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RATIO ANALYSISWITH INTERPRETATIONS

FINANCIAL MANAGEMENT

PRESENTED TOSIR HASSAN SHAHZAD

BY

NASEER AHMED - 4528ABID BILAL 4531

MBA

11.1.11


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Overview

Ratios : One Quantity Expressed in Terms of

Another Quantity

The Financial Ratios are the tools for evaluation of

the company performance

The Financial Ratios are also very powerful tool

from Investors point of view for investment in betteropportunities.


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Companies Evaluated

In the present presentation two companies have been

evaluated through certain financial ratios

Company A : D. G. Khan Cement Company

Company B : Fauji Cement Company

Data has been collected from the Balance Sheet andIncome Statement for the year 2010


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PROFITABILITY RATIOS

[Gross Profit Ratio = (Gross profit

/ Net sales) 100]

GROSS PROFIT RATIO

(2,705,367 / 16,275,354 ) x 100

= 16.62%

(515,584 / 3,808,455) x 100= 13.53%


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Profitability ratios are the measure of assessing

businesss performance of generating profits with

respect to its expenses and other relevant expenses in

a specific period of time say one year. The higher

value as compare to the competitors or industry

average or relative to previous period show the

business is going well. In the present case, Company A

has generated 16.62% Gross Profit as compare toCompany B whose Gross Profit is 13.53% which shows

that Company A has better managed its COGS which

resulted in increase of the Gross Profit.


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[Net Profit Ratio = (Net profit / Net

sales) 100]

NET PROFIT RATIO

(2,261,163 / 16,275,354 ) x 100

= 13.89%

(366,117 / 3,808,455) x 100= 09.61%


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Company A has generated 13.89% Net Profit as

compare to Company B whose Net Profit is 09.61%.

We can drive result that Company A is performing wellin competition of Company B.


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Operating Exp. Ratio = [(Operating

Expenses / Net sales] 100

OPERATING EXP. RATIO

(1,355,869 / 16,275,354) x 100

= 08.33%

(176,687 / 3,808,455) x 100= 04.64%


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Although the Company A has shown better profits in

term of Gross Profit and Net Profit but the Expense

Ratio results show that Company A has further chancesto improve its operating expenses, as Company B has

managed its operating expenses very well which is

almost half of the Company B. With further

improvement in this area by Company A, it can enhance

its profits.


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Return on Equity = {Net profit /

Ordinary Shares} 100]

RETURN ON EQUITY

(233,022 / 3,650,993 ) x 100

= 06.38%

(250,179 / 7,419,887) x 100= 03.37%


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Company A has better paid to its shareholders. The

results are further supported by the EPS which is higher

as compared to Company B (EPS of Company A is 0.64and Company B is 0.33. The results are further

supported by Debt to Equity which show that the

Company Bs gearing position is worse than the

Company A (results are in Debt to Equity Slide)

although both the companies are highly geared.


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[Return on Capital Employed=(PBIT/Capital

employed)100]

RETURN ON CAPITAL EMP.

(2,261,163 / 33,256,854) x 100

= 06.80%

(366,117 / 22,795,084) x 100= 01.47%


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Company A is very strong in this area and proved that

the management is well employing it Capital Employed

(capital investment) generating almost 4.5 times morereturn than the Company B.

Stock or Shares and Long-term Liabilities.


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[Assets Turn Over=(Net Sales / Capital

employed)100]

ASSETS TURNOVER

(16,275,354 / 33,256,854)

= 0.49 times

(3,808,455 / 22,795,084)= 0.17 times


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Assets Turnover show that how much company has

generated by employing on unit of currency. Company

A is generating about Paisa 49 revenues against Re.1.0assets whereas the Company B is generating paisas 17.

This reveals that although the return is not so impressive

but compared to Company B, Company A is performing

well.


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EFFICIENCY RATIOS

[(Accounts Payable Payment Period = Total Accounts

Payable / COGS) x 365]

A/P PAYMENT PERIOD

(1,679,749 / 13,569,994) x 365

= 45 days

(1,698,674 / 3,292,871) x 365= 188 days


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EFFICIENCY RATIOS

[(Accounts Receivable Collection Period = Total

Accounts Receivable / Net Sales) x 365]

A/R COLLECTION PERIOD

303,949 / 16,275,354) x 365

= 6.81 days

(24,514 / 3,808,455) x 365= 2.34 days


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EFFICIENCY RATIOS

[(Inventory Turnover Period = Inventory /

COGS) x 365]

INVENTORY TURNOVER PER.

