FATIMA JINNAH WOMEN UNIVERSITY, RAWALPINDI

FINANCIAL STATEMENT ANALYSIS

FINANCIAL ANALYSIS OF FAUJI FERTILIZERS LIMITED PAKISTAN

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ACKNOWLEDGEMENTS:

All praise is for Allah Almighty, the Creator of this world who enables us to do this arduous work. No work in reality is the sole effort of its writers as many people like the foundation stone contributes silently. These people sometime deserve more praise and appreciation than the writers themselves. Same is the case with this project. It is unequivocally stated that among such silent contributionsMiss. Sadia Usmani,Lecturer Department of Public Administration, FJWU Rawalpindi stands prominent. Her confidence in us, all her motivations to do something authentic gave the basic impetus for undertaking this strenuous task. Our project is a result of discussions with many other people including our class fellows, teachers and friends working in different organizations. Finally and most importantly, we are very thankful our parents, who pray for our success day night.

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ABSTRACT:

This analytical report is about the financial situation of the fauji fertilizer limited, the largest manufacturers of fertilizer in Pakistan. They are one of the top companies of the country with a massive share in the market of urea. This analysis would certainly help us in knowing the current financial status of the company as we have done a time series analysis for the last 5 years

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COMPANY PROFILE:

With a vision to acquire self - sufficiency in fertilizer production in the country, FFC was incorporated in 1978 as a private limited company. This was a joint venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark. The initial authorized capital of the company was 813.9 Million Rupees. The present share capital of the company stands at Rs. 3.0 Billion. Additionally, FFC has Rs. 1.0 Billion stakes in the subsidiary Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited).FFC commenced commercial production of urea in 1982 with annual capacity of 570,000 metric tons.

Through De-Bottle Necking (DBN) program, the production capacity of the existing plant increased to 695,000 metric tons per year.

FFC participated as a major shareholder in a new DAPS/Urea manufacturing complex with participation of major international/national institutions. The new company Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited) commenced commercial production with effect from January 01, 2000. The facility is designed to produce 551,000 metric tons of urea and 445,500 metric tons of DAP.This excellent performance was due to hard work and dedication of all employees and the progressive approach and support from the top management.In the year 2002, FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated at Mirpur Mathelo, District Ghotki from National Fertilizer Corporation (NFC) through privatization process of the Government of Pakistan. This acquisition at Rs. 8,151 million represents one of the largest industrial sector transactions in PakistanCompany’s brand name is “SONA” under the umbrella of the Fauji fertilizer company that is abbreviated as given.The company introduced its product under the name of “SONA UREA” in 1982 as the first plant was underway as far as the production is concerned; the company and brand name had already been registered when the company entered the business in 1978.At first, the company had put all its efforts in the production of urea as there was a definite need for the urea production in the country because of the high demand and consumption. Talking about the current situation and the future prospective, the company has been one of the leading Organizations of the country for a long time now and the brand name are very well established.

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CONTENTS:

1. What is Ratio Analysis?

2. Liquidity Ratios

3. Debt Management Ratios

4. Profitability Ratios

5. Asset Management Ratios

6. Dividend/Market Value Ratios

7. Limitations and Uses of Ratio Analysis

8. Trend/time-series analysis of income statement(chart)

9. Trend/time-series analysis of income statement(graphs)

10. Final trend analysis

11. Overall Conclusion

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What is Ratio Analysis?

Similar to baseball's use of statistics to rank players and teams, in business there are

endless possible ratio combinations. Ratio Analysis uses a combination of financial or

operating data from a company or industry to provide a basis of comparison. Each ratio

measures a unique relationship that may impact others. Several of the most commonly

used ratios are grouped into categories, including:

Liquidity Ratios measure how easily a firm can meet its obligations.

Debt Management Ratios indicate financial leverage and how well a company

can handle that debt.

Profitability Ratios indicate the earnings potential of a company.

Asset Management Ratios measure how efficiently a company uses its assets

Dividend/Market Value Ratios measure earnings for investors.

Ratios can provide meaningful comparisons of companies in similar industries, a

company to its industry, or a company to itself over time.

Liquidity Ratios

Liquidity Ratios provide measures of how easily a firm can meet its obligations.

Quick Ratio

Current Ratio

Debt Management Ratios

Debt Management Ratios indicate how leveraged a company is in terms of debt, and

how well it can handle that debt with its assets and operating income. Here are some

commonly used ratios of debt management:

Debt Ratio

Times Interest Earned (TIE)

Profitability Ratios

Profitability Ratios indicate the earnings and profitability potential of a company.

