Acknowledgement

Acknowledgement

We would like to thanks various people, colleagues, instructor, and fellow batch mates, who provided the help and support directly or indirectly by providing, sample reports, suggestions, shared the ideas of their reports, and pointed various sources on the web to get help about the analysis of financial analysis. Without their help and timely support this project report would not have been possible.

A special thanks to Mr. Khurram Nasir, course instructor, Financial Management, whose guidance and supervision was instrumental. He was ever ready to provide help to his students, especially after the class, including, for handing over the old report on Shell, prepared by the previous batch group. That report not only guided and gave the insight into the contents and general layout, as a first hand knowledge, but also pointed out the mistakes to be avoided for, which were corrected by the instructor himself.Group MembersAGHA FAHAD

AMJAD HUSSAIN

AASIM HAMEED

Letter of Transmittal

July 9, 2007

SZABIST

100 Clifton

Karachi

Dear Mr. Khurram Nasir

Enclosed please find the report, Financial Statement Analysis of Shell Pakistan, in the partial fulfilment of the course of Financial Management, offered to MBA (Evening) IIIA in summer 2007. The report includes the basic analysis of four financial statements of Shell Pakistan a company in oil and gas sector, from the year 2000 to 2006. The analysis includes ratios analysis, common size analysis, Du Pont chart, graphical trends and forecast for the year 2007 on the basis of past seven years data.

This is an amateur effort of our group members towards practical learning and application of AFS theory that grasped during the class of financial management. Indeed the job was challenging from collecting the data to analysis and interpretations of results; but it was enthralling as well, to see the classroom theory into action.

The finding of the reports will be shared during class presentation, and clarification will be provided if needed during question answer session.

We are eagerly looking forwardyour positive remarks, and criticism for the improvement and our learning. We feel that this knowledge will be helpful in future work terms, and in our careerYours very truly,

Group MembersExecutive Summary

Shell Pakistan Ltd. is a growing company in oil and gas distribution and marketing. It is playing a major role in the economy of Pakistan along with its major competitor Pakistan State Oil (PSO). The past five to seven years data and key financial statistics summary indicates that company is quite stable, and leading towards more profitability with a control on its costs. The share capital of the company grew from 234 (Rs./mn) to 438 in last decade, while reserves grew from 1238 (Rs./mn) to 7952. Dividends per share rose from Rs.12.5 in 2001 to Rs.30 in 2006, with a peak of Rs.35 from 2003 05. On the other side current assets to current liabilities ratio thinned from 1.2 to 1.13., no. of days stock grew from 18 to 27, including no. of days trade debts from just 3 to 14.Major performance of the company can be gauged from profit after tax as % of average capital employed increased from 20.8 in 2000 to 33.6 in 2006. Also profit after tax as % of sales also jumped from 1.4 in 2001 to 2.3 in 2006.The company is quite stable according to its ratio analysis, and key performance indicators showing a growing trend in yield and dividends per share.

Table of Contents

6Introduction

6History of the company

6Shell Pakistan Limited

8Growth and development

8Vision

9Values

9Corporate Responsibilities

10Corporate Principles

13Key Terms

17Data

17Balance Sheet

20Profit and Loss Account

22Cash Flow Statement

23Modified Du Pont Chart Calculations

24Computations

24Ratio Analysis

25Percentage Change

27Percentage Change - Profit and Loss Account

29Percentage Change - Cash Flow Statement

30Common Size Balance Sheet

32Common Size Profit and Loss Account

34Financial Statistics Summary

35Du Pont Analysis

42Analysis of AFS

42Ratio Analysis

42Liquidity Ratios

42Current Ratio

43Interrelation between Current Assets and Current Liabilities

44Components of Current Assets

44Components of Current Liabilities

46Quick Ratio

46Components of Quick Ratio

49Asset Management Ratios

49Inventory Turnover Ratio

49Interrelation of Total Sales and Stock in Trade

50Other Factors Influencing the Ratio

51Components of Total Sales

52Days Sales Outstanding (DSO) Ratio

55Fixed Assets Turnover

56Interrelation of Total Sales and Total Fixed Assets

56Other Factors

57Components of Total Sales

58Total Assets Turnover

58Interrelation of Total Sales and Total Assets

59Analyzing Total Assets

61Total Debt to Total Assets (Debt Ratio)

63Times Interest Earned

66Profitability Ratios

66Profit Margin on Sales

69Basic Earning Power

72Return on Assets

75Return on Equity (ROE)

78Earnings per Share (EPS)

81Percentage and Common Size Analysis

81Total Sales

84OVERALL PROFIT AND LOSS STATEMENT ANALYSIS

92Forecast for 2007

96Contributions

100Appendices

101References

IntroductionHistory of the company

The SHELL is among one of the powerful brand across the globe and every where its red and yellow emblem communicates the quality and convenience of the oil and fuel industry, and its been more than 100 years now to its highly managed and organized operations successfully.

The Shell brand name enjoys over a 100-year history in this part of the world, dating back to 1899 when Asiatic Petroleum, the far eastern marketing arm of two companies: Shell Transport Company and Royal Dutch Petroleum Company, began importing kerosene oil from Azerbaijan into the subcontinent. Even today, the legacy of the past is visible in a storage tank carrying the date - 1898.

The documented history of Royal Dutch Shell plcin IndoPak subcontinent dates back to 1903 when partnership was struck between The Shell Transport & Trading Company and the Royal Dutch Petroleum Company to supply petroleum to Asia. Shell Pakistan Limited

In 1928, to enhance their distribution capabilities, the marketing interest ofRoyal Dutch Shell plc and the Burma Oil Company Limited in India were merged and Burma Shell Oil Storage & Distribution Company of India was born. After the independence of Pakistan in 1947, the name was changed to the Burma Shell Oil Distribution Company of Pakistan. In 1970, when 51% of the shareholding was transferred to Pakistani investors, the name of changed to Pakistan Burma Shell (PBS) Limited. The Shell and the Burma Groups retained the remaining 49% in equal propositions. In February of 1993, as economic liberalization began to take root and the Burma divested from PBS, Shell Petroleum stepped into raise its stake to 51%. The years 2001-2 have seen the Shell Petroleum Company successively increasing its share, with the Group now having a 76% stake in Shell Pakistan Ltd (SPL)- an expression of confidence.

Growth and development

Along with all the achievements, organization development and network expansion Shell Pakistan Limited (SPL) is successfully able to meet its financial performance objectives as well. A very fast growth in the profits reporting year by year has become the trend for SPL since last decade, and especially in last 5 years. Around only Rs. 200 million in 1995 to more than Rs. 2500 million current profits is really a handsome growth. (Financial details are in later section)In 1992 when Shell Pakistan Limited replaced PBS, it also changed traditional corporate culture and endeavor all the modern strategies to set the trends in the Oil, Fuel and Lubes Marketing and won retail consumer preferences up to 70 % and also currently enjoying highest brand share preferences among the major OMCs (Oil Marketing Companies).

Large investments in the above stated period also catalyzed to boost SPL corporate image and quality preferences for performance. Only for year 2003 Capex 2500 million plus.

Vision

At Shell Pakistan Limited, we strive to deliver results, performance to the highest standards, develop our people, provide quality customer service and actively pursue consistent safety improvements.

A firm based on performance enables us to deliver strong returns and valued growth for our shareholders, greater and better choices for our customers and opportunities and improvements in the quality of life of our communities. In an unsettled world, our commitment to performance at every level continues to be both challenge and the aspiration.

Values

Shell Pakistan Ltd. employees share a set of core values honesty, integrity and respect for people. We also firmly believe in the fundamental importance of trust, openness, teamwork and professionalism, and pride in what we do.

Corporate Responsibilities

Shell Pakistan Ltd. recognizes five areas of responsibility. It is the duty of management continuously to assess the priorities and discharge these inseparable responsibilities on the basis of that assessment.

a.To shareholders

To protect shareholders investment, and provide a long-term return competitive with those of other leading companies in the industry.

b. To customers

To win and maintain customers by developing and providing products and services which offer value in terms of price, quality, safety and environmental impact, which are supported by the requisite technological, environmental and commercial expertise.

c. To employees

To respect the human rights of our employees and to provide them with good and safe working conditions and competitive terms and conditions of employment.

To promote the development and best use of the talents of our employees; to create an inclusive work environment where every employee has an equal opportunity to develop his or her skills and talents.

To encourage the involvement of employees in the planning and direction of their work; to provide them with channels to report concerns.

We recognize that commercial success depends on the full commitment of all employees.

d. To those with whom we do business

To seek mutually beneficial relationships with contractors, suppliers and in joint ventures and to promote the application of these Shell Pakistan Ltd. General Business Principles or equivalent principles in such relationships. The ability to promote these principles effectively will be an important factor in the decision to enter into or remain in such relationship.

e. To society

To conduct business as responsible corporate members of society, to comply with applicable laws and regulations, to support fundamental human rights in line with the legitimate role of business, and to give proper regard to health, safety, security and the environment.

