CONTENTS

Financial Statement Analysis |

Final Project: Financial Decision Making

Financial Statement Analysis of PPL

SUBMITTED TO:

Sir Hassan

SUBMITTED BY:

Ifzal Ahmed MBA1-FA09-003

COMSATS Institute of Information Technology, Lahore

SUBMITTION DATE:

May 05, 2010

EXECUTIVE SUMMARY

INTRODUCTION

INDUSTRY ANALYSIS

COMPANY ANALYSIS

MARKET RISK CALCULATION

RATIO ANALYSIS

O LIQUIDITY RATIOS

O ASSETS MANAGEMENT RATIOS

O SOLVENCY RATIOS

O PROFITABILITY MEASURES

RECOMMENDATIONS

BIBLOGRAPHY

Financial Statement Analysis |

EXECUTIVE SUMMARY

The project assigned to us was on Pakistan Petroleum Ltd. in which we had to discuss main

idea that whether the investment in company’s stocks was feasible or not. Since we have

work-out on this project and we have had done analysis of Petroleum industry and company

analysis through different dimensions. This project on Pakistan Petroleum contains various

aspects and position of companies financial Performance. Than majorly brief but adequate

industry and company analysis for financial statements were important parts of our project. In

this we have done horizontal, vertical and ratio analysis along with Beta, Alpha and CAPM

calculation. Importantly three year projections of company’s financials were significant part

of our project. Last but not the least this project is concluded with recommendations about

whether the investment in company’s stocks is advisable or not. The project of Pakistan

Petroleum Ltd Also contains the contents in ordinal format and the bibliography having links

concerned to this project.

Financial Statement Analysis |

INTRODUCTION

The pioneer of the natural gas industry in the country, Pakistan Petroleum Limited (PPL) has been a key player in the energy sector since the 1950s.The company has managed to sustain its positioning due to its robust business programme and persistent efforts to optimize production from existing fields and new discoveries, currently contributing about 25 percent of the country’s total natural gas supplies in addition to crude oil, Natural Gas Liquid and Liquefied Petroleum Gas.

PPL’s history can be traced back to the establishment of a public limited company in June 1950, the majority shares of which were held by Burmah Oil Company (BOC) of the United Kingdom. In September 1997, BOC disinvested from the E&P sector worldwide and sold its equity in PPL to the Government of Pakistan. In July 2004, the government, in turn, sold 15 percent of its holding in PPL to the general public through an Initial Public Offer, reducing its share to 78.4 percent. The remaining equity is divided between International Finance Corporation and private investors, holding 1.3 percent and 20.3 percent respectively.

The company operates five producing fields across the country at Sui (Pakistan’s largest gas field), Adhi, Kandkhot, Chachar and Mazarani and holds working interest in seven partner-operated producing fields. These are Qadirpur, the second largest gas field, Miano, Sawan, Block 22 (Hasan, Sadiq and Khanpur) and Tal Block (Manzalai).

As a major stakeholder in securing a safe energy future for the country, PPL pursues a dynamic exploration agenda aimed at enhancing hydrocarbon reserves. In Pakistan, the company’s exploration portfolio comprises 22 exploration blocks. Of these, PPL operates seven through joint ventures with other Exploration and Production (E&P) companies and has working interest in 15 more exploration areas, including three off-shore blocks, as non-operating partner. PPL is also among the first local E&P companies to extend its operations beyond national borders and has an interest in an exploration licence in Yemen in a joint venture with OMV.

Over the years, PPL has developed a reliable foundation and infrastructure for providing clean, safe energy through sustainable exploitation of indigenous natural resources while adhering to the highest standards of health and safety and constraining the ecological footprint of its operations. As a result, Monitoring and Inspection and Design & Construction departments, Mazarani and Kandhkot gas fields, Adhi field, Sui Field Gas Compressor Station, Sui Production, Sui Field Engineering and Purification Plant were certified for ISO 9001:2000 Quality Management System.

As such, the company believes in value addition for all its stakeholders and remains committed to a transparent financial and corporate regime. This factor has been recognized by the prestigious Management Association of Pakistan that selected PPL as the recipient of its 25th and 26th Corporate Excellence Awards.

At PPL, the health and safety of employees and sustainable use of natural resources are key requirements of operational excellence. Every effort is made to enhance Health, Safety and

Financial Statement Analysis |

Environment awareness among staff and other stakeholders. This commitment is evident from the landmark certification of Mazarani Gas Field, Sui Production, Sui Field Gas Compressor Station and Adhi Field for ISO 14001 and OHSAS 18001 certification. Besides, PPL was also awarded the Annual Environmental Excellence Award in 2006, 2008 and 2009 by the National Forum for Environment and Health.

