report on lucky

8/9/2019 Report on Lucky

1/33

REPORT

ON

FINANCIAL STATEMENT

ANALYSIS

TOPIC Ratio Analysis

Submitted to Sir G.M. Malik

Submitted by Anwar-ul-Haq

Roll No. 08

BS (A&F) 7th sem

DEPARTMENT OF COMMERCE

BAHAUDDIN ZAKRIYA UNIVERSITY

MULTAN


2/33

Ratio Analysis

A tool used by individuals to conduct a quantitative analysis of information in a

company's financial statements. Ratios are calculated from current year numbers and are

then compared to previous years, other companies, the industry, or even the economy to

judge the performance of the company. Ratio analysis is predominately used by

proponents of fundamental analysis. A ratio without any standard of measurement is

useless.

Common-size Analysis

A Common-size financial statement displays all items as percentages of a common base

figure. This type of financial statement allows for easy analysis between companies or

between time periods of a company.

The values on the common size statement are expressed as percentages of a statement

component such as revenue. Formatting financial statements in this way reduces the bias

that can occur when analyzing companies of differing sizes. It also allows for the analysis

of a company over various time periods, revealing, for example, what percentage of sales

is cost of goods sold and how that value has changed over time.

Horizontal Financial Statement Analysis

It is conducted by setting consecutive balance sheet, income statement or statement of

cash flow side-by-side and reviewing changes in individual categories on a year-to-year

or multiyear basis.

A comparison of statements over several years reveals direction, speed and extent of a

trend(s). The horizontal financial statements analysis is done by restating amount of each

item or group of items as a percentage.

Such percentages are calculated by selecting a base year and assign a weight of 100 to the

amount of each item in the base year statement. Thereafter, the amounts of similar items

or groups of items in prior or subsequent financial statements are expressed as a

percentage of the base year amount. The resulting figures are called index numbers or

trend ratios.


3/33

Vertical financial statement analysis

In this type of analysis an item is used as a base value and other items are compared with

it. In the balance sheet, for example, total assets equal 100%. Each asset is stated as a

percentage of total assets. Similarly, total liabilities and stockholders' equity are assigned

100% with a given liability or equity account stated as a percentage of the total liabilities

and stockholders' equity. For the income statement, 100% is assigned to net sales with all

revenue and expense accounts related to it.

Advantages of Ratio Analysis

Ratio analysis can also help us to check whether a business is doing better this year than

it was last year; and it can tell us if our business is doing better or worse than other

businesses doing and selling the same things.

The list of categories of readers and users of accounts includes the following people and

groups of people:

Investors

Lenders

Managers of the organization

Employees

Suppliers and other trade creditors

Customers

Governments and their agencies

Public

Financial analysts

Environmental groups

Researchers: both academic and professional

Types of Ratios


4/33

Mainly there are five types of ratios which are used to evaluate the performance of

company. These are

Liquidity Ratios

Activity Ratios

Leverage Ratios

Profitability Ratios

Investment Valuation Ratios

Each of these ratios further has different ratios and we can gauge the performance of

company by analyzing those ratios.

Liquidity Ratios

Liquidity ratios use to determine company's ability to pay off its short-terms debts

obligations. Generally, the higher the value of the ratio, the larger the margin of

safety that the company possesses to cover short-term debts. The ratios which judge the

liquidity of company are:

Current Ratio

Quick Ratio

Cash Ratio

Sales to Working Capital

Activity ratios

An indicator of how rapidly a firm converts various accounts into cash or sales. In

general, the sooner management can convert assets into sales or cash, the more

effectively the firm is being run. The ratios which judge the activity of company are:

Recievable Turnover Ratio

Average Collection Period Ratio

Accounts Payable turnover Ratio

Average Payment Period

Inventory Turnover Ratio

Average Age of Inventory

Operating Cycle

Cash Cycle


5/33

Leverage Ratio

Any ratio used to calculate the financial leverage of a company to get an idea of the

company's methods of financing or to measure its ability to meet financial obligations.

There are several different ratios, but the main factors looked at include debt, equity,

assets and interest expenses.

