nalysis of Financial Statements of Mirpurkhas Sug

oject of AFS by Prof. Asif Bashir

Muhammad HassanL1F08MBAM2098
Talha RehmanL1F08MBAM2099
Gulshan FatimaL1S10MBAM0195
Umer QaisarL1s11mbam0003
FaryalAhmadL1S10MBAM1236

Contents
Executive Summary.........................................................................................................................8
Introduction......................................................................................................................................9
Sugar Industry of Pakistan...........................................................................................................9
Mirpurkhas Sugar Mills Ltd........................................................................................................9
Vision & Mission...........................................................................................................................10
Vision.............................................................................................................................................10
Mission..........................................................................................................................................10
1.

Firm Comparability................................................................................................................11
1.1.

Industry...........................................................................................................................11

1.1.1.

SEC Code.................................................................................................................11

1.1.2.

Principle Line Of Business......................................................................................11

1.1.3.

Diversification.........................................................................................................11

1.2.

Size Of The Firm.............................................................................................................12

1.2.1.
1.3.

Capitalization...........................................................................................................12

Sales................................................................................................................................13

1.3.1.

Sales Trend...............................................................................................................13

1.3.2.

Market Share............................................................................................................13

1.4.

Ownership.......................................................................................................................14

1.4.1.

Board Of Directors..................................................................................................14

1.4.2.

Point Of Significance...............................................................................................14

1.5.

2.

International....................................................................................................................15

1.5.1.

International Sales...................................................................................................15

1.5.2.

International Assets..................................................................................................15

1.5.3.

Business Situation....................................................................................................15

Credit Analysis.......................................................................................................................16
2.1.

Accounting Comparability..............................................................................................16

2.1.1.

LIFO/FIFO/Other Inventory Accounting................................................................16

2.1.2.

Revenue Recognition...............................................................................................16

2.1.3.

Lines Of Credit, Loan Commitments, Ratings (Bonds, Preferred).........................17

2.1.3.1.

Lines of credit......................................................................................................17

2.1.3.2.

Ratings.................................................................................................................17

2.1.4.

Restriction On Sales Of Assets................................................................................17

2.1.5.

Business Cycle.........................................................................................................17

2.2.

Analysis Of Current Assets And Liabilities Composition..............................................18

2.2.1.

Current Assets Composition....................................................................................18

2.2.2.

Current Liability Composition.................................................................................19

2.3.

Working Capital And Related Ratios..............................................................................20

2.3.1.

Working Capital.......................................................................................................20

2.3.2.

Current Ratio...........................................................................................................22

2.3.3.

Net Trade Cycle.......................................................................................................23

2.3.4.

Cash Ratio................................................................................................................25

2.4.

Operating Measures, Accounts Receivables...................................................................25

2.4.1.

Accounts Receivable Turnover................................................................................25

2.4.2.

Collection Period.....................................................................................................27

2.5.

Operating Measures, Inventory.......................................................................................28

2.5.1.

Inventory Turnover Ratio........................................................................................28

2.5.2.

Days To Sell Inventory............................................................................................30

2.5.3.

Conversion Period...................................................................................................31

2.5.4.

Liquidity Index........................................................................................................32

2.5.5.

Calculation Z-Score.................................................................................................33

2.5.6.

Acid Test Ratio........................................................................................................34

2.5.7.

Cash Flow Ratio......................................................................................................35

2.6.

Financial Flexibility, Alternatives...................................................................................36

2.6.1.

Lines Of Credit, Loan Commitments......................................................................36

2.6.2.

Debt Ratings............................................................................................................36

2.7.2.1.
2.6.3.
2.7.3.1.

Planned Issues......................................................................................................36
Stock Ratings...........................................................................................................37
Planned Issues......................................................................................................37

2.6.4.
2.7.4.3.

Short Term Assets................................................................................................38

2.7.4.4.

Long Term Assets.................................................................................................38

2.6.5.
3.

4.

Availability Of Assets For Liquidation....................................................................38

Contingencies..........................................................................................................38

Forecasted / Pro Forma Statements.......................................................................................41

3.1.

Income Statement............................................................................................................41

3.2.

Statement Of Cash Flows................................................................................................43

3.3.

Balance Sheet..................................................................................................................44

3.4.

Z-Score............................................................................................................................47

3.5.

Longer Term Cash Flow Forecasting..............................................................................47

3.5.1.

Specifications For Assumptions..............................................................................47

3.5.2.

Cash Flows From Operating, Investing And Financing Activities..........................47

Long Term Solvency Analysis...............................................................................................49

4.1.

Accounting Adjustments/Uncertainties...........................................................................49

4.1.1.