Corporate Principles

Principle 1: Economic

Long-term profitability is essential to achieving our business goals and to our continued growth. It is a measure both of efficiency and of the value that customers place on Shell Pakistan Ltd. products and services. It supplies the necessary corporate resources for the continuing investment that is required to develop and produce future energy supplies to meet customer needs. Without profits and a strong financial foundation, it would not be possible to fulfil our responsibilities.

Criteria for investment and divestment decisions include sustainable development considerations (economic, social and environmental) and an appraisal of the risks of the investment.Principle 2: Competition

Shell Pakistan Ltd. supports free enterprise. We seek to compete fairly and ethically and within the framework of applicable competition laws; we will not prevent others from competing freely with us.

Principle 3: Business Integrity

Shell Pakistan Ltd. insists on honesty, integrity and fairness in all aspects of our business and expects the same in our relationships with all those with whom we do business. The direct or indirect offer, payment, soliciting or acceptance of bribes in any form is unacceptable. Facilitation payments are also bribes and should not be made. Employees must avoid conflicts of interest between their private activities and their part in the conduct of company business. Employees must also declare to their employing company potential conflicts of interest. All business transactions on behalf of Shell Pakistan Ltd. must be reflected accurately and fairly in the accounts of the company in accordance with established procedures and are subject to audit and disclosure.

Principle 4: Political Activities

a. Of companiesShell Pakistan Ltd. acts in a socially responsible manner within the laws of the countries in which we operate in pursuit of our legitimate commercial objectives.

Shell Pakistan Ltd. does not make payments to political parties, organizations or their representatives. Shell Pakistan Ltd. does not take part in party politics. However, when dealing with the government, Shell Pakistan Ltd. has the right and the responsibility to make our position known on any matters which affect us, our employees, our customers, our shareholders or local communities in a manner which is in accordance with our value and the Business Principles.

b. Of employeesWhere individuals wish to engage in activities in the community, including standing for election to public office, they will be given the opportunity to do so where this is appropriate in the light of localcircumstances.

Principle 5: Health, Safety, Security and the Environment

Shell Pakistan Ltd. has a systematic approach to health, safety, security and environmental management in order to achieve continuous performance improvement.

To this end, Shell Pakistan Ltd. manages these matters as critical business activities, sets standards and targets for improvement, and measures, appraises and reports performance externally.

We continually look for ways to reduce the environmental impact of our operations, products and services.

Principle 6: Local Communities

Shell Pakistan Ltd. aims to be good neighbours by continuously improving the ways in which we contribute directly or indirectly to the general well-being of the communities within which we work.

We manage the social impacts of our business activities carefully and work with others to enhance the benefits to local communities, and to mitigate any negative impacts from our activities.

In addition, Shell Pakistan Ltd. takes a constructive interest in societal matters, directly or indirectly related to our business.

Principle 7: Communication and Engagement

Shell Pakistan Ltd. recognizes that regular dialogue and engagement with our stakeholders is essential. We are committed to reporting of our performance by providing full relevant information to legitimately interested parties, subject to any overriding considerations of business confidentiality. In our interactions with employees, business partners and local communities, we seek to listen and respond to them honestly and responsibly. Principle 8: Compliance

We comply with all applicable laws and regulations of the counties in which we operate.

Key TermsNon Current Assets: All those assets which cant be converted into cash immediately. All those assets which company will be using for long term operations.

Fixed Assets: At SPL fixed assets involve land, tanks, pumps, pipelines, plants, machinery, computers, furniture and vehicles.

Long Term Investments: SPL has made long term investments in terms of Shares of Pak Arab Pipeline Company Limited, Arabian Sea Country Club Limited and non trading shares for Provident and Pension Trust of Shell Pakistan.

Long Term Loans and Advances: Advance payments to C.E.O, Directors, Executives, Employees and contractors for housing, motorcar/motorbike or general purpose; recoverable in 2 to 5 years with normal interest rate say 1% .

Long Term Deposits and Prepayments:

Current Assets:

Stores and Spares: Stores are valued at the lower of average cost and net realizable value whereas spares are valued at the lower of cost worked out on FIFO basis and net realizable value. Items in transit are stated as cost incurred to date.

Stock in trade: Valued at the lower of cost, calculated on FIFO basis and net realizable value. Charges such as excise, customs, and similar levies on unsold stock of product are added to the value of stock and carried forward.

Trade debts: original invoice amount less provision for impairment which is based on a review of outstanding amounts at the balance sheet date. Bad debts are written off to PL account when identified.

Loans and Advances: Again Advance payments to C.E.O, Directors, Executives and Employees considered good and recoverable in short term.

Trade Deposits and Short Term Prepayments: Customs, Duties, Levies and short term prepayments for SPL.

Other Receivables: Comprises of 10 different accounts but major share is of price differentials on import purchases and claims. Other than this staff retirement and worker participation funds, sales tax and customs receivable, due from related parties and advances to suppliers etc.

Taxation Recoverable: Last time observed in 2003 accounts books, since then this account has been closed and no more existing in current records.

Cash and Bank Balances: Cash in hand and deposits with banks with interest bearing current accounts

Current Liabilities:

Current Maturity of Liabilities against Assets Subject to Finance Lease: SPL has leasing agreements with various leasing companies for the lease of operational vehicles like trucks, transport vans, mobile training units etc. These liabilities are payable by 2009.

Short Term Running Finances Utilized Under Mark-up Arrangements: Short term running finances available from various banks and secured by stock in trade, trade debts and other receivables.

Short Term Loans: Again available from various banks and secured by stock in trade, trade debts and other receivables of SPL.

Creditors, Accrued and Other Liabilities: Payables to contract dealers, creditors, for accrued liabilities, duties and surcharge etc.

Mark-up Accrued: for the arrangements of short term loans and running finances.

Non-current liabilities:

Asset Retirement Obligation: A separate Account has been created since last two years for those assets which are going to be retired.

Deferred taxation: Deferred tax liability arising in respect of tax depreciation allowances and deferred tax asset in respect of short term provision and add back to taxable income expected to be reversed in future periods.

Liabilities against Assets Subject to Finance Lease: Accounted for at the net present value of minimum payments under the lease agreement. Finance charges under the lease agreement are allocated to periods during the lease term so as to produce a constant periodic rate of financial cost on the remaining balance of principal liability for each period.

Share Capital: SPL share capital is the amount they generated by selling its shares to general public, employees and other corporations. These include ordinary shares with the face value of Rs.10.

PL A/C

Sales: Sales of the companys products including non fuel retail sales and other revenues.

Other Revenue: License and franchise fee charge to the dealers.

Net Revenue: Earnings after sales tax

Cost of Products Sold: Cost of all material, work in process, finished goods and manufacturing cost less closing finished good inventory.

Administrative and Marketing Expenses: At SPL it includes salaries, wages, stores, material, fuel, power, lease and rentals, repair and maintenance, insurance, travelling, advertising and publicity, depreciation and amortization etc.

Other Operating Income: Dividend income, insurance commission, markup for short term deposits and delayed payments and few other accounts provides other operating income to SPL.

Worker's Profit Participation and Worker's Welfare Fund: At SPL these are the two separate investment funds to benefit the worker. Theyve separate authorized shares and books of accounts which are audited as well.

Operating Profit: At SPL operating profits include Financial Charges such as bank charges, interest workers fund, markups, exchange losses and few more.

Earnings per share - basic and diluted: There is diluted effect as the numbers of shares are the same but net operating profit after tax (NOPAT) in year 2006 was more than 2005 which jumped EPS from 55.90 to 70.92.

DataBalance Sheet

2000200120022003200420052006

Non Current Assets

Fixed assets 3,940,588 4,302,720 4,501,209 4,828,157 5,399,282 5,587,840 5,728,075

Long term investments 5,001 5,001 88,201 1,877,001 1,877,001 1,877,001 1,877,001

Long term loan and advances 82,742 92,772 90,155 91,591 78,514 84,879 139,640

Long term deposits and prepayments 8,734 16,228 7,910 30,332 76,700 48,244 110,445

Total Non Current Assets 4,037,065 4,416,721 4,687,475 6,827,081 7,431,497 7,597,964 7,855,161

Current Assets

Stores and spares 15,171 18,335 11,638 24,227 22,184 16,366 28,865

Stock in trade 2,361,480 2,699,910 4,605,199 2,826,981 4,536,965 6,608,167 9,979,886

Trade debts 413,926 521,777 1,193,243 1,577,228 2,038,016 3,738,128 5,235,840

Loans and advances 11,377 18,499 27,023 33,821 33,523 33,273 41,821

Trade deposits and short term prepayments 55,374 31,551 70,930 118,263 78,078 144,451 167,317

Other receivables 815,142 1,943,365 758,425 587,665 637,229 1,690,655 3,881,795

Taxation recoverable - - - 67,493 - - -

Cash and bank balances 2,325,509 2,411,619 478,764 1,075,698 566,636 752,112 981,197

Total Current Assets 5,997,979 7,645,056 7,145,222 6,311,376 7,912,631 12,983,152 20,316,721

Total Assets 10,035,044 12,061,777 11,832,697 13,138,457 15,344,128 20,581,116 28,171,882