The ratios which judge the leverage of company are:

Time Interest Earned Ratio

Debt Ratio

Debt to Equity Ratio

Gearing Ratio


Profitability ratios discuss the different measures of corporate profitability and financial

performance. These ratios, much like the operational performance ratios, give users a

good understanding of how well the company utilized its resources in generating profit

and shareholder value. The ratios which judge the profitability of company are:

Total Assets Turnover

Fixed Assets turnover

Gross Profit Margin

Operating Profit Margin

Net Profit Margin

Return on Assets

Return on equity

Investors Ratios

These are the ratios that can be used by investors to estimate the attractiveness of a

potential or existing investment and get an idea of its valuation. However, when looking

at the financial statements of a company many users can suffer from information

overload as there are so many different financial values. This includes revenue, gross

margin, operating cash flow, EBITDA, pro forma earnings and the list goes on.

Investment valuation ratios attempt to simplify this evaluation process by comparing


6/33

relevant data that help users gain an estimate of valuation. The ratios which come under

this category are:

EPS

Price\Earnings Ratio

Dividend Payout Ratio

Dividend Yield

Book Value

Ratio Analysis of Lucky Cement

Current RatioThe current ratio of the company tells about the short term debt paying ability of the

company. It is computed as follows:

Current Assets/ Current Liabilities

Current ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008

2.12:1 0.63:1 0.94:1 0.85:1 1.09:1

The current ratio of the company seems deteriorating. It is high in one year and low in the

next year. A company must maintain a current ratio of at least 2 but in this scenario

company is maintaining the current ratio of 2 in the only year of 2004. In the next years

till 2007, company is even not being able to pay its current liabilities through its current

assets. Thus the short term debt paying ability of the company is not satisfactory in the

year 2005, 2006 and 2007 as its current ratio is not 1.

Horizontal Analysis of Current Assets

2004 2005 2006 2007 2008

100.00 (32.13) 225.24 273.45 422.40

Horizontal Analysis of Current Liabilities

2004 2005 2006 2007 2008

100.00 230.19 510.49 682.41 825.76


7/33

It is evident from the above table that the current liabilities of the company show a very

increasing trend and they increase to seven times in the ending year of 2008. While the

current assets of the company increased three times in the ending year of 2008 as

compared to its base year. Although the trend of current assets is increasing except the

year 2005 but its not so high. We can say that the proportion with which the current

assets of the company is increasing is less as compared to the proportion with which the

current liabilities of the company are rising.

If we the current assets of the company in the years of analysis, we see that the proportion

of cash in current assets is more as compared to the other current assets except the year

2008. The other major component of the current assets is inventory. But stocks and spares

are also increasing in the current assets. It is desirable for a company that its current

assets mostly should include cash and other liquid assets.

Acid Test Ratio

This ratio relates the most liquid assets of the company with the current liabilities of the

company and is computed as follows:

Current Assets- Inventory/ Current Liabilities

Inventory is removed from the current assets because inventory is not considered to be a

liquid asset because it may be slow moving or may be obsolete. This ratio is also called

as quick ratio. In many cases the most conservative acid test ratio is also computed in

which only cash equivalents, marketable securities and net receivables are compared with

the current liabilities. While calculating the acid test ratio for Lucky Cement only

inventory is excluded from the current assets.

Acid test ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008

1.94:1 0.57:1 0.85:1 0.74:1 1:1

Normally the quick ratio of 1 is treated as good for a company. The quick ratio of the

company is up to the merit only in the year 2004 and 2008. As we also saw that company


8/33

wasnt able to get a current ratio of 1 in the year 2005, 2006 and 2007 so obviously it

cant attain a quick ratio of 1 in these years.

If we compare the current ratio and quick ratio of the company, we can say that the

company is not depending so much on its inventory. It means that the proportion of

inventory is not much in the current assets of the company and it is a good sign as

inventory is not considered to be liquid asset.

Horizontal Analysis of Inventory

2004 2005 2006 2007 2008

100.00 (33) 250 392 411

Proportion of inventory in current assets

2004 2005 2006 2007 2008

10.41% 8.6% 9.7% 12.5% 8.4%

Although the trend of the inventory is increasing but we can see that the proportion of

inventory in the current assets is not so much which is good as inventory takes

comparatively a longer time to get converted into cash.

Cash Ratio

This ratio is computed to evaluate the liquidity position of the company very critically. It

includes only the current assets which are cash or cash equivalents or marketable

securities and omits all other current assets. Normally this ratio is given less weight age

when analyzing the liquidity position of the company because it doesnt show the true

picture of the liquidity. It is computed as follows:

Cash equivalent + Marketable Securities/ Current Liabilities

Cash ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008


9/33

1.07 0.067 0.43 0.2 0.04

Normally a cash ratio of 1 is treated as good for the companies. The cash ratio of the

company is very low in the years of analysis except the year 2004. It means company has

less cash or cash equivalents to pay off its current liabilities.

