Lucky Cement Comparative Financial Statments Analysis

Financial Statement Analysis |

Final Project: Corporate Finance

Financial Statement Analysis

SUBMITTED TO:

Sir Moen Shehzad

SUBMITTED BY:

Ifzal Ahmed MBA1-FA09-003

COMSATS Institute of Information Technology, Lahore

SUBMITTION DATE:

December 31, 2009

Table of Contents

Chapter 1 Introduction of the Company History 2

Organization Structure 2 Export Overview 3 Key Financial Figures 5 Financial Performance 8

Chapter 2 Data Collection & Methodology Data Collection 12 Methodology 12 Users of Financial Statements analysis 12 Tools of Analysis 14

Percentage Analysis 14Ratio Analysis 18 Liquidity Ratios 19 Solvency Ratios 21 Efficiency/Activity Ratios 24 Profitability Ratios 27

Chapter 3 Financial Statement Analysis Percentage Analysis 34

Vertical and Horizontal Analysis of Profit and Loss 34Trend Analysis of Profit & Loss Account 36Balance Sheet Analysis: Vertical Analysis 39Balance Sheet Analysis: Horizontal Analysis: 40Trend Analysis 41

Risk (Beta) Estimation of Lucky Cement 43 Ratio Analysis 44

Liquidity Ratios 44Debt Ratios 46Activity Ratios 49Profitability Ratios 54

Conclusion 59

References 61


Chapter 1Introduction of the Company


History

Lucky Cement Limited was founded in 1996 by Abdul Razzak Tabba. The company initially started with factories one at Pezu district of the North West Frontier Province (N.W.F.P). Now they also have a plant in Karachi. Lucky Cement Limited was sponsored by Yunus Brothers Group (YB Group) which is one of the largest business groups of the Country based in Karachi and has grown up remarkably over the last 50 years. The YB Group is engaged in diversified manufacturing activities including Textile, Spinning, Weaving, Processing, Finishing, Stitching and Power Generation. The Group consists of a number of industrial establishments other than Lucky Cement Limited, they include

Lucky Textile Mills - established in 1983 Fazal Textile Mills Limited - established in 1987

Gadoon Textile Mills Limited - established in 1988

Lucky Energy (PVT) Limited - established in 1993

Yunus Textile Mills Limited - established in 1998

Organization Structure

Lucky Cement Limited is managed by the team of professionals, who are committed and dedicated to fulfill the mission and vision of the organization. Two production plants and five marketing offices are managed by the staff strength of then 1800 permanent employees throughout Pakistan.


Export Overview

This diagram exhibits the countries which are engage in business with lucky cement. The reason for selecting these countries is the low transportation cost. This is the main advantage of lucky cement over other cement manufactures of cement as export to India are concern.

This graph shows the top regions for Lucky cementIn FY 01 - 08

This graph shows the overall export share of Lucky as compare to other industry.


This in the map of Pakistan and exhibits the location of plants of lucky cement. One factory is in Northern and one in southern region. These two plants are strategically very important based on following reasons.

Northern Plant

Availability High quality and much quantity limestone. Capacity of 4.0 million tons

Next to Indus highway

Access to Indian and central Asian markets.

Serve demand in northern region and also in Afghanistan.

Southern Plant

Availability High quality and much quantity limestone Capacity of 2.5 million tons

Access to Karachi port and National Highway.

The only manufacture with loading capacity at Karachi seaport .

Serve the need of Southern region and Middle east, East Africa, and Sri Lanka.

This is the only cement manufacture in country which is strategically placed in this region in order to capture the domestic as well as export market. This is competitive edge over pears.


Key Financial Figures

Production & Sales Volume Performance:

During this year lucky cement has achieved all time high volume of production and sales as enumerated in the table below:

A comparative analysis of sales volume of the industry with lucky cement


Market share of lucky cement


Year wise Market share

The overall comparative growth of industry can be seen from following graph


Financial Performance

A comparison of the key financial results of Our Company for the year ended June 30, 2008 with the same period last year is as under:


Sale performance

Lucky cement has achieved an overall net sales revenue growth of 35.43% as compared to same period last year. Increase in revenue was attributed due to both increases in volume by 19.75% and net retention by 15.68%.Our Company continued to focus more on exports because of strong establishment of its brand in international market market.. The domestic sales registered a negative growth of 6.38% because of higher exports made by the company which registered a growth of 116.29%. The ratio of sales revenue from exports was 54.43% whereas the local sales accounted for 45.57% during the financial year under review. The average combined net retention prices per ton improved by 13.10% over the comparative period last year. The prices in the international markets remained robust whereas the prices in the domestic market were under pressure, however in the last quarter the prices started increasing because of substantial increase in production cost coupled with duties and taxes increased by the Government in federal budget

Cost of Sales

The major cost of production for cement manufacturing is the energy cost which constitutes 68.77% of the total cost of production. The energy cost is further divided into heat energy and power energy which constitutes 44.12% and 24.65% respectively of the total cost of production. As a matter of fact, the international prices of coal and oil have increased manifold during the last year which have badly affected the cost of production both in Pakistan and abroad. The international prices of coal were approximately US$ 80 per ton by end of last year which has now increased to US$ 210 per ton by the year ended June 30, 2008. The prices of furnace oil have also increased tremendously which have also affected the cost of production.

Beside decline in the sale of cement, the cement is packed either in paper bags or polypropylene bags. The increase in the prices of paper and the polypropylene in the international markets have also increased the cost of cement bags substantially. Similarly, the


other cost factors have been increased either because of inflation, oil prices and depreciation of Pak Rupee for imported items.

Resultantly, the production cost per ton of our Company was only increased by 18.89%.

Gross Profit

Our Company achieved a gross profit rate of 25.73% for the year ended June 30, 2008 compared to 29.35% gross profit rate achieved same period last year. However, the gross profit in term of absolute value was increased by 18.71% because of the volumetric growth.

Finance Costs

The finance costs was reduced substantially from Rs.186 per ton last year to Rs.23 per ton during the year ended June 30, 2008 mainly because of interest rates hedging executed by the Company by entering into cross currency swaps agreements with the banks. These hedging transactions allowed the company to offset positive interest differential between KIBOR and LIBOR against the total financing cost of the Company. On the other hand, these swaps exposed the Company to currency risk for depreciation of Pak Rupee but at the same time ever increasing exports of the Company provided a natural hedge against these swaps transactions to mitigate the currency risk.

As you know the economic and political scenario of the Country started deteriorating from November 2007 resultantly the Pak Rupee lost almost 12% of its value by June 30, 2008 as compared to June 30, 2007. Due to the depreciation of Pak Rupee our Company on the one hand incurred exchange loss of Rs.800.359 million on cross currency swap but on the other hand realized exchange gain of Rs.277.816 million on realization of GDR proceeds and export sales.

Distribution Costs

Distribution costs incurred by the Company were in-line with the increase in the volume of export sales. The percentage of distribution costs to net export sales was 12.51% for the year ended June 30, 2008 compared to 11.66% last year.

Deferred Taxation

During the year under review, the deferred tax provision amounted to Rs.456.53 million was reversed out of the total provision of Rs.1,515.54 million created in prior years due to higher ratio of local sales. Since the ratio of exports has increased which are covered under presumptive tax regime on which no deferred tax provision is required, therefore to that extent deferred tax was reversed.

Contribution to The National Exchequer

Our Company contributed a total amount of Rs.3.907 billion (2007: Rs.4.137 billion) to the Government Treasury in shape of taxes, levies, excise duty and sales tax. In addition to that


our Company earned precious foreign exchange of approximate US$ 150 million during the year under review from exports besides bringing foreign investment of US$ 109 million against the issuance of GDRs in the international market.

Chapter 2Data Collection & Methodology


Data Collection and Methodology

Data CollectionThe overall objective of financial statement analysis is the examination of a firm’s financial position and returns in relation to risk. This must be done with a view to forecasting the firm’s future prospective. Our project was regarding the analysis of financial statements of lucky cement with its close competitors i.e. maple leaf cement and cherat cement company. We will build relationship between items of financial statements among themselves so that a clear idea about the real picture can be revealed. We will use different tools and techniques which will help us in doing so. However in doing so we will take the help of financial statements and general market perception about the figures which will be subjective in nature. In our analysis we relied mostly on secondary form of data and consult many text books while analyzing the financial performance indicators. All of the financial statements of lucky cement, maple leaf and cherat cement were collected from their respective websites. In addition some help from the website of Karachi stock exchange and Lahore stock exchange was also taken. We analyzed the financial statements of six years starting from 2005 to most recent financial statements of year ended June 2009. Some of the graph representing the overall performance of our main company was taken from lucky cement website and their financial statements in the introduction section only. Main problem was with the industry averages and market price of their stocks because of the unavailability of historical data for market price of stocks in calculating of the profitability ratios. We also compared the ratios with their predetermined calculated ratios for the purpose of accuracy and found our results very correct. While calculating some of the ratios we also took help from our text book written by Van Horne and from some other reference books such as Corporate Finance by Ross westerfield Jeff and Business Finance by Gitmen.

