Financial and Ratios Analysis of Nishat Mills Pakistan
INTRODUCTION AND HISTORY OF THE COMPANY MISSION STATEMENT
To provide quality products to customers and explore new markets to promote/expand sales of the Company through good governance and foster a sound and dynamic team, so as to achieve optimum prices of products of the Company for sustainable and equitable growth and prosperity of the Company. VISION STATEMENT To transform the Company into a modern and dynamic yarn, cloth and processed cloth and finished product manufacturing Company with highly professionals and fully equipped to play a meaningful role on sustainable basis in the economy of Pakistan.
To transform the Company into a modern and dynamic power generating Company with highly professionals and fully equipped to play a meaningful role on sustainable basis in the economy of Pakistan.
CHAPTER – 2 FINANCIAL ANALYSIS OF THE COMPANY 1. RATIO ANALYSIS
The term “accounting ratios” is used to describe significant relationship betweenfigures shown on a balance sheet, in a profit and loss account, in a budgetary controlsystem or in any other part of accounting organization. Accounting ratios thus shows therelationship between accounting data. Ratio analysis is very important while measuring the performance of the business. These ratios are carried out from the Income statement and balance sheet.
Many partiesincluding management, investors and Government are interested in these ratios. Thepurpose of analysis is to measure the performance of the company and financial health ofthe organization.
ADVANTAGES OF RATIOS ANALYSIS
Ratio analysis is an important and age-old technique of financial analysis. Thefollowing are some of the advantages of ratio analysis: a. Simplifies Financial Statements: It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business.
b. Facilitates Inter-Firm Comparison: It provides data for inter-firm comparison. Ratios highlight the factors associated with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms. .
Helps in Planning: It helps in planning and forecasting. Ratios can assist management, in its basicfunctions of forecasting for Planning, co-ordination, control and communications. d. Makes Inter-Firm Comparison Possible: Ratios analysis also makes possible comparison of the performance of differentdivisions of the firm. The ratios are helpful in deciding about their efficiency orotherwise in the past and likely performance in the future. e.
Help in Investment Decisions: It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc. 3.
LIMITATIONS OF RATIOS ANALYSIS
The ratios analysis is one of the most powerful tools of financial management. Though ratios are simple to calculate and easy to understand, they suffer from seriouslimitations. f. Limitations of Financial Statements: Ratios are based only on the information whichhas been recorded in the financial statements.
Financial statements themselves aresubject to several limitations. Thus ratios derived, there from, are also subject to thoselimitations. For example; non-financial changes though important for the business arenot relevant by the financial statements.Financial statements are affected to a very greatextent by accounting conventions and concepts. Personal judgment plays a great part indetermining the figures for financial statements. g.
Comparative Study Required: Ratios are useful in judging the efficiency of thebusiness only when they are compared with past results of the business. However, such acomparison only provide glimpse of the past performance and forecasts for future maynot prove correct since several other factors like market conditions, managementpolicies, etc. may affect the future operations. Ratios alone are not adequate.Ratios are only indicators, they cannot be taken asfinal regarding good or bad financial position of the business. Other things have also tobe seen.
h. Problems of price level changes: A change in price level can affect the validity ofratios are calculated for different time periods. In such a case the ratio analysis may not clearly indicate the trend in solvency and profitability of the company. The financial statements, therefore, be adjusted keeping in view the price level changes if a meaningful comparison is to be made through accounting ratios. i.
Lack of Adequate Standard: No fixed standard can be laid down for ideal ratios.There are no well accepted standards or rule of thumb for all ratios which can be accepted as norm. It renders interpretation of the ratios difficult. j. Limited Use of Single Ratios: A single ratio, usually, does not convey much of a sense.
To make a better interpretation, a number of ratios have to be calculated which is likely to confuse the analyst than help him in making any good decision. k. Personal Bias: Ratios are only means of financial analysis and not an end in itself. Ratios have to interpret and different people may interpret the same ratio in different way. l.