Current Liabilities

Current maturity of liabilities against assets subject to finance lease 29,476 38,035 54,402 24,061 58,268 50,330 26,480

Short term running finances utilised under mark-up arrangements - - - - 1,396,221 3,416,350 1,779,860

Short-term loans - - - - - 250,000 3,250,000

Creditors, accrued and other liabilities 4,261,407 6,039,409 5,353,002 6,273,281 6,580,796 7,739,836 11,938,370

Mark-up accrued - - 46,797 77,035

Taxation 348,774 106,409 36,437 0 7,730 705,767 830,632

Proposed dividends 420,790 280,526 490,921 894,178 999,375 - -

Total current liabilities 5,060,447 6,464,379 5,934,762 7,191,520 9,042,390 12,209,080 17,902,377

Net Current Assets 937,532 1,180,677 1,210,460 (880,144) (1,129,759) 774,072 2,414,344

Total Assets less Current Liabilities 4,974,597 5,597,398 5,897,935 5,946,937 6,301,738 8,372,036 10,269,505

Non-current liabilities

Surplus on Revaluation of Fixed Assets 2,946 2,946 2,946 - - - -

Deferred taxation 110,200 141,000 29,236 17,257 126,418 20,747 50,059

Liabilities against assets subject to finance lease 89,607 63,902 44,575 77,862 42,791 16,270 7,019

Asset retirement obligation - - - - - 31,946 98,320

202,753 207,848 76,757 95,119 169,209 68,963 155,398

Total liabilities 5,263,200 6,672,227 6,011,519 7,286,639 9,211,599 12,278,043 18,057,775

Net assets 4,771,844 5,389,550 5,821,178 5,851,818 6,132,529 8,303,073 10,114,107

Financed by:

Share capital 350,658 350,658 350,658 350,658 350,658 350,658 438,323

Reserves 2,233,026 2,233,026 2,233,026 2,233,026 2,233,026 2,233,026 2,233,026

Unappropriate profit 2,188,160 2,805,866 3,237,494 3,268,134 3,548,845 5,719,389 7,442,758

Shareholder's equity 4,771,844 5,389,550 5,821,178 5,851,818 6,132,529 8,303,073 10,114,107

Profit and Loss Account

2000200120022003200420052006

Sales 62,012,729 74,996,942 78,898,045 88,959,942 90,107,570 111,495,036 132,840,460

Non-fuel retail sales 118,874 154,891 137,671 129,445 118,504 124,935

Non-fuel retail others 24,227 20,515 35,792 23,172 25,189 19,542

Other revenue 151,993 207,218 315,098 403,322 300,759 413,517

Total Sales 62,012,729 75,292,036 79,280,669 89,448,503 90,663,509 111,939,488 133,398,454

Less: Sales tax 25,889,469 9566887 10,238,615 11,625,686 11,483,159 13,516,798 16,135,935

Net Revenue 36,123,260 65,725,149 69,042,054 77,822,817 79,180,350 98,422,690 117,262,519

Cost of products sold 32,720,625 61628478 64,164,232 72,049,466 72,973,109 89,684,584 107,301,071

3,402,635 4,096,671 4,877,822 5,773,351 6,207,241 8,738,106 9,961,448

Administrative and marketing expenses 1,438,203 2486672 3,292,917 3,794,361 3,806,007 3,454,308 3,807,932

Distribution expenses 157,237 - - 1,155,458 989,263

1,807,195 1,609,999 1,584,905 1,978,990 2,401,234 4,128,340 5,164,253

Other operating income 422,107 191,717 154,463 110,324 12,017 111,196 161,564

2,229,302 1,801,716 1,739,368 2,089,314 2,413,251 4,239,536 5,325,817

Worker's Profit Participation fund 88,000 84,631 101,892 116,972 195,430 246,390

Worker's Welfare Fund 33,000 35,546 36,037 33,538 70,181 81,924

Operating Profit 2,229,302 1,680,716 1,619,191 1,951,385 2,262,741 3,973,925 4,997,503

Financial Charges 216,414 50,269 46,755 51,480 73,817 330,941 398,009

Profit before taxation 2,012,888 1,630,447 1,572,436 1,899,905 2,188,924 3,642,984 4,599,494

Taxation 713,800 574419 509,624 644,908 680,910 1,191,914 1,491,025

Profit after taxation 1,299,088 1,056,028 1,062,812 1,254,997 1,508,014 2,451,070 3,108,469

Unappropriated profit brought forward 1,467,658 2,188,160 2,805,866 3,237,494 - - -

Surplus on revaluation of FA to unappropriate profit - - - 2,946 - - -

Profit avaiable for appropriation 2,766,746 3,244,188 3,868,678 4,495,437 1,508,014 2,451,070 3,108,469

Earnings per share - basic and diluted37.0530.12 30.31 35.79 43.01 70.92 55.92

Cash Flow Statement

2000200120022003200420052006

Cash flow from operating activities

Cash generated from/(used in) operations 2,931,123 2,194,426 (154,607) 4,803,157 887,035 705,132 2,581,820

Mark-up and short term finances and short term loans paid (49) (752) (255) (1,357) (4,038) (85,741) (235,819)

Taxes paid (388,260) (785,984) (691,360) (760,817) (496,526) (599,548) (1,336,848)

Long term loans and advances (net) (32,901) (10,030) 2,617 (1,436) 13,077 (6,365) (54,761)

Long term deposits and prepayments (net) 3,624 (7,494) 8,318 (22,422) (46,368) 28,456 (62,201)

Mark-up received on short term deposits 73,570 194,327 159,380 84,751 17,212 6,108 10,388

Net cash inflow from operating activities 2,587,107 1,584,493 (675,907) 4,101,876 370,392 48,042 902,579

Cash Flow from Investing Activities

Fixed capital expenditures (887,033) (897,053) (703,146) (814,005) (1,118,137) (816,319) (724,924)

Long term investment made - - (83,200) (1,788,800) - - -

Proceeds from sale of property, plant and equipment 11,043 4,648 8,541 12,607 47,432 29,674 43,700

Net cash used in investing activities (875,990) (892,405) (777,805) (2,590,198) (1,070,705) (786,645) (681,224)

Cash Flow from Financing Activities

Dividends paid(531,269)(574,697)(418,672)(817,936)(1,114,666)(1,271,990)(1,285,490)

Repayment of liability under fianance lease (54,055) (31,281) (60,471) (96,808) (90,304) (74,060) (70,290)

Net cash used in financing activities (585,324) (605,978) (479,143) (914,744) (1,204,970) (1,346,050) (1,355,780)

Net decrease/increase in cash and cash equivalents 1,125,793 86,110 (1,932,855) 596,934 (1,905,283) (2,084,653) (1,134,425)

Cash and cash equivalents at July 1 1,199,716 2,325,509 2,411,619 478,764 1,075,698 (829,585) (2,914,238)

Cash and cash equivalents at June 30 2,325,509 2,411,619 478,764 1,075,698 (829,585) (2,914,238) (4,048,663)

Modified Du Pont Chart Calculations

2000200120022003200420052006

Total Cost 59,245,983 72,047,848 75,411,991 84,953,066 89,155,495 109,488,418 130,289,985

Sales 62,012,729 75,292,036 79,280,669 89,448,503 90,663,509 111,939,488 133,398,454

Fixed Assets 4,037,065 4,416,721 4,687,475 6,827,081 7,431,497 7,597,964 7,855,161

Current Assets 5,997,979 7,645,056 7,145,222 6,311,376 7,912,631 12,983,152 20,316,721

Total Assets 10,035,044 12,061,777 11,832,697 13,138,457 15,344,128 20,581,116 28,171,882

