Prepared by:

Asadullah Amin Shah

Samreen Javaid
Gulnaz Fatima
Submitted to:
The Chairman KUBS
Financial Analysis of Indus Motor Company 2005

PURPOSE OF FINANCIAL ANALYSIS

In order to know that whether a firm is using its resources efficiently or not, financial
analysis is necessary. The information derived from these types of analysis should be used to
determine the overall financial position of the company. By studying annual report of Indus
Motor Company (IMC), we calculate certain ratios which will help us to determine the existing
strengths and weakness of IMC and also its last year performance and current years financial
condition. It provides the information about performance of IMC to the investor of funds
whether in the form of credit investor (short term or long term credit investors) or Equity
investors as owner of the firm. On the other hand the investor is also looking for the risk
associated with his investment.
This analysis provides the investor information about the liquidity, creditability,
operational efficiencies and growth opportunity in the organization.
Liquidity is a firm’s ability to satisfy it short term obligations as they become due.
Liquidity of a business firm is measured by its ability to 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.
Liquidity Ratios of Adil textile mills limited have been increased from previous year
which shows that companies liquidity that is the ability to pay short-term debts, is more that the
last year. It is a positive sign for the financial institutions (for the sake of giving loan) as well as
for perspective investors, that they can invest in the company with low risk as its liquidity is
increasing.
 The Income statement for last 5 years is given below which shows that the earning per
share is more or less increasing in last 5 years which ultimately pointing toward the company
growth in terms of sales and other respects

The balance for the last five years is provided sheet is provided below which also shows
that company total asset and equity is increasing in last five years which ultimately results in a
company growth.
 ACTIVITY RATIOS
Sr.n Ratios 2010 2009
o
1 INVENTORY TURNOVER : 1.5x 3.53x
CGS/ Ending Inventory
2 AVERAGE AGE OF INVENTORY 240days 102days
360/Inventory Turnover
3 AVERAGE COLLECTION PERIOD 15.33days 100days
Account receivable / Average credit sales per day
4 ACCOUNT RECEIVABLE TURNOVER 23.48x 3.6x
360/Average Collection Period
5 AVERAGE PAYMENT PERIOD 197.3days 138.2days
Account Payable/Average credit purchases per day
6 ACCOUNT PAYABLE TURNOVER 1.82x 2.60x
360/Averge Payment Period
7 OPERATING CYCLE 255.33dys 202days
Average Age Inventory + Average Collection
Period
8 CASH CONVERSION CYCLE 58.03days 63.8days
Operating Cycle – Average Payment Period
9 FIXED ASSET TURNOVER : 0.65x 0.79x
Sales / Total Fixed Assets
10 TOTAL ASSET TURNOVER: 0.42x 0.62x
Sales / Total Assets
11 SALES TO NETWORTH 2.72x 3.13x
Sales /Stockholder Equity

Interpretation
Activity ratios measure the speed with which accounts are converted into sales or cash.
The inventory turnover ratio of the company decreased & average age of inventory is increased
from last year which shows that company is less efficient in selling its inventory in this year.
Average collection period has decreased from previous year, which is good sign for company. It
means account receivable conversion into cash is faster in 2004.
The increase in average payment period shows that we pay cash to our supplier quickly
than last year. The benefit lies with this is that we hold cash with us for maximum time period
but it loses supplier’s confidence. Company’s cash conversion cycle is also increasing from 202
days to 255.33 days. It means that company is able to sell its inventory late and collect its
account receivable early as compare to previous year.
 Firm’s fixed assets turnover ratio is decreasing in 2004 which shows that the fixed assets
are giving less turnover (productivity) than the turnover in last year.
Total assets turnover has decreased which means the company is not utilizing its assets properly.

LEVERAGE/GEARING RATIOS

A) Degree of Indebt ness

Sr.n Ratios 2004 2003
o
1 DEBT RATIO: 0.84x 0.80x
Total Liabilities / Total Assets*100
2 DEBT EQUITY RATIO: 500.45% 400.03%
Total Liabilities / Stockholders Equity*100
3 EQUITY MULTIPLE 600.45% 502.03%
Total Assets / Total Stockholders
Equity*100

B) COVERAGE RATIO
Sr.n Ratios 200 2003
o 4
1 TIME INTEREST EARNED RATIO 0.04 2.66
Earning Before Interest & Taxes/Interest

RESULTS OF LEVERAGE RATIOS

Leverage ratio of a firm indicates the amount of other people’s money being used in
attempt to generate profits
Debt ratio is increased from the last year, which indicates that company is making less
investment in its assets by stock holder’s equity and using more money of creditors, by this,
dividend per share will acceptable.
As company debt equity ratio has increased. This causes their earning per share to reduce.
Equity multiple of company is decreased than last year which shows that total assets against
stockholder equity are reducing than last year. It is not a good indication for share holders.