Incomparable: Not only industries differ in their nature, but also the firms of the similar business widely differ in their size and accounting procedures etc. It makes comparison of ratios difficult and misleading.
TYPES OF RATIO ANALYSIS
Two types of Ratio Analysis are generally carried out, m. Cross Sectional Approach. In this approach, the effectiveness of business is compared with the competitors business of the same period. n.
Tim Series Analysis. Most companies use the Time Series Analysis in which the performance ofcompany over a period is measured. Ratio Analysis categories: (1) Liquidity. (2) Turnover. 3) Profitability.
(4) Leverage. 5. LIQUIDITY RATIOS: Liquidity ratios are the ratios for testing short term solvency or financial position of abusiness. These are designed to test the ability of the business to meet its short termobligation promptly. A class of financial metrics that is used to determine a company’sability to pay off its short-terms debts obligations. Generally, the higher the value of theratio, the larger the margin of safety that the company possesses to cover short-termdebts o.
Current Ratio: Current ratio may be defined as the relationship between current assets and current liabilities.This ratio is also known as “working capital ratio”. It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. It is calculated by dividing the total of the current assets by total of the current liabilities. (1) Limitations of Current Ratio: This ratio is measure of liquidity and should be used very carefully because it suffers from many limitations.
It is, therefore, suggested that it should not be used as the sole index of short term solvency (a) It is crude ratio because it measure only the quantity and not the quality of the current assets. b) Even if the ratio is favorable, the firm may be in financial trouble, because of more stock and work in process which is not easily convertible into cash, and, therefore firm may have less cash to pay off current liabilities. (c) Valuation of current assets and window dressing is another problem. This ratio can be very easily manipulated by overvaluing the current assets.An equal increase in both current assets and current liabilities would decrease the ratio and similarly equal decrease in current assets and current liabilities would increase current ratio. CURRENT RATIO= CURRENT ASSET/CURRENT LIABILITIES 008= 13929518000/11721605000 = 1.
19 2007= 13309087000/7649373000= 1. 74 2006 = 9758440000 /7051533000= 1. 38 Year| 2008| 2007| 2006| Nishat| 1. 19| 1. 74| 1.
38| (2) Comments: Current Ratio clears the extent to which the claim of short term creditors can be met by assets that are to become cash within a year. The best standard ratio is 2:1 so, the Nishat has current ratio below standard. There is a mixed trend from 2006 to 2008. p. Liquidity or Acid Test or Quick Ratio: Liquid ratio is also termed as “Liquidity Ratio”,” Acid Test Ratio” or “Quick Ratio”.
It is the ratio of liquid assets to current liabilities.The true liquidity refers to the ability of a firm to pay its short term obligations as and when they become due QUICK RATIO= (CURRENT ASSET-STOCK)/CURRENT LIABILITIES 2008 = (13929518000-4103648000)/11721605000 = 0. 84 2007 = (13309087000 – 3106436000)/7649373000 = 1. 33 2006 = (9758440000 – 3003174000)/7051533000 = 0. 96 Year| 2008| 2007| 2006| Nishat| 0.
84| 1. 33| 0. 96| (1) Comments: Nishat liquidity position is not considerable because it is near to 1 in year 2006 and 2007 which shows that it has liquid assets to meet its current liabilities. q. Turnover/ Activity ratios:Activity ratios are measures of how well assets are used. Activity ratios — which are, for the most part, turnover ratios — can be used to evaluate the benefits produced by specific assets, such as inventory or accounts receivable.
Or they can be use to evaluate the benefits produced by all a company’s assets collectively. These measures help us gauge how effectively the company is at putting its investment to work. INVENTORY DAYS = INVENTORY DAYS = INVENTORY/COST OF SALES*365 2008 = (4103648000/16298857000)*365= 91. 9 2007 = (3106436000/14335254000) *365= 79. 1 2006 = (3003174000/13701626000) *365= 80Year| 2008| 2007| 2006| Nishat| 91. 9| 79.