Horizontal Analysis of Cash

2004 2005 2006 2007 2008

100.00 (86) 206 224 (73)

Proportion of cash in current assets

2004 2005 2006 2007 2008

50.56% 10.5% 46.32% 22.9% 3.2%

We only did the horizontal analysis of cash and also computed the proportion of cash

because the company does not have other cash equivalents and any other marketable

securities.

The trend of cash is deteriorating and it shows a very low trend in the year of 2005 and

2008. Also if the proportion of cash in current assets is worked out then we can see that

companys cash proportion also declined greatly in those years in which the trend of cash

declined.

Sales to Working Capital

This ratio relates the sales of the company with its working capital. It describes that how

much sales are being generated from the working capital. If the ratio is high then this

means that working capital is being used properly. It is computed as follows:

Sales/Working Capital

Sales to working capital ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008


10/33

2.8 32.23 (14.68) (20.09) (147.86)

The working capital is being used effectively in all the years but in 2008 it is too much

high which means that the company is over trading which is not good for the company. In

the years 2006, 2007 and 20087 the average working capital is not in positive which

means that its sales need more funding and the company is generating them from the

current liabilities. Hence it should generate a positive working capital in the next years.

Conclusion about Liquidity

After analyzing the liquidity ratios of the company we see that the liquidity position of

the company is good only in the years 2004 and 2008. The company in future must try to

maintain greater current ratio by increasing its current assets and decreasing or

controlling its current liabilities. Also the company must try to increase the proportion of

its cash and invest in marketable securities to avail more liquid assets.

Activity Ratios

Recievable Turnover Ratio

This ratio tells that how many times a company collects its receivables in a year. It is

computed as follows:

Credit Sales/ Average Trade Recievables

Normally it is better that this ratio should be high and this means company collects its

receivables more in a year.

Recievable turnover ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008

177.78 203.25 132.90 43.56 28.34

This shows that the company is collecting its receivables very efficiently except the last

year. We can relate this recievable turnover with the trade recievables of the company

and hence analyze the efficiency of the company in collecting its recievables.


11/33

Horizontal Analysis of Trade Recievables

2004 2005 2006 2007 2008

100 119.7 370 1757.9 3659.7

Note: Average trade recievables are taken in the above trend

We see that the trend of trade recievables is very high and it is exceptionally high in the

last two years. Thus due to the increasing trend of trade recievables it was not able to

collect its recievables many a times in the last two years as it did in the early years.

It is better that company must have a high recievable turnover ratio because it will

decrease the average collection period of the company.

Average Collection Period Ratio

This ratio tells that in how many days company is able to collect its recievables. This

ratio is computed as follows:

360/ Recievable Turnover Ratio

Average collection period of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

2 2 3 8 13

It shows that the management of Lucky Cement is very efficient in collecting its

receivables and takes a very less time to collect the amount due from the customers. This

ratio shows an increasing trend. We cant say that this is a bad sign for the company in

recovering its debts. The company might have used a lenient credit collection policy to

increase sales. However it must be kept in mind that payment time should be given to

those customers who have good credit worthiness. While doing the analysis of this ratio it

must be kept in mind that what are the credit terms of the company and thus the average

collection period of the company must be compared to those credit terms.


12/33

Note: The credit sales and credit terms of lucky cement are not mentioned in its annual

reports so above mentioned ratios are computed as if all sales are on credit.

Account Payable Turnover Ratio

This ratio tells that how many times the company was able to payoff its amounts which

were due to its vendors. It is computed as follows:

Credit Purchases/ Average Trade Payables

Account payable turnover ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008

5.96 5.37 4.91 5.90 4.95

The company shows a dwindling trend in this respect of this ratio. We will see the trend

of companys trade payables and then relate it with the payable ratio.

Horizontal Analysis of Trade Payables

2004 2005 2006 2007 2008

100 136.95 292.25 424.2 721.11

Note: Average trade payables are taken in the above trend

The trend of trade payables is increasing, but if we compare it with the payable turnover

ratio of the company we find that the payable turnover ratio is almost same although the

trend is high. It may be the case that the company is paying the trade payables of larger

amounts. It is desirable that this ratio should be less so that the company retains more

cash.