Net Income 2,766,746 3,244,188 3,868,678 4,495,437 1,508,014 2,451,070 3,108,469

Profit Margin4.46%4.31%4.88%5.03%1.66%2.19%2.33%

Total Asset Turnover 6.18 6.24 6.70 6.81 5.91 5.44 4.74

ROA27.57%26.90%32.69%34.22%9.83%11.91%11.03%

Asset/Equity 2.10 2.24 2.03 2.25 2.50 2.48 2.79

ROE57.98%60.19%66.46%76.82%24.59%29.52%30.73%

Computations

Ratio Analysis

2000200120022003200420052006

Liquidity Ratios

Current1.191.181.200.880.881.061.13

Quick0.720.760.430.480.370.520.58

Asset Management Ratios

Inventory Turnover26.2627.8917.2231.6419.9816.9413.37

Days Sales Outstanding4.739.293.442.372.535.4410.48

Fixed Assets Turnover15.3617.0516.9113.1012.2014.7316.98

Total Assets Turnover6.186.246.706.815.915.444.74

Debt Management Ratios

Total debt to total assets0.520.550.510.550.600.600.64

Times Interested Earned10.3033.4334.6337.9130.6512.0112.56

EBTIDA Coverage

Profitabaility Ratios

Profit margin on sales4.46%4.31%4.88%5.03%1.66%2.19%2.33%

Basic Earning Power (BEP)22.22%13.93%13.68%14.85%14.75%19.31%17.74%

Return on Total Assets (ROA)27.57%26.90%32.69%34.22%9.83%11.91%11.03%

Return on Common Equity (ROE)57.98%60.19%66.46%76.82%24.59%29.52%30.73%

Percentage Change

200120022003200420052006

Non Current Assets

Fixed assets9.19 4.61 7.26 11.83 3.49 2.51

Long term investments0.00 1663.67 2028.09 0.00 0.00 0.00

Long term loan and advances12.12 (2.82)1.59 (14.28)8.11 64.52

Long term deposits and prepayments85.80 (51.26)283.46 152.87 (37.10)128.93

Total Long Term Assets9.40 6.13 45.65 8.85 2.24 3.39

Current Assets

Stores and spares20.86 (36.53)108.17 (8.43)(26.23)76.37

Stock in trade14.33 70.57 (38.61)60.49 45.65 51.02

Trade debts26.06 128.69 32.18 29.22 83.42 40.07

Loans and advances62.60 46.08 25.16 (0.88)(0.75)25.69

Trade deposits and short term prepayments(43.02)124.81 66.73 (33.98)85.01 15.83

Other receivables138.41 (60.97)(22.52)8.43 165.31 129.60

Taxation recoverable

Cash and bank balances3.70 (80.15)124.68 (47.32)32.73 30.46

Total Current Assets27.46 (6.54)(11.67)25.37 64.08 56.49

Total Assets20.20 (1.90)11.04 16.79 34.13 36.88

Current Liabilities

Current maturity of liabilities against assets subject to finance lease29.04 43.03 (55.77)142.17 (13.62)(47.39)

Short term running finances utilised under mark-up arrangements144.69 (47.90)

Short-term loans1200.00

Creditors, accrued and other liabilities41.72 (11.37)17.19 4.90 17.61 54.25

Mark-up accrued64.62

Taxation(69.49)(65.76)(100.00)9030.23 17.69

Proposed dividends(33.33)75.00 82.14 11.76 (100.00)

Total current liabilities27.74 (8.19)21.18 25.74 35.02 46.63

Net Current Assets25.93 2.52 (172.71)28.36 (168.52)211.90

Total Assets less Current Liabilities12.52 5.37 0.83 5.97 32.85 22.66

Non-current liabilities

Surplus on Revaluation of Fixed Assets0.00 0.00 (100.00)

Deferred taxation27.95 (79.27)(40.97)632.56 (83.59)141.28

Liabilities against assets subject to finance lease(28.69)(30.24)74.68 (45.04)(61.98)(56.86)

Asset retirement obligation207.77

2.51 (63.07)23.92 77.89 (59.24)125.34

Total liabilities26.77 (9.90)21.21 26.42 33.29 47.07

Net assets12.94 8.01 0.53 4.80 35.39 21.81

Financed by:

Share capital0.00 0.00 0.00 0.00 0.00 25.00

Reserves0.00 0.00 0.00 0.00 0.00 0.00

Unappropriate profit28.23 15.38 0.95 8.59 61.16 30.13

Shareholder's equity12.94 8.01 0.53 4.80 35.39 21.81

Percentage Change - Profit and Loss Account200120022003200420052006

Sales20.94 5.20 12.75 1.29 23.74 19.14

Non-fuel retail sales30.30 (11.12)(5.98)(8.45)5.43

Non-fuel retail others(15.32)74.47 (35.26)8.70 (22.42)

Other revenue36.33 52.06 28.00 (25.43)37.49

21.41 5.30 12.83 1.36 23.47 19.17

Less: Sales tax(63.05)7.02 13.55 (1.23)17.71 19.38

Net Revenue81.95 5.05 12.72 1.74 24.30 19.14

Cost of products sold88.35 4.11 12.29 1.28 22.90 19.64

20.40 19.07 18.36 7.52 40.77 14.00

Administrative and marketing expenses72.90 32.42 15.23 0.31 (9.24)10.24

Distribution expenses(100.00)(14.38)

Operating Profit(10.91)(1.56)24.86 21.34 71.93 25.09

Other operating income(54.58)(19.43)(28.58)(89.11)825.32 45.30

(19.18)(3.46)20.12 15.50 75.68 25.62

Worker's Profit Participation fund(3.83)20.40 14.80 67.07 26.08

Worker's Welfare Fund7.72 1.38 (6.93)109.26 16.73

Operating Profit(24.61)(3.66)20.52 15.96 75.62 25.76

Financial Charges(76.77)(6.99)10.11 43.39 348.33 20.27

Profit before taxation(19.00)(3.56)20.83 15.21 66.43 26.26

Taxation(19.53)(11.28)26.55 5.58 75.05 25.10

Profit after taxation(18.71)0.64 18.08 20.16 62.54 26.82

Unappropriated profit brought forward49.09 28.23 15.38 (100.00)

Surplus on revaluation of FA tounappropriate profit(100.00)

Profit avaiable for appropriation17.26 19.25 16.20 (66.45)62.54 26.82

Earnings per share - basic and diluted(18.70)0.63 18.08 20.17 64.89 (21.15)

Percentage Change - Cash Flow Statement

200120022003200420052006

Cash flow from operating activities

Cash generated from/(used in) operations(25.13)(107.05)(3206.69)(81.53)(20.51)266.15

Mark-up and short term finances and short term loans paid1434.69 (66.09)432.16 197.57 2023.35 175.04

Taxes paid102.44 (12.04)10.05 (34.74)20.75 122.98

Long term loans and advances (net)(69.51)(126.09)(154.87)(1010.65)(148.67)760.35

Long term deposits and prepayments (net)(306.79)(211.00)(369.56)106.80 (161.37)(318.59)

Mark-up received on short term deposits164.14 (17.98)(46.82)(79.69)(64.51)70.07

Net cash inflow from operating activities(38.75)(142.66)(706.87)(90.97)(87.03)1778.73

Cash Flow from Investing Activities

Fixed capital expenditures1.13 (21.62)15.77 37.36 (26.99)(11.20)

Long term investment made2050.00 (100.00)

Proceeds from sale of property, plant and equipment(57.91)83.76 47.61 276.24 (37.44)47.27

Net cash used in investing activities1.87 (12.84)233.01 (58.66)(26.53)(13.40)

Cash Flow from Financing Activities

Dividends paid8.17 (27.15)95.36 36.28 14.11 1.06

Repayment of liability under finance lease(42.13)93.32 60.09 (6.72)(17.99)(5.09)

Net cash used in financing activities3.53 (20.93)90.91 31.73 11.71 0.72

Net decrease/increase in cash and cash equivalents(92.35)(2344.63)(130.88)(419.18)9.41 (45.58)

Cash and cash equivalents at July 193.84 3.70 (80.15)124.68 (177.12)251.29

Cash and cash equivalents at June 303.70 (80.15)124.68 (177.12)251.29 38.93

Common Size Balance Sheet

2000200120022003200420052006

Non Current Assets

Fixed assets39.2735.6738.0436.7535.1927.1520.33

Long term investments0.050.040.7514.2912.239.126.66

Long term loan and advances0.820.770.760.700.510.410.50

Long term deposits and prepayments0.090.130.070.230.500.230.39

Total Long Term Assets40.2336.6239.6151.9648.4336.9227.88

Current Assets

Stores and spares0.150.150.100.180.140.080.10

Stock in trade23.5322.3838.9221.5229.5732.1135.42

Trade debts4.124.3310.0812.0013.2818.1618.59

Loans and advances0.110.150.230.260.220.160.15

Trade deposits and short term prepayments0.550.260.600.900.510.700.59

Other receivables8.1216.116.414.474.158.2113.78

Taxation recoverable0.000.000.000.510.000.000.00

Cash and bank balances23.1719.994.058.193.693.653.48

Total Current Assets59.7763.3860.3948.0451.5763.0872.12

Total Assets100.00100.00100.00100.00100.00100.00100.00

Current Liabilities

Current maturity of liabilities against assets subject to finance lease0.290.320.460.180.380.240.09

Short term running finances utilised under mark-up arrangements0.000.000.000.009.1016.606.32

Short-term loans0.000.000.000.000.001.2111.54

Creditors, accrued and other liabilities42.4750.0745.2447.7542.8937.6142.38

Mark-up accrued0.000.000.000.000.000.230.27

Taxation3.480.880.310.000.053.432.95

Proposed dividends4.192.334.156.816.510.000.00

Total current liabilities50.4353.5950.1654.7458.9359.3263.55

Net Current Assets9.349.7910.23-6.70-7.363.768.57

Total Assets less Current Liabilities49.5746.4149.8445.2641.0740.6836.45

Non-current liabilities

Surplus on Revaluation of Fixed Assets0.030.020.020.000.000.000.00

Deferred taxation1.101.170.250.130.820.100.18

Liabilities against assets subject to finance lease0.890.530.380.590.280.080.02

Asset retirement obligation0.000.000.000.000.000.160.35

2.021.720.650.721.100.340.55

Total liabilities52.4555.3250.8055.4660.0359.6664.10

0.000.000.000.000.000.000.00

Net assets47.5544.6849.2044.5439.9740.3435.90

Financed by:

