Allawasaya textile mills LTD.

Introduction of the firm

The company was incorporated in Pakistan in 1958 as private company. It was converted onto public limited company in 1965. Its shares are quoted on stock exchanges in Pakistan. It is principally engaged in manufacturing of yarn. The finishing plant of company was closed in 1978 due to the obsolete machinery.

Company performance

The mill was operated to produce polyster cotton yarn throughout the year. The market for the yarn remained favorable during the year. The process of cotton however mostly remained sub-dued in the local market due to its slump in international market. The company has earned a net profit after tax Rs.28944621 for the year under this report compared to met profit after tax of Rs.57735646 last year.

Renovation plan

A comprehensive plan for the renovation of unit No. 1 of the mill is underway for the replacement of manual winder with auto winders and the replacement of old cards with modern cards. Two auto cone winders have already been installed subsequent t the balance sheet date. Four more auto cone winders are expected to be installed in coming years. Similarly, the old cards shall be replaced with new cards and with this replacement of the carding machines and winders, the quality of yarn produced by unit No 1 will improve resulting in better marketability of yarn produced by mills.

Factory location

Factory is located Mumtazabad industrial area, Vehari road Multan.

Ratio analysis

Ratio analysis involves the methods of calculating and interpreting financial ratios to assess the firm’s performance and status. The basic inputs t ratio analysis and the firm’s income statement and balance sheet for the periods to be examined.

Types of ratio comparisons

There are two major types of ratio comparisons:

Ø  Cross-sectional analysis

Ø  Time –series analysis

Cross-sectional analysis

Cross-sectional analysis is the comparison of different firm’s financial ratios at the same point in time; comparing the firm’s ratio to those firms in its industry or to industry averages. Frequently, a firm will compare its ratio values to those of its key competitors of group of competitors that firm wishes to evaluate.

Time -series analysis

Time series analysis is applied when a financial analyst evaluates performance overtime. Comparison of current to past performance, using ratio analysis, allows the firm to determine whether it is progressing as planned. Developing trends can be seen by using multi year comparison and knowledge of these trends should assist the firm in planning future operations.

Groups of financial ratios

Ø  Liquidity ratios

Ø  Activity ratios

Ø  Debt analysis ratios

Ø  Profitability ratios

Ø  Marketability ratio

Ratio analysis of allawasaya textile mills LT    D.

Liquidity ratios:

Liquidity of a business firm is measured by its ability ot satisfy its short-term obligation as they come due. Liquidity refers to the solvency of the firm’s overall financial position—the ease with which it can pay its bills. The following four ratios measure the liquidity of the firms.

ü  Net working capital

ü  Current ratio

ü  Quick(acid—test) ratio

ü  Cash ratio

Net working capitals

Ratios	Formula	2000	2001
Net working Capital (Rs.000)	CA - CL =	-22,206,642	-16,794,354

ATM’s NWC shows –ve balance. It means that company will not able to meet its short-term obligations in case of insolvency. But this balance has improved from previous year, which shows that company is more efficient in selling its inventory as compare to previous year.

Current ratio

Ratios	Formula	2000	2001
Current Ratio	CA / CL =	78%	84%

Current ratio has improved from previous year which indicate that the firm’s current asset has increased which improve the liquidity position of the firm. This increase in current asset is mainly due to account receivables.

Quick Ratio

Ratios	Formula	2000	2001
Quick Ratio	CA – inventory / CL	49%	58%

Quick ratio is improved from previous year but still company has huge inventory with it. As inventory is not more liquid asset, so in case of insolvency, firm will not be able to sell its inventory as per requirement.

Cash Ratio

Ratios	Formula	2000	2001
Cash Ratio	Cash  + Marketable Securities /CL	23%	5%

Cash has reduced from 23% to 5%. This reduction is due to the reasons. First, the company is making investment in fixed assets from current assets and second is, inventory is sold on credit, which cause account receivable to grow.

Activity Ratios

Inventory Turnover

Ratios	Formula	2000	2001
Inventory Turnover	CGS / Inv. =	17.6100	23.4300

The inventory turnover ratio of the company improved from last year it means that company is more efficient in selling its inventory in a year, but this sale is on credit, which is not good for them.

 

Average Age of Inventory

Ratios	Formula	2000	2001
Avg. Age of Inventory	360 / Inv. Turnover =	20.0000	15.0000

As, in year 2001, the company is able to sold its inventory, so this ratio has decreased, which shows efficiency of firm in selling its inventory as compare to previous year.

