2010: Rs. 196), lighting charges including Rs. 468 (2010: Rs. 247), depreciation including Rs. 1355 (2010: Rs. 1001), freight & expenses on local sales including Rs. 2853 (2010: Rs. 1103) are increasing in 2011. So 2011 is unfavorable.

4)

Administrative expenses
Administrative expenses x 100 Sales

1.44%

1.84%

Interpretation:
Expenses are increasing with decreasing ration. According to %, 2011 is favorable because % is decreasing.

5)

Selling & Distribution expenses

Administrative expenses x 100 Sales

1.44%

1.84%

Interpretation:
Expenses are increasing with decreasing ratio. According to %, 2011 is favorable because % of expense ratio is decreasing.

6)

Operating Profit
Operating profit x 100 Sales

7.58%

10.13%

Interpretation:
Operating profit is increasing with decreasing ratio because cost of sales has been increased and GP rate has been decreased. According to %, 2011 is unfavorable because % of operating profit ratio is decreasing.

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7)

Other expenses
Other expenses x 100 Sales

4.22%

4.11%

Interpretation:
Other expenses are increasing in 2011. There is minor difference in increasing expenses. Bank charges including Rs. 4121 (2010: Rs. 2455) and interest on workers profit participation fund including Rs. 489 (2010: no expense incurred) has been increased. In 2011, short term loans were less (Rs. 16,874) as compared to 2010 (Rs. 19,583). Similarly long term loans in 2011 were Rs. 34128 and in 2010 were Rs. 23,277. 2011 is unfavorable.

8)

Financial charges
Financial charges x 100 Sales

3.03%

3.63%

Interpretation:
Financial charges are increasing in 2011 with decreasing ratio. 2011 is a favorable.

9)

Other Charges
Other charges x 100 Sales

0.32%

0.45%

Interpretation:
In 2011, expenses are increasing with a very low decreasing rate. A few other charges are increased in 2011. 2011 ratio is less than 2010. So 2011 is a favorable.

10)

Other income
Other income x 100 Sales

0.12%

0.05%

Interpretation:
In 2011, other income is increasing with increasing rate. Gain on re-measurement of financial liability at fair value is Rs. 2170 and miscellaneous income is Rs. 68 while in 2010 both incomes are zero. 2011 is favorable.

12)

Profit before taxation

PBT x 100 Sales

4.3%

6.10%

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Interpretation:
In 2011, PBT is increasing with decreasing rate as cost of sales has been increased and GP has been down. 2011 is unfavorable.

13)

Taxation
Taxation x 100 Sales

1.38%

2.28%

Interpretation:
In 2011, tax is decreasing. Current tax is Rs. 4147 (2010: Rs. 6285) and prior tax is Rs. 51 (2010: Rs. 607). So 2011 is favorable.

14)

Profit after Taxation

Net Profit x 100 Sales

2.96%

3.81%

Interpretation:
In 2011, tax is increasing as compared to 2010 but ratio is decreasing. 2011 is favorable.

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HORIZONTAL ANALYSIS
SHADAB TEXTILE MILLS LIMTED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED JUNE 30, 2011

2011
Note: Rs. will be in thousand.

2010

1)
=

Net Sales
1832307 (2011) / 1246000 (2010) x 100 147%

Interpretation:
The sale is increased to Rs. 1832307000 as compared to previous year sale of Rs. 1246000000 which representing 47% increase against previous year. Local sale of Rs. 1836832 (2010: Rs. 1248407) and waste of Rs. 13545 (2010: Rs. 8537) has been increased. 2011 is favorable.

2)
=

Cost of sales
1664082 / 1095568 x 100 151.89%

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Interpretation:
The cost of sale is increased to Rs.1664082000 as compared to previous year cost of sale of Rs.1095568000 which representing 51.89% increase against previous year. 2011 is unfavorable.

3)
=

Gross Profit
168225 / 150432 x 100 111%

Interpretation:
The GP is increased to Rs.168225000 as compared to previous year GP of Rs.150432000 which representing 11% increase against previous year. 2011 is favorable.

4)
=

Operating expenses
29327 / 24149 x 100 121.44%

Interpretation:
The operating expenses are increased to Rs.29327000 as compared to previous year operating expenses of Rs.24149000 which representing 21.44% increase against previous year. 2011 is unfavorable.

5)
=

Administrative & General Expenses

26474 / 23046 x 100 114.87%

Interpretation:
The administrative and general expenses are increased to Rs.26474000 as compared to previous year administrative and general expenses of Rs.23046000 which representing 14.87% increase against previous year. 2011 is unfavorable.