Deferred Tax Assets/Liabilities................................................................................49

4.1.2.

Pensions...................................................................................................................50

4.1.3.

Unconsolidated Subsidiaries (Guaranteed Issued)..................................................50

4.1.4.

Contingent Liabilities..............................................................................................50

4.1.5.

Minority Interests.....................................................................................................51

4.1.6.

Convertible Debt (Debt Or Equity).........................................................................51

4.1.7.

Preferred Stock (Debt Or Equity)............................................................................52

4.1.8.

Market Value Of Assets...........................................................................................52

4.1.9.

Investment In Associate...........................................................................................53

4.1.9.1.

Our Companys Profit Share In Unicol Ltd.........................................................54

4.1.10.

Inventories (FIFO/LIFO/Other)...........................................................................55

4.1.11.

Intangible Assets (Value/Remove).......................................................................55

4.2.

Miscellaneous Items........................................................................................................55

4.2.1.
4.3.

Compensating Balances Employees........................................................................55

Solvency Ratios Analysis Of Asset Distribution And Capital Structure/Leverage......56

4.3.1.

Total Debt To Total Capital......................................................................................56

4.3.2.

Total Debt To Equity Capital...................................................................................57

4.4.

Solvency Ratios Asset Coverage..................................................................................59

4.4.1.

Fixed Assets To Common Equity............................................................................59

4.4.2.

Net Tangible Assets To Long Term Debt.................................................................59

4.4.3.

Total Liabilities To Net Tangible Assets..................................................................61

4.5.

Solvency Ratios Earnings Coverage............................................................................62

4.5.1.

Earnings Extraordinary, Preferred Dividends, Minority Earnings, Taxes,

Averaged/Smoothed...............................................................................................................62
4.5.2.
4.6.

Times Interest Earned..............................................................................................63

Earnings Coverage To Preferred Dividends....................................................................64

5.

Profitability Analysis.............................................................................................................65
5.1.
5.1.1.

6.

7.

Return On Invested Capital.............................................................................................65

Invested Capital...........................................................................................................65

5.2.

Return On Equity............................................................................................................66

5.3.

Return On Total Assets....................................................................................................67

5.4.

Return On Long Term Capitalization..............................................................................69

5.5.

DuPont Analysis & Disaggregation................................................................................69

5.5.1.

Break Down Developed In Class................................................................................69

5.5.2.

Historical Breakdown/Trends......................................................................................71

5.5.3.

Estimation Of The Sustainable Growth Rate..............................................................72

Vertical Analysis....................................................................................................................73
6.1.

Breakdown Of Current Assets.........................................................................................73

6.2.

Current Assets Vs. Non Current Assets...........................................................................73

6.3.

Breakdown Of Current Liabilities...................................................................................74

6.4.

Total Liabilities vs. Shareholder Equity..........................................................................75

6.5.

Major Cost Breakdown...................................................................................................75

6.6.

Operating Cash Flow Trend............................................................................................76

Valuation................................................................................................................................77
7.1.
7.1.1.

Required Rate Of Return.................................................................................................77

CAPM..........................................................................................................................77

7.1.1.1.

Risk Free Rate Is 30-Day T-Bill Rate..................................................................78

7.1.1.2.

Market Return......................................................................................................78

7.1.1.3.

Expected Market Risk Premium..........................................................................78

7.1.1.4.

Beta Calculation...................................................................................................79

7.2.
7.2.1.

Risk Return Comparative Framework............................................................................80

Security Market Line Plotting.....................................................................................80

7.2.1.1.

Risk Free Rate......................................................................................................81

7.2.1.2.

Expected Market Risk Premium..........................................................................81

7.2.2.

DDM: K= (D1/P) + G..................................................................................................81

7.2.2.1.

Estimated Dividend..............................................................................................82

7.2.2.2.

Estimated Sustainable Growth.............................................................................82

7.2.2.3.

Observed Price.....................................................................................................82

7.3.

Price Comparison:...........................................................................................................83

8.

Conclusion...............................................................................................................................1

9.