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Earnings Per Share

Gross Profit Ratio

Profit Margin

Return on Assets

Return on Equity

Asset Management Ratios

Asset Management Ratios are used to measure how efficiently a company uses its

assets. These can measure various assets in relation to sales or profit. Here are some

commonly used asset management ratios:

Inventory Turnover Ratio

Dividend/Market Value Ratios

Dividend/Market Value Ratios measure how well a company uses its assets to generate

earnings for its investors.

Dividend Yield

Price to Earnings

There may be good business reasons to support management's decision to reduce or increase liquidity or fixed assets in a different manner than the rest of the industry. Having a single ratio out of line with an industry, therefore, does not necessarily mean there is a problem.

Measure of short term liquidity:

LIQUIDITY RATIO:

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Liquidity ratios tell us about the firm’s ability to satisfy its short-term obligations as they come due. Now we will analyze a few of the liquidity ratios regarding the company.

These ratios indicate the ease of turning assets into cash. They include the Current Ratio, Quick Ratio, and Working Capital.

Current Ratios:

The Current Ratio is one of the best known measures of financial strength. It is figured as shown below:

Current Ratio = Total Current Assets / Total Current Liabilities

Current ratio:YEARS 2005 2006 2007 2008C.R 0.91 0.90 0.94 0.82

• Now we can see that the figure has decreased in the current ratio when compared to the year 2005.• It’s a bad trend for a manufacturing firm like Fauji Fertilizer Company.• We can see from the financial statements of the company that both the current assets and the current liabilities have decreased but the assets have decreased comparatively more than previous year.• One of the major reasons for the problem seems to be lower short term investments

Quick Ratios:

The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best measures of liquidity. It is figured as shown below:

Quick Ratio = Cash + Government Securities + Receivables / Total Current Liabilities

Quick ratio:

YEARS 2005 2006 2007 2008Q.R 0.69 0.61 0.68 0.54

• The above comparison shows that the quick ratio has decreased as the company ended the year 2008.• It is not a healthy sign for the company.• Now it has already been discussed that the company’ current assets have decreased comparatively. The financial statements show that the firm’s inventory has increased. That has caused the quick ratio figure to fall a bit.

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• Hence the firm’s overall ability to satisfy the short –term obligations is decreasing which is not good at all.

WORKING CAPITAL:

Working Capital is more a measure of cash flow than a ratio. The result of this calculation must be a positive number. It is calculated as shown below:

Working Capital = Total current Assets –Total Current Liabilities

Working capital:YEARS 2005 2006 2007 2008W.C (1162) (1119) (666) (2114)

A general observation about these three Liquidity Ratios is that the higher they are the better, especially if you are relying to any significant extent on creditor money to finance assets.

Debt Management Ratios:

Measure of long term credit risk:

Debt ratios indicate the amount or the percentage of other people’s money being used to generate profits. We will now discuss the two debt ratios with respect to the company we have selected.

Debt ratio:

This ratio reveals how well inventory is being managed. It is important because the more times inventory can be turned in a given operating cycle, the greater the profit. The Inventory Turnover Ratio is calculated as follows:

Debt ratio = Total Liabilities/Total Assets

Debt Ratio:YEARS 2005 2006 2007 2008D.R (%) 44 40 39 37

• We can see that the percentage has decreased

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Times Interest Earned Ratio (TIER)

This ratio indicates of a company’s ability to meet its interest payment obligations. It is calculated as follows:

Time interest earned Ratio = Operating income/Annual Interest Expense

Times Interest Earned (TIER)

YEARS 2005 2006 2007 2008T.I.E.R 23.13 14.94 12.10 15.44

• As we can see that the trend is a increasing one when we compare the calculated ratio for the last three years.• It is a good trend for the firm.• The increasing trend shows that the firm is having its ability to make the contractual interest payments.

PROFITIBILITY RATIO:

Measure of profitability:

Profitability ratios help in evaluating the firm’s profits with respect to a given level of sales, a certain level of assets, or the owner’s investment. We will discuss six ratios in this regard with respect to the company.