MethodologyFinancial Statement Analysis |

Users of Financial Statements analysisThis analysis will help all of the stakeholders of the company. As it is an academic project the particular use of this analysis will be for students, teachers, and general public however in general it will benefit the investor, debtors, employees and the management of company in their respective ways. As a standard way we list down the users of this analysis as:

Investors: To help them determine whether they should buy shares in the business, hold on to the shares they already own or sell the shares they already own. They also want to assess the ability of the business to pay dividends

Creditors: To determine whether their loans and interest will be paid when due Debtors: businesses supplying goods and materials to other businesses will read their

accounts to see that they don't have problems: after all, any supplier wants to know if his customers are going to pay their bills

Employees and management : information about the stability and profitability of their employers to assess the ability of the business to provide remuneration, retirement benefits and employment opportunities

Students and researchers: researchers' demands cover a very wide range of lines of enquiry ranging from detailed statistical analysis of the income statement and balance sheet data extending over many years to the qualitative analysis of the wording of the statement

Financial advisors: they need to know, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on

General Public(potential investors)

Interest Group Ratios ConsideredInvestors Return on Capital EmployedCreditors LiquidityDebtors Gearing ratiosEmployees and management Profitability ratios + Return on Capital EmployedStudents and researchers Depends on the nature of their studyFinancial advisors Possibly all ratiosGeneral Public(potential investors) Profitability and maybe Return on Capital Employed


Tools of Analysis

Two broad techniques will be applied for this analysis. They are: Percentage Analysis Ratio Analysis

These are the two main techniques mostly used for analyzing financial statements. First we will discuss percentage analysis, its uses, and benefits and then we will explain ratio analysis in detail later in this section.

Percentage Analysis

Percentage analysis as name suggest is techniques used to describe items of financial statements as percentage of either time or any other item in financial statements. Like we can find that how much increase or decrease occurred in financial statements’ items through the years both in percentage terms and Rs terms. This helps in identifying a relationship between different items of financial statements in time series.

1. Horizontal analysis (Index Analysis)2. Trend Analysis 3. Vertical Analysis (Common Size Analysis)

In this part we will discuss each part in separate and then we will combine them for overall analysis.


Horizontal analysis (Index Analysis)

Percentage Analysis

1. Horizontal analysis (Index Analysis)

This technique is also known as comparative analysis. It is conducted by setting consecutive financial statements side-by-side and reviewing changes in individual items on a year-to-year or multiyear basis. The most important item revealed by comparative financial statement analysis is trend. A comparison of statements over several years reveals direction, speed and extent of a trend(s). The horizontal financial statements analysis is done by restating amount of each item or group of items as a percentage.

Such percentages are calculated by selecting a base year and assign a weight of 100 to the amount of each item in the base year statement. Thereafter, the amounts of similar items or groups of items in prior or subsequent financial statements are expressed as a percentage of the base year amount. The resulting figures are called index numbers or trend ratios. In our analysis we selected 2008 as base year and determined horizontal analysis only for two years both in Rs and percentage terms. This method is useful when identifying an increase/decrease relationship among the individual items through years. As basis of Analysis, the analyst may seek variables which seem to improve or deteriorate and bring a challenge to the stakeholders in their various decisions

Like in the following figure we have selected 2008 as base year and increase/decrease in 2009 is calculated both in Rs and percentage terms. For example take stores and spares we see that there is a decrease in the percentage as well as Rs terms. While there is huge increase in trade debts which is almost 76% as compare to the previous year. Similarly more relationships can be found from the given table which makes our analysis more clear.


Trend Analysis

Vertical Analysis (Common Size)

Calculate Change in Dollar Amount

Rupee change= Current year amount- Base year amount

Percentage change=Rupee change/Base year amount

Or

Percentage change= Current year amount- Base year amount /Base year amount

2. Trend Analysis

Trend analysis is more like horizontal analysis. It reveals patterns in data covering successive periods. The difference is that trend gives us a more clear time series analysis of financial statements. This gives us an increase/decrease trend throughout the years or we can take even take decades for our analysis. In this method one year is taken as base year and increase/decrease trend is found for each year. The current year item is taken as percentage of the base year and similarly relationship between individual items throughout years can be seen. In addition trend does not give us change only depicts a pattern of data in various successive years. Formula for calculating trend is given as:

Trend Percentage= Current period amount/Base period amount*100

We calculated trend in MS Excel. We took 2005 as base year and trends for successive periods are found until year end June 2009. A glimpse of our findings can be seen in the figure below.

We can see the trend of individual items in balance sheet in above figure.


3. Vertical Analysis (Common Size Analysis)

This method is defined as analysis of financial statements that reveals the relationship of each item to the total, which is 100 %. Vertical/Cross-sectional/Common size statements came from the problems in comparing the financial statements of firms that differ in size.In this tool each item in balance sheet is calculated as percentage of total assets on the asset side while on liability side each item is expressed as percentage of total liabilities and equities. While in income statement each item is expressed as percentage of total sales or revenue. This is helpful when we want to find how much an contributed in total sales (let say) comparing to last year’s contribution of the item to total sales or revenue.

For example in this figure we can see that stock in trade in 2008 comprised 2.07% of total assets while in 2009 it increased to 3.12% of total assets. Similarly relationship between many of the items can be found using this analysis

Formula for calculating Common size percentage:

Common size %age=Analysis amount/base Amount


For balance sheet we take total assets as base amount while for income statement we take total sales/revenues/turnover as base amount.

A graphical illustration of above data is given in above chart.

Ratio Analysis

An integral aspect of financial statement analysis involves performing “Ratio Analysis”. This involves calculating a number of different industry standard ratios and comparing them to various benchmarks. The benchmarks can be the ratios of other competitors, industry average ratios. There’s no set procedure for performing ratio analysis because it all depends on the type of company you’re analyzing – certain industries have industry specific ratios. This complex data could seem confusing sometimes. Therefore there are many well-tested ratios out there that make the task a bit less perplexed. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking.

In other words The Balance Sheet and the Statement of Income are essential, but they are only the starting point for successful financial management. Apply Ratio Analysis to Financial Statements to analyze the success, failure, and progress of any business. Not everyone needs to use all of the ratios we can put in these categories so the table that we present at the start of each section is in two columns: basic and additional.

The basic ratios are those that everyone should use in these categories whenever we are asked a question about them. We can use the additional ratios when we have to analyze a business in more detail or when we want to show someone that we have really thought carefully about a problem

We have discussed percentage analysis above now in this section we will explain ratio analysis. These are calculated between two individual items of financial statements. Broadly we can divide these ratios into four categories and then we will discuss each of them separately. The four broad categories are given as:


Liquidity Ratios

Ratio Analysis

These categories have their own significance and advantages as their name suggests. Now we will discuss each of them in detail.

Liquidity Ratios

These ratios indicate the ease of turning assets into cash. They include the Current Ratio, Quick Ratio, and Working Capital. These ratios are important for short term creditors who are normally interested in short term liquidity of the company. In doing so they want to analyze whether the firm will able to pay the receipts in due time or not or. There are three current ratios that we have calculated in our project and that are widely used and acceptable for short term creditors.

1. Current Ratio

The Current Ratio is one of the best known measures of financial strength. Formula for current ratio is given below:

Current Ratio = Total Current Assets / Total Current Liabilities

The main question this ratio addresses is: "Does your business have enough current assets to meet the payment schedule of its current debts with a margin of safety for possible losses in current assets, such as inventory shrinkage or doubtful collectable accounts?" A generally acceptable current ratio is 2 to 1. But whether or not a specific ratio is satisfactory depends on the nature of the business and the characteristics of its current assets and liabilities. The minimum acceptable current ratio is obviously 1:1, but it’s not necessary to be so because it depends on nature of business and attitude of suppliers or vendors.

For example in our analysis we have found the current ratio of our main company i.e. lucky cement company and its competitors and the results are given in the following graph.


Solvency Ratios

Efficiency/Activity Ratios

Profitability Ratios

2. Quick Ratio

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

The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding inventories, it concentrates on the really liquid assets, with value that is fairly certain. It helps answer the question: "If all sales revenues should disappear, could my business meet its current obligations with the readily convertible `quick' funds on hand?"

A short illustration of our findings can be seen in order to better understand the concept of quick ratio given below.

In our example we have taken Stock in trade, Trade Debt, other receivables, cash & bank, Loans and advancements as quick assets because they are considered to be most liquid.

3. Net 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

Bankers look at Net Working Capital over time to determine a company's ability to weather financial crises. It determines a company’s attitude towards risk. If high Net working capital it means company is conservative in terms of investing and is interested in keeping cash with themselves while a low or sometimes negative net working capital may mean that company invest more and does not keep cash with themselves.An illustration of working capital trend among the three companies can be seen in below graph.

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.

Solvency Ratios

One of many ratios used to measure a company's ability to meet long-term obligations. The solvency ratio measures the size of a company's after-tax income, excluding non-cash depreciation expenses, as compared to the firm's total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations.Acceptable solvency ratios will vary from industry to industry, but as a general rule of thumb, a solvency ratio of greater than 20% is considered financially healthy. Generally speaking, the lower a company's solvency ratio, the greater the probability that the company will default on its debt obligation.This can be divided into four sub parts which are given as:

Debt Ratio: The debt to asset ratio is the percentage of total debt financing the firm uses as compared to the percentage of the firm's total assets. It helps you see how much of your assets are financed using debt financing

Equity Ratio: A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Debt to Equity Ratio: Indicates what proportion of equity and debt that the company is using to finance its assets. Sometimes investors only use long term debt instead of total liabilities for a more stringent test.

Capitalization Ratio: A ratio showing the financial leverage of a firm, calculated by dividing long-term debt by the amount of capital available

Now we explain these ratios in more detail in this section.


1. Debt Ratio

A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load.A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk.Formula for debt ratio calculation:

Debt ratio= Total Debt/Total Assets

This ratio explains the stricture of total assets i.e. how much of assets comprise of debt and how much of equity. Generally the lower the ratio the better it is. How ever on other side if it is low it means company will have to share more profit with shareholder on the positive side they will have low risk of default. This ratio is generally important for long term debt holder. An example of lucky cement can be seen in the graph on the next page. Here we can see a trend of this ratio for lucky cement company.

Here we can see how much variation occurred in Lucky cement’s debt ratio

2. Equity Ratio

The Equity Ratio is a good indicator of the level of leverage used by a company. The Equity ratio measures the proportion of the total assets that are financed by stockholders and not creditors.