1| 80| (1) Comments: The above diagram shows that Nishat has high inventory days required converting stock in sale which shows that management is not efficient r. Debtors Turnover Ratio or Receivables Turnover Ratio: Debtor’s turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. DEBTORS DAY = (TRADE DEBATOR/CREDIT SALES) *365 2008 = (1329027000/19267633000)*365= 25. 18 2007 = (831653000/17180192000) * 365= 17. 67 2006 = (1026884000/16417358000) * 365= 22.
83Year| 2008| 2007| 2006| Nishat| 25. 18| 17. 67| 22. 83| (1) Comments: Graph shows Nishatmanagement has more efficient to collect their receivables whish shows efficient debtormanagement. s. Creditors / Accounts Payable Turnover Ratio This ratio is similar to the debtor’s turnover ratio.
It compares creditors with the total credit purchases. It signifies the credit period enjoyed by the firm in paying creditors. Accounts payable include both sundry creditors and bills payable. Same as debtor’s turnover ratio, creditor’s turnover ratio can be calculated in two forms, creditors’ turnover ratio and average payment period.CREDITORS DAYS = (TRADE CREDITORS/CREDIT SALES) * 365 2008 = (1350500115/10113499351)*365= 21.
62 2007 = (1030875769/6628341926)*365= 19. 69 2006 = (1243588067/4889681966)*365= 21. 35 Year| 2008| 2007| 2006| Nishat| 21. 62| 19. 69| 21. 35| (1) Comments Nishat credit management is not good as it has less no of days.
If we comparecreditor’s days to debtors day than we can see Nishat is goingbetter to manage its resources. t. Total Assets Turnover Ratio. The total assets turnover ratio measures the use of all assets in terms of sales, by comparing sales with net total assets.This interactive tutorial walks you through the calculations as well as where on the financial statements to find the numbers. TOTAL ASSETS TURNOVER RATIO= SALES/TOTAL ASSETS 2008 = (1350500115/10113499351)= 0.
51 2007 = (1030875769/6628341926)= 0. 43 2006 = (1243588067/4889681966)= 0. 53 Year| 2008| 2007| 2006| Nishat| 0. 51| 0. 43| 0.
53| (1) Comments: Total asset turnover ratio of Nishat is not good in the last two year 2007, 2008 so we can say it is not using its assets for generating the revenue in a better way. u. Fixed Assets Turnover Ratio: Fixed assets turnover ratio is also known as sales to fixed assets ratio.This ratio measures the efficiency and profit earning capacity of the concern. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets Fixed Assets Turnover Ratio= COST OF SALES/FIXED ASSETS 2008 = (16298857000/10647310000)= 1.
53 2007 = (1030875769/6628341926)*365= 1. 35 2006 = (1243588067/4889681966)*365= 1. 29 Year| 2008| 2007| 2006| Nishat| 1. 53| 1. 35| 1. 29| (2) Comments: Nishat shows the decreasing trend in year 2006 and after it increasing trend still 2008.
6. PROFITABILITY RATIOS:Profitability ratios (also referred to as profit margin ratios) compare components of income with sales. They give us an idea of what makes up a company’s income and are usually expressed as a portion of each dollar of sales. The profit margin ratios we discuss here differ only by the numerator. It’s in the numerator that we reflect and thus evaluate performance for different aspects of the business: The gross profit margin is the ratio of gross income or profit to sales.
This ratio indicates how much of every dollar of sales is left after costs of goods sold. Gross Profit (GP) Ratio = (GROSS PROFIT/SALES)*100 008 = (2968776000/19267633000)*100 = 15. 41 2007 = (1030875769/6628341926)*100 = 1. 35 2006 = (1243588067/4889681966)*100 = 1. 29 Year| 2008| 2007| 2006| Nishat| 15.
41| 16. 56| 1. 54| (1) Comments: Gross Profit ratio of Nishat show increasing trend in 2007 due to good economic and financial situation of world and good market situation in Pakistan but it decrease in 2008due to inflation and economic instability in Pakistan and irregular power supply of WAPDA. v. Operating Profit Ratio: Operating ratio is the ratio of cost of goods sold plus operating expenses to net sales.