EARNINGS PER SHARE:

Common stock holders and potential investors in common stock look first at a company’s earnings record. Their investment is in shares of stock, so earning per share and dividends per share are of particular interest. Formula for calculating earnings per share is as follows

Earnings Per Share= Net Income –Preferred Dividends/ Average Number of Common Shares Outstanding

Earnings per Share:

YEARS 2005 2006 2007 2008E.P.S (pre tax)E.P.S

14.629.92

14.169.39

15.8410.86

20.3513.22

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(aftertax)

• Earning per share has increased from what it was last years.• It’s a good situation for the company.• The reason for this also would be the increase in the earning available for the common stock.• Return on assets has increased.• It’s a healthy sign for the company.• The decrease in both the earning available for common stock and total assets has contributed in the positive outcome.• Even though both have decreased

GROSS PROFIT MARGIN:

This ratio is the percentage of sales dollars left after subtracting the cost of goods sold from net sales. It measures the percentage of sales dollars remaining (after obtaining or manufacturing the goods sold) available to pay the overhead expenses of the company.

The Gross Margin Ratio is calculated as follows:

Gross Margin Ratio = Gross Profit / Net Sales

Reminder: Gross Profit = Net Sales - Cost of Goods Sold

Gross Margin Ratio:

YEARS 2005 2006 2007 2008G.P.M (%) 36.06 32.4 36 40

• The gross profit margin has increased.• It depicts a good trend for the firm.• In this case both the sales and the gross profit have increased but the sales have increased comparatively more.• Cost of goods sold has also increased but not as much as the sales have done.

NET PROFIT MARGIN RATIO:

This ratio is the percentage of sales dollars left after subtracting the Cost of Goods sold and all expenses, except income taxes. It provides a good opportunity to compare your company's "return on sales" with the performance of other companies in your industry. It is calculated before income tax because tax rates and tax liabilities vary from company to

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company for a wide variety of reasons, making comparisons after taxes much more difficult. The Net Profit Margin Ratio is calculated as follows:

Net Profit Margin Ratio = Net Profit Before Tax / Net Sales

Net profit margin ratio:YEARS 2005 2006 2007 2008N.P.M.R (%) 19.22 15.48 18.86 21.33

• The net profit margin ratio has increased from last years.• That is a good sign for the firm.• The sales have increased.• The decrease in both the earning available for common stock and total assets has contributed in the positive outcome.• Even though both have decreased

RETURN ON ASSETS RATIO:

This measures how efficiently profits are being generated from the assets employed in the business when compared with the ratios of firms in a similar business. A low ratio in comparison with industry averages indicates an inefficient use of business assets. The Return on Assets Ratio is calculated as follows:

Return on Assets = Net Profit Before Tax / Total Assets

Return on assets:

YEARS 2005 2006 2007 2008R.O.A (%) 25.36 25.47 26.73 31.46

Return on assets is increasing in average. More profits are being generated from the assets employed in the business when

compared with the ratios of previous years.

RETURN ON EQUITY:

Return on equity looks at return earned by management on stockholders investments that is on owner’s equity. Return on equity can be calculated as follows:

Return on Equity=Net Income/Average Total Equity

Return on Equity:

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YEARS 2005 2006 2007 2008R.O.E (%) 39.36 35.78 42.11 53.11

• The return on common stock equity has increased from last years.• That definitely is a good trend.• From the financial statements we have learned that the common stock equity is increasing as it was last year but the earning available for common stock has increased which resulted in the above situation

Asset Management Ratios:

Asset Management Ratios are used to measure how efficiently a company uses its assets. These can measure various assets in relation to sales or profit.

INVENTORY TURNOVER:

Inventory turnover indicate how quickly inventory sells. It can be calculated as follows:

Inventory turnover rate(times) = cost of good sales/average inventory

Inventory turnover indicate how many days inventory take to sell. It can be calculated as follows:

Inventory turnover(days) = 365 days/inventory turnover rate

YEARS 2005 2006 2007 2008I.T (time)I.T (days)

47.478

29.3112

25.5414

55.207

•We can see that the inventory turnover has increased.•That is a good trend as the company is now turning the inventory into finished goods more frequently as compared to the previous years.•The cost of goods sold has also increased as to inventory.

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•So the firm is getting more efficient in its production operations.

MARKET VALUE RATIO:

PRICE EARNING RATIO:

Price earning ratio can be calculated as follows:

Price earning ratio=Current stock price /earning per share

Price earnings ratio:YEARS 2005 2006 2007 2008P.E.R 13.80 11.23 10.93 4.444

The p/e ratio reflects investors expectation concerning the company’s future performance. The more optimistic these expectations, the higher the p/e ratio is likely to be.