The calculation of equity ratio is:

Equity Ratio=Total Owner's Equity / Total Assets


http://www.money-zine.com/Definitions/Investing-Dictionary/Leverage/

http://www.money-zine.com/Definitions/Investing-Dictionary/Assets/

http://www.money-zine.com/Definitions/Investing-Dictionary/Owners-Equity/

A low equity ratio will produce good results for stockholders as long as the company earns a rate of return on assets that is greater than the interest rate paid to creditors. This ratio is vice versa of debt ratio it shows how much of total assets is financed by shareholders equity. There is also a tradeoff between this ratio, if management wants to lower their shareholders they can choose to lower this ratio and finance major part of their assets from debt which in turn will increase their default risk and will have to pay more interest. In contrast if they increase this ratio they can minimize the default risk so its company’s choice to go on either side. A simple table showing shareholders part in assets can be seen in below table. Here we can see that in 2005 65% of assets are financed by debt while 35% are financed by common stock equity.

3. Debt to Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets A ratio greater than one means assets are mainly financed with debt, less than one

means equity provides a majority of the financing.

If the ratio is high (financed more with debt) then the company is in a risky position - especially if interest rates are on the rise

Formula for calculating debt to equity ratio:

Debt to Equity Ratio=Total Debt / Total Equity

The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.An example of debt to equity ratio is cherat cement is that in 2005 this ratio is 0.84 which means for every one unit of debt they have issued 0.84 unit of shareholders equity. As shown in the table below:

4. Capitalization Ratio


http://www.money-zine.com/Definitions/Investing-Dictionary/Assets/

http://www.money-zine.com/Definitions/Investing-Dictionary/Owners-Equity/

http://www.money-zine.com/Definitions/Investing-Dictionary/Return-on-Assets/

A ratio showing the financial leverage of a firm, calculated by dividing long-term debt by the amount of capital available:Formula for calculating capitalization ratio is:

Capitalization ratio= Long term debt/Long term debt+ Common Equity

By using this ratio, investors can identify the amount of leverage utilized by a specific company and compare it to others to help analyze the company's risk exposure. Generally, companies that finance a greater portion of their capital via debt are considered riskier than those with lower leverage ratios. This ratio deals with company’s long term debt.


These ratios are used to find how much efficient a company is in converting their assets into sales or revenue or in simple words identify the efficiency of the firm.Activity ratios measure company sales per another asset account—the most common asset accounts used are accounts receivable, inventory, and total assets. Activity ratios measure the efficiency of the company in using its resources. Since most companies invest heavily in accounts receivable or inventory, these accounts are used in the denominator of the most popular activity ratios These ratios can be divided into four major parts given as:

Accounts receivable turnover Inventory turnover ratio Total asset turnover Times interest earned ratio

We will explain these ratios separately and briefly.

1. Accounts receivable turnover

Accounts receivable is the total amount of money due to a company for products or services sold on an open credit account. The accounts receivable turnover shows how quickly a company collects what is owed to it.

Accounts Receivable Turnover = Total Credit Sales or only Sales/ Accounts Receivable


This ratio tells the credit policy of the company the greater this ratio the better but however company should not tighten this policy so much as it affects the sales. The greater this ratio means company receives accounts receivables more frequently and if policy is loose then this ratio might be low. This ratio is calculated in days and in times separately the difference is in understanding otherwise the concept is same. A graphical illustration of lucky cement’s accounts receivables turnover can be seen in below graph.

2. Inventory turnover ratio

For a company to be profitable, it must be able to manage its inventory, because it is money invested that does not earn a return. The best measure of inventory utilization is the inventory turnover ratio (sometimes called inventory utilization ratio), which is the total annual sales or the cost of goods sold divided by the cost of inventory.It’s calculated as:

Inventory Turnover Ratio = Total Credit Sales or only Sales/ Cost of Goods sold

Using the cost of goods sold in the numerator is a more accurate indicator of inventory turnover, and allows a more direct comparison with other companies, since different companies would have different markups to the sale price, which would overstate the actual inventory turnover.

In seasonal businesses, where the amount of inventory can vary widely throughout the year, the average inventory cost is used in the denominator. For example an Inventory turnover ratio of 21 means that company converts its inventory into sales 21 times in a year.

3. Total asset turnover

The total asset turnover measures the return on each dollar invested in assets and is equal to the net sales, which is total sales minus returns and allowances, divided by the average total assets.

Formula for calculating this ratio:

Average Total Assets = Assets at Beginning of Year + Assets at End of Year/2


Total Asset Turnover = Net Sales/Average Total Assets

It shows how much revenue is generated for each dollar invested in assets. This ratio tells how much efficient is the firm in converting its total assets into sales the higher this ratio the better is for the firm. For example a turnover ratio of 0.81 means firm utilizes 81% of its total assets into sales it means they have a margin to increase this ratio.

4. Times interest earned ratio

The times interest earned ratio indicates the extent of which earnings are available to meet interest payments. A lower times interest earned ratio means less earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates.A company must have enough earnings to pay its interest expense; otherwise it will eventually fail. Because earnings rise and fall depending on market and economic conditions, it would be preferable if the company’s earnings were much higher than interest expense in most years; otherwise, investing in the company would incur significant risk when the economy falters, as it always does eventually. The amount of safety desired depends on the stability of the company’s earnings, and how cyclical the company’s sector is. A company whose earnings rise and fall significantly with economic cycles should have a greater margin of earnings over interest payments.Formula for calculating this Ratio:

Interest Coverage Ratio=Earnings before Interest and Taxes / Interest Expense of Long-Term Debt

An example of this ratio can be seen in the table below:

This means that lucky cement company paid interest 55 times in 2005 an it decreased to 30 times in 2006 and to almost 5 times in 2009. This maybe due to the decrease in finance cost and less earning in 2009.


These ratios deals with the performance related to income statement in major. These ratios will be of interest to investor. Some examples of profitability ratios are profit margin, return on assets and return on equity. It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios.


For instances, some industries experience seasonality in their operations. The retail industry, for example, typically experiences higher revenues and earnings for the Christmas season. Therefore, it would not be too useful to compare a retailer's fourth-quarter profit margin with its first-quarter profit margin. On the other hand, comparing a retailer's fourth-quarter profit margin with the profit margin from the same period a year before would be far more informative. Some of the widely profitability ratios are listed below:

1. Gross Margin Ratio

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.

Comparison of your business ratios to those of similar businesses will reveal the relative strengths or weaknesses in your business. The Gross Margin Ratio is calculated as below:

Gross Margin Ratio = Gross Profit / Net Sales

*Gross Profit = Net Sales - Cost of Goods Sold

The greater his ratio the better the firm’s performance is. This ratio will mainly be affected by cost of goods sold or the level of sales. A graphical illustration of Maple leaf Cement Company’s gross profit in relation to its Competitors is given below.

2. Operating Profit Ratio

Operating profits are arrived at by deducting marketing, administration, depreciation and R&D costs from the gross margin. Companies seek to maximize operating costs through efficient operations and effective marketing.Operating profit is the profit earned from a firm's normal core business operations. This value does not include any profit earned from the firm's investments (such as earnings from firms in which the company has partial interest) and the effects of interest and taxes.

Calculated as:

Operating Profit Ratio= EBIT (Excluding any non Operating Income)/Net Sales.


The higher the ratio the better it is for the company. This ratio is effected by any administrative costs and marketing cost or depreciation cost. In our example lucky cement company has an operating ratio of 15% in 2008 which increased to 23% in 2009. The increase is normally attributed to high level of sales in 2009 and comparatively low administrative and marketing expenses.

3. Net Profit Ratio

Net profits are the profits that remain after tax. It is this final profit that is available for distribution as dividend or for adding to shareholder equity as retained earnings. Here we use net profit margin or ratio to analyze the final performance of any firm.

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. Sometimes it is better to calculate it before income tax because tax rates and tax liabilities vary from company to 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 = Net Profit/Net Sales or Revenue

A practical illustration can be found in this graph.

4. Return on Equity

The ROE is perhaps the most important ratio of all. It is the percentage of return on funds invested in the business by its owners. In short, this ratio tells the owner whether or not all the effort put into the business has been worthwhile. If the ROE is less than the rate of return on an alternative, risk-free investment such as a bank savings account, the owner may be wiser to sell the company, put the money in such a savings instrument, and avoid the daily struggles of small business management. The ROE is calculated as follows:

Return on Equity = Net Profit /Average Shareholders' Equity

Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares. The greater this ratio the better the firm’s position is. And this shows how much company is earning on the shareholders equity. A comparison of three firms’ ROE is shown in below graph.


5. Return on Assets

The Return on Assets of a company determines its ability to utilize the Assets employed in the company efficiently and effectively to earn a good return. The ratio measures the percentage of profits earned per Rs of an Asset and thus is a measure of efficiency of the company in generating profits on its Assets.

Formula for calculating ROA is:

Return on Assets = (Net Profit / Total Assets) x 100

A low ratio in comparison with industry averages indicates an inefficient use of business assets. This ratio will be of importance for investor who wants to see the company’s ability to generate sales using its total assets efficiently. For instance lucky cement has ROA of 10% in 2007 which decreased to 9 % in 2008 thus causing a slight decrease in their efficiency.

6. Earnings per Share

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability.

Calculated as:

EPS= Net Income-Dividends on preferred stock/ Average Number of Shares outstanding

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. An earnings per share is generally considered to be the


single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio.This ratio will also be of our prime concern.

7. Dividend Payout Ratio

The percentage of earnings paid to shareholders in dividends.

Calculated as:

DPO= Dividends / Earning Per Share

The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. This ratio is an indicator of how much of Earning the firm is giving in dividend to the common shareholder.8. Price Earnings Ratio

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

P/E Ratio= Market Price per share/Earning per Share

EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters. It is an important ratio for investors. This shows how much an investor is willing to pay for one unit of earning. It should be carefully examined it should not be too high or not too low. A high ratio may sometimes depict that no one is willing to pay for the stock. In our observation it was difficult to find historical data on market prices so ratios for some years were not calculated.