PROFITABILITY RATIOS
Sr.n Ratios 2004 2003
o
1 GROSS PROFIT RATIO: 7.77% 1.73%
 Gross profit / Sales*100
2 OPERATING PROFIT RATIO: 0.38% 0.26%
Operating profit / Sale*100
3 NET PROFIT RATIO: 0.16% 6.65%
Net Profit After Tax/Sales*100
4 RETURN ON INVESTMENT: 0.06% 4.14%
Net Profit After Tax / Total Assets*100
5 RETURN ON EQUITY: 0.004% 0.21%
Net Profit After Tax / Total stockholder’s
equity*100

RESULTS OF PROFITIABILITY RATIOS

These ratios measure firms efficiency in terms of earning profit by utilizing resources.
Due to more cost of goods sold & operating expenses, gross profit, operating profit & net profit
ratios have reduced, no matter sale also increased but not as much as cost of goods sold. The
company has to control its cost of goods sold & operating expenses, so as to increase profits.
As company’s total assets (investment) has increased but company is not utilizing them
as efficiently as it can, so the profits in 2004 are not increasing as they could, which cause return
on investment to reduce from previous year.
As company is making investment through stockholder’s equity so the return on equity
has decreased. Company has to raise more credit for investment so as to increase the returns of
stockholders.

MARKETABILITY RATIOS
Sr.n Ratios 2004 2003
o
1 EARNING PER SHARE Rs.0.06 Rs.2.98
Net Profit After Tax –Dividend to Preferred Stock/ Outstanding
Common Stock
2 PRICE EARNING RATIO
Market price of Common Stock/Earning Per Share
3 MARKET PRICE TO BOOK VALUE RATIO
Market price of Common Stock/Book Value Per Share
4 DIVIDEND PER SHARE Rs.8.94 Rs.4
Total Dividend/ Outstanding Common Stock
5 DIVIDEND PAYOUT RATIO 0.48 0.25
Dividend Per Share/ Earning Per Share
6 RETENTION RATE 0.52 0.75
 1-Payout Ratio
7 GROWTH IN TERMS OF RETURN 0.21 0.12
Payout Ratio*Return on Equity
8 DIVIDEND YIELD
Dividend Per Share/Current Market Price

RESULTS OF MARKETIABILITY RATIOS

It measures the return earned on owner’s investment in the firm.
The increase in EPS is due to increase in profits in 2004. it is attractive for new investors.
The EPS has been decreased and market price of shares has been increased. It caused
increase in price earning ratio. It is also very attractive for new as well as for the existing
shareholders. Dividend per share is more than double. It is very good sign for the company to
capture new investors as well as the confidence of existing investors. Also company’s growth in
terms of return is about doubled, which shows that how quickly the company’s return is growing.
 Common size analysis
HORIZENTAL ANALYSIS

Particulars 2004 2005 Change in %age

Rs in 000 Rs in 000 Rs Change
Sales 300006628 100% 346527690 46521062 44.04%
Cost of Sales (276691385) 92.2% (340525691) 63834306 47.00%
Gross Profit 23315243 7.7% 6001999 (17313244) 25.50%
Other operating income 1151709 0.38% 892475 (259234) 31.60%
Distribution cost (4101866) 1.36% (8294397) 4192531 24.36%
Administrative expense (7562960) 2.5% (11264065) 3701105 32.33%
Profit/Loss from operations 12802126 4.2% (12663988) (138138) 15.10%
Finance cost (11724869) 3.9% (8668213) (3056650) 17.10%
Workers, profit participation (53863) 0.01% ………. (53863) 15.00%
fund 1023395 0.34% (21332201) 20308806 34.42%
Loss before taxation (1500033) 0.49% (1726796) 226763 17.25%
Income tax expanse (476639) 0.15% (23058997) 23011358 17.45%
Net profit/Loss for the
period

RESULTS OF INCOME STATEMENT ANALYSIS

This analysis of Adil Textile Mills Ltd. shows that Gross profit, Operating income,
financial cost, profit from operations are decreasing and all other items of income statement are
increasing.
The sales are increasing 44.04% than sales of 2003, which shows company’s growth in
terms of its sales. Also company’s cost of sales, operating expenses and other expenses are
increasing extensively, which the company should try to control as it can. But on the other hand
its gross profit is decreasing and net profits is increasing with acceptable rate.
 VERTICAL ANALYSIS