Share capital3.492.912.962.672.291.701.56

Reserves22.2518.5118.8717.0014.5510.857.93

Unappropriate profit21.8123.2627.3624.8723.1327.7926.42

Shareholder's equity47.5544.6849.2044.5439.9740.3435.90

Common Size Profit and Loss Account

2000200120022003200420052006

Sales100.0099.6199.5299.4599.3999.6099.58

Non-fuel retail sales0.160.200.150.140.110.09

Non-fuel retail others0.030.030.040.030.020.01

Other revenue0.200.260.350.440.270.31

100.00100.00100.00100.00100.00100.00100.00

Less: Sales tax41.7512.7112.9113.0012.6712.0812.10

Net Revenue58.2587.2987.0987.0087.3387.9287.90

Cost of products sold52.7681.8580.9380.5580.4980.1280.44

5.495.446.156.456.857.817.47

Administrative and marketing expenses2.323.304.154.244.203.092.85

Distribution expenses0.250.000.000.000.001.030.74

Operating Profit2.912.142.002.212.653.693.87

Other operating income0.680.250.190.120.010.100.12

3.592.392.192.342.663.793.99

Worker's Profit Participation fund0.120.110.110.130.170.18

Worker's Welfare Fund0.040.040.040.040.060.06

Operating Profit3.592.232.042.182.503.553.75

Financial Charges0.350.070.060.060.080.300.30

Profit before taxation3.252.171.982.122.413.253.45

Taxation1.150.760.640.720.751.061.12

Profit after taxation2.091.401.341.401.662.192.33

Unappropriated profit brought forward2.372.913.543.62

Surplus on revaluation of FA to unappropriate profit

Profit available for appropriation4.464.314.885.031.662.192.33

Financial Statistics Summary2000200120022003200420052006

Share Capital (Rs. / mn)351351351351351351438

Reserves (Rs. / mn)4421503954705501678179529676

Shareholders Equity (Rs. / mn)47725390582158527132830310114

Break up Value (Rs.)136154166167203237231

Dividends per share (Rs.)16.512.518.035.035.035.030.0

Bonus1:41:4

Profit Before Tax (Rs. / mn)2013163015721900218936434599

Profit after Tax (Rs. / mn)1299105610631255150824513108

Earnings per share of Rs.10 (Rs.)37.030.130.335.843.055.92*70.92

Price earnings ratio7.09.37.311.88.19.89*6.78

Working Capital

Current assets to current liabilities1.21.21.20.91.01.11.13

Number of days stock18142416222227

No. of days trade debts335681014

Performance

Profit after tax as % of average capital employed28.620.318.621.121.431.433.6

Profit after tax as % of average shareholders equity29.420.819.021.521.731.833.8

Cost of sales as % of sales94.794.994.394.193.792.692.9

Profit before tax as % of sales3.22.22.02.12.43.33.5

Profit after tax as % of sales2.11.41.31.41.72.22.3

Total debt ratio2.51.91.71.71.40.80.3

Du Pont AnalysisShell Pakistan

Modified Du Pont Chart

For the year 2000

Shell Pakistan

Modified Du Pont Chart

For the year 2001

Shell Pakistan

Modified Du Pont Chart

For the year 2002

Shell Pakistan

Modified Du Pont Chart

For the year 2003

Shell Pakistan

Modified Du Pont Chart

For the year 2004

Shell Pakistan

Modified Du Pont Chart

For the year 2005

Shell Pakistan

Modified Du Pont Chart

For the year 2006

Analysis of AFSRatio Analysis

Liquidity Ratios

Current Ratio

The current ratio for Shell over the five years between 2002 and 2006 shows a mixed trend, as illustrated by the following bar chart.

The ratio dropped dramatically from 1.2 in 2002 to 0.88 in 2003, remained constant at this level in 2004 and then increased to 1.06 in 2005 and then to 1.13 in 2006. The fluctuations in the ratio can best be explained by considering the changes in the components of current assets and current liabilities over the five years under consideration.

Interrelation between Current Assets and Current Liabilities

The following graph shows the interrelation between the current assets and current liabilities.

The narrow gap between the current assets and current liabilities throughout the five years, as illustrated in the above chart, explains why the current ratio is so close to 1 and averages out to be 1.03. The graph also shows that the current liabilities have been steadily increasing between 2002 and 2006. In contrast, current assets decreased sharply in 2003, before they began to show an increase. This dip in the current assets in 2003 explains why the current ratio was less than 1 (current ratio in 2003 was 0.88) during that particular year. Even though current assets increased the following year (2004), so did current liabilities, and the current ratio remained constant at 0.88, as current liabilities remained higher than current assets. Current assets rose above current liabilities in 2005 and 2006, giving current ratios greater than 1 in both years (1.06 in 2005 and 1.13 in 2006).

Negative Working Capital

Because in 2003 and 2004, the current ratio was lower than 1 (0.88 in both cases), this means that current liabilities were greater than current liabilities which means that Shell has negative working capital. Theoretically, this means that Shell has taken on more than it can chew, running up more debts and liabilities than it can pay off, which has the potential to culminate in bankruptcy. However, since the current ratio subsequently improved in 2005 and continued to improve in 2006, this seems only to be a temporary setback.

Components of Current Assets

The reason for the changes in the current ratio can also be explained by looking at the components of the current assets as well as the current liabilities.

The changes in the components of current assets are depicted in the following graph.

The graph shows that the overall trend in current assets over the years has been increasing, with slight variations. In 2003, there was a drastic decline in the value of Stock in trade, falling from Rs. 4,605,199,000 to Rs. 2,826,981,000, a decline of 38.61%. During this year, all other assets (except for taxation recoverable) were on the rise. Therefore, the decline in the current ratio in 2003, at least at this stage, is primarily attributable to the decrease in stock in trade. After 2003, stock in trade increased, as did all the other current assets. In addition, in 2004, an additional current asset was present taxation recoverable (value of Rs. 67,493,000), which did not exist previously. Despite this increase the current assets, the current ratio did not manage to increase in 2004, and remained at 0.88, the same as in 2003. This serves to support the earlier assertion that current liabilities have also increased, so that the current ratio remains constant.

Components of Current Liabilities

The increase in the components of current liabilities helps to explain where and how current liabilities have increased. This is illustrated in the following graph.

According to the graph, the major component of current liabilities is creditors, accrued and other liabilities. This is the only current liability which has been showing an increasing trend over the years. The other current liabilities show a mixed trend, declining in some years and increasing in others. There seems to be no dramatic increase in the current liabilities in 2003, which could account for a decrease in the current ratio in that particular year. This suggests that the decline in the current ratio in 2003 is due primarily to the decline in stock in trade.

In 2004, the current liabilities begin to increase. Before 2004, short term running finances utilized under mark-up arrangements did not exist on the balance sheet. The first time this appears is in 2004, and it peaks in 2005. This increase in current liabilities offsets the increase in current assets, so that the current ratio in 2004 (0.88) remains the same as in 2003. In 2005, Short term running finances utilized under mark-up arrangements reaches its peak, which theoretically should have depressed the current ratio. However, in 2005, the current assets increase more than the current liabilities do, and, as a consequence, the current ratio improves.Quick Ratio

The quick ratio for the five years, like the current ratio, also shows a mixed trend, as illustrated in the following graph.

The quick ratio increases from 0.43 in 2002 to 0.48 in 2003. However, the following year, the quick ratio drops to 0.37. After that, in 2005 and 2006, the quick ratio increases to 0.52 and 0.58 respectively.

Components of Quick Ratio

The drop in the quick ratio, like the drop in the current ratio, can be analyzed by looking at the individual components making up the ratio. These components are illustrated in the following graph.

The quick ratio has been calculated first by subtracting stock in trade from the total current assets, and then dividing the resulting figure (hereinafter referred to as Current Assets Less Stock in Trade) by the current liabilities. The components of this equation are illustrated in the graph, namely:

1. Total Current Assets

2. Stock in Trade

3. Total Current Assets Less Stock in Trade

4. Total Current Liabilities

The quick ratio will increase (improve) if current assets increase, stock in trade decreases and/or if current liabilities decrease. Similarly, if current assets decline, and/or if one or both of stock in trade and current liabilities increase, the quick ratio will also deteriorate. This is what the above graph attempts to analyze: changes in the total current assets, stock in trade and current liabilities.

In 2002, the quick ratio stood at 0.43, which increased to 0.48 in 2003. This increase was due mainly to the sharp decline in the stock in trade. The value of stock in trade was Rs. 4,605,199,000 in 2002, but it fell to Rs. 2,826,981,000 in 2003, a decline of 38.61%. Because of this decrease, the value of Current Assets Less Stock in Trade increased, and, despite the increase in current liabilities, the quick ratio improved in 2003.