Average Collection Period

Ratios	Formula	2000	2001
Avg. Collection Period	A/C Receivable / Avr.Sales Per Day =	10.5000	13.6000

It has increased from previous year, which is not good sign for them. In long run this situation cause the company to write off its receivables. But still account receivables are increases from previous year.

Average Sales per Day

Ratios	Formula	2000	2001
Avg. Sales Per Day	Net Sales / 360	1563376	1637226

Operating Cycle

Ratios	Formula	2000	2001
Operating Cycle Ratio	Avg.Age of Inv. + Avg. Collection Period =	30.5000	28.6800

Average Payment Period

Ratios	Formula	2000	2001
Avg. Payment Period	A/C Payable / Avg.Purchase Per Day =	12.0000	11.0000

The reduction in average payment period is due to increase net purchases. Which improve company’s reputation in the market. It also increase their confidence in supplier’s eyes.

Average Purchase per Day

Ratios	Formula	2000	2001
Avg. Purchase per Day	Net Purchase / 360	918644	1099444

 

Account Receivable Turnover

Ratios	Formula	2000	2001
Account  Receivable Turnover	360 / Avg. Collection Period =	34.2800	26.3200

Account Payable Turnover

Ratios	Formula	2000	2001
Account Payable Turnover	360 / Avg. Payment Period =	30.0000	33.0000

Cash Conversion Cycle

Ratios	Formula	2000	2001
Cash Conversion Cycle	Operating Cycle-Avg.Payment Period=	18.5000	17.6800

This ratio is also reduced little bit. It means that company is able to sell its inventory quickly and collect its account receivable early as compare to previous year but receivable are not reduced more.

Fixed Assets Turnover

Ratios	Formula	2000	2001
Fixed Assets Turnover	N Sales / NFA	7.1600	5.9600

Firm’s fixed assets are increased as compare to previous year but the ratio has decreased which means that in this year company has not utilized its fixed assets efficiently to generate sale. Which is not good for them because fixed assets are more productive as compare to current assets.

Total Assets Turnover

Ratios	Formula	2000	2001
Total Assets Turnover	N Sales / TA =	3.5000	3.1000

Total assets turnover has reduced little bit, which means the company is  not utilizing its assets properly. More sale is due to current assets which are not more productive. Company has to change its fixed assets so as to increase its productivity.

Debt Ratio Analysis

Debt Ratio

 

Ratios	Formula	2000	2001
Debt Ratio	Total liabilities / Total Assets =	66%	59%

Debt ratio is reduced continuously from the last two years, which indicate that company is making investment in its assets by stock holder’s equity and not using more money of creditors, by this, dividend per share will increase. So they have to use more money of creditors, so as to increase earning per share.

Debt Equity Ratio

Ratios	Formula	2000	2001
Debt Equity Ratio	T Liabilities / Stockholders'Equity =	199%	142%

As company’s liquidity portion decrease continuously so, debt equity ratio has decreased. This causes their earning per share to reduce. More over, liabilities are also short term, not more long term.

Time Interest Earned Ratio

Ratios	Formula	2000	2001
Time interest earned ratio	EBIT / Interest  =	14.0000	13.0000

As, company’s long term debts are in very little amount, so, their interest amount is also low, which improve their time interest earned ratio. This also improves creditor’s confidence in the firm. Company can pay its interest liabilities easily.

Profitability Ratio

Gross Profit Ratio

Ratios	Formula	2000	2001
Gross Profit Margin	Gross Profit / Net Sales =	19.00%	9.23%

Due to more cost of goods sold, the ratio has reduced, no matter sale also increased but not as much as cost of goods sold. Company has to control its cost of goods sold, so as profit can be increased.

Net Profit Ratio

Ratios	Formula	2000	2001
Net Profit Margin	Net Profit (After Taxation) / Net Sales =	10.25%	4.91%

This reduction in the ratio is also due to making more cost of goods sold, as company’s other charges are reduced as compare to previous year but ratio has reduced. So firm has to purchase the material as needed so as to reduce cost of goods sold.

Operating Profit Ratio

Ratios	Formula	2000	2001
Operating Profit ratio	Operating  Profit  / Net Sales	17%	7%

This reduction in the ratio is also due to huge cost of goods sold. Other administrative and selling expenses also increased but not as much as cost of goods sold. If company is not able to control its cost of goods sold it will damage its profitability position which reduce investor’s confidence.