It is generally expressed in percentage.It measures the cost of operations per dollar of sales. This is closely related to the ratio of operating profit to net sales. Operating Profit Ratio= OPERATING PROFIT/SALE*100 2008 = (7304400000/19267633000)*100= 37. 91 2007 = (2175475000/17180192000)*100 = 12. 66 2006 = (1243588067/4889681966)*100 = 12.
1 Year| 2008| 2007| 2006| Nishat| 37. 91| 12. 66| 12. 1| (1) Comments: Operating profit of Nishat show increasing trend in 2006 ,2007 and 2008 due to decrease in operating expenses. w. Net Profit/ (Loss) after Tax: Net profit ratio is the ratio of net profit (after taxes) to net sales.
It is expressed as percentage. Net Profit/ (Loss) after Tax = (NET PROFIT BEFORE SALES/SALES) *100 2008= (6396968000/19267633000)*100= 33. 02 2007 = (1356208000/17180192000)*100= 7. 89 2006 = (1758866000/16417358000)*100= 10. 71 Year| 2008| 2007| 2006| Nishat| 33.
02| 7. 89| 10. 71| (1) Comments: The Net Profit margin tells us the ability of a company to generate the earning aftermeeting all costs of business. There is an increase in net profit of Nishat in 2006. In year 2008 it gained a net profit. The ratio hasdecreased as compare to previous year due to increase in cost and expansion of projectand finance cost.
Nishat top net profit is in year 2008. x. Return on Assets: Where asset turnover tells an investor the total sales for each $1 of assets, return onassets [or ROA for short] tells an investor how much profit a company generated for each$1 in assets. The return on assets figure is also a sure-fire way to gauge the asset intensityof a business. Companies such as telecommunication providers, car manufacturers, andrailroads are very asset-intensive, meaning they require big, expensive machinery orequipment to generate a profit.
Return on Assets= (NET INCOME/TOTAL ASSET) *100 2008 = (6138968000/37916579000)*100= 16. 9 2007 = (1211208000/39587091000)*100= 3. 06 2006 = (1758866000/16417358000)*100= 5. 24 Year| 2008| 2007| 2006| Nishat| 16. 19| 3. 06| 5.
24| (1) Comments: This ratio measures the return of total investment of the business. Nishat company return on asset is much better, it decreases in 2005 to 2007 and then increase in 2008, it is athighest point in 2008, y. Return on Capital Employed (ROCE) Ratio: Capital employed and operating profits are the main items. Capital employed may be defined in a number of ways. However, two widely accepted definitions are “gross capital employed” and “net capital employed”.
Gross capital employed usually means the total assets, fixed as well as current, used in business, while net capital employed refers to total assets minus liabilities. On the other hand, it refers to total of capital, capitalreserves, revenue reserves (including profit and loss account balance), debentures andlong term loans. Return on Capital Employed (ROCE) Ratio= (PROFIT BEFORE INTEREST AND TAXATION/CAPITAL EMPLOYED)*100 2008 = (6396968000/26194974000)*100= 24. 42 2007 = (1211208000/39587091000)*100= 4. 25 2006 = (1758866000/16417358000)*100= 7.
29 Year| 2008| 2007| 2006| Nishat| 24. 42| 4. 25| 7. 29| (1) Comments:Nishat return on capital employed is reasonablebetween 2006and 2007. And Nishat is going to negative its return of capital employed in 2008 due to economic crises.
RETURN ON EQUITY CAPITAL (ROE) RATIO: In real sense, ordinarily shareholders are the real owners of the company. They assume the highest risk in the company. (Preference shareholders have a preference over ordinary shareholders in the payment of dividend as well as capital. Preference shareholders get a fixed rate of dividend irrespective of the quantum of profits of the company). The rate of dividends varies with the availability of profits in case of ordinary shares only.