In 2004, however, the quick ratio dropped from 0.48 to 0.37. This can be explained by looking at the current assets and the stock in trade for that particular year. Total current assets increased from 2003 (from Rs. 6,311,376,000 in 2003 to Rs. 7,912,631,000 in 2004, an increase of 25.37%), this should have improved the quick ratio. However, the value of stock in trade also increased from Rs. 1,577,228,000 in 2003 to Rs. 2,038,016,000, an increase of 60.49%. As a consequence, as is also shown on the graph, the gap between the current assets and stock in trade has decreased, resulting in a decrease in the value of Current Assets Less Stock in Trade. Similarly, current liabilities also increased from Rs. 7,191,520,000 to Rs. 9,042,390,000, by 25.74%. Since the percentage increase in the current liabilities as well as the stock in trade is greater than the increase in the total current assets, the quick ratio declines in 2004.

In 2005, and then in 2006, the quick ratio increased. In both these years, the value of total current assets, stock in trade and total current liabilities have all increased. However the magnitudes of these changes have been such that the quick ratios for both 2005 and 2006 have improved. In both the years, current assets have increased by 64.08% in 2005 and 56.49% in 2006 (as explained in the section Current Ratio). Current liabilities have also increased by 35.02% and 46.63% in 2005 and 2006 respectively (as explained in the section Current Ratio). At the same time, stock in trade also increased by 45.65% and 51.02% in 2005 and 2006 respectively. Since the percentage increase in the current assets in both years is more than the percentage increase in both the current liabilities and stock in trade, the overall effect is an increase in the quick ratio.

Asset Management Ratios

Inventory Turnover Ratio

The inventory turnover ratio provides a measure of how many times a companys inventory (or, in Shells case, stock in trade) is sold and replaced over the year. It is calculated by dividing sales for the year by the stock in trade for the year. Shells inventory turnover ratio for the years 2002 to 2006 is illustrated in the following graph.

According to the graph, the inventory turnover increased dramatically from 17.22 in 2002 to 31.64 in 2003. However, after that, the ratio continued to decline, to 19.98 in 2004 and then 16.94 in 2005 and 13.37 in 2006. There could be two main factors responsible for any changes in the ratio, namely:

1. Sales

2. Inventory (or stock in trade)

An increase in sales and/or decrease in stock in trade will improve the inventory turnover. Similarly, if sales decrease and/or stock in trade increase, the ratio will decline. For this reason, the analysis of the changes in the inventory turnover ratio focuses on these two items.

Interrelation of Total Sales and Stock in Trade

The following graph analyzes the interrelationship between total sales and stock in trade.

In 2003, the total sales increased from Rs. 79,280,669,000 (in 2002) to Rs. 89,448,503,000 (2003), an increase of 152.06%, which was the largest increase in the five years. In this year, the stock in trade also declined, from Rs. 4,605,199,000 in 2002 to Rs. 2,826,981,000, a decline of 38.61%, which was the only decrease in stock in trade between 2002 and 2006. The increase in total sales and the decrease in the stock in trade contributed to the increased turnover in 2003 (31.64 times, as compared to 17.22 in 2002).

However, after 2003, the inventory turnover declined, and this decline continued until 2006. In 2004, 2005 as well as 2006, both the sales and the stock in trade increased. Therefore, the decline in the inventory turnover ratio depended on the relative change in both the variables. In 2004, sales increased by only 1.36%, whereas stock in trade increased by 160.49%. Thus, 2004 seems to be a difficult year for Shell, as far as sales were concerned. The year 2004 showed the smallest increase in sales, and the largest increase in stock in trade, resulting in the most dramatic fall in the inventory turnover (from 31.64 in 2003 to 19.98 in 2004). Sales seemed to have picked up in 2005 when the increases in sales and stock in trade were 23.47% and 45.65% respectively. The corresponding figures for 2006 were 19.17% for sales and 51.02% for stock in trade. Since the percentage change in sales has, in all three years, been smaller than the percentage change in the stock in trade, the inventory turnover has worsened.

Other Factors Influencing the Ratio

Stock in trade has increased throughout 2004, 2005 and 2006. It could be argued that it was necessary to maintain higher levels of inventories because of increased sales. However, although sales have increased in 2004, 2005 and 2006, they have been increasing at a declining rate, as compared to the stock in trade, where the rate of increase is positive. At first glance, this is suggestive of the fact that the company is having problems selling off its inventory, or is maintaining obsolete stores of stock, which cannot be sold. However, this could be due to other reasons as well, which are not immediately apparent by looking at the balance sheets and profit and loss accounts.

Fluctuations in Exchange Rate

One reason is the fact that many of Shells inputs, including its stock in trade, are imported, and are purchased in US dollars. The amounts are then converted into Pakistani Rupees, using the exchange rate prevailing on the date of the transaction, and the converted amount appears on the financial statements. The exchange rate has been continually increasing over the years, and this continues to make Shells imports more expensive. Since stock in trade is valued at cost on the balance sheet, this means an increase in the monetary value of stock in trade shown on the balance sheet, even though the actual quantity purchased may not have changed. Details about the natures of the imports could not be obtained from the financial statements, so the role (if any did in fact exist) of the exchange rate in determining the value of stock in trade could not be ascertained.

Fluctuations in Oil PricesSimilarly, fluctuating international oil prices have also contributed to the changes in the sales figures. In 2006, according to the notes to the accounts, and the directors review, international oil prices increased, and this helped increase sales revenues for Shell. This is contrary to reports in news and business magazines that oil prices have fallen in 2006. Quantities sold have increased over the years, but the reduction in oil prices are reflected in the total sales revenues figures. For example, if the quantity of fuel sold increases by 25%, but prices fall by 10%, the net increase in the sales revenue is only 12.5%. As a consequence, it is difficult to categorize a decrease in the sales revenue (in absolute terms), or a decrease in the rate of increase of sales revenues as a shortcoming on the part of Shell. It could be a result of decreasing fuel prices, or government regulation (as has been the case in 2006) of the oil and gas industry.

Components of Total Sales

Shells sales revenues comprise non-fuel components (labeled non-fuel retail) as well as fuel sales (labeled Sales). The non-fuel components are not affected by international oil prices, or by government regulation, but they do contribute to total sales revenues. Therefore, it is necessary to analyze these components in order to obtain a better idea of the changes in sales revenue.

The following chart illustrates the extent (as a percentage) to which each of the various fuel and non-fuel components contribute to total sales revenue in each of the years between 2002 and 2006.

20022003200420052006

Sales99.5299.4599.3999.6099.58

Non-fuel retail sales0.200.150.140.110.09

Non-fuel retail others0.030.040.030.020.01

Other revenue0.260.350.440.270.31

100.00100.00100.00100.00100.00

The chart illustrates that sales of fuels comprise the majority of the sales revenue for each of the five years. As a consequence, the changes in the total sales revenues are dictated to a large degree by the sales in the fuel sector, rather than in the non-fuel sector. Therefore, it will not help to analyze the contribution of the non-fuel components in the total sales revenue.

Days Sales Outstanding (DSO) Ratio

The DSO ratio illustrates how many days sales are represented by accounts receivables, or, in other words, how many days the company must wait after making a sale to collect the receipts. The following chart shows the changes in the days sales outstanding (DSO) ratio between 2002 and 2006.

According to this graph, the DSO ratio has been increasing continuously over the years. It started out at 5.42 in 2002, then eventually increased to 14.13 in 2006.

The two components making up this ratio are Accounts Receivable (or trade debts) and average daily sales (Total sales divided by 360). The trends in these two components are shown in the following graph.

This graph shows that both average daily sales and trade debts have increased over the years. However, the sharp increases in the trade debts are the main reason behind the changes in the DSO ratio. In 2003, the average daily sales increased by 5.3% from the figures for 2002. In contrast, the trade debts increased by 32.18% in the same period. Subsequent years show a similar pattern: the percentage increase in trade debts is more drastic, and always greater than the percentage increase in the average daily sales. In contrast the increase in average daily sales is more gradual.

At first glance, this could suggest that Shell is failing to manage its trade debts properly and efficiently, and is letting more days lapse before it collects its debts. However, before making such a categorical statement, it is necessary to consider Shells credit policy how many days credit is being allowed to creditors? If, for example, 15 days credit is being allowed, then the changes in the ratio are acceptable in all the five years, although it does mean that Shell is relaxing its credit collection procedure. However, relaxing its credit collection procedure could also mean that it is trying to attract more clients, and this, in the long run, could mean more sales and more profits in later years (albeit at the risk of more bad debts).Therefore, a relaxation of debt collection procedure is not necessarily a bad thing.

On the other hand, if, for example, Shells debt collection procedure is 10 days, then the DSO figures for 2005 and 2006 are not acceptable. Because both figures are greater than 10, this means that Shell is taking longer to collect its debts than its credit policy allows, and therefore it needs to make its debt collection procedures more efficient.

However, no comment could be made on Shells DSO ratio, as information regarding Shells credit policy could not be obtained. Therefore, it could not be ascertained whether the DSO ratio was going well for Shell or not.

Fixed Assets Turnover

The following chart depicts the changes in the fixed asset turnover ratio between 2002 and 2006.

The ratio started out at 17.61 in 2002, and except for a decline in 2004, showed an overall increasing trend.

