financial analysis shell pakistan

7/18/2019 Financial Analysis Shell Pakistan

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“Credit Analysis and Management ”

“Analyse the latest annual Report of Shell

Pakistan Ltd.”

Salman Muhammad (1102-BH-BAF-10)

Sir Muhammad Ashraf

June 16, 2014



In Pakistan, Shell has a robust downstream business, supplying,

distributing and marketing a variety of fuels, and is one of the oldest and

largest multinational companies in the country, enjoying a legacy since

1898. It also has a 26% share in the White Oil pipeline operated by Pak

Arab Pipeline Company (PAPCO) and a 30% stake in Pakistan Refinery

Limited (PRL). Shell continues to play a leading role in meeting Pakistan’s

growing energy demand, while prioritising Health, Safety and

Environment (HSE) practices in all our operations and activities with our

people, assets and communities we work in.

As the world shifts towards a new, low-carbon energy future, Shell is

taking steps today to help build the energy system of tomorrow: producing

more cleaner-burning natural gas; working to deliver advanced fuels and

lubricants and lower-carbon bio fuels; and building capabilities in carboncapture and storage. It is because of this that Shell is a preferred

innovative energy company.

During 2013, the Company earned a profit after tax of Rs.1, 061 million

against a loss after tax of Rs.1, 935 million (restated) in the same period

last year. The Company’s performance has witnessed a significant

recovery and our results have started to reflect the continued focus by

management to improve operating performance. This was achieved by

concerted efforts to increase our market share as well as to restrict costs,notwithstanding a high inflationary environment.

Despite this significant improvement compared with last year, financial

results of the Company are still not satisfactory. High cost of funding

government receivables, a disproportionate and punitive income tax

regime and extremely low fuel margins continued to affect the profitability

of your Company. The impact of high rupee depreciation in the second half

of 2013 also had

a significant impact on the financial performance.

Overall market conditions remained competitive and despite the

challenges, we continue to maintain our position as the second largest Oil

Marketing Company in Pakistan.

Despite the challenges faced, the Company’s underlying operational

performance during 2013 generally improved. The Company gained

market share in both Motor Gasoline and Diesel for Retail business and

significantly grew profitability of its Aviation and Lubricants business

segments.



Financial risk refers to the chances of collapse of a business due to wrong

financing policies/decisions/strategies such as lopsided capital structure

and asset-liability mismatch. Financial risk can plunge a successful

business to the brink of bankruptcy, if not into it. Hence, it is very vital for

a credit decision to have an in-depth financial analysis of the customer.

In order to analysis the financial risks of a company the financial

statements are looked upon for comparison using percentages and ratios.

Financial statements, the end product of accounting, are viewed as proxies

of economic activities and business performance. Analysis of financial

statements enjoys a prominent place in the assessment of the study of

credit risks, lending decisions and on going monitoring of the lending

portfolio.

Four main categories of ratios for credit analysis are:

1. Liquidity Ratios: Indicate the company’s ability to meet short -term

obligations, continue operations and remain solvent.

2. Leverage Ratios: Shows the capital structure, the mix of the owners

funds and funds borrowed from others.

3. Profitability Ratios: Indicates the earnings potential and its impact

on shareholder returns.

4. Operating Ratios: Demonstrates how efficiently the assets are

being utilized to generate revenue.

Liquidity Ratios:

The liquidity ratios reflect the sufficiency of cash in the firm to meet its

liabilities. Those liabilities maturing for payment within the next 12

months are termed current liabilities. Such liabilities will be paid through

generating cash and other liquid assets through working capital operating

cycle.



1. Current Ratio:

Numerator: Current Assets Denominator: Current Liabilities

Current Ratio For Shell Pakistan 2013,

The current ration of 0.904 indicates that the current assets in the form of

cash, inventory and receivables are sufficient to pay 90% over the current

liabilities falling due for payment in the next 12 months.

2. Quick Ratio or Acid Test Ratio:

Numerator: Current assets less inventory or cash + account receivables

Denominator : Current Liabilities (Including bank borrowings against

inventory)

In a crisis it may be difficult to dispose off the inventory of a firm. Hence

inventory and other less liquid assets are excluded to determine a

conservative measure of liquid funds of the borrower. A ratio of 1 or more

than 1 is considered satisfactory.

Acid Test Ratio for Shell Pakistan,



The Liquid assets recoverable at hand are only 36% over the current

liabilities, which is not satisfactory for the lending company.