Thus ordinary shareholders are more interested in the profitability of a company and the performance of a company should be judged on the basis of return on equity capital of the company. Return on equity capital which is the relationship between profits of a company and its equity, can be calculated as follows. Equity share capital should be the total called-up value of equity shares. As the profit used for the calculations are the final profits available to equity shareholders as dividend, therefore the preference dividend and taxes are deducted in order to arrive at such profits.RETURN ON EQUITY CAPITAL (ROE) RATIO= (NET PROFIT AFTER TAX – PREFERENCE DIVIDEND)/EQUITY 2008 = ((6138968000-0)/25147180000)*100= 24. 41 2007 = ((1211208000-0)/30163898000)*100= 4.
02 2006 = ((1632866000-0)/21112409000)*100= 7. 73 Year| 2008| 2007| 2006| Nishat| 24. 41| 4. 02| 7. 73| (1) Comments: Nishat company return on equity ratio has mix trend. It decreases in 2006 and it goes down and become more down in 2007 and go to highest point in 2008.
8. DEBT TO EQUITY RATIO: Debt-to-Equity ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders’ funds.It is also known as external internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company. DEBT TO EQUITY RATIO = TOTAL LONG TERM DEBT/SHAREHOLDEERS FUND 2008= (1047794000/25147180000)= 0.
04 2007 = (1773820000/30163898000)= 0. 06 2006 = (3015384000/21112409000)= 7. 73 Year| 2008| 2007| 2006| Nishat| 0. 04| 0. 06| 7.
73| (1) Comments: Nishat shows decreasetrend 2006 to 2008 which shows that its debt to equity is better. 9. DEBT SERVICE RATIO OR INTEREST COVERAGE RATIO: Interest coverage ratio is also known as debt service ratio or debt service coverageratio.This ratio relates the fixed interest charges to the income earned by the business. It indicates whether the business has earned sufficient profits to pay periodically the interest charges. Debt Service Ratio = NET PROFIT BEFORE INTEREST AND TAX/FIXED INTEREST CHARGES 2008= (6396968000/907432000)= 7.
05 2007 = (1356208000/819267000) = 1. 06 2006 = (1758866000/755054000)= 2. 23 Year| 2008| 2007| 2006| Nishat| 7. 05| 1. 66| 2. 33| (1) Comments: Interest Cover Ratio shows that how many times interest is earned by the company.
Interest cover ratio of Nishat is not very healthy and it shows that the financial costs are very high and earnings are very low. Management must look into the matter and shouldimprove this ratio. In year 2008 Nishat Company earned 7. 05 times interest which is higher among all year and easy to pay the interest expense. 10.
EARNINGS PER SHARE RATIO: Earnings per share ratio are a small variation of return on equity capital ratio and are calculated by dividing the net profit after taxes less preference dividend by the total number of equity shares. EARNINGS PER SHARE (EPS) RATIO = PROFIT AFTER TAX/NO OF SHARES 008= (6138968000/159785736) = 38. 4 2007 = (1211208000/159789974) = 7. 58 2006 = (1632866000/159771625) = 10. 22 Year| 2008| 2007| 2006| Nishat| 38. 4| 7.
58| 10. 22| (1) Comments: The earning per share of Nishat has shown mixed trend in above diagram,earning per share of Nishat company is less in 2006, and it goes more down in2007 and 2008 which mean there is no earning and it going down. Nishat should better manage itsfinancial position and improve its performance to get out this fall in earning per share. 11. EARNINGS YIELD The earnings per share for the most recent 12-month period divided by the current market price per share.
The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company. EARNINGS YIELD = EARNING PER SHARE/MARKET PRICE PER SHARE*100 2008= (38. 42/85. 97)*100 = 44. 69 2007 = (7. 58/129.
2)*100 = 5. 87 2006 (10. 22/104. 8)*100 = 9. 75 Year| 2008| 2007| 2006| Nishat| 44. 69| 5.
87| 9. 75| (1) Comments: Earning Yield of, Nishat was at lowest point in 2007 dueto economic crises. Return on investment of Nishat was very high in 2008. MARKET VALUE OF SHARE Year| 2008| 2007| 2006| Nishat| 85. 97| 129.