Earning are declining to low level, the price of stock usually does not

DIVIDEND YIELD:

Dividend Yield can be calculated as follows:

Dividend yield =Annual Dividend / current stock Price

YEARS 2005 2006 2007 2008D.Y 11.39 8.07 9.43 13.57

Dividend yield:

Dividends are expressed as a rate of return on market price of stock. In 2006 dividend yield declined to 8.07 in comparison with 2005 as 11.39 it show less

profitability but afterwards it is good trend showing increase in dividend yield whuch is beneficial in investors or shareholders point of view.

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USES AND LIMITATIONS OF FINANCIAL RATIOS

Benchmarking Financial Ratios:

Financial ratios are not very useful on a stand-alone basis; they must be benchmarked against something. Analysts compare ratios against the following:

1.The Industry norm –

This is the most common type of comparison. Analysts will typically look for companies within the same industry and develop an industry average, which they will compare to the company they are evaluating. Several companies included in an index that can distort certain ratios.

2. Aggregate economy –

It is sometimes important to analyze a company's ratio over a full economic cycle. This will help the analyst understand and estimate a company's performance in changing economic conditions, such as a recession.

3. The company's past performance –

This is a very common analysis. It is similar to a time-series analysis, which looks mostly for trends in ratios.

Limitations of Financial Ratios

There are some important limitations of financial ratios that analysts should be conscious of:

Many large firms operate different divisions in different industries. For these companies it is difficult to find a meaningful set of industry-average ratios.

Inflation may have badly distorted a company's balance sheet. In this case, profits will also be affected. Thus a ratio analysis of one company over time or a comparative analysis of companies of different ages must be interpreted with judgment.

Seasonal factors can also distort ratio analysis. Understanding seasonal factors that affect a business can reduce the chance of misinterpretation. For example, a retailer's inventory may be high in the summer in preparation for the back-to-school season. As a result, the company's accounts payable will be high and its ROA low.

Different accounting practices can distort comparisons even within the same company (leasing versus buying equipment, LIFO versus FIFO, etc.).

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It is difficult to generalize about whether a ratio is good or not. A high cash ratio in a historically classified growth company may be interpreted as a good sign, but could also be seen as a sign that the company is no longer a growth company and should command lower valuations.

A company may have some good and some bad ratios, making it difficult to tell if it's a good or weak company.

In general, ratio analysis conducted in a mechanical, unthinking manner is dangerous. On the other hand, if used intelligently, ratio analysis can provide insightful information. 

TREND PERCENTAGES:

To calculate the change over a longer period of time—for example, to develop a

sales trend—follow the steps below:

1. Select the base year.

2. For each line item, divide the amount in each no base year by the amount in

the base year and multiply by 100.

3. The percentages in the other years were calculated by dividing each amount in a

particular year by the corresponding amount in the base year and multiply by

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Historical Data 2008

(Rs. Millions)

2007

(Rs. Millions)

2006

(Rs. Millions)

2005

(Rs. Millions)

Inventory 258 643 953 560

Property & equipment 12,731 10,390 9,608 9,185

Current liabilities 11,824 11,476 10,884 10,263

Sales 30,593 28,429 29,951 25,481

Cost of sales 18,235 18,312 20,242 16294

Gross profit 12,358 10,117 9,709 9187

Distribution costs 2,669 2,419 2,747 2371

9,690 7,699 6,962 6816

Finance cost 695 704 501 326

Other expenses896

845 736 716

8099 6150 5725 5774

Other income 1,943 1,665 1,260 1440

Net profit before taxation 10,041 7,815 6,985 7214

Provision for taxation 3,516 2,454 2,349 2317

Net profit after taxation 6,525 5,361 4,636 4897

EPS 13.44 10.86 9.39 9.92

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TREND PERCENTAGES 2008

(%)

2007

(%)

2006

(%)

2005

(%)

Inventory 46 114 170 100%

Property & equipment 138 113 105 100%

Current liabilities 115 112 106 100%

Sales 120% 112% 117% 100%

Cost of sales 112% 112% 124% 100%

Gross profit 135% 110% 105% 100%

Distribution costs 113% 102% 115% 100%

142% 112% 102% 100%

Finance cost 213% 215% 153% 100%

Other expenses 125% 118% 102% 100%

140% 107% 99% 100%

Other income 135% 116% 88% 100%

Net profit before taxation 139% 108% 97% 100%

Provision for taxation 152% 105% 101% 100%

Net profit after taxation 133% 109% 95% 100%

EPS 133% 109% 95% 100%

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Calculation notes:

The base year trend percentage is always 100.0%. A trend percentage of less than 100.0%

means the balance has decreased below the base year level in that particular year. A trend

percentage greater than 100.0% means the balance in that year has increased over the

base year. A negative Calculation notes:

1. The base year trend percentage is always 100.0%. A trend percentage of less than

100.0% means the balance has decreased below the base year level in that

particular year. A trend percentage greater than 100.0% means the balance in that

year has increased over the base year. A negative trend percentage represents a

negative number.

