Finance Project on Fauji Fertilizer Company

                               ANALYSIS OF RATIOS                              

For the analysis of the financial statements of the Fauji Fertilizer Company private limited we use the ratio analysis in order to get a clear vision about the financial position with simple interpretation. For this purpose we can analysis the financial statements through the followings ratios:

1             LIQUIDITY RATIOS

2             DEBT RATIOS

3             ACTIVITY RATIOS

4             MARKETABILITY RATIONS

5             PROFITABILITY RATIOS

LIQUIDITY RATIOS

The liquidity of a business firm is measured by its ability to satisfy its short-term obligations as they came due. Liquidity refers to the solvency of the firm’s overall financial position__ the ease with which it can pay its bills. Basic measures of liquidity are:

(1)    Net working capital

(2)    Current ratio

(3)    Quick ratio

(4)    Cash ratio

By putting the values taken from the annual report of “Fauji Fertilizer Company Limited” in the formulas of above ratios the results are shown in the following table.

interpretation of the results

Net Working Capital

Net working capital, although not actually a ratio, is commonly used to measure a firm’s overall liquidity. This requirement is intended to force the firm to maintain sufficient operating liquidity and helps to protect the creditor. Fauji Fertilizer Company shows a sufficient amount of working capital in all the years of its performance. NWC has been gradually increasing by the year 2001.But it has decreased from 5585658 in the year 2001 to 395860 in the year 2002. This positive NWC shows good liquidity position of the firm.

Current Ratio

A current ratio of 2.0 is occasionally cited as acceptable, but a value’s acceptability depends on the industry in which the firm operates. A current ratio of 1.0 would be considered acceptable for a utility but might be unacceptable for a manufacturing firm. The more predictable a firm’s cash flows, the lower the acceptable current ratio. Current ratio of the company has been successfully up till year2001 but it is 1.04 times in the year 2002 and it is 2.34 in the year 2001. Although there is a decrease in CR but it is still acceptable because it is more than one.

Quick Ratio

The quick ratio is similar to the current ratio except that it excludes inventory, which is generally the least liquid current asset. Quick ratio is an extended version of current ratio in which only very quick assets (which can be quickly liquidated) are considered. A rule of thumb is that figure of Hh8€h4he short-term liquidity position of the firm is very healthy because of the following points:

1. Current ratio of the firm is 1.08 times which shows that the firm has more current assets as compared to the current liabilities.
2. Net Working capital of the firm is positive
3. Quick ratio of the company is .79 times which is also good.
4. Cash ratio of the company is also very good which is 6.73% of total assets

ACTIVITY RATIOS

Activity ratios are used to measure the speed with which various accounts are converted into sales or cash. With regard to current accounts, measures of liquidity are generally inadequate Basic measures of activity are:

(1)    Inventory turnover

(2)    Fixed assets turnover

(3)    Total asset turnover

(4)    Average age of inventory

(5)    Average collection period

(6)    Accounts receivable turnover

(7)    Operating cycle

(8)    Account payable turnover

(9)    Average payment period.

INTERPRETATION of the results

Inventory Turnover

Inventory turnover commonly measure the activity, or liquidity, of a firm’s inventory. An inventory turnover of 20.0 would not be unusual for a grocery store, whereas a common inventory turnover for a manufacturer would be 4.0. Inventory turnover of the company is 4.49 times in the year   2002 and it has increased from the last year figure of 3.45 times. Though there is a decrease in inventory turnover yet  it is acceptable.

Total Assets Turnover

Total assets turnover indicates the efficiency with which the firm uses all its assets to generate sales. Generally, the higher a firm’s total asset turnover, the more efficiently its assets have been used. This measure is probably of greatest interest to management, because it indicates whether the firm’s operations have been financially efficient. Fauji Fertilizer Company turns its asset over in 2002 by .6 times   and it was .86 times in the year 2001 This shows that the total assets turnover has been very low. Thus it shows inefficiency of the management of the firm to use assets to generate revenuers.

NET FIXED ASSETS TURNOVER

Net fixed assets turnover of the company is 1.76 times in the year 2002 which has significantly decreased as compared to the last year’ s turnover of 7.85 times. This is not a good sign for the company..