3. Net Working Capital:

The Net Working Capital is a measure of Owner’s stake or long-term liquid

fund in the firm. It has a close relationship with the current ratio. When

the current ratio equals 1, the net working capital is zero.

Net Working Capital Ratio for Shell Pakistan,

Other measure used to determine liquidity:

Ageing Receivables:

Ageing schedule of accounts receivable. The risk analyst checks the list of

the account receivables and takes note of how old each receivable is and

compares the same with industry profile. Comparatively ageing

receivables reflect poorly on the liquidity of the subject enterprise.

4.

Inventory Turnover:



Numerator: Cost of Goods Sold

Denominator: Average Inventory

This Ratio measures the number of times, on average; the inventory is sold

during a year. Its purpose is to measure the liquidity of the inventory.

Inventory Turnover for Shell Pakistan

For Inventory turnover only a comparison with industry average or

historical comparison can be meaningful. So, in 2012 the inventory

turnover is 12.084 and in 2013 it is 14.745. Which means that the average

number of times the inventory sold during the year of Shell Pakistan has

increased which means that the revenue has increased from the previous

year.

Looking at the liquidity ratios for Shell Pakistan the current ratio shows

that the current assets can only cover 90% over the current liabilities in a

period of 12 months.

The Acid test ratio indicates that the recovery of only most liquid assets

possible is at 34%, which is not a very good sign for the financial

institutions.

The net working capital is negative i.e. below unity. The Current liabilities

exceed the current assets by an amount of -3171604, which implies that



the lending bank is running a more than normal financial risk in respect to

Shell Pakistan.

Inventory turnover has increased from the previous year, which is a

positive sign for the lending institutions.

The Liquidity Ratios in respect for Shell Pakistan do not seem to be so

favourable for them when regarded in respect for borrowings by the

lending institutions for approval of finance for the company.

Leverage Ratios:

These Ratios reflect the financial risk inherent in the borrower firm. The

Banks needs to assess the leverage of the borrower from the viewpoint of

debt service, the firm size, and industry practices.

1. Debt-Equity Ratio:

Numerator : Total Outside Liabilities (long + short term liabilities)

Denominator: Tangible Net Worth (Generally equity + reserves – Intangible assets)

This Ratio is intended to measure the long-term solvency of the firm and

the relative stakes of the capital holders of the firm, debt holders vs. equity

holders.



In 2012, Shell Pakistan’s Debt to Equity Ratio was 6.657 whereas in 2013

it is 4.620, which is a good sign as Shell Pakistan is more relying on its

equity than its debt comparatively to the year 2012.

2. Long-Term Debt to Equity Ratio:

Numerator : Long Term Debt (Existing + Proposed)

Denominator: Tangible Net Worth

This Ratio would indicate long-term solvency of the firm. It is important to

consider the measure/size of this ratio when evaluating long-term project

loan for a company.

The long-term Debt to Equity ratio of the firm indicates that Shell Pakistan

has less long-term debts than the short-term debts. In 2012, the ratio was

0.057 and in 2013 it has improved even more to 0.0462, relying more on

equity than debt.

3. Interest Coverage Ratio:



Numerator : Earnings before interest and taxes (EBIT)

Denominator : Interest Expense.

The larger the ratio, the better for the bank, since it indicates the number

of times the EBIT is larger than the interest due to the bank and other

lenders.

As Shell Pakistan bears no interest expense the ratio equals to zero,

indicating that there is no interest expense but only taxation is deducted

from the EBIT.

4. Debt Service Coverage Ratio:

Numerator: EBIT+ Depreciation + Principal repayment on existing and

proposed loans.

Denominator: Annual Debt service. i.e. total of interest and instalment

payments on existing and proposed loans.

This and its variations are one of the most important ratios for assessingthe debt service capacity of the firm or its new project over a period of

time the ratio measures the number of times the firm can pay its debt

commitments with current earnings.

As there is no debt, interest expense or existing and proposed loans forShell Pakistan there is no need for this leverage Ratio.

5. Net Fixed Assets to Tangible Net Worth Ratio:

Numerator: Net Fixed Assets (gross fixed assets less depreciation)

Denominator : Tangible Net Worth



This Ratio Indicates how much of the firm’s least liquid assets have been

financed by net worth. It also serves as a variation of the equity multiplier,

and shows how much of the owner’s funds have gone into financing fixed

assets. A higher Ratio also means that more fixed assets have been financed

from debt rather than by internal generation. This ratio is, therefore, a

measure of risk inherent in the borrower firm.