9. Earning Yield

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. The earnings yield is used by many investment managers to determine optimal asset allocations.Formula for earning yield is computed as follows:

Earning yield Ratio=Earnings per Share / Market Price per share

So a share that cost RS 200 and had an EPS of RS 10 would be on a P/E of Rs 20 and would have an earnings yield of 5%.

PE is more widely used and discussed and it is therefore what most investors prefer to use out of sheer familiarity. Earnings yield is more consistent with other measures that are used such as dividend yield, bond yields and interest rates


http://moneyterms.co.uk/yield/

10. Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows:

Dividend Yield= Dividend per share/ Market Price per share

In our analysis we couldn’t find data for some years that’s because of unavailability of historical data for market prices of shares.

Financial Ratios Chart


Financial statement analysis

Ratio analysis Percentage analysis

Horizontal analysis

Trend analysis

Vertical analysis



Solvency Ratios

Liquidity Ratios

Current ratioQuick RatioNet Working Capital

1 .Debt ratio

2 .Equity Ratio

3 .Debt to Equity

4 .Capitalization ratio

1 .Receivables Turnover

2 .Inventory Turnover

3 .Assets Turnover

4 .Interest Earned Ratio

1 .Gross Profit Ratio

2 .Operating Profit Ratio

3 .Net Profit Ratio

4 .Return on Equity

5 .Return on Assets

6 .Earnings per Share

7 .Dividend Payout Ratio

8 .Price Earnings Ratio

9 .Earning Yield

10 .Dividend Yield

Chapter 3Financial Statement Analysis


Percentage Analysis

This type of analysis is further divided into three categories as explained earlier. Main focus of all percentage analysis will be on profit and loss account because it tell us how company revenue and cost structure is in last year and how relative increase or decrease effects profitability. However balance sheet will be analyzed side by side to see how assets are allocated and financed over 6 years period.

Vertical and Horizontal Analysis of Profit and Loss

Income Statement 2008 2009 Vertical Analysis Horizontal Analysis

2008 2009Rupee Differences

Percentage Differences

Net Sales 16957879 26330404 100 100 9372525 55.26944Cost of Sales 12600706 16519138 74.30591 62.73788 3918432 31.09692

4357173 9811266 25.69409 37.26212 5454093 125.175Distribution Cost 1155054 2427837 6.811312 9.22066 1272783 110.1925Administrative expense 125752 165936 0.741555 0.630207 40184 31.95496

1280806 2593773 7.552867 9.850867 1312967 102.511Operating Profit 3076367 7217493 18.14123 27.41125 4141126 134.6109Finance Cost 126743 1236971 0.747399 4.697881 1110228 875.9679Other Operating Income -1293 -23255 -0.00762 -0.08832 -21962 1698.531Other Charges 644388 826776 3.799933 3.140005 182388 28.30407

769838 2040492 4.539707 7.749566 1270654 165.0547

Profit Before Taxation 2306529 5177001 13.60152 19.66168 2870472 124.4499


Taxation -371141 580452 -2.18861 2.204493 951593 256.397

Profit After Taxation 2677670 4596549 15.79012 17.45719 1918879 71.66227

Total Cost * 14281502 21757110

* Total cost includes all expenses (CGS, Distribution and administration expenses, Financing Cost, and taxation)

Here we are doing vertical and horizontal analysis side by side because there is a strong link between both. In short it is clear that year 2009 was more profitable for lucky cement as compared to previous year, starting from CGS we see that this year CGS is only 62% as compared to 74% in 2008. This tells that relative increase in our sales is more than that in CGS as shown in next columns increase in sales is 55% (Note: this increase is of Rupee sales, this means it takes in to account both price increase and volume of sales increase) in actual company volume sales increased by 6.25% although domestic demand decreased by 14% and so is the reason that many of competing firm suffered losses or reduce performance, but lucky cement focused on export market and got benefited with increased international demand and thus was successful to achieve 6.25% volume increase and 55% rupee increase in sales, but when we look to CGS increase in it is only 31%. Looking at rupee differences column we can simply say that for every 1 rupee increase in sales company was able to keep CGS increase only to the level of 42 paisa, which means giving 58 paisa increase to gross profit and finally resulting in 125% increase in gross profit from lass year GP. Looking at note 27 of annual report it is very clear that raw material consumption cost increase only by 17%, which is great success of company that it maintained bargaining power over suppliers and kept raw material cost controlled only abnormal increase of 39% (which is higher than 31% increase in CGS) shown in note 20 is in fuel and power cost due to increase in government prices of petroleum and electricity, otherwise all other items of CGS increased in line with overall increase of CGS, so we can say that increased cost of fuel and energy was compensated by control on raw material consumption cost. Thus in total company this year earned 37 paisa GP out of each rupee sale as compared to 25 paisa in last year.

Distribution cost is clearly increasing at higher pace as compared to our sales. It is very clear in vertical analysis that in 2008 it costs only 6.8 rupee in every 100 rupee sale however in 2009 it is costing 9 rupees for every 100 rupee sales. If we look in horizontal analysis its rapid increase of 110% greater than 55% increase in sales is obvious due to rise in petroleum (fuel) prices. Going to note 28 it becomes very clear that dramatic increase is only in items that includes fuel consumption (Logistics and related charges 126%; travelling and conveyance 38%; vehicle running 38%), company tried to minimize all other components of distribution cost and also went successful in reducing rupee value of few items like entertainment -28%; advertisement -52% and loading -17%, despite of increase in sales (rupee & volume). Instead of this great effort company failed to compensate for increased fuel cost and it is being reflected in income statement analysis.

Next, we see that administration cost was also controlled and increase in it is less as compared to increase in sales, here is one noticeable point that company efficiency in controlling administration cost was same as was in CGS, this clearly tell us that to boost profitability company controlled cost at each level and tried best to increase sales. 31% increase in all cost structure was maintained against 55% increase in revenues, except factors of inflation in fuel prices which is uncontrollable.


Hence total effect of company operations is visible with increase in operating income by 134%. This year company is successful to have 9 rupee additional in its operating profit for each 100 rupee sale as compared to last year.

A material percentage change apparent in finance cost is only because of small absolute Rs. 896 million gain due to currency swap in year 2008. This gain was subtracted in computation of year 2008 finance cost. This gain if neglected then increase in financial cost is only 20%. However this difference created is being slightly diluted in title of other operating income because this year company reported gain of 21.36 millions on forward contracts in other operating income (Note 30&31). This is reason of incredible percentage difference of other operating income of two years. Finally we cannot make comment on taxation because no reconciliation is given in annual reports. It is stated in Note 33 (and in every year taxation note) ‘Since the Company is not liable to any tax under the Normal Tax Regime, therefore, no numerical tax reconciliation is given’ As far as this analysis of two year is concerned we can conclude that company went successful to reduce it costs and in profitability in 2009 net profit is 17.4 rupee on every 100 rupee sale which is 1.66 rupee higher as compared to last year and company achieved profit growth of 71.6 % by increasing sales by 55%.

At this point we can also go for calculation of DOL in 2008EBIT= profit before taxes + finance cost And then calculate percentage change in EBIT. I.e. in our case 163.6% so our DOL comes out to be 2.96, which means 1% change in 2008 sales caused 3% change in EBIT.

Trend Analysis of Profit & Loss Account

*

Total cost includes all expenses (CGS, Distribution and administration expenses, Financing Cost, and taxation)


Income Statement Trend Analysis (base year 2004) 1 equals to 1002004 2005 2006 2007 2008 2009

Net Sales 1 1.368767 2.745894 4.30629 5.831845 9.055073Cost of Sales 1 1.438894 2.807308 4.894842 6.971912 9.139962

1 1.253592 2.645028 3.33967 3.959432 8.915653Distribution Cost 1 1.165329 1.659507 24.35312 56.51502 118.7903Administrative expense 1 1.336361 2.324882 2.424442 2.738979 3.614219

1 1.283677 2.119925 9.179201 19.30378 39.09228Operating Profit 1 1.251661 2.67872 2.964995 2.974911 6.979465Finance Cost 1 2.000646 76.53652 79.58375 11.69 114.0907Other Operating Income 1 0.742839 0.132161 409.6934 0.841797 15.13997Other Charges 1 1.189024 2.504665 2.648267 12.00045 15.39706

1 1.339571 3.445852 5.964192 12.21907 32.38722

Profit Before Taxation 1 1.245958 2.62895 2.770413 2.375169 5.331063

Taxation 1 1.343539 2.162431 0.501365 -1.3007 2.034254

Profit After Taxation 1 1.205356 2.823064 3.714542 3.904664 6.702834Total Cost * 1 1.418731 3.056233 4.76882 6.422749 9.784717

First we will have an over look of all of the components of income statement and link them with profitability ratios also and in second step we will compare few important items graphically to reach at conclusion.Here firstly we compare net sales with CGS we can simply conclude that year 2004 is most profitable as compared to all successive years. We see in all years increase in our Sales is more than increase in CGS. In year 2009 we see our sales is 9.05 times as compared to 2004 but our CGS is 9.13 times so it means that our gross profit margin will be less in 2009 as compared to gross profit margin of 2004, and this is proved in gross profit ratio in 2004 is 37.8% and is higher than any other year, however in year 2006 we see that increase in CGS is very slightly greater then that in sales so GPM in 2006 (37%) is close to that of 2004.Now before moving further I like to discuss shaded areas of table. In year 2006-2007 company changed its reporting policy just to show rapid increase in their net sales. There is difference in amount of net sales of year 2006 between two annual reports (i.e. 2005-2006 and 2006-2007) this difference is due to the factor of logistics expense, upto 2005-2006 company used to deduct these expenses from gross sales to calculate net sales, but in year 2006-2007 when fuel prices seems to rise continually company decided to make this factor part of distribution cost, in 2006 this factor amounted 69,572 thousand and is accounted in calculation of net sales however in 2007 it further increased to 438,522 thousands which is part of distribution cost this year so it can be see clearly that distribution cost index suddenly raised to extreme level 2.3 and in successive years it continued to rise to level 118 times in 2009 as compared to 2004. no other index rises so sharply, think if company kept it as part of net sales then it could never show impressive growth of its net sales year by year. Now in end there arises another question of noticeable increase in 2009 gross profit, operating profit and net profit index this can be explained from last row. We can have better understanding of reason behind this from graphs