PPL has played a significant role as a responsible corporate citizen since the inception of its commercial activities in Sui by establishing Model School Sui in 1957 for children of workers and local communities. Over time, the outreach of PPL’s Corporate Social Responsibility (CSR) portfolio has gone well beyond obligatory requirements. In 2001, PPL Welfare Trust was founded to provide geographical and thematic diversity within its CSR initiatives, which include education, health, infrastructure development and socio-economic uplift of disadvantaged communities, particularly those living in and around its operating areas. In recognition of these efforts, PPL has won the Corporate Philanthropy Award for four consecutive years from 2004 to 2007 for its commitment to social development.

INDUSTRY ANALYSIS

Historically the demand of petroleum products has been increasing at an average rate of 7.5 percent per year (last 4 years 4.25 %). The long term growth estimates have been forecast to range between at 4.5 to 5%. The maximum growth of 9% has been forecast in oil and gas consumption in the transport sector.

The consumption of furnace oil however, is expected to double itself mainly in power generation. There are several refinery projects in different stages of development which when reach maturity shall considerable increase the country’s refining capacity. The recent overhauling of Pakistan Refinery Limited (PRL) and Park-Arab Refinery Limited (PARCO) production units have enhanced production of HSD & FO during Jul-Oct 2007, which was up by 21 percent and 26 percent as against corresponding months of last year respectively. But, these are deficit products as their local production meets only 47 percent and 45 percent of the local demand for HSD and FO, respectively. Hence, in the meantime the growing needs for petroleum products will have to be met from additional imports of refined products as well as increase crude imports for the new refineries.

The existing infrastructure in the country is not adequate to bear the burden of the large volumes which are envisaged at the term of this millennium. For storage, transportation and distribution of the additional quantities of oil, additional facilities on the continuing basis need to be introduced before the existing facilities become so incapable that the consumers bear the cost of Shortages & non-availability in the market. In addition to the injection of adequate and modern facilities, the consumer will look for innovative marketing techniques and safe and friendly products to satisfy their sophisticated demands & concern about pollution and ecological imbalance. The petroleum industry must prepare itself to meet the challenges of free market and discerning consumers of the new era.

Based on the various factors, such as GDP growth, sustainable agricultural activities, increase in the vehicle population leading to increased petroleum trade activity, and thermal power generation etc., the POL requirement of the country are on constant increase.

Financial Statement Analysis |

As per OCAC’s long term demand estimates the POL demands, in the next 5 years i.e. up to 2005-10 is expected to increase by about 33% to a volume of 22,345 million tons as compared to 1998 99 actual of 16,805 million tons. Currently the demand is met by importing refined products mainly HSD and HSFO to the tune of 63% and the balance 37% demand is met by processing imported and as well as the indigenous crude.

In developing counties the demand for middle distillates and furnace oil grows at a fast rate. At present the demand for gas oil & furnace oil constitutes about 84% of the fuel. The four domestic refineries cannot meet such demand and since the refining capacity has been left far behind these two products are being and shall continue to be imported in large quantities in future. In 1998-99 nearly 5026 million tons of gas oil and 5.32 million tons of furnace oil was imported. At the time kerosene, gasoline and JP-1 were also imported to meet the small shortfalls in the supply from the local refineries.

The cost of current and next year’s petroleum imports are expected to be close to $7billion, which is higher than previous years import and about $1.2billion higher than current year’s revised estimates of $ 6.6billion. The oil import bill for the year 2007-2008 has been reported as approximately $9.00 billion.

The anticipated total consumption of crude oil for the next year has been estimated at 73.3million tons out of which the consumption of HSD High Speed Diesel and furnace oil, which recorded at 7.4 million tons and 7.3 million tons in the previous fiscal year, have been increasing substantially during the current year and it is being estimated that their demand will increase to 9.1 million tons and 8.1 million this year. The cumulative cost of Diesel and Furnace Oil has been projected at $2.25billion for the next year against $2.7billion during the current year. For the current year, an amount of $6.4billion had been estimated for the import of about 64.75million tons of crude, 4.6million tons of diesel, 2million tons of furnace oil.