6)
=

Selling and Distribution expenses

2853/ 1103 x 100 258%

Interpretation:
The selling and distribution expenses are increased to Rs.2853000 as compared to previous year selling and distribution expenses of Rs.1103000 which representing 158% increase against previous year. 2011 is unfavorable.

7)
=

Operating Profit
138898 / 126283 x 100 110%

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Interpretation:
The operating profit is increased to Rs.138898000 as compared to previous year operating profit of Rs.126283000 which representing 10% increase against previous year. 2011 is favorable.

8)
=

Other expenses
77385 / 75333 x 100 102.72%

Interpretation:
The other expenses are increased to Rs.77385000 as compared to previous year other expenses of Rs.75333000 which representing 2.72% increase against previous year. 2011 is unfavorable.

9)
=

Financial charges
55612 / 45315 x 100 122.72%

Interpretation:
The financial charges are increased to Rs.55612000 as compared to previous year financial charges of Rs.45315000 which representing 22.72% increase against previous year. 2011 is unfavorable.

10)
=

Other charges
5901 / 635 x 100 104.72%

Interpretation:
The other charges are increased to Rs.5901000 as compared to previous year other charges of Rs.635000 which representing 4.72% increase against previous year. 2011 is unfavorable.

11)
=

Other income
2238 / 697 x 100 321%

Interpretation:
The other income is increased to Rs.2238000 as compared to previous year other income of Rs.697000 which representing 221% increase against previous year. 2011 is favorable.

12)
=

Profit before Taxation

79623 / 76030 x 100 104.72%

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Interpretation:
The profit before taxation is increased to Rs.79623000 as compared to previous year profit before taxation of Rs.76030000 which representing 4.72% increase against previous year. 2011 is favorable.

13)
=

Taxation
25381 / 28498 x 100 89%

Interpretation:
The taxation is decreased to Rs.25381000 as compared to previous year taxation of Rs.28498000 which representing 11% decrease against previous year. 2011 is favorable.

14)
=

Profit after Taxation

54242 / 47532 x 100 114%

Interpretation:
The net profit is increased to Rs.54242000 as compared to previous year net profit of Rs.47532000 which representing 14% increase against previous year. 2011 is favorable.

RATIO ANALYSIS
Ratio analysis is used to evaluate relationships among financial statement items. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency.

TYPES OF RATIOS

Liquidity

Financial

Coverage

Turnover

Efficiency Profitability

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Current WC Quick Cash

Interest

Dividend

Fixes asset Total asset Inventory

GP NP ROI ROC ROS ROO Debt Debt to equity Debtor turnover Creditor turnover

SHADAB TEXTILE MILLS LIMTED

BALANCE SHEET AS ON JUNE 30, 2011

2011 A) LIQUIDITY RATIOS

1) Current Ratios Current assets Current liabilities = 1.2 : 1 = 0.81 : 1 Interpretation:

2010

In 2011, co. has Rs.1.2 of current assets to meet Rs.1 of current liabilities. 2011 is favorable as co. has more currents assets as compared to currents assets of 2010.

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2) =

Working capital Current assets current liabilities 39757 = -53957

Interpretation: In 2011, co. has positive working capital means co. has more assets than its current liabilities. In 2010, co. has negative working capital means co. has current assets less than currents liabilities to meet current obligations. So 2011 is favorable year. 3)

Quick Ratio / Acid test ratio / Liquid Ratio

Current assets (inventory + prepaid expenses) Current liabilities = 0.32

=0.39

Interpretation: In 2011, co. has Rs. 0.39 of quick assets to meet Rs.1 of current liabilities. 2011 is favorable as co. has more quick assets as compared to quick assets of 2010. 4) Cash Ratios Cash + bank balance + Securities Current liabilities =0.021 Interpretation: In 2011, co. has Rs. 0.021 of cash & bank balance to meet Rs.1 of current liabilities. Company need other assets converted to meet current obligations. So 2011 is unfavorable but comparing with 2010, it is favorable year. = 0.01

B)
1)

FINANCIAL LEVERAGE / SOLVENCY RATIOS

Debt Ratio (Debt to- Asset ratio)
Total debts Total assets

0.63

= 0.73

Interpretation:
In 2011, co. has debts of Rs. 0.63 to finance the assets of Rs. 1 or the Co. has assets of Rs. 1 to meet debts of Rs. 0.63. As standard is 0.5:1 and here it is greater than 0.5. So ratio of 2011 is unsatisfactory and unfavorable.