GROSS FIXED ASSETS TURNOVER

Gross fixed assets turnover of the company 0.8 times has decreased from the last year figure of 1.02 times   that is not in the favor of the company.

AVERAGE AGE OF INVENTORY

Average age of inventory tells that for how many days on average the inventory is held .The greater the number of days, the inefficient will be the management. Average age of inventory of the company has reduced to 80 days in the year 2002 from 104 days in 2001 This shows inventory is kept for less number of days as compared to the last year.

AVERAGE COLLECTION PERIOD

Average collection period indicates that how many days are required to collect amount from the trade debts. The earlier the cash is received from the debtors; the better will be for the company. Average collection period of the company has increased to 30 days in the year 2002 from the year 2001 figure of 27 days. This shows inefficiency in the collection of Accounts receivable

ACCOUNTS RECEIVABLE TURNOVER

Account receivable turnover indicates that how many times accounts receivable is converted into cash a high turnover indicates the efficiency of the management. Accounts receivable turnover has decreased to 11.98 times in 2002 from 13.61 times in the year 2001. This is not a good sign for the company.

OPERATION CYCLE

Operating cycle of any company shows the number of days lapsed from the acquisition of raw material till the receipt of cash from the sale of finished goods. Operating cycle of the company is 92.08 days in 2002 and is 117.94 in 2001.This is a good sign for the company.

ACCUOUTS PAYABLE TURNOVER

Accounts payable turnover indicates that how many times accounts payable converted into cash payments. It should be maximum one. Accounts payable has increased to 6.4 times in 2002 from 5.26 times in 2001 that is not a good sign for the company.

AVERAGE PAYMENT PERIOD

Average payment period indicates that after how many days the payment to creditors is made. This time period should be maximum one. Average payment period of the company has decreased to 56 days from 68 days in 2001. This is not good sign for the company.

DECISION

Activity ratio shows that the management of the firm is quite active in utilizing its assets to generate sales for the business. Thus we can say that operating efficiency of the business is very good due to the following reasons:

1. Inventory turnover of the company is good
2. Average age of inventory of the company is also acceptable
3. Accounts receivable turnover of the company has been excellent

DEBT RATIOS

The debt position of a firm indicates the amount of other people’s money being used in attempting to generate profits. In general, the financial analyst is most concerned with long-term benefits, because these commit the firm to paying interest over the long rum as well as eventually repaying the principally borrowed. Because the creditors claims must be satisfied before, the distribution of earnings to share holders. Basic measures of debt are:

(1)    Debt ratio

(2)    Debt-equity ratio

(3)    Interest coverage ratio

(4)    Fixed assets to long term debts

(5)    Operating cash flow/total debts

INTERPRETATION of the results

Debt Ratio

The debt ratio measures the proportion of total assets financed by the firm’s creditors. The higher this ratio, the greater the amount of other people’s money being used in an attempt to generate profits. FFC’s debt ratio has increased to 61.79% in the year 2002 from 32% in the year 2001. This shows that the company has increased its dependence on the outsider’s sources of finances. This ratio is slightly high than the acceptable limit of 60%. This shows that there is a significant increase in the debts of the company.

Debt Equity Ratio

The debt-equity ratio indicates the relationship between the long-term funds provided by creditors and those provided by the firm’s owners. It is commonly used to measure the degree of financial leverage of the firm. FFC’s debt equity ratio is 161.69% in the year   2002 and has increased significantly from 47.05% in the year 2001. This shows that debts are more as compared to shareholders equity So this shows risk for the investors.

INTEREST COVERAGE RATIO

Interest coverage ration tells that how many times the firm is able to pay its financial charges out of its profit .A high ratio is desirable. This ratio for the company is 8.24 times in the year 2002 and has significantly decreased from 19.14 times in the year 2001. This shows not good sign for the company. It shows that due to high debts financial charges of the company has increased.

FIXED ASSETS TO LONG TERM DEBT

Fixed assets of the firm are almost 2.24 times its long-term debts in the year 2002. There is a significantly decrease 11.44 times in this ratio in this year This shows that the firm has got more LTD in this year.

OPERATING CASH FLOW/TOTAL DEBTS

Operating cash flow of the company is 27.51% of the amount of total debts of the company. This shows good sign for the firm. This ratio has decreased as compared to the ratio of 41.09% in the year 2001.This shows that the firm has earned less from its operations in this year as compared to the pervious year.