4,054,618 / 13,569,994) x 365

= 109 days

(1,157,217 / 3,292,871) x 365= 128 days


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EFFICIENCY RATIOS

The analysis shows that in all these areas, Company A

is well contributing towards its profitability by

managing Accounts Receivable, Accounts Payable andInventory Turnover periods. Company B is very week in

payment of its payables which is calculated to 188

days as compared to 45 days of Company A.

However, the accounts receivable are well managed by

both the companies which reflects that both the

companies are almost selling its products on cash

payment basis.


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LIQUIDITY RATIOS

[(Current Ratio = Current Assets /

Current Liabilities]

CURRENT RATIO

16,417,492 / 13,786,189)

= 1:1.91

(2,070,718 / 3,984,915)= 1:0.52


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LIQUIDITY RATIOS

[(Quick Ratio = (Current Assets

Inventory) / Current Liabilities]

QUICK/ACID TEST RATIO

((16,417,492 - 4,054,618) / 13,786,189)

= 1:0.89

((2,070,718 - 1,157,217) / 3,984,915)= 1:0.22


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LIQUIDITY RATIOS

The purpose of using liquidity ratio is to determine the

ability of the company for paying off its short term

debts. The higher value of liquidity ratios reflects thatthe company is well secured in performing its

obligations of short term debts. The calculation of quick

ratio shows that Company A is well secured in this

region. However the position of Company B is not so

secured. The Company A can easily meets its short termliabilities. Even is position with respect to Inventory

Turnover is also better as shown in the previous slides.


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GEARING RATIOS

[(Debt to Equity Ratio = Long-term Debts

/ Equity)]

DEBT TO EQUITY RATIO

5,170,645 / 3,650,993)

= 1.42:1

(11,981,056 / 4,719,887)= 2.54:1


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GEARING RATIOS

[(Interest Cover Ratio =

PBIT / Interest)]

INTEREST COVER RATIO

(2,261,163 / 2,249,185)

= 1.01 times

(366,117 / 390,336)= 0.98 times


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GEARING RATIOS

Gearing ratio is the measure to check the equity to

borrowed funds/long term financing. The best measure

is the gearing ration (Debt to equity). The results ofboth the company shows that they are highly geared as

the portion of their borrowed money is very much

higher than the owners equity. The other best measure

is to check, how much the profit covers its interest. The

higher t he interest cover ratio value, the more safe thecompany position is. In the present case, both the

companies are almost covering its interest through its

profit with the ratio of 1:1.


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INVESTORS RATIOS

[Earnings per share Ratio = (Net profit after tax

Preference dividend) / Total No. of shares)]

EARNING PER SHARE

233,022,000 / 365,099,300)

= 0.64

(250,179,000 / 741,988,700)= 0.33


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INVESTORS RATIOS

Most important is what the company is paying back to

its investors/owners. The greater value of EPS maintain

the investors and owners confidence on the company.The Company A is paying almost double the value of

the Company B and building its better image before

the investors.


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Company A Company BProfitability Ratios:

GP Ratio

NP Ratio

Operating Ratio

Return Equity

ROCE

Assets Turnover

16.62

13.89

08.33

06.38

06.80

00.49 T

13.53

09.61

04.64

03.37

01.47

00.17 T

Efficiency Ratios:

APPP

ARCP

Inventory Turnover

45 days

7 days

109 days

188 days

2.5 days

128 days

Liquidity Ratios:

Current Ratio

Quick Ratio

1:1.91

1:0.89

1:0.52

1:0.22

Gearing Ratios:

Debt to Equity Ratio

Interest Cover Ratio

1.42:1

1.01 T

2.54:1

0.89 T

Gearing Ratios:

EPS 0.64 0.33

CONCLUSION - SUMMARY


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CONCLUSION

After evaluating both the companies through Financial

Ratios we have reached to the conclusion that the

company A (D. G. Khan Cement Company is Operatingwell as compared to the Company B (Fauji Cement

Company) in almost all the areas and the Company A

is the better investment opportunity between these two

companies.


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Questions and Discussion

THAN

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