0.00

2.00

4.00

6.00

8.00

10.00

2004 2005 2006 2007 2008 2009

IND

EX Sales

CGS

GP

Now it become clear that upto 2006 company increase in sales was almost in line with CGS increase so GP increases also in same pace, we can compare it with results in GP ration that in these 3 years ratio remained stable between 34-37%, but in next two years (2007 & 2008) graph depicts that company efficiency to increase sales declined however CGS kept on rising with same pace (probably prices of outputs not increase against inflation of inputs, better evaluation can be done if unit sales data is available for each year ) as a result gross profits suffered and raised (rupee amount) at lower rate (line getting flatter) and it can be compared with GP ratio of these two years fallen in range of 20s, but in 2009 company boosted it sales drastically keeping CGS to rise with same previous pace thus Gross profit drastically raised and its index increased by 4.96 times in 2009. This again is comparable with GP ratio that in


2009 it increased to 32% from 21% in 2008. Here it become clears how different angle of analysis are related with each other and show similar results.

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2004

2005

2006

2007

2008

2009

ind

ex

s Sales

Total Cost

Net Profit

Now this graph gives a wider look and considers overall cost structure including Distribution and administration costs. Here we see that in year 2009 although sales are sharply increased but unlike CGS total cost also raised with higher pace. And that’s why net profits could not boost up as much as our gross profit was boosting up. Net profits only raised by 2.8 times as compared to 4.96 times increase in gross profits. Here we see that this burden was created by distribution cost whose index increased by 62 times. We can compare this result with NPM in next part where we see our NPM rises by only 1 % in 2009. This is only because of rising distribution cost in 2009, we can see it raised to level of 9.2 % from 6.8% of sales. If it would have remained 6.8% then our Net Profit margin would have increased to 19.86% instead of 17% and net profit index would be 7.63 times which means 3.72 times increase which is closer to 4.96 increases in Gross profits. Thus our end of net profit line would be steeper as was gross profit line in 2009.


Balance Sheet Analysis:Vertical Analysis

Balance sheet at June 2009 Vertical Analysis 2008 2009 2008 2009

ASSETSNON-CURRENT ASSETSProperty, plant and equipment 25881375 30476872 75.5902 79.3826Long term advance 0 55373 0.0000 0.1442Long term deposits 2175 2175 0.0064 0.0057

25883550 30534420 75.5965 79.5325CURRENT ASSETSStores and spares 4160146 3411549 12.1503 8.8860Stock-in-trade 709372 1196608 2.0718 3.1168Trade debts – considered good 720314 1267248 2.1038 3.3008Loans and advances 111989 108876 0.3271 0.2836Trade deposits and short term prepayments 189641 9761 0.5539 0.0254Other receivables 890204 59251 2.6000 0.1543Tax refunds due from the government 538812 538812 1.5737 1.4034Taxation-net 130899 176584 0.3823 0.4599Sales tax refundable 634136 40162 1.8521 0.1046Cash and bank balances 270011 1049091 0.7886 2.7326

8355524 7857942 24.4035 20.4675TOTAL ASSETS 34239094 38392362 100.0001 100.0000

EQUITY AND LIABILITIES

Share capital 3233750 3233750 9.4446 8.4229Reserves 15421673 20018222 45.0412 52.1412

18655423 23251972 54.4858 60.5641Non-Current LiabilitiesLong term finance 6633333 4300000 19.3736 11.2001


Long term deposits 30252 28589 0.0884 0.0745Deferred liabilities 174171 234633 0.5087 0.6111Deferred taxation 1058998 1478490 3.0930 3.8510

7896754 6041712 23.0636 15.7368CURRENT LIABILITIESTrade and other payables 3549543 2677356 10.3669 6.9737Accrued mark-up 288977 233381 0.8440 0.6079Short term borrowings 3606710 6187941 10.5339 16.1176Current portion of long term finance 241667 0 0.7058 0.0000Sales tax payable

7686897 9098678 22.4507 23.699234239074 38392362 100.0000 100.0000

Only one noticeable change in balance sheet is that company is doing capital expenditure to increase fixed assets and going for extension but company is not financing its expansion from fixed liabilities instead is going toward equity and current liabilities, in next session of trend analysis it will become further clear about aggressive strategy of company, noncurrent liability is not only decreasing in percentage but also in absolute amount. Notice that company raised equity from retained earnings in this year it has not issued any shares and thus not diluted it EPS. One more important point that will strengthen our discussion is that increase in current liabilities is solely due to raise of short term borrowing from 10% to 16% because we also see that company successfully reduce its trade payables (account payables) also. So up to some extent company is using short term financing instead of long term (probably due to high interest rates).

Horizontal Analysis:

Balance sheet at June 2009 Horizontal AnalysisDollar difference

Percentage Difference

ASSETSNon Current AssetsProperty, plant and equipment 4595497.00 0.1776 Long term advance 55373.00 MATH ERRORLong term deposits 0.00 0.0000

4650870.00 0.1797 CURRENT ASSETSStores and spares (748597.00) (0.1799)Stock-in-trade 487236.00 0.6869 Trade debts – considered good 546934.00 0.7593 Loans and advances (3113.00) (0.0278)Trade deposits and short term prepayments (179880.00) (0.9485)Other receivables (830953.00) (0.9334)Tax refunds due from the government 0.00 0.0000 Taxation-net 45685.00 0.3490 Sales tax refundable (593974.00) (0.9367)Cash and bank balances 779080.00 2.8854

(497582.00) (0.0596)TOTAL ASSETS 4153267.53 0.1213

Equity and LiabilitiesShare capital 0.00 0.0000 Reserves 4596549.00 0.2981

4596549.00 0.2464


Non Current LiabilitiesLong term finance (2333333.00) (0.3518)Long term deposits (1663.00) (0.0550)Deferred liabilities 60462.00 0.3471 Deferred taxation 419492.00 0.3961

(1855042.00) (0.2349)Current Liabilities Trade and other payables (872187.00) (0.2457)Accrued mark-up (55596.00) (0.1924)Short term borrowings 2581231.00 0.7157 Current portion of long term finance (241667.00) (1.0000)

1411781.00 0.1837 4153288.00 0.1213

Here we see that total company assets are increasing by 12% approx and that is only because of 17% increase in plant and equipment for expansion. Current assets as total are reducing and only two items of noticeable increase in current assets are stock-in-trade (inventory) and Trade debts (account receivables) and increase in both of them is obvious because of increasing sales by 55% as mentioned earlier. As no share issued during the year so share capital do not increased but reserves increased and that increase is only because of inappropriate profits and again it becomes clear that company is paying its long term finance and reducing it by 35%. It is also efficient in paying its trade debts a and reduced them by 24%, more light on this will be thrown in activity/efficiency ratios

Trend Analysis:

Tend Analysis (base year 2004) (1equals 100 percent)Balance Sheet 2004 2005 2006 2007 2008 2009ASSETS

Non Current AssetsProperty, plant and equipment 1 2.675331 3.808679 4.037973 5.143401 6.056664Long term advanceLong term deposits 1 0.956044 0.956044 0.956044 0.956044 0.956044

1 2.674554 3.80739 4.036581 5.141509 6.065358

Current AssetsStores and spares 1 1.365671 2.002719 3.151197 6.57585 5.39256Stock-in-trade 1 0.671989 2.504153 3.925308 4.117529 6.945676Trade debts – considered good 1 1.394473 6.015468 29.14325 44.03974 77.47909Loans and advances 1 4.189172 6.285173 7.515337 3.480405 3.383659Trade deposits and short term prepayments 1 1.275897 36.01832 1.22044 23.95667 1.233072Other receivables 1 0.251349 1.057945 2.308967 11.22351 0.747025Tax refunds due from the governmentTaxation-net 1 0.902381 0.633681 1.340609 3.505691 4.729211Sales tax refundableCash and bank balances 1 0.14142 2.063617 1.239075 0.269993 1.049021

1 0.67869 2.25242 2.734525 4.224032 3.972486TOTAL ASSETS 1 2.111545 3.368752 3.669287 4.882703 5.474984Equity and LiabilityShare CapitalShare capital 1 1.075 1.075 1.075 1.319898 1.319898Reserves 1 1.346152 2.388613 3.618445 8.304187 10.77931

1 1.191913 1.641392 2.17166 4.331323 5.398527

Non Current LiabilitiesLong term finance 1 5.678403 8.831822 7.248351 5.768116 3.73913


Long term deposits 1 1.248253 1.34211 1.272911 1.488926 1.407077Deferred liabilities 1 1.093262 1.706646 1.383608 1.636622 2.204762Deferred taxation 1 1.725295 2.885052 3.045646 2.128181 2.9712

1 4.244037 6.650963 5.649545 4.450515 3.405036

Current LiabilitiesTrade and other payables 1 1.691909 4.106537 4.37712 10.04512 7.576851Accrued mark-up 1 13.78249 20.9602 35.95866 31.85724 25.72825Short term borrowings 1 1.38366 1.136196 5.038951 6.344804 10.88562Current portion of long term financeSales tax payable

1 2.301863 5.104874 6.824097 8.257649 9.774255Total Assets 1 2.111545 3.368752 3.669287 4.8827 5.474984

0

2

4

6

8

10

12

Ind

ex

Non-CurrentAssets

Current Assets

Non Currentliabilites

Current liabilites

Equity

Now we can build very strong links between 6 years profit and loss and balance sheets. Notice that in year 2004-05-06 company heavily financed its expansions from debt and raised level of long term financing to its peak as red point in table shows in 2006 it is 8.8 times of that in 2004. now come to profit and loss side of the picture, we see that finance cost in 2006 increased tremendously as shown by yellow mark in trend analysis of income statement in 2006 finance cost index raised to 76.53 times as compared to 2 times in last year, we see from income statements that in 2006 finance cost raised by 281.76%, this is because of double cause 1. Increase in long term financing and 2. Increase in interest rates (external factor). So company started settlement of debt and in note 14 of 2007 statement it becomes clear that company settled finance taken from MCB, UBL and NBP. This is the reason of sharp drop of noncurrent liabilities in 2006 and then later company continued to decrease long term financing, but fixed assets expansion is not constrained and this is reflected by issuance of equity in 2007 raising index from 1.075 to 1.32 (graph shows total equity index) and also small increase in short term financing. So here we may can say that 2006 is the turning point of lucky cement when benefits of financial leverage were being overcome by its costs so management worked accordingly.