This ratio is further related with the average payment period.

Average Payment Period

This ratio tells that in how many days company pays its trade payables which it owed. It

is computed as follows:

360/Account Payable Turnover Ratio

Average payment period of lucky cement in the respective years is given below

2004 2005 2006 2007 2008


13/33

60 67 73 61 73

It is also showing an increasing trend except in the year 2007. Normally this ratio is

analyzed by the credit terms which are given to the company. It is better that a company

must payoff its trade payables in the credit terms which are allowed to it. If we consider

the credit terms allow Lucky Cement to pay its trade liabilities in 90 days then we can say

that it is able to pay its trade liabilities in the allotted time which is a good sign. If a

company is paying its trade liabilities in a given time, then this gives an edge to the

company and its credit worthiness increases. There is negative impact on the companys

credit worthiness if its average payment period exceeds its credit time.

Inventory Turnover Ratio

This ratio tells that how many times company was able to sell its inventory in a year. It is


CGS/ Average Inventory

Inventory turnover of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

12.58 18.06 18.54 15.97 18.18

The ratio is showing a deteriorating position and it has decreased in the year 2004 and

2007.

Horizontal Analysis of Cost of Goods Sold

2004 2005 2006 2007 2008

100 121.9 212.3 385.1 593.2

Horizontal Analysis of Inventory

2004 2005 2006 2007 2008

100 (16.41) 158.8 321.47 402.41


14/33

Note: Average inventory is taken in the above trend

After doing the horizontal analysis of both CGS and inventory we can tell that why there

is low inventory ratio in the year 2007. It is due the fact that inventory has increased to

big extent as compared to the previous years but cost of goods sold has not shown a big

trend as compared to the inventory increase. Thus the decline in the inventory turnover

ratio was due to the fact that company had more inventory. Same was the problem for the

year 2004 in which inventory held was more and also there was low production which

resulted in less CGS.

It is desirable that this ratio must be high so that the company must sale its inventory

many a times in a year. However it must be kept in mind that the cost of goods sold

should not be so high and inventory should be kept low. The high inventory results in

wastage of inventory as well as increasing of storage cost.

Average Age of Inventory

This ratio tells that after how many days company sells its inventory. This ratio is


360/Inventory Turnover Ratio

Average age of inventory of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

29 20 19 22 20

The company is able to sell its inventory almost in 20 days but it took more time to sell

its inventory in the year 2004 and 2007. This was due to low inventory turnover ratio in

the above mentioned years.

Operating Cycle

This ratio tells that how much time a company takes to acquire raw material, convert it

into finish product and realize the cash after the sale of finished product. It is computed

as follows:


15/33

Average Age of Raw Material + Average age of Work in Process + Average Age of

Inventory + Average Collection Period

Operating life cycle of Lucky Cement

Average Age of Raw Material

This ratio tells that after how many days raw materials was issued to production by

management. It is computed as follows:

Raw Material Issued to Production/ Average Raw Material

Average age of raw materials of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

63 56 47 45 58

Note: Raw material and packing material were not separately told in the balancesheet therefore both are considered as raw materials

Average age of Work in Process

This ratio tells that after how many days work in process was issued to production by

management. It is computed as follows:

Cost of Goods Manufactured/ Average WIP

Average age of work in process of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

18 9 11 12 9

Average age of inventory of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

29 20 19 22 20

Average collection period of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

2 2 3 8 13


16/33

Now adding average age of raw material, work in process, inventory and average age of

collection period we will get operating cycle of Lucky Cement.

Operating cycle of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

112 87 81 88 100

The companys operating cycle is largely composed of the time it takes to manufacture

its product. The company is realizing cash quickly and hence it takes less time to collect

its recievables after the sales. In the last year the company had a big operating cycle than

the other years. This is because the average collection period was a bit greater than the

other years. The company is almost having a consistent operating cycle and this is good.

Cash Cycle

The cash cycle of a company tells about the cash disbursement and cash collection. The

cash cycle attempts to measure the amount of time each net input dollar is tied up in the

production and sales process before it is converted into cash through sales to customers It

is computed as follows:

Operating life cycle Average Payment Period

Cash cycle of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

52 20 8 27 27

The cash cycle of the company is low so it is a good indication and it means that cash is

tied up for less amount of time.