Long-term solvency of the company is also very good because their profitability ratios are very high and the firm is using debts. Interest coverage of the company is also very good. And fixed assets to net worth is 1.74 times.

PROFITABILITY RATIOS

There are many measures of profitability. Each related the return of the firm to its sales, assets, equity, or share value. As a group, these measures allow the analyst to evaluate the firm’s earnings with respect to a given level of sales a certain level of assets, the owners’ investment, or share value. With out profit, a firm could not attract outside capital. Basic measures of profitability are:

(1)    Gross profit margin

(2)    Operating profit margin

(3)    Net profit margin

(4)    Return on shareholders investment

(5)    Return on total assets

(6)    Earning per share

INTERPRETATION OF THE RESULTS

Gross Profit Margin

The gross profit margin measures the percentage of each sales dollar remaining after the firm has paid for its goods. The higher the gross profit margin, the better and the lower the relative cost of merchandise sold. Gross profit margin of the company has decreased in the year 2002 as compared to last year, which has gross profit margin of 47%. This decrease is due to increased cost of goods sold. 

Operating Profit Margin

The operating profit margin measures the percentage of each sales dollar remaining after all costs and expenses other than interest and taxes are deducted. It represents the pure profits earned on each sales dollar. A high operating profit margin is preferred. Operating profit margin of the company has decreased to 31.09% in 2002 as compared to the year 2001(38.37%).

 This has increased due to increased selling and administrative expenses.

Net Profit Margin

The net profit margin measures the percentage of each sales dollar remaining after all costs and expenses, including interest and taxes, have been deducted. The higher the firm’s net profit margin, the better. The net profit margin is commonly cited measure of the firm’s success with respect to earnings. Net profit margin of the company has decreased to 18.31% in the year 2002 against 26.74% in the year 2001. This has just reduced due to the industry crisis.

Return On shareholders Investment

Return on shareholders investment (ROI) measures the overall effectiveness of management in generating profits with its available assets. The higher the firm’s return on investment, the better. For the year 2002 it is 28.56%, which is less than that of 2001(33.72%). So it is not a good sign for the company.

RETURN ON TOTAL ASSETS

Return on Total asset of the company has decreased to 10.91% in the year 2002    from 22.93% in the year 2001. It shows inefficiency of the company management to generate profit on the total assets.

Earning Per Share

The firm’s earnings per share (EPS) are generally of interest to present or prospective stockholders and management. The earnings per share represent the number of dollars earned on behalf of each outstanding share of common stock. They are closely watched by the investing public and considered am important indicator of corporate success. Earning per share of the company has decreased to 11.98 per share in the year 2002 against 12.49 per share in the year 2001. This is just because of industry crisis.

DECISION

Profitability position of the firm is very good though it has decreased yet it is very good due to the following points:

1. Gross profit of the company is very good which is 32.59%
2. Operating profit of the company is also good which is 22.04%
3. Net profit, Return on investment, Return on total assets, all are very good and are 10.40%, 21.26%, 7.93% respectively.

MARKETABILITY RATIOS

Equity investor is more interested in the dividends of the company. It is also concerned about the profitability positing of the firm. For the purpose of equity investor we calculated the following ratios:

1. Dividend per share
2. Dividend payout ratio
3. Dividend yield ratio
4. Book value per share
5. Price earning ratio
6. %age of earnings  retained
7. Degree of financial leverage

INTERPRETATION OF THE RESULTS

DIVIDEND PER SHARE

Dividend per share of the company of the company is 9 per share in the year 2002 and it was 8.5 in the year 2001. Company has increased its dividend to a little bit extent. Dividend per share of 9 is ideally good.

DIVIDEND PAYOUT RATIO

Company is giving maximum dividend to its shareholders. This ratio has increased to 75.11% in the year 2002 from 68.05% in 2001. It is a good thing for the equity y investor because he is interested in dividend.

DIVIDEND YIELD RATIO

Dividend yield ratio the company is 10.59% in the year 2002 and last year this ratio was 10%. For those investors who want to earn current profit ,for them this ratio is good but for those investors who want to earn capital gain low dividend yield ratio is acceptable.