Increase in interest rates of long term assets is clearly proved by following notes of year 2004-05 and 2008-09

Note 18.1 The long-term finances carry floating mark-up rates ranging between 11.82% to


16.18% (2008: 9.41% to 14.55%) per annum. (2009 annual report)

Note 11.1 The long-term finances carry floating mark-up rates ranging between 2.83% to 9.76%(2004: 2.65% to 3.95%) per annum. (2005 annual report)

From here we can see that upper limit of range in 2005 is much less then lower range in 2009, that’s the reason of moving toward equity from debt.

Risk (Beta) Estimation of Lucky Cement

Few assumptions made in this analysis area follow:

1. LSE 25 index return is considered as market return 2. Lucky cement return is based only on capital gain3. Dividend gain is not considered because our data is based on 1 year stock prices and

index values only.

Following is the Data and Computation of Returns

last working day

Stock Price

Index Values

January 29.2 1,435.75

February 36.56 1,676.56

March 45.61 2,068.44

April 58.19 2,151.50

May 57.13 2,160.60

June 60.61 2,128.00

July 71.21 2,313.20

August 71.36 2,737.28

September 77.92 2,915.51

October 67.74 2,846.33

November 63.81 2,827.88

December 66.87 2,912.77

Now we calculate Covar (RM,RL) = 65.4119And standard deviation of RM= 8.6So Variance RM= 73.96So beta of lucky cement share = 65.4119/73.96= 0.8844

Figure proves our results beta. Beta is always slope of characteristics line with market return on x-axis and stock returns on y-axis


Stock return (RM)

Market return(RM)

February 25.20548 16.77242March 24.75383 23.37405April 27.58167 4.015587May -1.82162 0.422961June 6.091371 -1.50884July 17.48886 8.703008August 0.210645 18.33305September 9.192825 6.511208October -13.0647 -2.37283November -5.80159 -0.6482December 4.795487 0.030019

y = 0.8843x + 2.6834

-20

-10

0

10

20

30

-10 0 10 20 30

Market Return

Sto

ck R

etu

rn

Series1

Linear (Series1)

Interpretation: keeping all assumptions a side beta of lucky cement stock tells us that if Market return falls by 1% return 0.88% only and if we talk considering assumptions we ban say that if LSE25 falls or rises by 1 % lucky cement share price will fall/rise by only 0.88% so lucky cement is average beta stock.

Ratio Analysis

Our main focus in this part of analysis will be on comparison of Lucky cements performance over 6 years with elected competitors, because up to some extent we already have discussed lucky cements individual performance and analyzed directions in which it is going, of course few o aspects that are not touched in upper portion will be enlightened here.

Liquidity Ratios:

1. Current ratio

In current ratio we see that Lucky's current ratio is increasing in 2006 means that increase in current assets over the year is greater then increase in current liabilities. In 2008-09 horizontal analysis we see that investment in current assets is falling from 24% to 20% however current liabilities are increasing from 22% to 23% so that’s why liquidity o company is falling in this year lucky cement have only 86 paisa in current assets to pay for its current liability. We already know that lucky cement is operating with aggressive strategy and minimization of long term financing is leading to increase in short term financing. But we can not say that it is dangerous for lucky cement because with major share in export market it do have guarantee of having payments in time to settle its


Cherat

YearCurrent Assets

Current Liabilties

Current Ratio

2005 1,384,495

449,823 3.08

2006 1,267,950

516,444 2.46

2007 1,240,430

542,025 2.29

2008 1,719,948

1,597,703 1.08

2009 1,343,431

1,070,994 1.25

Lucky

YearCurrent Assets

Current Liabilities

Current Ratio

2005 1,342,511

2,142,763 0.63

2006 4,455,494

4,752,035 0.94

2007 5,402,678

6,352,556 0.85

2008 8,355,524

7,686,897 1.09

2009 7,857,942

9,098,678 0.86

Maple Leaf

YearCurrent Assets

Current Liabilties

Current Ratio

2005 1,940,059

1,595,499 1.22

2006 2,664,462

2,649,519 1.01

2007 4,051,957

3,756,487 1.08

2008 5,994,896

7,382,464 0.81

2009 5,214,877

9,962,884 0.52

short term obligation, it is proved by having profitable operations over years with negative working capital.

In comparison with maple leaf and cherat cement; lucky cement liquidity is very week but if we notice it is stable over 6 years, both of competitors current ratio fall rapidly in later years and this is due to very low profits and losses in later years as explained later. Lack of profitability leads to nonpayment of short term obligations thus increasing current liabilities in comparison with current assets. Little more analytical thinking tell us that lucky cement current asset to total asset ratio is continually higher then competitors but still it have lower current ratio which indicates that it have comparative high percentage of non-current liabilities which indicates that probably suppliers have more trust in them. Following table shows current asset comparison of lucky cement with Maple leaf cement.

CA to TA (%) 2006 2007 2008 2009maple leaf 14 16 22 20Lucky cement 18 21 24 20

2. Quick Ratio:

Lucky

YearQuick Assets

Current Liabilities

Quick Ratio

2005 434,739

2,142,763 0.20

2006 2,879,712

4,752,035 0.61

2007 2,810,575

6,352,556 0.44

2008 2,701,890

7,686,897 0.35

2009 3,681,074

9,098,678 0.40

Now let's analyze quick ratio keeping aspect of current ratio in mind. We see here that cherat have very high liquidity in year 2005 and 2006 and were also as profitable in these two years as was lucky cement. But later on there was very sharp fall in liquidity of cherat, apparently very high liquidity of cherat in 2009 was just because of highly stocked inventories in their shelves because of less then expected sales, inventory of cherat cement in 2009 accounts 87.8% of all of its current assets whereas that of lucky cement for the same year accounts only for 58.64% of current

so we can conclude that in 2008 and 2009 lucky cement liquidity is better than both of competitors because quick ratio is better measure as we know inventory can never be turned into cash in shorter time span first it must be turned into finished goods then must be sold and then receivables must be converted into cash, and this specially is not a rapid process in times of lower demand and suppressed economic conditions when receivable turnover is lower. we


Cherat

Year Quick AssetsCurrent Liabilities

Quick Ratio

2005 764,943 449,823 1.70

2006 697,046 516,444 1.35

2007 500,385 542,025 0.92

2008 145,993 1,597,703 0.09

2009 89,546 1,070,994 0.08

Maple Leaf

YearQuick Assets

Current Liabilities

Quick Ratio

2005 499,292

1,595,499 0.31

2006 573,106

2,649,519 0.22

2007 1,349,357

3,756,487 0.36

2008 1,701,713

7,382,464 0.23

2009 1,296,441

9,962,884 0.13

see in 2008 and 2009 lucky cement have more liquid assets to pay shot term obligations, i.e. 0.4 rupee in quick assets to pay entire short term liabilities. A better conclusion on liquidity can be made after studying activity ratios also.

Debt Ratios

1. Debt ratio

Lucky

YearTotal Liabilities Total Assets

Debt Ratio

2005 9,673,153

14,806,836 0.65

2006 16,553,144

23,622,777 0.70

2007 16,370,211

25,723,761 0.64

2008 15,583,651

34,239,074 0.46

2009 15,140,390

38,392,362 0.39

We see in year 2005 lucky cement debt ratio was highest of all and it further increased to .70 in next year which means that 70 % of our assets are financed by other people money, but in 2006 as shown in graph earlier company realized rising finance cost and economic down turn with high interest rate, it lessened long term financing and issued shared in 2007 thus reducing debt ratio, in contrast maple leaf is increasing debt financing in later years so as a result it finance cost raised to level of 22% sales in 2009 as compared to only 4.6% of Lucky cement in 2009, this high cost of financing is the main reason of losses incurred by

maple leaf in last two years. Cherat cement got very small amount of total assets as compared to our main company but still after reaching to level of 50% of outsiders money in 2007 cherat reached to the level of zero NPM due to finance cost burden but however next year they boosted sales and kept CGS in control to achieve small profits.


Cherat

YearTotal Liabilities

Total Assets

Debt Ratio

2005 1,460,329

3,202,800 0.46

2006 1,498,963

3,611,889 0.42

2007 1,296,758

3,533,350 0.37

2008 2,224,167

4,382,273 0.51

2009 2,475,106

4,743,510 0.52

Maple Leaf


Total Assets

Debt Ratio

2005 4,138,511

10,428,973 0.40

2006 11,493,675

18,793,412 0.61

2007 14,443,937

23,436,974 0.62

2008 17,790,672

26,151,561 0.68

2009 18,943,037

26,660,838 0.71

Equity ratios are just reciprocal image of Debt ratios (i.e. 1-debt ratio) so we now move to debt to equity ratios.