Conclusion about companys Activity

The company is realizing cash quickly and the inventory is sold quickly. The company is

a bit slow in the payment of its dues (considering the credit time as 30 or 60 days). The

company is mainly getting time in the manufacturing of its product and it should take

measures to increase the turnover of raw materials so that production of the company is


17/33

increased. However the company must keep in mind that excessive production may cause

it to decrease in the price of its product and in increased storage cost. The company must

not produce too much and too low amount of its product.

Long Term Ratios (Leverage Ratios)

Time Interest Earned Ratio

This ratio tells that how many times a company is able to pay its interest from its income.

The greater the ratio better is companys position in paying long term debts. It is


EBIT/ Interest

Time interest earned ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

95.38 59.67 33.45 3.55 24.27

This shows that companys ability to pay its interest obligations decreased significantly

and it decreased very largely in the year 2007. We can compare the interest obligations

with the income of company and interpret the results.

Horizontal Analysis of Interest

2004 2005 2006 2007 2008

100 200 763.8 7958.37 1169.1

Horizontal Analysis of EBIT

2004 2005 2006 2007 2008

100 125.2 267.87 296.5 297

We can see from the above two tables that in 2007 the interest was very much high as

compared to the base year and this is due to large borrowings of the company in that year.

But the income of the company has increased in steady pace. Thus the income in the year


18/33

2007 didnt grow as large as the interest grew. This was the reason due to which the ratio

was very low in that year.

It is advisable that the company must maintain a time interest earned ratio of at least 5.

Thus Lucky Cement is not up to the mark in the year 2007.

Debt Ratio

This ratio determines the percentage of assets financed by the creditors and also helps to

determine how well creditors are protected in case of insolvency. It is computed as

follows:

Total Liabilities/ Total Assets

Debt ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

38.5 65.3 70.07 63.64 45.5

It shows that company had financed its assets mainly from creditors in the year 2005,

2006 and 2007. It is desirable that the companies should have 60 percent financing of its

assets from creditors. Lucky Cement is almost up to the standard in all the years except

the year of 2006 in which ratio was a little bit high. Creditors feel secure in financing the

company when they see that company is financing a major portion of assets by itself. So

we can say that the debt ratio of Lucky Cement is satisfactory and creditors are secured in

case of its insolvency.

The earnings of company increased and it was indeed due to favourable leverage factor.

It is better for the company to follow a 50:50 policy because in doing so income

generated will be used to pay less interest and hence increasing the profit available to the

shareholders.

Debt to Equity Ratio


19/33

This ratio tells that how much a company has the ability to pay its liabilities. This ratio is

useful in determining that how well the creditors are secured in case of insolvency of the

company. It is computed as follows:

Total Liabilities/ Total Equity

Debt to equity ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

63 188 234 175 84

Vertical Analysis - % 2004 2005 2006 2007 2008

Share Capital & Reserve 61.42 34.67 29.93 36.35 54.49

Non Current Liabilities 25.30 50.86 49.96 38.96 23.06

Current Liabilities 13.28 14.47 20.11 24.69 22.45

Total Equity & Liabilities 100.00 100.00 100.00 100.00 100.00

It is evident that the company relied on the financing of creditors more in the year 2005,

2006 and 2007. The owners equity was more as compared to its debts in the year 2004

and 2008. Often it is advised that the company must maintain this ratio to low level so

that risk is less. The risk is increased when a company takes loan from the creditors

because creditors must be paid in any situation and thus high loan can take the company

to insolvency. So in this scenario company is getting a major portion of its funds from

creditors but at the same time it is utilizing the borrowed funds effectively and hence

increasing the income manifold. But creditors wont feel so much secured to finance this

company because it is evident that proportion of borrowed funds is very high as

compared to the funds of shareholders

Gearing RatioThis ratio takes into consideration only the long term debts of the company and tells

about the companys ability to pay its long term liabilities. It is computed as follows:

Total Liabilities/ Total liabilities + Total Equity

Gearing ratio of lucky cement in the respective years is given below


20/33

2004 2005 2006 2007 2008

22.8 56.5 59.5 47.6 26.8

Gearing ratio measures the proportion of funds contributed by the creditors. It means that

in year 2005, 2006 and 2007 the company mainly got its fund from long term debts.