%AGE OF EARNING RETAINED

Company‘s %age of earnings retained are just 31.95% and 24.89 % in both the current years of 2001 and 2002 respectively. This shows more attractiveness for the equity investor. There is a decreased in this ratio due to the more distribution of the dividend as compared to the last year.

OPERATING CASH FLOW/CASH DIVIDEND

Operating cash flow to cash dividend compares operations cash flow to cash dividend paid by the firm. A high ratio is desirable .The company is generating sufficient cash from its operations to declare cash divided This ratio has improved to 2.17 times in the year 2002 against the last year figure of .76 times. It shows that the firm has sufficient cash available for the distribution of dividend.

PRICE EARNING RATIO

The stocks of the company are being traded 7.1 times its earnings. This shows investor’s confidence on the firm’s ability to generate earnings and growth opportunities for the firm. Price earning ratio of 7.1 times shows that to earn one rupees the investor is willing to invest 7.1 rupees in business.

DEGREE OF FINANCIAL LEVERAGE

Degree of financial leverage is defined as the percentage change in EBIT over percentage change in EBT. This leverage results from the presence of fixed cost within the expenses of the firm. Degree of financial leverage of the firm is 1.14 times and it has increased from 1.06 times in year 2001.This shows that if EBIT increase by 100% EBT will increased by 106%.

BOOK VALUE PER SHARE

Book value per share is good one if it is below the market price of its shares. Book value per share of the company is 41.96 per share, which shows investor’s confidence on the firm’s ability to generate profits.

DECISION

From the point of view of equity investor the firm is very much attractive because of the following s points:

1. Dividend per share of the company is 9 per share, which is very much attractive for the investor.
2. Dividend payout ratio of the company is also very high i.e. 75% of the earning per share
3. Earring per share of the company is also very high whichsi11.98 per share.
4. operating cash flow /cash dividend of the firm  is 2.17 times of the cash dividend.

CONCLUSION

From our analysis we might   conclude that the liquidity position of the firm is good, operating performance is also well as compared to the past year. The firm is operating   in a good manner, but from the last year the firm has obtained loans from the outside sources. As the firm is a levered firm so this debt will increase the profits of the firm very much.

Common Statement Analysis

(Vertical Analysis)

INCOME STATEMENT

FAUJI FERTILIZER COMPANY LIMITED

For the year ended December 31,2002.

Common Statement Analysis

(Horizontal Analysis)

INCOME STATEMENT

FAUJI FERTILIZER COMPANY LIMITED

For the year ended December 31,2002.

Common Statement Analysis

(Vertical Analysis)

BALANCE SHEET

FAUJI FERTILIZER COMPANY LIMITED

For the year ended December 31,2002.

Asset side

Common Statement Analysis

(Vertical Analysis)

BALANCE SHEET

FAUJI FERTILIZER COMPANY LIMITED

For the year ended December 31,2002.

LIABILITY SIDE

Common Statement Analysis

(Horizontal Analysis)

BALANCE SHEET

FAUJI FERTILIZER COMPANY LIMITED

For the year ended December 31,2002.

ASSET SIDE

Common Statement Analysis

(Horizontal Analysis)

BALANCE SHEET

FAUJI FERTILIZER COMPANY LIMITED

For the year ended December 31,2002.

LIABILITY SIDE

FORMULAS OF RATIOS:

RATIO ANALYSIS:

Basically ratio analysis is the instruments used for evaluating and interpreting the financial health/position of the company. Ratio analysis allows present and prospective investor and lender along with the firm’s management to evaluate the firm’s financial position or performance.

LIQUIDITY RATIOS:

      Liquidity ratio’s refers the ability of firm to pay its short-term obligation on time.

Current ratio

                              Current assets

                     Current ratio              =     ------------------------

                                                                  Current liabilities

Shrinkage Of Current Assets:

                                                                                       Current liabilities

                     Shrinkage Of Current Assets = 1-       --------------------------- x 100

                                                                                         Current assets

Quick Ratio:

                                                              Current assets- inventories 

                                       Quick ratio=  ---------------------------------

                                                                    Current liabilities

Cash Ratio:

                                          Cash + Marketable Securities (M/S) 

                  Cash ratio = ---------------------------------------------­­­­­­----- x 100

                                                Total assets

Net Working Capital:

                                     N.W.C     = Current Assets – Current liabilities.