2. Debt to Equity ratio:

Lucky


Shareholders Equity

Debt to Equity

2005 9,673,153

5,133,683 1.88

2006 16,553,144

7,069,633 2.34

2007 16,370,211

9,353,550 1.75

2008 15,583,651

18,655,423 0.84

2009 15,140,390

23,251,972 0.65

Debt to equity ratio is of special interest for creditors it tells them that how much equity (owners money) is their behind the money they invested to provide them a secure side. An other interpretation of sudden fall in debt level of lucky cement is that it may reached threshold level of debt to equity and faced difficulty in arranging debt financing, value of 2.34 in 2006 means that there is only 1 rupee invested by owners against 2.83 rupee investment of creditors, this interpretation comes in mind because

when we see case of maple leaf which is under ownership of a strong reputable saigol group easily reached to level of 2.82 in 2009 and kept their equity in limits just to keep ownership and management undiluted. As cherat is a small asset firm with small amount of owners investment their maximum level is 1.03 which means that there is only 1.03 rupee of debt against each rupee of owners.Going toward equity side of financing is not at all always beneficial because main objective is owners wealth maximization and effect of dilution in shares cause denominator of EPS to rise and reduces our EPS, but if selecting debt financing is so costly that it reduces nominator to the level that even if denominator remain constant we get reduced EPS then selecting


Cherat


Shareholders Equity

Debt to Equity

2005 1,460,329

1,742,471 0.84

2006 1,498,963

2,112,926 0.71

2007 1,296,758

2,236,592 0.58

2008 2,224,167

2,158,106 1.03

2009 1,175,106

2,268,404 0.52

Maple Leaf


Shareholders Equity

Debt to Equity

2005 4,138,511

6,290,462 0.66

2006 11,493,675

7,299,737 1.57

2007 14,443,937

8,993,037 1.61

2008 17,790,672

8,360,889 2.13

2009 18,943,037

6,717,801 2.82

issuance instead of debt is beneficial so it’s a game of tradeoff and picture becomes more clear in profitability ratios that Lucky cement despite of diluting equity by issuance of shares achieved very high EPS as compared to competitors, but this rational approach is no always the case because dilution do have other effects like loss of control in management and ownership.

3. Equity Multiplier/Capitalization Ratio:

YearTotal Equity Total Assets

Equity multiplier

2005 5,133,683 14,806,836 2.88

2006 7,069,633 23,622,777 3.34

2007 9,353,550 25,723,761 2.75

2008 18,655,423 34,239,074 1.84

2009 23,251,972 38,392,362 1.65

Equity multipliers is simply reciprocal of equity ratio tells us how much management is able to borrow on initial owners investment in other words how many times management increased owners investment. In case of maple leaf it is continually increasing only because management is not diluting shares and raising more debt to finance assets expansion so for each single rupee of owner’s investment they have assets of 3.97 rupees, but in case of Lucky cement dilution is done to support asset increase and to pay back

high debt to reduce finance cost that’s why in 2009 they have only 1.65rupees of assets against each rupees of owners this do not mean that they have less assets in fact this means that owners have invested more of their own money in business rather than borrowing more from outsiders, it is very clear that assets of lucky cement are more in absolute amount from competitors taken into account in this report. In my opinion most of the picture is clear on this stage but we will once again summarize all in charts to see how over 3 companies are moving in different aspects of analysis.


YearTotal Equity

Total Assets

Equity Multiplier

2005 1,742,471

3,202,800 1.84

2006 2,112,926

3,611,889 1.71

2007 2,236,592

3,533,350 1.58

2008 2,158,106

4,382,273 2.03

2009 2,268,404

4,743,510 2.09

Year Total EquityTotal Assets

Equity Multiplier

2005 6,290,462

10,428,973 1.66

2006 7,299,737

18,793,412 2.57

2007 8,993,037

23,436,974 2.61

2008 8,360,889

26,151,561 3.13

2009 6,717,801

26,660,838 3.97

Activity Ratios:

1. Receivable Turnover:

Lucky

Year Net SalesAvg Account Receivables

in times

in days

2005 3,980,109

69,208.0 57.509 6.34

2006 8,054,101 112,222.5 71.769 5.01

2007 12,521,861 417,757.0 29.974 12

2008 20,819,749 1,131,865.5 18.394 19.5

2009 30,915,035 1,468,508.5 21.052 17

This ratio tells management efficiency in collecting its receivables. Usually if sales is high then high receivable turnover is accepted because more sales are on credit then it takes more time in collecting receivables. In year 2006 lucky cement showed high efficiency in collecting its receivables, turnover is increasing instead of increase in credit sales by a tremendous growth rate of 102%. Turnover of 71.769 means that company is turning its account receivable into cash 71.769 times in year means that it takes just 5 days to collect it average receivables from the market. But in successive years this efficiency reduced, there can be two interpretations of this, firstly that increased credit sales reduced efficiency of collection/credit department and it took more time to turn receivables in cash or it can be management decision to loosen its credit policy just to motivate customers for increased purchase, a marketing technique to boost sales. Now looking at maple leaf we see that its efficiency in collecting receivable is just slightly lower than that of lucky cement but on other hand it sales in each year are much less than those of lucky cement so to be equally efficient it must have higher turnover then lucky cement. Now notice another important point that in year 2005, 2006, 2007 lucky cement is far more efficient in collection of receivables, so even if its current and quick ratio is less than that of maple leaf it do not matters a lot because former is generating cash at a higher pace from its receivables to pay for short upcoming liabilities in those periods.


Maple Leaf

Year Net Sales

Avg Account Receivables

in times

in days

2005 4,290,734

89,850.5 47.75 7.5

2006 5,709,792

137,057.0 41.66 8.6

2007 3,711,081

184,348.0 20.13 17.8

2008 7,815,829

480,465.5 16.27 22.43

2009 15,251,374

738,419.0 20.65 17.6

But here we noticed a very positive point about our 3rd competitor cherat cement, it is making all its sales on cash or advance payments throughout which is very positive point for high liquidity of firm with small assets and sales level as of cherat cement.

2. Inventory Turnover:

Lucky

Year CGSAvg Inventory

in times

in days

2005 2,600,589

144,026 18.06 21

2006 5,073,797

273,594.5 18.54 20

2007 8,846,708

553,837.0 15.97 23

2008 12,600,706

692,814.0 18.19 21

2009 16,519,138

952,990.0 17.33 21

Inventory turn over is all about management effectiveness or better to say marketing department effort that how quickly they convert their inventory into sales. Because once inventor is sold only then we can convert it to cash, so inventory turnover is major art of operating cycle of company (discussed later) we see that lucky cement maintained stable inventory turnover in all 5 years. in 2009 inventory turnover of 21 means that it is 21 times converting its total inventory into sales or better to say that inventory on average spend 21

days with Lucky cement, and this is almost comparable with all other competitors so we will go a step further to come out with better results, but before that look a at sharp drop in ratio of maple leaf in 2005-06 this is probably sales growth was greater then compared to inventory growth which means company managed to reach high level of sales without keeping bulk of stock in of stock in shelves thus applying concept of JIT(just-in-time) now a step further is to break down inventory into parts and compare turnover of finished goods,


Cherat


in times

in days

2005 1,544,122

84,214.5 18.34 20

2006 1,488,882

116,862.5 12.74 28

2007 2,242,296

131,257.5 17.08 21

2008 2,834,336

162,389.5 17.45 21

2009 3,896,647

244,039.5 15.97 23

Maple Leaf


in times

in days

2005 962,802

141,681.0 6.80 54

2006 3,561,212

192,081.5 18.54 20

2007 3,401,188

195,327.5 17.41 21

2008 6,491,999

401,830.5 16.16 23

2009 10,296,865

542,433.0 18.98 20

which willl tells us that how many days our finished product waits in company before getting sold, because that tells actual efficiency of marketers other two parts of inventory (raw material and wip) are dependent on manufacturing speed also, finished goods turnover of our three companies for year 2009 are shown below

Now here we see that lucky cement in most efficient in selling its finished goods in just 4.25 days however maple leaf is very efficient in converting raw material to finished goods in less time but of no use because finished goods inventory is more illiquid as compared to lucky cement it took 14 days approx for maple leaf to sale its finished

goods.But if we conclude here that cherat is slow then lucky we will be wrong, at this step we will do one more calculation that how quickly inventory is converted to cash that is addition of inventory turnover days in receivable turnover days, it tell us in how many days company generates cash its average inventory.

Here from above

Cherat we easily conclude that best of all because it is selling its inventory on cash/advance so need not to wait for collection of receivables after sale and it is so efficient that once a bag of cement is manufactured it just take 4 days to convert it in cash however Lucky cement takes 21.25 days to in cash its finally manufactured bag of cement, now compare operating cycle of maple leaf with lucky cement, apparently both seems to be quit similar means that both are converting their average inventory to cash in equal times, but when we comes to finished goods to cash side we see that male leaf is taking approx 10 additional days to cash out its bag of cement.