Fixed Assets Equity Ratio

This ratio tells that what portion of fixed assets is being financed by its owners. If the

ratio is increasing it means that the assets are being financed by its creditors. It is


Fixed Assets/ Total Equity

Fixed assets equity ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

116.8 178.8 271.12 217.2 138.4

The trend is increasing and hence we can say that assets are mostly being financed by its

creditors. But this ratio is less in the last year.

Conclusion about Leverage

The company is quite good enough to pay its long term debts except the year 2007 in

which its time interest earned ratio was bit low. Along with the capital provided by the

owners, the companys most funds comprise of long term debts and it is also utilizing the

debt effectively as evident from the profit generated.


Net Profit Margin

This ratio determines the income generated by sales. The income taken in this ratio is

before tax. It is computed as follows:

Net Profit before Tax/ Net Sales

Net profit margin ratio of lucky cement in the respective years is given below


21/33

2004 2005 2006 2007 2008

33.4 30.4 31.7 21.5 13.6

The ratio is showing a deviating trend and it has increased significantly in the last two

year. This decline can be explained by doing the vertical analysis of income statements of

each year.

Vertical Analysis -% 2004 2005 2006 2007 2008

Turnover 100.00 100.00 100.00 100.00 100.00

Cost of Sales 62.16 65.34 63.00 70.65 74.27

Gross Profit 37.84 34.66 37.00 29.35 25.73Distribution Cost 0.67 0.60 1.28 3.97 6.81

Administrative Cost 1.61 1.54 1.33 0.89 0.77

Operating Profit 35.56 32.52 34.39 24.49 18.14

Finance Cost 0.37 0.54 1.03 6.89 0.75

Other Income/Charges 0.04 0.02 0.02 (0.04) 0.04

Profit before Taxation 33.40 30.40 31.70 21.49 13.60

Horizontal Analysis of Turnover

2004 2005 2006 2007 2008

100 136.87 276.9 430.6 583.2

Horizontal Analysis of CGS

2004 2005 2006 2007 2008100 143.89 280.7 489.5 696.9

Horizontal Analysis of Gross Profit

2004 2005 2006 2007 2008


22/33

100 125.4 270.82 333.9 396.4

Horizontal Analysis of Distribution Cost

2004 2005 2006 2007 2008

100 116.5 506.4 2435.3 5651.5

Horizontal Analysis of Admin Expenses

2004 2005 2006 2007 2008

100 133.6 232.5 242.4 285.9

Horizontal Analysis of Operating Profit

2004 2005 2006 2007 2008

100 125.2 267.8 296.5 297.5

Horizontal Analysis of Interest

2004 2005 2006 2007 2008

100 200.0 763.8 7958.37 1169.1

Horizontal Analysis of EBT

2004 2005 2006 2007 2008

100 124.6 262.9 277.04 273.5

Now with the help of horizontal analysis we can more clearly define that why profit was

low in last two years. In the year 2007 and 2008, the cost of goods sold and the

distribution cost increased greatly as compared to its previous years. While the sales of

company didnt increase too much as the proportion of cost of goods sold and distribution

cost increased. The company should control its distribution cost and cost of goods sold to

get more profit. Also in the year 2007, company utilized its most of profit in paying


23/33

interest. The company should avoid in taking too much loan because the net profit

decreases largely.

Total Assets TurnoverThis ratio measures the activity of the assets and the ability of firm to generate its sales

through the use of its assets. It is computed as follows:

Sales/ Total Assets

Total assets turnover ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

4.14 2.68 3.40 4.86 4.95

The company was not able to utilize its assets effectively in the year 2005. This was due

to the fact that company held more assets idle and wasnt able to utilize these assets

effectively.


Non Current Assets 71.79 90.93 81.14 78.98 75.60

Current Assets 28.21 9.07 18.86 21.02 24.40

Total Assets 100.00 100.00 100.00 100.00 100.00The vertical analysis of the company shows that its total assets mostly comprise of fixed

assets. The year in which turnover ratio was low is due to the above mentioned fact as it

is evident with the help of vertical analysis.


2004 2005 2006 2007 2008

100 136.87 276.9 430.6 583.2

Horizontal Analysis of Total Assets

2004 2005 2006 2007 2008

100 111.15 236.88 266.93 388.27


24/33

The horizontal analysis shows that sales didnt increase too much as compared to the

increase of assets. Thus it is evident that assets were not fully utilized in the year 2005.

