Financial analysis of Fauji

fertilizers PVT Ltd.

Prepared by :

Hafiz mohd owais paracha

Ashar ali

Mashal Khalid

Seerat

Shaoib jan allah wala

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.

LIQUIDITY RATIOS 2002 2001

Net working capital 395860 5585658
Current ratio (times) 1.04 2.34
Quick ratio (times) 0.79 1.90
Cash ratio (% age) 6.73% 16.25%

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 6.73% of total assets is

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.

Activity ratios 2002 2001

Inventory turnover 4.49 3.35
Average age of inventory 80.10 104.33
Account receivable turnover 11.98 13.61
Average collection period 30.04 26.45
A/c payable turnover 6.40 5.26
Avg.payment period 56 68
Operating cycle 92 118
Fix asset turnover 1.76 7.85
Total asset turnover .60 .86

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 run 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

Debt ratios 2002 2001

Debt ratio 61.79% 32%
Debt equity ratio 161.69% 47.05%
Interest coverage ratio 8.24 19.14
Fix asset to long term debts 2.24 13.64
Operating cash flow/TD 27.15% 41.09%

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 previous 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. Without 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) Earnings per share

Profitability ratios 2002 2001

Gross profit margin 39.78% 46.90%
Operating profit margin 31.09% 38.37%
Net profit margin 18.31% 26.74%
Return on total asset 10.91% 22.93%
Return on SH investment 28.56% 33.72%
Earning per share 11.98 12.49
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.

Earnings 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.
Earnings 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 earnings ratio

6. %age of earnings retained

7. Degree of financial leverage

Marketable ratios 2002 2001

Dividend per share 9.00 8.50
Dividend payout ratio 75.11% 68.05%
Dividend yield ratio 11.25% 10.63%
Price earnings ratio 6.68$ 6.41$
Degree of financial ratio 1.14 1.00
%Age of earnings retained 24.89% 31.95%
Book value per share 41.96 37.04

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 earnings 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.

Description /Items Year 2002 % Age Year 2001 %Age

Sales 16786699 100% 11982414 100%
-CGS 10109117 60.22% 6362616 53.10%
Gross profit 6677582 39.78% 5619798 46.90%
- Selling & Dist.Exp 1457797 8.68% 1022139 8.53%
Operating Profit 5219785 31.09% 4597659 38.37%
+ Other incomes 783922 4.67% 1061844 8.86%
- Other charges 496073 2.96% 390520 3.26%
Profit before I. & T 5507634 32.81% 5268983 43.97%
- Financial charges 668213 3.98% 275271 2.3%
Profit before Tax 4839421 28.83% 4993712 41.68%
Taxation 1766000 10.52% 1790000 14.94%
Profit after Tax 3073421 18.31% 3203712 26.74%
Common Statement Analysis
(Horizontal Analysis)

INCOME STATEMENT

FAUJI FERTILIZER COMPANY LIMITED

For the year ended December 31,2002.

Description /Items Year 2002 % Age Year 2001 %Age

Sales 16786699 140% 11982414 100%
-CGS 10109117 158.88% 6362616 100%
Gross profit 6677582 118.82% 5619798 100%
- Selling & Dist.Exp 1457797 142.62% 1022139 100%
Operating Profit 5219785 113.53% 4597659 100%
+ Other incomes 783922 73.82% 1061844 100%
- Other charges 496073 127.02% 390520 100%
Profit before I. & T 5507634 104.52% 5268983 100%
- Financial charges 668213 242.74% 275271 100%
Profit before Tax 4839421 96.91% 4993712 100%
Taxation 1766000 98.66% 1790000 100%
Profit after Tax 3073421 95.93% 3203712 100%

Common Statement Analysis

(Vertical Analysis)
 BALANCE SHEET

FAUJI FERTILIZER COMPANY LIMITED

For the year ended December 31,2002.

Asset side

Index analysis 2002 %Age 2001 %Age

Tangible fix assets
Operating fix assets 9378161 33.30% 1511310 10.82%
Capital work in process 138313 00.49% 15917 00.11%
Total tangible fix assets 9516474 33.79% 1527227 10.93%
Goodwill 1987694 0
Long term investment 7077892 25.13% 2491364 17.83%
Ltd prepayments & def.cost 128495 00.18% 161881 00.32%
Lt advances and loan 50137 00.46% 45369 01.16%
Total fix assets 18760622 66.61% 4225841 30.24%
Current assets
Stores and spares 1618373 05.75% 1229557 08.80%
Stock in trade 630808 02.24% 614327 04.40%
Trade debts 1400893 04.97% 880298 06.30%
Loans and adv.pre payments 1068419 03.79% 1025100 07.34%
Short term investments 2792279 09.91% 3726744 26.67%
Cash and bank balances 1894680 06.73% 2270358 16.25%
Total current assets 9405452 33.39% 9746384 69.76%
Total assets 28166144 100.0% 13972225 100.0%

Common Statement Analysis

(Vertical Analysis)
 BALANCE SHEET

FAUJI FERTILIZER COMPANY LIMITED

For the year ended December 31,2002.