Working Capital Ratio:

                                                                       Net working capital

                           Working Capital Ratio= --------------------------- x 100

                                                                                Sale

Working capital to total assets:

                                                                                           NWC

                             Working capital to total assets  = ----------------- x 100

                                                                                       Total Assets

Activity Ratio

Basically  used to measured stream with which current account convert into cash/sale. That how productivity management is utilizing the assets of business to generate the desired rate.

Inventory Turnover:

                                                                                Cost of good sold

                                          Inventory turnover =  -----------------------

                                                                                    Ending stock

Average age of inventory:

                                                                                               No working days

                                                Average age of inventory = -------------------------- 

                                                                                               Inventory turnover

Average Collection Period:

                                                                                 Total credit sale

            Average credit sale per day    =       ------------------------------------

                                                                                          360

                                                                               Account receivable

           Average collection period =   ------------------------------------

                                                                          Average credit sale per day

       Account Receivable Turnover:

                                          No of working days

                    A.R.T.O   = ---------------------------

                                                   ACP

Average payment period

                                                      Accounts payable

                             APP = --------------------------------------------

                                         Average credit purchase per day

                                               Accounts payable

                             APP = --------------------------------------------

                                         Average credit purchase per day

Accounts Payable Turnover:

                                                                                       No of working days                                                                                                                                                                                

                                   Account Payable Turnover = ----------------------------

                                                                                               APP

Operating Cycle:

            Operating Cycle = Average Age Of Inventory + Average Collection Period

                         OC = AAI + ACP

Cash Conversion cycle:

                                                  C.C.C = AAI + ACP – AAP

                                                                 OR

                                                  C.C.C  = O.C – AAP

EFFICIENCY OF THE FIRM

                                        Net sale

Fixed Assets Turnover  = ---------------------

                                               Net fixed Assets

Total Asset Turn Over:

                                               Net sale

                         TA.T.O= -------------------

                                           Total assets

Debt Ratio’s

       Debt ratios for the sake of two purposes

v  Measure the degree of indebt ness (how much we are in lose).

v  Ability to pay the debts (to check that the company will pay the interest or lease      payment on time or not)

Debt Ratio:

                                                        Total debt       

                                Debt ratio = --------------- x 100

                                                      Total assets

Debt Equity Ratio:

                                                                          Total debt 

                                                   D.E.R = ---------------------------x 100

                                                                   Stockholder equity

Time Interest Ratio

                                                   Earning before interest taxation

                                     T.I.R = -------------------------------------------

                                                                      Interest

Profitability Ratio:                  

 With the help of this ratio’s the analyst can evaluate the firm earning with respect to given level of sale at certain level of assets, the owner’s investment or share value.

   Gross Profit Ratio                                                                

                                                                                           G.P

                                                  Gross Profit Margin = ---------- x 100

                                                                                           Sale

Operating Profit Margin:

                                                                    O.P

                                        O.P. margin = ----------- x 100

                                                                 Net sale

Net Profit Margin

                                                    Net profit after taxation

                               N.P margin = ------------------------------------ x 100

                                                                                  Sales

    Return On Assets

                                                   N.P.A.T

                                R.O.A = -----------------

                                                Total Assets

Return On Equity:

                                               N.P.A.T                    

                               R.O.E  =------------ x 100

                                                S.H.E 

Marketability Ratio’s :

           These ratios refer to the market value of company’s stock towards profitability.

     Earning per share :

                                                                 N.P.A.T- dividend to P.S.H

                                                EPS = --------------------------------------------- x 100

                                                           No of shares of common stock

Book value per share:

                                                                              Assets – Liabilities

                                                              B.V = ------------------------------

                                                                               Outstanding stock        

Dividend Per Share :

                                                                                                    Dividend

                                                 Dividend per share = -----------------------------------

                                                                                      Outstanding common stock

Dividend Pay Out Ratio:

                                                                     Dividend per share

                        Dividend pay out ratio = --------------------------- x 100

                                                                      Earning per share

Market to Book Ratio :

                                                                  Market price of stock

                                             M.B.R = -------------------------------

                                                                  B .V per share

Dividend yield:

                                                    Dividend per share

                     Dividend yield =  ------------------------------- x 100

                                                     Market price of share