There could be two main factors responsible for any changes in the ratio, namely:

1. Sales

2. Total fixed assets

An increase in sales and/or decrease in total fixed assets will improve the fixed asset turnover. Similarly, if sales decrease and/or total fixed assets increase, the ratio will decline. For this reason, the analysis of the changes in the fixed asset turnover ratio focuses on these two items.

Interrelation of Total Sales and Total Fixed Assets

The following graph analyzes the interrelationship between total sales and total fixed assets.

In 2003, sales increased by 12.75%, whereas total fixed assets increased by 7.26%. Because sales increased more than fixed assets did, the fixed asset turnover ratio increased in 2003. However, the following year, in 2004, the fixed asset ratio declined. This can again be explained by analyzing the relative changes in sales and fixed assets. Fixed assets increased by 11.83%, whereas sales increased by only 1.29%. Because fixed assets increased more than sales, the fixed asset turnover ratio declined. In subsequent years (2005 and 2006), however, the fixed asset turnover ratio increased. This, like the previous year (2004) can be explained by looking at the relative percentage changes in sales and total fixed assets. In 2005, fixed assets increased by 3.49%, whereas total sales increased by 23.47%. Similarly, in 2006, fixed assets increased by 2.51%, whereas total sales increased by 19.17%. Since in both cases, the percentage increase in fixed assets has been less than the percentage increase in sales, the fixed asset turnover has managed to improve. Theoretically, this could mean that the companys situation (despite a temporary setback in 2003) is improving and it is becoming more efficient at utilizing its fixed assets to generate sales.

Other Factors

However, an opinion cannot be formed about the ratios without considering other factors. These factors are discussed in the following sections.

Fluctuations in Exchange Rate

Several of Shells fixed assets are imported and are purchased in US dollars. The amounts are then converted into Pakistani Rupees, using the exchange rate prevailing on the date of the transaction, and the converted amount appears on the financial statements. The exchange rate has been continually increasing over the years, and this continues to make Shells imports more expensive. Since fixed assets are valued at cost on the balance sheet, this means an increase in the monetary value of fixed assets shown on the balance sheet, even though the actual quantity purchased may not have changed. Details about the natures of the imports could not be obtained from the financial statements, so the role (if any did in fact exist) of the exchange rate in determining the value of fixed assets could not be ascertained.

Fluctuations in Oil Prices

Similarly, fluctuating international oil prices have also contributed to the changes in the sales figures. In 2006, according to the notes to the accounts, and the directors review, international oil prices increased, and this helped increase sales revenues for Shell. This is contrary to reports in news and business magazines that oil prices have fallen in 2006. Quantities sold have increased over the years, but the reduction in oil prices are reflected in the total sales revenues figures. For example, if the quantity of fuel sold increases by 25%, but prices fall by 10%, the net increase in the sales revenue is only 12.5%. As a consequence, it is difficult to categorize a decrease in the sales revenue (in absolute terms), or a decrease in the rate of increase of sales revenues as a shortcoming on the part of Shell. It could be a result of decreasing fuel prices, or government regulation (as has been the case in 2006) of the oil and gas industry.

Components of Total Sales

Shells sales revenues comprise non-fuel components (labeled non-fuel retail) as well as fuel sales (labeled Sales). The non-fuel components are not affected by international oil prices, or by government regulation, but they do contribute to total sales revenues. Therefore, it is necessary to analyze these components in order to obtain a better idea of the changes in sales revenue.

The following chart illustrates the extent (as a percentage) to which each of the various fuel and non-fuel components contribute to total sales revenue in each of the years between 2002 and 2006.

20022003200420052006

Sales99.5299.4599.3999.6099.58

Non-fuel retail sales0.200.150.140.110.09

Non-fuel retail others0.030.040.030.020.01

Other revenue0.260.350.440.270.31

100.00100.00100.00100.00100.00

The chart illustrates that sales of fuels comprise the majority of the sales revenue for each of the five years. As a consequence, the changes in the total sales revenues are dictated to a large degree by the sales in the fuel sector, rather than in the non-fuel sector. Therefore, it will not help to analyze the contribution of the non-fuel components in the total sales revenue.Total Assets Turnover

The following chart depicts the changes in the total asset turnover ratio between 2002 and 2006.

The ratio started out at 6.70 in 2002, and except for a rise in 2003, showed an overall decreasing trend.

There could be two main factors responsible for any changes in the ratio, namely:

1. Sales

2. Total assets

An increase in sales and/or decrease in total assets will improve the total asset turnover. Similarly, if sales decrease and/or total fixed assets increase, the ratio will decline. For this reason, the analysis of the changes in the total asset turnover ratio focuses on these two items.

Interrelation of Total Sales and Total Assets

The following graph analyzes the interrelationship between total sales and total assets.

In 2003, total sales increased by 12.83%, whereas total assets increased by only 11.04%. This slight difference between the rate of increase of sales and total assets explains why the total asset turnover increased slightly. However, from 2004 onward, the total asset turnover ratio declined, with the most drastic decline in 2006, when it fell from 5.44 in 2005 to 4.74 in 2006. In all three of these years (2004, 2005 and 2006), total assets increased at a greater rate than sales did, and therefore the total assets turnover declined. Theoretically, this could mean that Shell is not generating a sufficient volume of business given its total asset investment, and should therefore consider disposing of some of its assets.

Analyzing Total Assets

A clearer picture can be obtained by analyzing the components of the total assets. This is illustrated in the following graph, which depicts the levels of all the different components of total assets over the past five years.

The graph shows how the different components of total assets (fixed plus current) have been changing over the years. In 2003, despite an increase in long term investments of 2028.09%, and in long term deposits of 283.46%, the total asset turnover ratio managed to increase. This was first because of a decline in several components of current assets, most notably stock in trade, which decreased by 38.61%, which offset the increase in the non-current assets, causing total assets to increase only by 11.04%. Similarly, in 2003, sales also increased by 12.83%, which helped improve the total asset turnover ratio slightly.

From 2004 onwards, all assets, fixed as well as current, registered an increase. Sales did not increase at the same rate, and therefore in each year the total asset turnover ratio declined. However, it cannot be said that the companys position is in danger, because of the factors mentioned earlier, namely fluctuations in the exchange rate and declines in oil prices. The appreciating dollar makes it more expensive to import fixed assets and inventory (assuming the other assets have nothing to do with the exchange rate), and this increases the monetary values of the fixed assets and the inventory. Similarly, declines in oil prices result in declines in sales revenue (or increases sales revenue at a slower rate). Both these factors combine to reduce the total asset turnover ratio. However, it has not been possible to ascertain whether this has been the case with Shell or not (although it definitely is a possibility), as no data regarding the extent of the impact of exchange rates and oil prices was available from the annual reports.Total Debt to Total Assets (Debt Ratio)

The following graph illustrates the changes in the total debt to total assets ratio between 2002 and 2006.

The chart shows that the ratio of total debt (or total liabilities) to total assets has been increasing over the years. It started out at 0.51 in 2002 and gradually increased to 0.64 in 2006, while it remained constant at 0.60 in both 2004 and 2005. Analysis of the gaps between total assets and total liabilities explains the changes in the ratio.

The following graph shows the changes in the total assets and total liabilities over the years.

According to the graph, both total assets and total liabilities have increased over the years. Therefore, it is necessary to look at the percentage change in the figures over the years in order to determine the reason behind the increase in the debt ratio.

The following table summarizes the percentage changes in both total assets and total liabilities.

20022003200420052006

Total Assets(1.90)11.04 16.79 34.13 36.88

Total liabilities(9.90)21.21 26.42 33.29 47.07

In all cases, the percentage increase in the total liabilities has been greater than the percentage change in the total assets, which explains why the ratio has increased between 2002 and 2006.

To help analyze the changes further, it would help to consider the changes in the total assets and the total liabilities separately. Changes in total assets are first broken down into changes in current assets and in non-current assets, and are illustrated in the following graph.

According to the graph, total current assets declined from 2002 to 2003, whereas total long term assets increased during the same period. The end result was therefore to bring about a small increase in total assets (11.04%, the smallest in the period). Following this, total current assets continued to rise rapidly, whereas the value of total long term assets increased only slightly (8.85% in 2004, 2.24% in 2005 and 3.39% in 2006). Therefore, the increase in total assets can primarily be attributed to increases in current assets.

These increases in total assets should have been sufficient to improve the debt ratio, not worsen it. However, total liabilities have increased at a faster rate than total assets, and this has contributed to the increase in the ratio over the years. The changes in the liabilities are broken down into current liabilities and long-term liabilities, and are illustrated in the following graph

The graph shows that the increase in total liabilities is primarily due to the increase in total current liabilities over the years. However, a better idea can be obtained by looking at the percentage changes in the figures, as the scale of the graph covers up many changes in the long term liabilities. The percentage changes are summarized in the following table.

20022003200420052006

Total current liabilities(8.19)21.18 25.74 35.02 46.63

Total long term liabilities(63.07)23.92 77.89 (59.24)125.34

Following 2002, current assets increased steadily. In contrast, the changes in the long term liabilities fluctuated widely, showing a sharp decline (59.24%) in 2005, followed by an increase of 125.34% in 2006. Despite the decline in the long-term liabilities during 2005, total liabilities still increased, suggesting that the long term liabilities did not constitute a significant portion on total debt. This is further confirmed by looking at the balance sheet.