LIABILITY SIDE

Index analysis 2002 %Age 2001 %Age

Authorized capital 3000000 106.51% 3000000 214.71%
Issued, subscribed and paid up 2564959 9.11% 2564959 18.36%
Capital reserve 160000 0.57% 160000 1.15%
Revenue reserve 8038098 28.54% 6776673 48.50%
Total stock holder equity 10763057 38.21% 9501632 68.00%
Long term liabilities
Redeemable capital 4420014 15.69% 0 0.00%
Long term loans 1283481 5.56% 223867 1.60%
Deferred taxation 2690000 9.55% 86000 0.62%
Total long term liabilities 8393495 29.80% 309867 2.22%
Current liabilities
Current maturities of redem.cap 379946 1.35% 0 0.00%
Current maturities of l.t loans 538045 1.91% 503151 3.66%
Short term running finance 3388897 12.03% 800000 5.73%
Creditors, accured. & Other liab. 2829008 10.04% 1561004 11.17%
Taxation 975960 3.47% 527083 3.77%
Dividend payable 641240 2.28% 512992 3.67%
Proposed dividend 256496 0.91% 256496 1.84%
Total current liabilities 9009592 31.99% 4160726 29.78%
Total liabilities and SHE 28166144 100% 13972225 100%

Common Statement Analysis

(Horizontal Analysis)

BALANCE SHEET
 FAUJI FERTILIZER COMPANY LIMITED

For the year ended December 31,2002.

ASSET SIDE

Index analysis 2002 %Age 2001 %Age

Tangible fix assets 100.0%
Operating fix assets 9378161 620.53% 1511310 100.0%
Capital work in process 138313 868% 15917 100.0%
Total tangible fix assets 9516474 623% 1527227 100.0%
Goodwill 1987694 0 100.0%
Long term investment 7077892 284% 2491364 100.0%
Ltd prepayments & def.cost 128495 79.37% 161881 100.0%
Lt advances and loan 50137 110.50% 45369 100.0%
Total fix assets 18760622 444% 4225841 100.0%
Current assets 100.0%
Stores and spares 1618373 131.62% 1229557 100.0%
Stock in trade 630808 122.64% 614327 100.0%
Trade debts 1400893 159% 880298 100.0%
Loans and adv.pre payments 1068419 104.22% 1025100 100.0%
Short term investments 2792279 75% 3726744 100.0%
Cash and bank balances 1894680 83.45% 2270358 100.0%
Total current assets 9405452 96.50% 9746384 100.0%
Total assets 28166144 201.58% 13972225 100.0%

Common Statement Analysis

(Horizontal Analysis)

BALANCE SHEET
 FAUJI FERTILIZER COMPANY LIMITED

For the year ended December 31,2002.

LIABILITY SIDE

INDEX ANALYSIS 2002 %AGE 2001 %AGE

Authorized capital 3000000 100% 3000000 100.0%
Issued,subscribed and paid up 2564959 100% 2564959 100.0%
Capital reserve 160000 100% 160000 100.0%
Revenue reserve 8038098 118.61% 6776673 100.0%
Total stock holder equity 10763057 113.27% 9501632 100.0%
Long term liabilities
Redeemable capital 4420014 0 100.0%
Long term loans 1283481 573.32% 223867 100.0%
Deferred taxation 2690000 312.79% 86000 100.0%
Total long term liabilities 8393495 2708% 309867 100.0%
Current liabilities
Current maturities of redem.cap 379946 0 100.0%
Current maturities of l.t loans 538045 106.93% 503151 100.0%
Short term running finance 3388897 424% 800000 100.0%
Creditors, accured. & Other liab. 2829008 187.34% 1561004 100.0%
Taxation 975960 185.16% 527083 100.0%
Dividend payable 641240 125% 512992 100.0%
Proposed dividend 256496 100% 256496 100.0%
Total current liabilities 9009592 216.53% 4160726 100.0%
Total liabilities and SHE 28166144 201.58% 13972225 100.0%