Recommendations....................................................................................................................2

EXECUTIVE SUMMARY
Mirpurkhas Sugar Mills Ltd was established in 1964 is located in the city of Mirpurkhas,
some 300km from the port of Karachi. Mirpurkhas sugar mill is a Public Limited company and
its shares are listed in the Karachi Stock Exchange. Credit Rating of the Company was A1+.
We financially analyzed the company. Setting industry benchmark and with the
development of a financial model income statement and balance sheet of the company are
projected. Projections have been made for two years. This is best way to analyze Mirpurkhas
sugar Mills Limited financial performance with respect to the sugar industry incorporating future
perspective.
Statements of Mirpurkhas sugar mills shows fluctuations in past trend. To clarify the
current situation and past situation of the company we did Credit analysis of the company,
Profitability analysis of the company, and solvency analysis of the company. We also calculate
the DDM model and apply on Mirpurkhas sugar Mills limited. For this Purpose we find the Past
10 years Return data and stock prices to calculate the growth rate and required return on our
stock. By this we calculate the further growth of our company.
In projected years companys Income statement shows low after tax income as compared with
past. This is the reason where company cash flow is negative and company required cash.
Working capital is also negative in 2010 and current ratio is also less than 1. Liquidity index of
Mirpurkhas sugar Mills also shows the decreasing trend.
For recommendations perspective they should focus on the liquidity index. Their current ratios
are less than 1. They must improve them to continue the operations of the business. They incur a
loss in 2007 due to high operating expenses. So, they must improve their utilization of assets to
decrease the operating expenses in coming years.

INTRODUCTION
SUGAR INDUSTRY OF PAKISTAN
Pakistan is the 15th largest producer of sugar in the world, 5 th largest country in the world
in terms of area under sugar cane cultivation, 11th by production and 60th in; yield. Sugarcane is
the primary raw material for the production of sugar. Since independence, the area under
cultivation has increased more rapidly than any other major crop. It is one of the major crops in
Pakistan cultivated over an area of around one million hectares. The sugar industry in Pakistan is
the 2nd largest agro based industry comprising 81 sugar mills with annual crushing capacity of
over 6.1 Million tones. Sugarcane farming and Sugar producing contribute significantly to the
national exchequer in the form of various taxes and levies. Sugar producing and its by-products
have contributed significantly towards the foreign exchange resources through import
substitution.

MIRPURKHAS SUGAR MILLS LTD.

The company was established in 1964 is located in the city of Mirpurkhas, some 300km
from the port of Karachi. Mirpurkhas sugar mill is a Public Limited company and its shares are
listed in the Karachi Stock Exchange. It has attained the distinction of being ranked amongst the
top ten companies in Pakistan in year 1982, 1983 and 1986. The original plant was supplied by
Fletcher Smith, UK and it had a crushing capacity of 1500TDC and has progressed to 5000TDC.
The company is involved in the development of higher yield sugar cane varieties on its 300acres
experimental farm and provides support to local cultivators in terms of fertilizers, agro chemicals
and the latest farming techniques.

VISION & MISSION

VISION
We aim to be a leading producer and supplier of high quality sugar in Pakistan. We aspire to be
known for the quality of our product. We intend to play a pivotal role in the economic and social
development of Pakistan thereby improving the quality of life of its people.

MISSION
As a leading producer of quality sugar in Pakistan, we shall build on our core competencies
and achieve excellence in performance. In doing so, we aim to meet or exceed the expectations
of all our stakeholders. In striving to serve our stakeholders better, our goal is not only to attain
technological advancements in the field of sugar technology, but also to inculcate the most
efficient, ethical and time tested business practices in our management. We shall continue to look
for innovative ways to introduce alternate uses of sugar to broaden our customer base.

1. FIRM COMPARABILITY
1.1.INDUSTRY
1.1.1.

SEC CODE

MIRKS is the symbol and the SEC Code of Mirpurkhas Sugar Mills Ltd.
1.1.2.

PRINCIPLE LINE OF BUSINESS

The Principle line of business of Mirpurkhas Sugar Mills Ltd. is the producing of
Sugarcane from sugar.
1.1.3.

DIVERSIFICATION

Mirpurkhas Sugar Mills Ltd. is owned by the Ghulam Faruque Group which is engaged
in multiple lines of business. The companies owned by Ghulam Faruque Group are:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Faruque (Pvt.) Limited.

Cherat Cement Company Limited.
Cherat Papersack Limited.
Greaves Pakistan (Pvt.) Limited.
Greaves Air-conditioning (Pvt.) Limited.
Greaves CNG (Pvt.) Limited.
Zensoft (Pvt.) Limited.
Madian Hydro Power Limited
Unicol Limited

1.2.SIZE OF THE FIRM

1.2.1.

CAPITALIZATION

Market Capitalization at Mirpurkhas Sugar Mills Ltd. is presented in the form of

Graphs with the help of table given below.

The above chart is clearly indentifying the movement in the market capitalization of the
Mirpurkhas Sugar Mills Ltd. This fluctuation is because of the changing trend in the market
value of the companys share price. In 2006 the number of common shares fully issued and
subscribed was 63,888,000 whereas in year 2010 company has increased its number of
common share to 70,277,000.