COMPANY ANALYSIS

Pakistan Petroleum Limited is one of the oldest and largest E&P companies in the country. The primary activities of the company involve exploration, development and production of Pakistan's natural reserves of oil and gas. It was incorporated on 5th June 1950 after the promulgation of the Pakistan Petroleum Production Rules in 1949. PPL inherited all the assets and liabilities of its parent company, the Burmah Oil Company (Pakistan Concessions) Limited and commenced business on 1st July 1952.

The company remained under the management control of Burmah Castrol, UK till 1997. After that the government purchased the entire equity interest of Burmah Castrol PLC, formerly Burmah Oil Company. After June 2004, the Government of Pakistan disinvested around 15% of its equity in the company through an Initial Public Offering (IPO). The

Financial Statement Analysis |

Government of Pakistan intends to privatize PPL and IPO was a significant step towards achieving this objective. As at June 2008, the government of Pakistan owned 78.4% stake of PPL, the International Finance Corporation (IFC) had 3.43% of shareholding and the rest 18.17% is free-float.

PPL is the second largest Exploration and Production (E&P) companies, both, in terms of production and reserves. PPL has been playing a crucial role in augmenting hydrocarbon resources since 1955. Presently PPL contributes around 25% of the country's total natural gas production. It is also one of the market leaders in terms of its holdings of exploration area. Out of 242,714 sq.kms area under exploration in Pakistan, PPL holds the second largest share, more than 22% in joint venture with partners. PPL is aggressive in exploration but at the same time conservative in selecting drilling sites.

It has discovered eight gas and three oil fields. PPL has working interest in 24 exploration blocks, of which eight are PPL operated and the other 14, including 4 off-shore are partner operated. Sui and Kandhkot gas fields are two of the major PPL operated fields where PPL has 100% ownership. In 1952 the company discovered the largest gas reserves at Sui. Within three years (1955) the supply of natural gas to Karachi for industrial and domestic use began through pipelines. Sui caters to about one-fifth of the total gas demand in the country. In 1959, vital discoveries at Kandhkot gas field and Mazarani field were made. Crude oil was discovered at Adhi field in 1978 and in 1980 commercial production started at Adhi.

In 1990, the Liquefied Petroleum Gas (LPG) and Natural Gas Liquid (NGL) Plan was installed and the production of LPG, NGL and gas from Adhi commenced. In the year 2007, PPL made oil and gas discovery at Mela-1 well (Nashpa Block) and two gas discoveries at Latif-1 (Latif Block) and Tajjal-1 (Gambat Block).

Profits for the 9 months ending March 2009 were Rs 20.970Billion which is 40% higher than same period last year. This translated into earnings of Rs 25.27 per share (9M 2008: Rs 18.04per share). This profit started from 37% higher sales this year of Rs 45.337Billion (9M 2008: Rs 33.126Billion). Main contributors to high profits this year are rupee depreciation against US dollar and delayed effect of the high international Oil prices. Other operating income has been high contributor in total profits, 3.344Billion, which comes directly from deposits in bank accounts, Musharika certificates, Pakistan Investment Bonds and TFCs.

On a closer look we get to see that along with high profits Finance cost has also went up by 38%. Similarly, other operating expenses have also increased by 46%. During the year on the operating front, Gas production from Sui and Sawan fields declined while production started from Gambat and Latif along with increases in production from Kandhkot and Nashpa. New business acquisitions included 75% working interest in Tullow Pakistan (Development) Limited in Chachar Development and Production lease, along with operatorship of the area in March 2009. The current production of the field is around 10 MMcfd of natural gas.The Exploration and Production (E&P) companies would be offered $4.08 per mmbtu in as

Financial Statement Analysis |

per 2009 petroleum policy, which was $3.65 per mmbtu in 2007 and $2.99 per mmbtu in 2001. The increase in the gas rates would bode positively for the E&P companies, and the sector is expected to show better results in the coming times.

Stock Data:

Pakistan Petroleum Limited Key Data:

  Ticker: PPL Country: PAKISTAN

  Exchanges: KAR Major Industry:Oil, Gas, Coal & Related Services

    Sub Industry:Crude Oil & Natural Gas Producers

  2009 Sales61,580,072,000(Year Ending Jan 2010).

Employees: 2,667

  Currency: Pakistan Rupees Market Cap: 196,175,694,279

  Fiscal Yr Ends: June Shares Outstanding: 995,815,707

  Share Type: Ordinary Closely Held Shares:650,689,016

BETA=nΣXY - (ΣX)(ΣY)/nΣX² - (ΣX)²

n = 48 ΣX= 54.64ΣY=68.07ΣX²= 1118.97Σxy = 777.35

BETA = 48(777.35) - (54.64)(68.07) / 48(1118.97) - (54.64)²

=37312.8 - 3719.3448 / 53710.56 - 2985.5296» 0.66

ALPHA = Ȳ - βẊ = 1.42 - 0.66(1.138) » 0.67

Financial Statement Analysis |

  Current Price (4/30/2010): 197.00(Figures in Pakistan Rupees)