Return on Assets or Investment

Ratios	Formula	2000	2001
Return on Total Assets	Net Profit / TA =	36.40%	15.38%

As firm’s total assets (investment) has increased but firm is not utilizing its fixed assets efficiently so, the profit in year 2001 has reduced, which cause return on investment to reduce from previous year. This decreasing trend may cause the company to sold its assets.

Return on Equity

Ratios	Formula	2000	2001
Return on Equity	Net Profit / Stockholders' Equity =	109.14%	37.28%

As company is making investment through stockholder’s equity so the return on equity has decreased. More over the profit also reduced in this year. Company has to raise more credit for investment so as to increase the returns of stockholders.

Marketability Ratios

Earning Per Share

Ratios	Formula	2000	2001
Earning per Share (Rs.)	EAFS / Common Stock Outstanding =	72.1700	36.1800

The reduction in EPS is due to low profit for the year and more capital raised by owners. As firm is not raising long term liabilities rather using owner’s capital which cause profitability to reduced. This situation of the company may bot attract more investors.

Price Earning Ratio

Ratios	Formula	2000	2001
Price/Earning Ratio	Market Price Per Share / EPS =	2.2800	3.3100

As earning per share has reduced which cause price-earning ratio to increase market price of their stock is also reduced significantly which is not good sign for the company.

Breakup Value

Ratios	Formula	2000	2001
Breakup Value	Stock holder's equity / outstanding shares	66.11	97

As shareholder’s equity is increasing, so the breakup value is increases, which is also not good sign for them. It reduce shareholder’s confidence.

 

Question #1

Would you like to invest in this firm  as a short term investor?

Ans

I will not like to invest as a short term investor in this firm because of the following reasons:

The net working capital of the mill has negative balance in both years. This balance indicates that mill has less current assets as compare to current liabilities. It  means that in short run the firm will not be able to meet its obligations as they come due.

Secondly the current ratio of the firm also indicate that firm has just 47% of current assets to satisfy its current liabilities. So there is a huge risk to invest in this firm as a short term creditor.

Moreover the firm’s liquidity position is not improving from last years, they have idle inventory in their current assets which can not be sold as per requirement.

We will  not invest because the current liabilities of the firm are increasing continuously, which shows that they are not satisfying their short term creditors.

Quick ratio also indicate that firm has shortage of most liquid assets(cash + M/S) . The portion of short term liabilities is more in total liability structure. It may be possible that they may not be able to pay their existing creditors.

 

Question # 2

Would you like to invest in this firm as a long term investor?

ANS

Answer of this question depends upon following factors:

First we will evaluate the firm’s debt ratio as well as the debt/equity ratios. The debt ratio has decreased from 66% to 59% from 2000 to 2001, which indicate that firm has large total assets against its total debts. Further more this ratio indicates that firm is using less debt in order to finance the total assets.

Secondly the debt equity ratio is also decreased significantly and indicates that firm is using more stockholders equity instead of debt in order to finance the assets. So because this trend, i will like to invest as long term investor because there is less chance that firm become defaulter.

Thirdly important argument, which enhanced my decision to invest as long term investor, is that the time interest earned ratio indicate that mill is in better position to satisfy the interest expenses and taxation. So, due to this i would like to invest as long term investor.

 

Question # 3

Would you like to purchase the shares of the mill?

ANS

Even though the earning per share and profit are decreased as compare to last year, but still it is earning good return as compare to other industry average. So i would like to purchase the shares of the firm.

Allawasaya textile and finishing mills ltd.

VERTICAL ANALYSIS OF PROFIT AND LOSS STATEMENT

Allawasaya textile and finishing mills ltd.

HORIZONTAL ANALYSIS OF PROFIT AND LOSS STATEMENT

ITMES	CHANGE	SOURCES	USES
Cash	(17,824,821)	17,824,821
Advances	23,483,186		23,483,186
Trade Debts	5,962,963		5,962,963
Stock in Trade	(2,879,221)	2,879,221
Store and Spares	642,412		642,412
Security Deposits	10,000		10,000
Capital Work in Progress	14,379,729		14,379,729
Gross Fixed Assets	11,767,786		11,767,786
Accum. Depreciation	5,886,241	5,886,241
Unappropriate Profit	24,744,621	24,744,621
Deffered Liabilities	938,941	938,941
Short Term Finances	5,173,758	5,173,758
Creditors Accruals	6,664,354	6,664,354
Provision for Taxation	10,310,000	10,310,000
Worker's Welfare Funds	687,600	687,600
Unclaimed Dividends	136,519	136,519
Proposed dividends	19,000,000		19,000,000
Total		75,246,076	75,246,076