The net fixed assets to tangible net worth ratio Is lower than it was in 2012

which means that Shell Pakistan has used more of its internal financing

than using debts to acquire fixed assets, which also indicates that thecompany relies more on its own equity than debt.

6. Dividend Pay-out Ratio:

Numerator: Cash Dividends Paid

Denominator: Net Profit After Tax

The more the dividends paid, the happier the equity holders are. However,

more dividends also mean less cash available as retained earnings.



Shell Pakistan had a loss in profit after tax and still managed to pay cashdividends in 2012 whereas profit had been earned in 2013 and the

dividends were paid a lesser amount than 2012. Typically a bank is wary of

high dividend payouts by the borrower. The less the equity the more the

risk for the lending bank, and the less the internal generation available for

new projects, the more the demand for bank debt.

Profitability Ratios:

The banks expects the borrowing firm to conduct its business prudently,mitigate risks, be cost effective and thus generate enough profits to cover

long-term debt obligations; taxes and other statutory payments; pay

reasonable dividends to equity holders; and thereafter leave a surplus for

plough back into reserves or invest in high yielding projects.

1. Return on Equity (ROE):

Numerator : Net Income

Denominator : Average total equity

The amount of net income returned as a percentage of shareholders equity.

Return on equity measures a corporation’s profitability by revealing how

much profit a company generates with the money shareholders have

invested.



In 2012, Shell Pakistan had a negative return on equity whereas in 2013 ithas a positive ROE, which shows a positive return on shareholders

investment.

2. Return on Assets:

Numerator: Net Income

Denominator: Average Total Assets

The more the assets have been worked for higher returns, the higher the

ROA, further, ROA is the product of the profit margin, a measure of expense

control, and asset utilization, the gross yield on assets.



Sales have increased from 2012 and hence the gross profit has increasedand so has the gross profit ratio, which shows operational efficiency has

increased comparatively.

Operating Ratios:

Operating ratios measure the operational efficiency and the liquidity of the

current assets of the borrower firm.

1.

Debtors Velocity:

Numerator : Average receivables outstanding

Denominator : Average daily sales

This ratio indicates the average number of days required to convert sales

into cash. The actual collection period so obtained is to be compared with

the firm’s credit policy to establish the firm’ ability to collect on its

receivables.



2. Creditors Velocity:

Numerator : Average outstanding of accounts payable

Denominator : Average daily purchases

This Ratio indicates the time lag between a purchase and its payment. The

more credit availed from its suppliers; the less a firm requires bank credit.

The Average collection period of sales in 2012 was 2.9 days and in 2013

2.86 days which means that the collection period of sales has decreased

which is good for Shell Pakistan and satisfactory for the Lending

institutions but the average payment period for purchases was 166.83 in

2012 and 138.78 in 2013 which is good from the suppliers perspective and

the lending institutions.

3. Sales To Fixed Assets:



This ratio shows how efficiently the fixed assets are used to generate

production and hence sales. In 2012 the ratio was 19.72 whereas it has

drastically increased in 2013 to 26.84.

4. Sales to Total Assets:

This ratio indicates how efficiently the company generates sales on each

dollar of assets. A volume indicator, this ratio measures the ability of the

company’s assets to generate sales. Sales to total assets ratio has increased

in 2013 respective to the one in 2012.

The operating Ratios of Shell Pakistan are considerably good which means

that the operation of Shell Pakistan is quite well comparatively to the

previous years. Where as the profitability ratios also show a growth in

sales and a better return on equity, which may be the indicator that Shell

Pakistan is progressing to a better stage in the Industry.

The Leverage ratios of Shell Pakistan are not of any concern as they are not

involved in any long-term debts and are not paying any kind of interest

expense, which is good to know for the lending institutions but Shell

Pakistan pays out dividends even when loss occurs.

In summary, 2013 has been a year of significant improvement in the

performance of the Company. Shell looks forward to continue

improvement in 2014 and beyond. A critical enabler of this will berepayment of government receivables and improvements in the regulatory



and tax environment. The management of Shell Pakistan continues to

work on further improving its operational performance as well as

engaging with relevant authorities on resolution of government related

issues.

financial analysis shell pakistan

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