By looking at the balance sheet, one could conclude that the position of the company is worsening, and it will eventually be unable to pay off its debts using its total assets. However, the annual reports do not provide any information as to why additional liabilities are being incurred. There has, for instance, been an increase in short term loans (of 1200%) in 2006, and it could be possible that the increase in liabilities is only because of an attempt on the companys part to invest in, for instance, better technology or assets. This means that, while the financial statements are looking bad now (because of increases in debt), the situation might improve later on.

Times Interest Earned

The times interest earned (TIE) ratio illustrates the extent to which operating profit before taxation can be used to pay interest expense i.e. how many times can operating profit be used to pay off interest expense (in this case, financial charges). The changes in Shells TIE ratio are illustrated in the following chart.

The graph illustrates that the TIE ratio shows a mixed trend, rising slightly from 34.63% in 2002 to 37.91% in 2003, and then declining until 2005, after which it increased slightly in 2006. Fluctuations in the ratio could be because of a change in either operating profit or in financial charges. An increase in financial charges and/or decrease in operating profit will depress the ratio, whereas the reverse situation will increase it. For this reason, the analysis focuses on the changes in operating profit and financial charges.

Changes in the operating profit are illustrated in the following graph.

This shows that operating profit has been increasing over the years. However, this is not sufficient to explain why the TIE ratio has been declining over the years. Because the TIE ratio has shown a mixed trend, this also means that the financial charges have also played a role in the ratio, and that they have also been increasing. This is confirmed by looking at the changes in the financial charges as well. The changes are in the financial charges are illustrated in the following graph.

The graph shows that financial charges have also increased over the years. The increase was slight between 2002, 2003 and 2004, but they increased dramatically in 2005, showing a 348.33% increase. This was what was responsible for the fall in the TIE ratio from 30.65 in 2004 to 12.56 in 2005.

The fall in the TIE ratio in 2004 can be explained by considering both the financial charges and the operating profit together. The reason that this was not done earlier was because the scale of the graph was such that it failed to illustrate the changes in the financial charges. The analysis is therefore done by looking at the percentage changes in the two figures, which are shown in the following table.

20022003200420052006

Financial Charges(6.99)10.11 43.39 348.33 20.27

Operating Profit(24.61)(3.66)20.52 15.96 75.62

In 2004, financial charges increased by 43.39%, whereas operating profit only increased by 15.21%. Therefore, the TIE ratio dropped, as the financial charges increased more than the operating profit did. Similarly, in 2006, the TIE ratio showed a slight improvement from the 2005 figures. This was due to an increase in the operating profit, which was more than the increase in financial charges.

In this case, also, one might be tempted to say that the increase in the interest charges will ultimately prove harmful for the company, as they are increasing their liabilities, whereas their operating profit is not increasing to match it. However, at this point, this conclusion would be premature. The rate of increase of operating profit is fluctuating, and declines in the year in which interest expense is the highest (2005), but this could also mean that the company is taking out loans to improve the state of the business, by, for example, purchasing fixed assets, or investing in new technology, and this would translate to higher profits later on.

Profitability Ratios

Profit Margin on Sales

The profit margin on sales ratio describes the percentage profit that is made on every dollar of sales. The following graph illustrates the changes in Shells profit margin on sales over the years

The graph shows that the profit margin increased from 2002 to 2003, after which it declined in 2004. After 2004, the profit margin began to increase until 2006. Changes in the profit margin could be because of changes in one or both of the following:

1. Sales Revenue

2. Profit available for appropriation

This change can be analyzed by looking at the changes in the profit available for appropriation and the changes in sales revenue. An increase in profit available for appropriation and/or a decrease in sales revenue will improve the ratio, whereas a decrease in profit available for appropriation and/or an increase in sales revenue will depress the ratio. For this reason, the analysis focuses on these two variables.

The following graph illustrates the changes in the profit available for appropriation between 2002 and 2006.

The graph shows that between 2002 and 2003, the profit available for appropriation increased, but in 2004, this figure dropped, after which it began to rise. This appears to be mostly responsible for the large fall in the profit margin (from 5.03% in 2003 to 1.66% in 2004). The decline in profit available for appropriation in 2004 could be because of a variety of factors. In that year, sales increased by 1.36%, but cost of products sold, and administration and distribution expenses all increased too. Similarly, financial charges increased by 43.39%, and taxation increased by 5.58% (although this was the smallest percentage increase in the amount of taxation in the five years between 2002 and 2006). The real culprit behind the drop in profit available for appropriation appeared to be the large fall in other income, which reached 89.11%, the largest in the five years. This appears to be the primary factor behind the fall in the profit available for appropriation.

Similarly, the profit margin can also be considered by looking at the trend in the sales revenue over the period. This trend is illustrated in the following graph.

The graph shows that sales revenue has been continually increasing over the years. However, except for 2004, the rate of increase has been such that the profit margin has managed to increase. In 2004, too, sales increased (albeit by a meager 1.36%). Had the profit available for appropriation not changed, or if the profit had increased more than the sales, the profit margin would have increased. However, the exact opposite happened. Sales increased, and profit available for appropriation declined by 66.45% also. The combined effect, naturally, was to decrease the profit margin for 2004.

Basic Earning Power

The basic earning power provides a measure of the capability of the firms assets to generate operating income. The following graph illustrates changes in Shells basic earning power (BEP) between 2002 and 2006.

The graph shows that BEP shows a mixed trend over the years. BEP increased from 13.68% in 2002 to 14.85% in 2003, declined slightly to 14.75% in 2004, rose to 19.31% in 2005 and then declined to 17.74% in 2006. In order to explain the fluctuations in BEP, it is essential to look at the changes in the variables making up the ratio. These two variables are:

1. Earnings before Interest and Taxation (Operating Profit)

2. Total Assets

An increase in operating profit and/or decrease in total assets will increase the BEP, whereas a decrease in operating profit and/or increase in total assets will decrease the BEP. Therefore, the analysis focuses on changes in operating profit and total assets.

Changes in operating profit are illustrated in the following graph.

The operating profit has been increasing over the years. The largest increase was in 2005 (75.62%), which was caused primarily by an increase of 23.47% in sales and an increase of 825.32% in other operating income, the largest percentage increases in all the five years. All other factors remaining constant, the BEP would have increased. Because the BEP is fluctuating, this means that total assets are either fluctuating too, or they are increasing at a higher rate than the operating profit is. To find out what the actual reason is, it is necessary to look at the trend in the total assets, which are illustrated in the following graph

This graph also shows that total assets have been increasing over the years. If operating profit had not increased, this would have made the BEP decline. However, because of the different scales of the graphs, one cannot compare the two and decide whether total assets or operating profit was responsible for the fluctuating BEP. For this reason it is necessary to look at the percentage changes in both operating profit and EBIT. The percentage changes are illustrated in the following table.

20022003200420052006

Total Assets(1.90)11.04 16.79 34.13 36.88

Operating Profit(3.66)20.52 15.96 75.62 25.76

In 2003 and 2005, the operating profit increased more than the total assets. Therefore, the BEP ratio increased in both these years. Similarly, the decline in the BEP in 2004 and 2006 was due to the fact that the increase in total assets was more than the increase in the operating profit. By looking at the ratio, one could conclude that Shells ability to utilize its total assets in order to generate operating profit is not managed properly. However, one must consider another factor: the influence of the exchange rate. As discussed earlier, Shell relies on imports, the value of which depends on the exchange rate, which has been increasing over the years. It might be possible that Shells fixed assets are fluctuating because of the exchange rate. Since fixed assets constitute the largest component of total assets, the value of total assets also changes at a variable rate. This might have been a reason behind the fluctuations in the BEP. However, although the exchange rate is mentioned as a factor influencing the financial statements in the annual reports, the exact extent of the impact of the exchange rate is not mentioned. Therefore, the theory that fixed assets are affected by fluctuations in the exchange rate is suggested only as a possibility, not as a definite reality.

Return on Assets

The return on assets (ROA) ratio measures the rate of return on the companys investments in total assets. The changes in the ratio are shown in the following chart.

According to this graph, the ROA increased in 2003, after which it declined to 9.83% in 2004 (from 34.22% in 2002). The ROA rose to 11.91% in 2005, but then declined slightly to 11.03% in 2006. In order to analyze the changes in the ratio, it is necessary to look at the factors behind the ratio, namely:

1. Profit available for appropriation

2. Total assets

If the total profit available for appropriation increases and/or total assets decrease, the ROA will improve. If, however, total profit available for appropriation decreases and/or total assets increase, the ROA will decline. Therefore the analysis looks at changes in both the total assets and the profit available for appropriation.

Changes in total assets are discussed in the section on BEP and are only summarized here for the sake of continuity. Total assets have increased over the years (Refer to graph of total assets in BEP), and had the increase not been offset by changes in the profit available for appropriation, the ROA would have declined over the years. If that had been the case, it would a