Particulars 2003 %age 2004 %age Change %age

Rs in 000 Of Rs in 000 Of in Change
Assets Assets Rs
ASSETS 989692 8.94% 860501 7.45% (129191 13.05%
NON CURRENT 4810 0.0004% - 0.002% ) 100%
ASSETS 160 0.000014% 234 0.046% (4810) 46.25%
Operating fixed assets 5449 0.0005% 5254 0.068% 74 3.58%
Intangible fixed assets - 0.0065% 7874 0.96% (195) 55.11%
Long-term loans 71511 16.28% 110923 21.96% 7874 40.78%
Long-term deposits 1802270 4.70% 2537213 3.8% 39412 15.28%
Finance under Musharika 518820 0.54% 439532 0.25% 734943 417.74%
agreements - 1.73% 28701 2.70% (79288) 27.52%
CURRENT ASSETS 59897 67.10% 310108 2.10% 28701 6.24%
Stores & spares 191300 100% 243947 0.43% 250211 4.40%
Stock-in-trade - 50176 60.24% 52647
Trade debts 7425371 6962005 100% 50176
Current maturity of 1106928 1155646 (463366
finance under Musharika 0 8 )
agreements 487188
Loans, advances &
prepayments
Other receivables
Taxation-net
Cash & bank balances
TOTAL ASSETS

RESULTS OF ANALYSIS OF BALANCE SHEET

This analysis of Adil textile limited’s balance sheet shows that what the change in its
assets is in 2004 with respect to assets in 2003. This asset analysis shows that all the assets
including non-current, fixed assets and current assets are growing positively. Only the major
things reducing in assets are accounts receivable & cash. Reduction in accounts receivable is
favorable for company that shows that more sale is on cash in 2004 than 2003. It also reduces the
risk associated with account receivable & their carrying cost. But reduction in cash and bank
deposits is not a positive sign for the company. It basically shows that the outflows of cash in
year 2004 are more than its inflows of the year. The company can reduce its outflows by
controlling its expenses.
INFORMATION FROM CASH FLOW STATEMENT
The cash flow statement gives us the complete information about cash inflows & cash
outflows of the company for the year. The above cash flow statement of company shows that the
outflows of the company in year 2010 are more than the its inflows in that year. It is a bit
awkward for Indus motors that its inflows for the year are less than its outflows. The company
should try to reduce its cost of goods sold and operating expenses which can mainly reduce its
outflows.
 Answers To Analytical Questions
Q#1: would you like to invest as an equity investor in IMC?
Yes, I would like to invest in the shares of the company due to following reasons:

 The company is the biggest automobile company in Pakistan.

 Its shares have a good market price. (Rs., as on June 30, 2010)
 Very good P/E ratio (i.e.)
 Earning per share is Rs. 43.81
 Company’s78,600,000 shares have backing of reserves and un appropriated profit of Rs.
2,592,595,000/-; this gives an extra equity of Rs.33 per share. As the share is available
around Rs.96. I will prefer to invest in it.
 The company is expanding and improving in quality and output quantity to be
competitive in coming post WTO implementation scenario. This effort on the part of the
management also strengthens the share and makes it attractive to invest.
 Dividend per share is Rs. 8.94 per share in this year which is very attractive.
 Its return on equity is about 43.6% which is very high and also its return on investment is
about 12.7% which is also very attractive.

Q#2: would you like to extend a long-term loan to IMC?

Yes, I would like to extend long term loan to the company, despite the fact that company
fiancé port-folio has already been loaded with debt quite heavily. My decision is backed by
following vindications:

 Company’s time interest ratio is highly increasing. This indicates that further investment
in the business shall further improve the profitability.
 Company has a good equity built up, which they are using effectively in their expansion
plans.
 With backing of good reputation of IMC, my decision gets reinforcement.
 The company is continuously growing from last many years and according to my
forecasting on the basis of certain facts like market situation, product demand, country’s
circumstances and other such factors, it will extensively grow in upcoming years.
 However, my final decision would depend on negotiations over terms of loan, amount of
loan and collateral.
Q#3: would you like to extend a short-term loan to IMC?
I would like to lend short term finances to the company. My decision is due to following
facts:

 The company’s liquidity ratios are very attractive that shows that the loan is backed by
huge amount of liquid assets.
 The risk is fairly mitigated by backing of IMC.
 The company has fairly improved in cash flow from operations.
 IMC’s profitability ratios are also very attractive.
 Increasing sales, profits and total fixed assets turnover all give green signal to extend
short-term loan to IMC without any hesitation.