CALCULATION OF MARKET RISK (BETA)

Expected Return Rs=ᾳ + β(Rm) where Rs= Required Return= (0.67 + 0.66(20.30) ᾳ = 0.67= 14.07% β= 0.66

Rm is assumed to be 20.30

CALCULATION OF CAPM

Rs = Rf + Bs (Rm - Rf)

Where;

Rs= Required Return on Pakistan Petroleum Ltd

Rf= Risk Free rate of Return which is assumed to be 12.25%

Bs= Beta of Pakistan Petroleum stock which was calculated to be 0.66

Rm= Market Rate of Return is assumed to be 20.30

Rs = Rf + Bs (Rm – Rf)

Rs = 12.25 + 0.66(20.30 – 12.25)

= 17.60 %

Financial Statement Analysis |

RATIO ANALYSIS OF PAKISTAN PETROLEUM LTD

LIQUIDITY RATIOS 2007 2008 2009

Current Ratio Current Assets 4.35 2.79 3.10Current Liabilities

Quick Ratio Quick Assets 4.16 2.67 2.96Current Liabilities

Cash Ratio Cash 0.10 0.08 0.09Current Liabilities

Fixed Asset Turn Over Ratio Sales 2.72 2.48 2.19Avg. Net Fixed Assets

LONG TERM SOLVENCY MEASURES

Total Debt Ratio Total assets - Total equity 0.22 0.31 0.28Avg. Total Assets

Times interest earned ratio Earnings before Interest & Tax 494 Times 458 Times 448 TimesInterest

ASSET MANAGEMENT, OR TUROVER, MEASURES 

Inventory TurnoverCost of Goods sold

10.07 10.53 11.87Avg. Inventory

Days sales in inventory365 days

36 35 31inventory turnover

Receivables Turnover Sales 4.8 4.11 3Avg. Accounts receivable

Days' sales in receivables 365 days 76 89 122Receivables turnover

ASSET TURNOVER RATIOS

Fixed Asset Turn Over Ratio Sales 2.72 2.49 2.19Avg. Net Fixed Assets

Financial Statement Analysis |

Total Assets TurnoverSales

0.84 0.82 0.86Avg Total Assets

PROFITABILITY MEASURES 

Profit Margin Net Income 43.68% 43.10% 45%Sales

Return on Assets Net Income 36.67% 35.38% 38.49%Avg Total assets

Return on equity Net income 41.82% 45.14% 44%Total Equity

P/E RatioPrice Per Share

5.68 10.36 12.99Earning Per Share

FINANCIAL RATIOS

Liquidity Ratios:

1. Current Ratio:

2007: = 4.35

2008: = 2.79

2009: = 3.10

This ratio shows that how much current assets a company as against current liabilities. And how efficiently company uses its current assets to generate more profit and higher ratio shows better performance. The latest current ratio of PPL is 3.10 which shows that PPL has current assets of Rs. 3.10 against liabilities of Rs.1. Current Ratio more than 1 is considered good, it means PPL is doing very good. It is because current assets increased in more proportion than current liabilities and mainly because of huge increase in trade debts which maybe because of lengthening credit period.

2. Quick Ratio:

2007: = 4.16

2008: = 2.67

2009: = 2.96

Quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to immediately extinguish its current liabilities. Quick assets include those current

Financial Statement Analysis |

Current AssetsCurrent Liabilities

Quick AssetsCurrent Liabilities

assets that presumably can be quickly converted into cash at close to their book values. Such items are cash, marketable securities and some accounts receivable. This ratio indicates a firm’s capacity to maintain operations as usual with current cash or near cash reserves in bad periods. Quick ratio of PPL was 4.16 in 2007 then it dropped to 2.67 and now 2.96. Still it is very good and showing good performance of the Company. Here we see that this ratio decreased because of high portion of trade debts which is not most liquid asset. This ratio is of more concern to the short term creditors.