3. Assets Turnover:

Lucky

Year Net SalesTotal Assets

Assets Turnover Ratio

2005 3,980,109

14,806,836 0.27

2006 8,054,101 23,622,777 0.34

2007 12,521,861 25,723,761 0.49

2008 20,819,749 34,239,074 0.61

2009 30,915,035 38,392,362 0.81

Assets turnover simply tells us that how much rupee of sale is generated from each rupee of investment in assets. Or better to say like that single rupee additional


Finished goods turnover Days TimesLucky Cement 4.25 84.6Cherat cement 4.67 77Maple leaf 14.38 25

Competitors

Finished goods turnover

inventory turnover days

receivable turnover

operating cycle

finished goods to cash cycle

Lucky Cement 4.25 21 17 38 21.25Maple Leaf 14.38 20 17.6 37.6 31.98Cherat cement 4.67 23 0 23 4.67

Cherat



2005 2,400,530

3,202,800 0.75

2006 2,434,513

3,611,889 0.67

2007 2,619,960

3,533,350 0.74

2008 3,013,752

4,382,273 0.69

2009 4,567,409

4,743,510 0.96

Maple Leaf



2005 4,290,734

10,428,973 0.41

2006 5,709,792

18,793,412 0.30

2007 3,711,081

23,436,974 0.16

2008 7,815,829

26,151,561 0.30

2009 15,251,374

26,660,838 0.57

investment in total assets will boost our sales by how much, it is how efficiently management is using assets in generating sales. We see that in lucky cement management’s efficiency is increasing continually in 2005 they achieved only 0.27 rupee sales on each rupee of assets but from gradual increase they reached to good level of 0.87 rupee sales from single rupee of assets, however maple leaf experienced fall in 2006 and then again increased only to the level of 0.57 rupee sales from each assets, decreasing local demand more badly effected maple leaf then lucky cement because lucky cement boosted its sales in export market, but it’s a success for cherat cement to reach high level of sales from small investment of assets in 2009 they got 96% of their assets as sale revenue. Graph can be better representation for comparison:

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2005

2006

2007

2008

2009

ind

ex

s Lucky

Mapple Leaf

Cherat

Figure clearly shows approximately linear growth of Lucky cement sales per rupee of assets, but still cherat cement seems to be step further in this aspect than but not as consistent as Lucky cement.


4. Interest Earned Ratio:

A general decrease in interest coverage ratio is apparent in all of 3 company, it is clear indicator of macro factor that is effecting all players, and this factor is tremendous increase in interest rates on debt as mentioned in last chapter that interest rate range in 5 years increased from 2.83%-9.76% to 11.82%-16.18%, so it is clear indicator that companies could not increased their earning with pace of increase in finance cost. And this is the reason lucky cement is reducing debt financing. Value of 4.19 of year 2009 means that company earning is 4.19 times of its interest cost and it is able to pay its interest obligation 4.19 times out of these earnings. An extraordinary value of 18 in year 2008 is because gain on currency swaps and forward contracts earned by company are adjusted with finance cost of that particular year this is the reason due to which finance cost in 2008 appears to be small if this adjustment of 896.417 million rupee would not be done then interest coverage ratio of this year would be 2.25 times and in year 2009 company was able to earn more in relation to its finance cost and reached level of 4.19. ratio of less then 1 means that company failed to earn from its operation enough to settle its interest obligations and we se that in year 2007, 2008 and 2009 maple leaf failed to earn from operations to pay its obligation and same happened with cherat in 2008.


Cherat

Year EBITFinance cost

Interest Coverage Ratio

2005 718,037

34,030 21.10

2006 799,111

80,364 9.94

2007 322,558

75,531 4.27

2008 25,078

81,576 0.31

2009 371,290

114,357 3.25

Lucky



2005 1,209,951

21,691 55.78

2006 2,552,976

82,809 30.83

2007 2,690,351

862,847 3.12

2008 2,306,529

126,743 18.20

2009 5,177,001

1,236,971 4.19

Maple Leaf



2005 1,233,255

205,677 6.00

2006 1,975,792

340,978 5.79

2007 198,434

338,453 0.59

2008 448,563

1,812,807 0.25

2009 2,482,590

3,400,241 0.73


1. Gross Profit Ratio

The gross profit ratio throughout the years has been quite steady except a slight decrease in 2008 which is mainly attributed to large increase in cost of goods sold however comparing this ratio with competitor depicts a clear picture that this may be due to economic downturn in 2008. Overall looking both the competitors along with the main company can be seen on the same line with non abnormal profits/losses. However cherat Cement Company was greatly affected by its high cost of goods sold and sales almost unchanged from previous years. Mainly this is because the overall growth in the cement industry decreased to 4.7 % in 2008 from 17.9% in 2007. In previous 5 years this figure was near 20% each year however in 2008 it decreased largely. (Source: Federal Bureau of Statistics). However we saw in 2009 that it again increased by huge amount thus gaining their momentum again. These trends can be seen in below graph along with their competitors' trends.


2. Operating Profit Ratio

This ratio is another indicator of company's performance in terms of value to their customer. Individual company performance followed the same trend set by gross profit. More ever in 2008 company’s operating expenses has increased firm their previous records this may be due to high selling expenses and administrative expenses. A prominent figure was that of logistics cost. It has been seen that in those years company’s logistics costs increased by more than enough amount and the reason was greater increase in exports that year however another main increase was that of power and fuel charges. That’s because of increase in prices of oil in international market. The same was the case with lucky cement's competitors but all those years lucky cement company was more consistent and good performer than its competitors. Below graph makes the story clearer.

3. Net Profit Ratio

This ratio gives the final big picture of lucky cement company along with its competitors. If we see individually it's clear that lucky cement company was stable company all these years even at time when overall industry was not in a good condition. But one thing to notice is that in 2008


the difference in lucky cement company’s operating profit margin and net profit margin is low that’s because of low finance cost and taxes. In all of these companies maple leaf was in the worst condition in the previous two years and that’s because of low sales, high cost of goods sold, and high distribution and selling cost which can overall be attributed to the economic downturn in these years.

4. Return on Equity

This ratio carries the same trend set by operating profit and net profit unless there is change in the shareholders equity. In our analysis we have seen that lucky cement company’s ROE is better than all other competitors. Maple leaf cement company ratio in the recent years is negative while cherat is going through almost the same condition. One more point to note here is that despite the issuance of new shares, Lucky's ROE has improved which is a good condition for investors. While Cherat and maple leaf didn’t issued new shares and despite that their ROE didn’t improved in recent years. So this indicates that even after economic downturn, political instability, and slump in real estate lucky has benefited its investors. The following table summarizes our findings.


5. Return on Assets

This ratio also supports our previous findings. The worst figure was of the year ended June 2008 which was 9% and almost 10% more than both of its competitors. This is due to effective utilization of assets by Lucky Cement Company. They utilized their assets to the best. The figures of ROA for Lucky cement have been steady through all these years. Average total assets of Lucky Cement have increased by handsome amount each year while the same entity for its competitors has not been increased so much.

6. Earnings per Share

The EPS of Lucky Cement was on the peak in last two years while their competitors were going through worst timings. In 2009 Maple leaf's EPS decreased to -2.64 lowest in previous 5 years along with Cherat who's EPS reached to 0.1. Lucky cement company’s EPS increased even their average share outstanding in 2008 and 2009. The reason behind EPS being high is increase in net income. Even in 2008 market capitalization of ordinary shares of cement industry decreased to Rs 117.1 Billion which was Rs 165.6 Billion in 2007 this means after such decrease in market capitalization Lucky Cement Company has managed to arrange funds through capital market. (Source: Federal Bureau of Statistics). This shows how interested investors are in Lucky cement. Table given below shows the result of our findings.


7. Price Earnings Ratio This ratio is very important regarding investors this shows how much an investor is willing to pay for one unit of earning. In our findings only the realistic figure are of Lucky Cement Company. This ratio should be carefully analyzed. Although this ratio for Lucky's competitors are high but at that point it indicates that investors are not willing to pa that much high. Only realistic figures are that of Lucky. In recent two years Lucky has P/E ratio of 9.9 and 4.1 respectively while at the same time Maple leaf's P/E ratio has been in negative which is mainly because of loss in current years while Cherat's Performance has been poor in all recent five years. So the best P/E ratio is that of Lucky giving the best and realistic output to its investors. The following table summarizes our findings.


Conclusion

Here instead of words it is better to compare 3 companies on three aspects of liquidity, Profitability and Debtness to have bird eye view of company although some subjective and company specific details for evaluation are applicable that have been discussed before in each respective part and interrelated with each other before. Activity ratios are better explained in words in this chapter.

Liquidity

00.20.40.60.8

11.21.41.61.8

2005 2006 2007 2008 2009

Qu

ick

rati

o

Lucky

Cherat

Maple

Debtness

00.1

0.20.3

0.40.5

0.60.7

0.8

2005 2006 2007 2008 2009

DE

BT

RA

TIO

Lucky

Cherat

Maple

Profitability


-15-10-505

1015202530

2005 2006 2007 2008 2009

net p

rofit

Lucky

Cherat

Maple

-20

-10

0

10

20

30

40

2005 2006 2007 2008 2009

ROE

Lucky

Cherat

Maple

Performance of all three companies must be clearly visible here LUCKY cement profitability is in increasing trend and Debtness is reducing which is contributing towards profitability and its ROE increased despite of dilution of shares twice in years. Maple leaf financed its assets from Debtness and not used equity financing just to keep ownership concentrated and that’s why suffering from high finance cost and pressure resulting in loss of profitability. Liquidity of maple leaf falling due to reduced profitability and Lucky cement liquidity although less apparently in start but its activity ratio analysis is a prove that low liquidity ratios are not bad sign for them. Cherat cement although apparently have low quick ratio but it is acceptable for them because their sales are on cash and major portion of quick assets are cash and bank (most liquid) thus it can easily pay short term liabilities, Cherat also suffered from economic down turn but started to recover slowly in 2009 by controlling its cost structure.


References:

Federal Bureau of Statistics Economic Survey of Pakistan Financial Statements of Lucky Cement Company for the Year 2005-2009 Financial Statements of Cherat Cement Company for the Year 2005-2009 Financial Statements of Maple Leaf Cement Company for the Year 2005-2009 Karachi Stock Exchange's Websites Lahore Stock Exchange's websites Investopedia.com Business Finance by Gitmen Financial Management by Van Horne & Wachovitz


Lucky Cement Comparative Financial Statments Analysis

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