2| 104. 8| 1) Comments: Graph shows that market value of share of Nishat Company is high in 2006 to 2007. In 2007 it is at highest point. 12. PRICE EARNING RATIO (PE RATIO): Price earning ratio (PE ratio) is the ratio between market price per equity share and earning per share.
The ratio is calculated to make an estimate of appreciation in the value of a share of a company and is widely used by investors to decide whether or not to buy shares in a particular company. PRICE EARNING RATIO (PE RATIO) = MARKET PRICE PER EQUITY SHARE/ ARNING PER SHARE 2008 = (85. 97/38. 42)= 2. 24 2007 = (129. /7.
58)= 17. 04 2006= (104. 8/10. 22)= 10. 25 Year| 2008| 2007| 2006| Nishat| 2. 24| 17.
04| 10. 25| (1) Comments: Price earnings ratio of Nishat shows mixed trend, but it has never gone negative and it is at high point in 2007 which encourage the investor, it shows that there is increase in market value of share and decrease in value of earning per share.
- The company should design effective internal control system, which not only increase the efficiency but also reduce the pressure exists on accounts and finance department. The company should arrange training and orientation programs for its employees on regular basis so that they can equip themselves with the latest developments in the field of finance and accounts.
- Monthly accounts should be prepared on regular basis so that it will help themanagement to make better and timely decisions.
- Calculations of mark-up should be made by the company to reconcile and check the mark-up charged by the banks to keep a good control on the financial charges charged by the banks.
- Trade debtors and creditors balances econciliations should be made on monthly basis along with keeping the balances updated by sending balance confirmations letters to the parties’ the selection criteria should also be improved. The company should select the educated and experienced employees and along with there should be a proper training system for them.
The 60th annual report and audited accounts for theyear ended June 30, 2008 of Nishat Mills has earned profit after tax Rs 6,138. 968Millionfor the year ended June 30, 2008. The profit increased by 406. 5% as compared to Rs.
1,211. 208 Million for the previous period. This increase in profit is mainly due to capitalgain of Rs. 5,060. 413 million resulting from mark to market transaction of ourinvestment in MCB Bank shares, and increase in dividend income by Rs. 230.
765million.Resulting from market to market transaction of our 4. 35 % respectively ascompared to the previous period. Percentage increase in gross profit does notcommensurate with that of sales due to the facts that there was an increase of 22. 2 % inlocal cotton rates (2008: Rs. 3,047/maund, 2007: Rs.
2,485/maund) and an increase of7. 65 % in imported cotton rate (2008: Rs. 3,714/maund, 2007: Rs. 3,450/maund). Finance cost increase by 10. 76 % mainly due to increase in average borrowing by 5%.
The year 2008 was a difficult year for fabric processing mills as in addition to thedomestic challenging scenario, recession of American market further slowed down theentire business cycle. Retailers were stuck up with high inventory levels, which hinderednew ventures.Unanticipated bankruptcy of some major textile businesses including, DanRiver, Linen ; Things, Goody’s Family Inc also gave unprecedented setback to analready fading market. This situation did not allow suppliers to increase any prices toovercome excessive overhead costs and ease out the worsening condition. Even thoughall major concerns were facinga perpendicular decline in the revenues, our company was able to sustain its salesin step with the plant efficiency.
A particular focus was conferred upon enhancingproduction efficiency are drawing more production in less number of hours and withoptimum workforce.With reference to this cost cutting strategy, an important step wastaken by shifting the Faisalabad stitching unit to Lahore, adjacent to the processing plant. This adaptation is expected to play an extra ordinary role in improving the supply,operations’ management and reduction in transportation costs.
BIBLIOGRAPHY (REFERENCE ; SOURCES USED)
- http://www. nishatmillsltd. com/nishat/invest.
- http://www. nonprofitsassistancefund. org/files/MNAF/ToolsTemplates/NonprofitFinancialRatios. pdf ATTACHMENTs