3. Cash Ratio:

2007: = 0.10

2008: = .08

2009: = .09

The cash ratio measures the extent to which a corporation or other entity can quickly liquidate assets and cover short-term liabilities, and therefore is of interest to short-term creditors. Cash ratio was 0.10 in 2007,.08 in 2008 and .09 in year 2009. It means PPL has Rs .09 against short term liability of Rs 1. This ratio indicates that PPL has not enough cash in their hands which shows that they are following aggressive policy. They do not put cash in their pockets instead invest them which is a positive sign but some of creditors may be think they will be exposed to high degree of default risk.

Asset Management

1. Inventory Turnover Ratio:

2007: = 10.07

2008: = 10.53

2009: = 11.87

Inventory turnover mean, the number of times the company will completes its operating cycle. Its mean greater the inventory turnover ratio, more will be the operating cycles. Which is favorable for the company’s position and as well as the inventory turn ratio is also increased in the past three years.

Days Sales in Inventory:

2007: = 360/10.07= 35 days

Financial Statement Analysis |

CashCurrent Liabilities

Cost Of Goods soldAverage inventory

2008: = 360/10.53= 34 days

2009: = 360/11.87= 31 days

This ratio shows that PPL is now more efficient in converting their inventory into sales. This is because their sales increased but the increase of sales raised from previous inventory on hand and purchases this year were low.

2. Fixed Asset Turn Over Ratio:

2007: = 2.72

2008: = 2.48

2009: = 2.19

This ratio shows that how company is utilizing its fixed assets efficiently for generating sales and higher the ratio better the company performance. PPL’s latest fixed assets turnover ratio is 2.19 which mean PPL is utilizing fixed assets of Rs 1 to generate sales of Rs 2.19. this ratio also indicates that are relying more on current assets than fixed assets now. In addition they are following aggressive policy. This increase occurred due to increase in sales which is higher that increase in fixed assets which was due to utilizing their inventory on hand rather that further purchases.

3. Total Asset Turnover Ratio:

2007: = 0.84

2008: = 0.82

2009: = 0.86

This ratio shows how company is utilizing its total assets efficiently for generating sales and more the ratio better the company’s performance. Total assets turnover ratio of PPL is 0.86 in 2009 which is quite good, means PPL is utilizing Rs 1 Total assets to generate sales of Rs 0.86. this ratio increased due to increasing sales and major part of increase was due to utilizing current assets. Fixed assets also increased but the increase in current assets was low.

4. Receivable turnover

2007: = 4.8

2008: = 4.11

Financial Statement Analysis |

SalesNet Fixed Assets

SalesAvg. Total Assets

SalesA/C Receivable

2009: = 3

Receivable turnover means how quickly company’s receivable is converted into cash. It must be higher. The PPL receivable turnover is 3 in 2009 which means it collects its debts 3 times in a year.

No. of Days = 365/4.8 = 76 days (2007)

= 365/4.11 = 89 days (2008)

= 365/3 = 122 days (2009)

It is the debt collection period. This ratio describes that how quickly a company collect its outstanding receivable. PPL debt collection period is 122 days in 2009 which means PPL is collecting cash from receivables in 122 days. This ratio is high and PPL should collect its debts earlier in order to maintain performance. This ratio increased due to loosening credit period notice that sales increased which maybe attributed to lengthening credit period which helped PPL but it should be kept in mind that they should arrange enough working capital so that risk exposure of long term investors is decreased.

Debt Management

1. Debt to Total Assets:

2007: = 0.20

2008: = 0.28

2009: = 0.24

In the debt to total asset ratio, which shows the comparison of the debt and total assets of the company. In the past few years, it is observed that the debt of the company is decreasing from the previous year in relation to the total assets of the company. This is favorable for company because it will decrease their financing cost and default risk. And it decreased due to large increase in assets against liabilities. Now they are able to fulfill their long term obligations effectively but its disadvantage is that now shareholders have increased which will increase the voting right of shareholder and possibly dilute the earnings of PPL.

2. Times Interest Earned:

2007: =494 times

2008: = 458 times

2009: = 448 times

Times interest earned ratio means how many number of times the company is earning its profit over its interest expenses. PPL’s Times interest earned ratio is very high which means it can pay its interest 448 times. This shows that the debt is low compared to the equity. This ratio decreased due to decrease in financing costs and increase in EBIT. This can be a positive sign for short term creditors and will decrease their default risk.