2. If the base year is zero or negative, the trend percentage calculated will not be

meaningful.

TREND/TIME-SERIES (GRAPHS):

There is a 20% increase from year one to final year , therefore there is a positive change in trend.

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There is an 11% increase from year one to final year , therefore it is a positive change in trend.

There is a 34% increase from year one to final year; therefore it is a positive change in trend.

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There is a 12% increase from year one to final year , therefore it is a positive change in trend.

There is a 113% increase from year one to final year , therefore it is a positive change in trend.

There is a 25% increase from year one to final year , therefore it is a positive change in trend.

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There is a 34% increase from year one to final year , therefore it is a positive change in trend.

There is a 39% increase from year one to final year , therefore it is a positive change in trend.

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There is a 52% increase from year one to final year , therefore it is a positive change in trend.

There is a 33% increase from year one to final year , therefore it is a positive change in trend.

There is a 33% increase from year one to final year , therefore it is a positive change in trend.

There is a 15% change from year one to final year , therefore there is a positive change in trend.

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There is a 38% change from year one to final year , therefore there is a positive change in trend.

There is a 64% decrease from year one to final year , therefore there is a negative change in trend.

FINAL TREND ANALYSIS: Sales: Sales graph is showing fluctuations in trend we can see fluctuation in

beginning but afterwards it tends to increase in following years overall there is a 20% increase in sales as compared to the first year. Therefore it is a positive change. It is favorable for company.

Cost of goods sold: Cost of goods sold graph is showing fluctuation in trend we can see a rapid increase in first year afterward it is showing fluctuation in trend but overall there is 20% increase as compared to the first year; therefore there is a positive change in cost of goods sold. It means company is increasing its in production which effects cost of good sold.

Gross profit: Gross profit graph is showing increase in trend at first there is gradual change and afterward in final year there is a large increase in gross profit overall there is a 34% increase from year one to final year, therefore it is a positive change in trend. It is favorable trend for company.

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Finance cost: Finance cost graph is showing a rapid increase in trend there is 113% increase in finance cost as compared to first year (2005).

Other expenses : Other expenses graph is showing increase in trend it

increases by 25% as compared to first year so there is a positive change. It is not favorable for company.

Other income: Other income graph is showing fluctuations in trend we can see it decreases in first year but afterwards it increases in following years overall it increases by 34% as compared to first year(2005), therefore there is a positive change

Net profit before taxation: Net profit before tax graph is showing fluctuations in trend we can see it decreases in first year but afterwards it increases in following years overall net profit before tax increase by 39% as compared to the first year (2005) , therefore there is a positive change.

Provision for taxation: Provision for taxation graph showing increase in trend at first there is gradual increase afterward it increases rapidly overall there is 52% increase as compared to the first year (2005), therefore there is a positive change.

Net profit after taxation: Net profit after taxation graph is showing fluctuation in trend we can see it decreases in first year but afterwards it increases in following years overall net profit after taxation increases by 33% as compared to the first year (2005), therefore there is a positive change.

Earning per share: Earning per share graph is showing fluctuation in trend we can see it decreases in first year but afterwards it increases in following years but overall earning per share increases by 33% as compared to the first year (2005) therefore there is a positive change.

Inventory: Inventory graph is showing fluctuation in trend we can see it

increases in first year but afterwards it decreases in following years overall Inventory decreases by 64% as compared to the first year (2005), therefore there is a positive change.

Current liabilities: There is 15% increase in trend as compared to the first year (2005) in current liabilities.

Property plant and equipment: Property plant and equipment graph shows 38% increase in trend as compared to the first year (2005).

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CONCLUSION:

A ratio gains utility by comparison to other data and standards. Taking our example, a gross profit margin for a company of 25% is meaningless by itself. If we know that this company's competitors have profit margins of 10%, we know that it is more profitable than its industry peers which are quite favorable. If we also know that the historical trend is upwards, for example has been increasing steadily for the last few years, this would also be a favorable sign that management is implementing effective business policies and strategies. Overall company is performing well as its average trend is increasing.

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