Fixed Assets Turnover Ratio

This ratio tells about the activity of fixed assets and the ability of a firm to generate its

sales through its fixed assets. It is computed as follows:

Sales/ Fixed Assets

Fixed assets turnover ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

5.76 2.95 4.21 6.16 6.55

Horizontal Analysis of Fixed Assets

2004 2005 2006 2007 2008

100 167.46 280.74 303.66 414.15

If we compare this ratio with total assets turnover ratio we find that sales are being

generated by the efficient use of its fixed assets. The ratio is down in the year 2005 and

this fact is told above.

Return on Assets

It measures the firms ability to utilize its assets to create profits by comparing profit with

the assets that generate profit. It is computed as follows:

Net Profit/ Total Assets

Return on assets ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

13.84 8.2 10.8 10.5 6.7


25/33

The decrease in return on assets in the year 2005 is due to the fact that company was not

able to utilize its assets efficiently while in the year 2008, its profit margin decreased.

The return on assets is explained properly by the DuPont analysis of return on assets.

DuPont Return on Assets

This ratio explains more about the return on assets by considering both the net profit

margin and total assets turnover ratio. It is computed as follows:

Net Profit Margin * Total Assets Turnover


2004 2005 2006 2007 2008

33.4 30.4 31.7 21.5 13.6


2004 2005 2006 2007 2008

4.14 2.68 3.40 4.86 4.95

DuPont Return on assets ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

13.82 8.17 10.78 10.44 6.73

Thus it is evident that return on assets has decreased in the year 2005 due to less efficient

use of assets, and decreased in the year 2008 due to low net profit margin. The company

must control its cost of goods sold and should improve its net profit margin to avail more

return on its assets.

Return on Equity

This ratio measures the return to its equity holders. It is computed as follows:

Net Profit/ Total Equity


26/33

Return on equity ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

22.54 23.56 36.54 28.76 12.37

This shows that the equity holders are almost consistent return. The return on equity is

exceptionally high in the year 2006 and exceptionally low in the year 2008. This different

trend would be explained more apparently by DuPont return on equity.

DuPont Return on Equity Ratio

This ratio tells more clearly about the return on equity of the company. It is computed as

follows:

Return on Assets * Financial Multiplier

Financial multiplier tells that how much leverage a company is using. Its formula is

Total Assets/ Total Owners Equity

Now we will calculate DuPont Return on equity.


2004 2005 2006 2007 2008

33.4 30.4 31.7 21.5 13.6


2004 2005 2006 2007 2008

4.14 2.68 3.40 4.86 4.95

Financial Multiplier of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

1.63 2.88 3.34 2.75 1.83

Return on equity ratio of lucky cement in the respective years is given below


27/33

2004 2005 2006 2007 2008

22.49 23.57 36.55 28.77 12.36

Now we can tell that why the company was able to have very high and very low return on

equity in the year 2006 and 2008 respectively. In the year 2006 company gained good

profit margin and utilized its assets very efficiently along with the usage of high financial

multiplier. In the year 2008, company wasnt able to generate adequate profit margin but

it utilized its assets efficiently. Also the leverage factor was low as compared to the other

years.

Gross Profit Margin

This ratio compares gross profit with the sales of the company. It is computed as follows:

Gross Profit/ Sales

Gross profit margin ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

37.84 34.66 37.00 29.35 25.73

We see that gross profit margin of the company is decreasing except the year 2006. This

downward trend can be explained by doing the vertical analysis of the companys income

statement.


Turnover 100.00 100.00 100.00 100.00 100.00

Cost of Sales 62.16 65.34 63.00 70.65 74.27

Gross Profit 37.84 34.66 37.00 29.35 25.73


2004 2005 2006 2007 2008

100 136.87 276.9 430.6 583.2



28/33

2004 2005 2006 2007 2008

100 143.89 280.7 489.5 696.9


2004 2005 2006 2007 2008

100 125.4 270.82 333.9 396.4

Thus decline in the ratio is due to the fact that companys cost of goods sold is increasing.

In the year 2006, the company was able to control its cost of goods sold and hence earned

high gross profit.

Operating Profit Margin

This ratio compares the operating profit of the company with its sales. It is computed as

follows.

Operating Profit/ Sales

Operating profit margin ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

35.56 32.52 34.4 24.48 18.2

The trend of this ratio is similar to gross profit margin ratio. In the last two years there is

a big difference between gross profit and operating profit ratio. This can be explained by

vertical analysis of the income statement of company.