Financial Statement Analysis |

Total DebtTotal Assets

EBITInterest

3. Long term Debt ratio:

2007: =0.060 times

2008: = 0.080 times

2009: = 0.076times

The ratios has decreased due to decrease in long term debt while equity on the other side has increased. This is good for the firm it will decrease risk exposure of long term debt holders. Now their financing cost will also decrease which will increase their income left for shareholders which will increase their market value and we will discuss this effect in detail in market to book ratio.

4. Debt to Equity Ratio:

2007: =0.19

2008: = 0.31

2009: = 0.23

This ratio tells how much debt is taken against every single unit of equity and as we have seen that their debt has decreased and equity increased so now the firm take less units of debt against every single unit of equity raised. This will decrease investors risk but may increase the cost of equity as equity is increased which is high cost form of equity.

Equity Multiplier:

2007: =1.19

2008: = 1.31

2009: = 1.23

Financial Statement Analysis |

Long Term debtLong Term debt +Equity

Total DebtTotal Equity

Equity multiplier is another measure of how much debt is taken against each unit of equity raised but it is very similar to Debt-Equity Ratio so effect is the same is above.

Profitability Ratios

1. Profit margin on sale:

2007: = 43.68 %

2008: = 43.10 %

2009: = 45 %

Net profit ratio refers to a measure of profitability and shows that a company earns how much profit after deducting all expenses. The profit of PPL is 45 % is 2009 and increasing from the previous year. PPL is getting 45% profit on sales after deducting all expenses. This was due to increase in sales while cost of sales not increased by that proportion on the other side financing cost also decreased.

2. Return on Equity:

2007: = 42 %

2008: = 45 %

2009: = 44 %

It is the ratio of net income to total equity. It means PPL has got a return of 44% in 2009 on its total equity. The return on equity in the previous year is averaged 44% which is very good and showing good performance of the company. This increase was due to increase in net income. Equity also increased but increase in net income was more than increase in equity. This ratio is one of the most important ratio for investors because investor wants to see what they will gain after debt is paid. Although it has decreased but it was due to increase in equity not decrease in income so its not a problem. The disadvantage is that equity will be diluted if more equity is raised.

3. Price Earnings Ratio:

Financial Statement Analysis |

Net Profit* 100

Sales

Net IncomeTotal Equity

Price Per ShareEarning Per Share

2007: = 12.99

2008: = 10.36

2009: = 5.68

The P/E ratio (price-to-earnings ratio) of a stock (also called its "P/E", "PER", "earnings multiple," or simply "multiple") is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio. PPL’s P/E ratio as reduced highly compared to the previous year’s which means now investors are paying less for each unit of net income, showing a healthy sign of the company’s performance.

4. Dividend Yield:

2007: = 4.19 %

2008: = 6.30 %

2009: = 6.86 %

The dividend yield or the dividend-price ratio on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio.PPL has given 6.86% yield per unit in the year 2009. An increase in this ratio tells that now the firm pays more to its shareholders in the form of dividend but this increase is not so big which means PPL stills follow the policy of holding back earnings for future investments and expansion.

5. Return on Capital Employed:

2007: = 57 &

2008: = 64%

2009: = 62 %

Return on Capital Employed (ROCE) is used as a measure of the returns that a company is realizing from its capital employed. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital.

6. Return on Assets:

Financial Statement Analysis |

Net IncomeTotal Assets

2007: = 33.29%

2008: = 32.29%

2009: = 33.41 %

This ratio tells how much they are earning on their assets. This ratio has increased slightly which is due to increase in net income against total assets. This is good sign for investors because it will decrease their risk and increase their return and expectation will also increase which may increase their cost of equity.

7. Price to Sale ratio:

2007: = 3.39

2008: = 3.18

2009: = 2.62

We have seen that P/E ratio has decreased and in some cases it may be negative so it may not provide us with the true side of the picture so we use Price to Sale ratio to enhance the image of the company. A decrease in this ratio is due to increasing price per share while sale per share has decreased which is because of increase in total equity in more proportion than the increase in sales. This might be due to their market value increasing while their performance has not changed so much. So the firm is going towards equating their internal strengths with market value of the firm.