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2)

Debt to Equity Ratio

Total debts Total equity

= 1.73

= 2.77

Interpretation:
In 2011, co. has debt financing of Rs. 1.73 as compared to equity financing of Rs. 1. Standard ratio is 1:1. If debt to equity ratio is greater than 1, it is unsatisfactory because creditors think that company is already in debts and having low equity. 2011 is unfavorable because it has ratio more than 1.

c) COVERAGE RATIOS
1)

Interest Coverage Ratio

Earnings before interest & tax Interest charges = 1.68

= 1.82

Interpretation:
In 2011, co. has EBIT of Rs. 1.82 to pay interest charges of Rs. 1. 2011 ratio is satisfactory because company has more profit to pay interest charges. Ratio greater than 1 will be considered satisfactory. Even ratio 1:1 also will be unsatisfactory.

D) OPERATIONAL / TURNOVER / EFFICIENCY RATIOS

1)

Debtor turnover ratio

Net credit sales Average trade debtors outstanding = 36 times

Interpretation:
A high DTR indicates effective credit management but may also mean loss of sales due to a strict credit policy. A low DTR indicates a lenient credit policy, over investment in debtors or slow paying debtors. However, it may also result in higher sales. In 2011, co. has low debtor turnover ratio so it is not good for company. 2011 is unfavorable year. 2)

Creditor turnover ratio

Net credit purchase Average creditors / A/P

= 76 times

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Interpretation:
As this ratio increases its better for the company because creditors are decreasing so company will easily meet its obligations. Like 4:1 ratio means that co. has paid 3 parts out of 4 and 1 part is remaining. The efficient and ideal ratio will be considered 100:1. Here co. has more ratio, so 2011 will be favorable.

E) EFFICIENY RATIO / ASSET UTILIZATION RATIO

1)

Fixed asset turnover ratio

Net sales Average fixed assets

= 7.12

Interpretation:
Standard ratio is 1:1. Higher ratio, higher efficient and lower ratio, low efficient as compared to standard. Here company has 7.12:1 ratio which means that co. has assets of Rs. 1 to generate sales of Rs.7.12. So 2011 will be favorable year. 2)

Total asset turnover ratio

Net sales Average total assets

= 7.65

Interpretation:
Standard ratio is 1:1. More ratio will be considered more efficient which means that company is utilizing assets properly to generate sales. Here ratio is 7.65:1 which means that company is utilizing its assets of Rs.1 to generate sales of Rs.7.65 which is favorable. 3)

Stock / Inventory turnover ratio

Cost of goods sold Average inventory

= 10.87

Interpretation:
1:1 ratio means that all goods produced in a year are left at the end of year in inventory with no sales. Increasing inventory shows that there is no demand in market. As this ratio increases like 2:1, 3:1, 4:1 etc it is better for the company because it shows that demand of product is higher in the market. It is good from investor point of view. 2011 is favorable year as it has higher ratio.

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F) PROFITABILITY RATIOS
1)

Gross Profit Margin

Gross Profit Net sales x 100 = 12.07%

= 9.18%

Interpretation:
In 2011, GP ratio is 9.18 which means that GP is 9.18 and 90.82 is CGS means company is spending 90% of its sales on production process. GP rate is so low because cost of sales has been increased and more raw materials were consumed in 2011. As 2011 is unfavorable year. 2)

Net Profit Margin

Net Profit Net sales x 100 = 3.81%

= 2.96%

Interpretation: In 2011, NP ratio is 2.96 which means that NP is 2.96 and 97.04 is
CGS+operting expenses means company is spending 97 of its sales on production process. NP rate is so low because cost of sales has been increased and more raw materials were consumed in 2011. As 2011 is unfavorable year.

3)

Return on Investment
Net Profit after tax Net total assets

= 0.1

= 0.096

Interpretation:
Standard ratio is 1:1. Higher ratio as 3:1 means that our net profit is 3 times of our assets. In 2011 ratio is 0.1:1 which means that net profit is 0.1 time of assets. As ratio is low and 2011 is unfavorable while comparing with 2010, it is favorable. 4)

Return on capital employed

Net Profit after tax Total capital employed

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= 0.18

= 0.23

Interpretation:
As ratio is 0.18:1 which means that total capital employed of Rs.1 is producing net profit of Rs.0.18. 5)

Return on Shareholders equity

Net Profit after tax Shareholders equity

= 1.8

= 1.58

Interpretation:
As ratio is 1.8:1 which means that total shareholders of Rs.1 is producing net profit of Rs.1.8. 2011 is favorable year because shareholder equity is producing more profit. 6)

Return on Ordinary equity

Net Profit after tax Ordinary shares

= 0.60

= 0.52

Interpretation:
As ratio is 0.60 which means that ordinary share of Rs.1 is producing net profit of Rs.0,60. 2011 is favorable year because ordinary share equity is producing more profit.

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REFERENCES:
www. See at: http://accounting-financial-tax.com/2009/10/horizontal-vs-vertical-analysis-offinancial-statements/

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