Turnover 100.00 100.00 100.00 100.00 100.00

Cost of Sales 62.16 65.34 63.00 70.65 74.27

Gross Profit 37.84 34.66 37.00 29.35 25.73

Distribution Cost 0.67 0.60 1.28 3.97 6.81

Administrative Cost 1.61 1.54 1.33 0.89 0.77


29/33

Operating Profit 35.56 32.52 34.39 24.49 18.14


2004 2005 2006 2007 2008

100 136.87 276.9 430.6 583.2


2004 2005 2006 2007 2008

100 143.89 280.7 489.5 696.9


2004 2005 2006 2007 2008

100 125.4 270.82 333.9 396.4

Horizontal Analysis of Distribution Cost

2004 2005 2006 2007 2008

100 116.5 506.4 2435.3 5651.5

Horizontal Analysis of Admin Expenses

2004 2005 2006 2007 2008

100 133.6 232.5 242.4 285.9

Horizontal Analysis of Operating Profit

2004 2005 2006 2007 2008

100 125.2 267.8 296.5 297.5


30/33

In the last two years the distribution cost increased largely and therefore decrease in

operating profit has occurred. The company must try to minimize its distribution cost so

that its operating profit should be high.

Conclusion about Profitability

The company is earning a relatively stable profit and the return on the assets and equity is

satisfactory. The utilization of assets is also good except the year of 2005. The company

should also consider decreasing its cost of goods sold and operating expense because its

trend is increasing.

Investment Ratios

Earning Per Share (EPS)It tells the amount of income earned on a common stock share in a year. It is computed as

follows:

Net Income Preferred Dividends/ Total Outstanding Share

EPS ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

2.80 3.14 7.35 9.67 9.84

Earning per share of the company is increasing and it is very good sign for companys

growth and helps to attract more investors. When more money is invested in the company

then it is able to flourish. EPS also tells that the profit of the company is increasing.

Hence after seeing the EPS ratio of the company we can say that the profit of company is

increasing.

Price/ Earnings Ratio

This ratio expresses the relationship between the market price of common stock share and

earnings per share of stock. It is computed as follows:

Market Price per Share/ EPS

Price/ earnings ratio of lucky cement in the respective years is given below


31/33

2004 2005 2006 2007 2008

13.97 13.51 13.66 12.72 9.96

The ratio of the company is almost consistent but it drops significantly in the last year.

This can be due to the fact that investors are losing hope in the growth of the company or

we can also say that this was due to political and economical position of the country due

to which investors didnt invest (year 2008 brought many fluctuations at KSE-100 index

and it shattered the confidence of investors).

Book Value per Share

It indicates the amount of stockholders equity that relates to each share of outstanding

common stock. It is computed as follows:

Total Stockholders Equity Preferred Stock/ Outstanding Shares

Book value per share of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

17.57 20.95 30.23 35.51 70.83

The book value of the companys stock is increasing and hence we can say that the profit

of the firm is increasing. The book value of the company is compared with its market

price to know that what investors feel about the company. If the stock is selling below the

book value then investors are optimistic about the growth of the company and vice versa.

Market value per share as on 30th June 09

2004 2005 2006 2007 2008

39.10 42.39 100.42 123.04 97.93

This shows that investors are optimistic in the growth of the company and are ready to

invest in the company as book value is quite low than its market price.


32/33

Dividend Yield

It tells about the relationship between the dividends per common share and the market

price per common share. It is computed as follows:

Dividend per Share/ Market price per common share

Dividend yield of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

- - 1.00 1.02 -

The company didnt declare any dividend in the years 2004, 2005 and 2008. While it

declared dividend in the rest of years. Companys dividend policy is deteriorating and it

might be the case that company is reinvesting its profit rather than distributing it in the

form of dividends. Those who want a consistent dividend wont invest in this company.

Payout Ratio

It measures the portion of earnings that is distributed as dividends. It is computed as

follows:

Dividend per Share/ EPS

Payout ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

- - 13.61 12.93 -

The companys dividend policy is not consistent and the investors will only invest in this

company if its earnings are more. Such type of investors will prefer that company should

reinvest its profit and then pay to them a large amount in the years when high profit is

attained.

Conclusion from Investors Point of view

The company is inconsistent in payment of its dividends and the investors who want a

consistent dividend would not like to invest in the company. However the market price of


33/33

the company is quite high which shows that investors are quite optimistic about the

growth of company.

report on lucky

Documents