8. Market to Book Ratio:

2007: = 3.24

2008: = 3.33

2009: = 2.56

This ratio tells how much a firm is valued in market and how much it should be (book value). In this case this ratio has decreased which is due to increasing book value per share in more proportion than it is increasing in market. PPL's stock is overvalued in the market. This ratio is better when it is around 1. Neither investors has enormous expectations nor they has chances of takeover. In this case PPL has to perform better and justify their position to analysts and critics if they want to increase their market value and at the same time survive in the market

Financial Statement Analysis |

Price Per ShareSales Per Share

Price Per ShareBook Value Per Share

The DuPont Identity

ROE2007=Profit Margin * Total Assets Turnover * Equity Multiplier

= 43.68 % * 0.84 * 1.26

= 42%

ROE2008=Profit Margin * Total Assets Turnover * Equity Multiplier

= 43.10 % * 0.82 * 1.40

= 45.56%

ROE2009=Profit Margin * Total Assets Turnover * Equity Multiplier

= 45 % * 0.86 * 1.31

= 44.44%

This approach is used to analyze the effect of different components on ROE This tells that ROE can be composed of three parts; profit margin, assets turnover, and equity multiplier. So if at any time one factor is affected the other factors can be used to compensate so that ROE is stable and growing.

In this case we see that profit margin remained stable while deviation in ROE has occurred which can be linked to the decrease in assets turnover as equity multiplier has also increased. With two factors affecting positive on ROE and one negative in 2008 we can see that the impact of negative factor was large which alienate the effect of others.

While in 2009 the negative effect was due to equity multiplier i.e. Increase in equity is more in proportion to debt.

So we can summarize that with other things constant if PPL increase their equity multiplier they can achieve higher level of ROE and the effect of positive income will not be than alienated by the decrease in other factors.

Financial Statement Analysis |

Horizontal and Vertical Analysis of Profit & Loss Statement

Horizontal analysis focuses on trends and changes in financial statement items over time. Along with the dollar amounts presented in the financial statements, horizontal analysis can help a financial statement user to see relative changes over time and identify positive or perhaps troubling trends. In one horizontal analysis approach, a base year is selected and the dollar amount of each financial statement item in subsequent years is converted to a percentage of the base year dollar amount. I have used chain base year here i.e. 2007 is used base year for 2008 and 2008 is used base year for 2009 so that immediate increase /decrease can be seen and not much of the interpretation will be dependent on long past data. Assuming 2007 is the base year, 2008 revenues were 119%% and assuming 2008 as base year 2009 revenues were 134% increased from the previous year, as shown in the above calculations.

Some interesting trends can be noted from this analysis. The percentages for each financial statement item increased each year, but the trends for each item differed. For example: in 2009 when revenues were 134% of the base year amounts, cost of goods sold was less—only 127% of the base year amount. Which means PPL raised its selling prices and/or its inventory cost declined?

 Notice that 2009 net income was 140% of the base year amount; even though operating expenses had increased to 148% of the base year amount, this was more than offset by the favorable trends in revenues and cost of goods sold.

In addition to base year comparisons, dollar and percentage changes from one year to the next could also be analyzed. For example: 2009 net income increased by 2% over the previous year, as shown in the above table.

Similarly vertical analysis which is sometimes is referred to as “common-size analysis” because all of the amounts for a given year are converted into percentages of a key financial statement component. For example in our analysis of the income statement, total revenue is 100% and each item is calculated as a percentage of total revenue and in year 2009 cost of sales was 33 % of net sales which was 35% in 2008. Vertical or common-size analysis allows one to see the composition of each of the financial statements and determine if significant changes have occurred. We will use the balance sheet information below to explain how one might prepare a three year vertical analysis. We see that in our analysis of income statement the only factor that decreased its proportion as a part of net sales is cost of sales which affected the profit margin in 2009 i.e.it increased by the same percentage as cost of sales decreased.

Since total revenues usually are set at 100 percent, vertical analysis of the income statement essentially shows how many cents of each sales dollar are absorbed by the various expenses..

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In the case of the above example, the organization appears to be fairly stable over the three years of data we have. Again, these percentages won’t provide you with a lot of insight in and of themselves.

Horizontal and Vertical Analysis of Balance Sheet

Vertical analysis of a balance sheet will answer questions relating to asset, liability, and equity accounts, such as the following:

What percentage of total assets is classified as current assets? Current liabilities comprise what percentage of total liabilities and stockholders’ equity?

Inventory makes up what percentage of total assets? Is this changing significantly over time? If so, is it increasing or decreasing? [These answers could lead to additional questions such as the following: If it is increasing, could this indicate that the company is having trouble selling its inventory? If so, is this because of increased competition in the industry or perhaps obsolescence of this company’s inventory?

Accounts receivable makes up what percentage of total assets? Is this changing significantly over time? If so, is it increasing or decreasing? (These answers might lead to additional questions such as the following: If it is increasing, could this indicate that the company is having trouble collecting its receivables? If it is decreasing, could this indicate that the company has tightened its credit policy? If so, is it possible that the company is losing sales that it might have made with a less strict credit policy?)

What is the composition of the capital structure? In other words, total liabilities make up what percentage of total assets and total stockholders’ equity makes up what percentage of total assets?

In our analysis we see that there is significant decrease in long term investments and long term loans while fixed assets has increased from 2008 to 2009. While on the other side loans and investment and other receivables have increased significantly. While short term investments have decreased significantly. The overall increase in total assets was 35% from base year 2008 and 21% from base year 2007. While on liabilities and owners equity side reserves increased largely from 8% in 2008 to 56% in 2009. On liabilities side deferred taxation has decreased from 607% in 2008 to 87% in 2009. A decrease in growth rate of overall liabilities has decreased from 76% in 2008 to 7% in 2009.

Similarly in vertical analysis we took total assets as base amount and divide other parts on it. And on the liability side we took total liabilities and owners equity as base amount and divide other sub parts on it.

We will analyze major parts here. On the assets side we see that fixed assets were 35% of total assets in 2008 while 42% of total assets in 2009. We saw in horizontal analysis that fixed assets increased but vertical analysis tells us about a decrease in proportion to total assets. This is because the overall assets increase in more percentage against that of fixed

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assets. Another large change can be seen in trade debts which was 21% of the total assets in 2008 while it is 33% of the total assets the same increase we can see in horizontal analysis which shows in an increase of 110% taking 2008 as base year. This is showing that company has extended its credit period and their investments in trade credit. We see that long term assets in 2008 were 38% of total assets while in 2008 while in 2009 long term assets were 45% of total assets. On the other side the ratio for current assets has decreased from 62% in 2008 to 54% in 2009.

On the liabilities and owners equity side equity was 71% of TL&OE while in 2009 it was 76% of TL&OE this truly shows the increase in owners' equity but major part of this increase is due to increase in reserves. PPL's long term liabilities have not increased by large percentage. Trade and other payables were 20% of TL&OE in 2008 while it was 16% of TL&OE in 2009. This percentage has decreased which shows that now PPL does not rely majorly on short term borrowings and this ratio is compensated by the increase in reserve. Overall current liabilities have also decreased as portion of TL&OE in 2009.

RECOMMENDATIONS

Below are some recommendations which justify our investment in securities of the Pakistan Petroleum Ltd.

1. Pakistan Petroleum Ltd. Is the pioneer of natural gas industry in Pakistan and is the front line player in the Industry, so we recommend investment in Pakistan Petroleum Ltd.

2. The last three years averaged growth rate of the Company is 25 % which means company’s performance in term of profitability, growth and sales is increasing.

3. PPL’s stock is considered reliable for investor as the stock price is constantly moving upwards in the recent time.

4. PPL had announced a dividend of Rs 15.50 per share in the year 2008, and in the year 2009, the announced dividend per share is Rs 13.00 which is quite attractive for an investor.

5. Shares of PPL are currently trading in Stock Exchange between 190 and 205 and are continuously moving upward which shows the sign of Investor’s confidence on the company.

6. Pakistan petroleum Ltd is the leader of the market in its industry and thus has a very high demand, so it is worth buying their shares.

7. If we see the Capital structure of PPL, we can see that there is a very little portion of Debt as compared to the Equity of the company, it’s another plus point of PPL.

8. The dividend on the PPL’s shares is attractive and the shares prices are going upward so an investor can earn handsome dividend and capital gain as well.

9. The Market risk of the PPL’s Stock is below 1 i-e 0.66 which means it is less risky. It has less deviation with the market.

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Bibliography:

The following links were used to obtain all the information about the project on Pakistan Petroleum Ltd.

http://www.ppl.com.pk/AboutPPL/CompanyInfo/Pages/CompanyOverview.aspx

http://www.ppl.com.pk/Repository/AnnualFinancialReport/Annual%20Financial %20Report%202007.pdf

http://www.ppl.com.pk/Repository/AnnualFinancialReport/Annual%20Financial %20Report%202008.pdf

http://www.ppl.com.pk/Repository/AnnualFinancialReport/PPL%20Annual %20Report%202009.pdf

http://www.brecorder.com/index.php? id=943778&currPageNo=1&query=&search=&term=&supDate

http://www.kse.com.pk/listing-companies/analysis_report.php?id=3&sid=3.07

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