Presented To:

Mr. Hamza Mukhtar

Presented By:
 SAIMA SHAHEEN RANA
 KARAM ELAHI
What is Financial Analysis?

Assessment of the firm’s past, present

and future financial conditions.

Financial Analysis is done to find the

firm’s strengths and weaknesses.
 Financial Statements
Statements that provide financial information about profit
or non profit organization. The common types of
financial statements are:

Balance Sheet
Income Statement
Statement of Cash Flow
Statement of changes in equity
Notes to the Accounts
Reasons of making the Financial
Statements
On the behalf of Principals, the Agents make financial
statements.

Analysis of the funds needs to the firm

Analysis of the financial condition and profitability of

the firm

Analysis of the business risk of the firm

 Users of Financial Statements

• Creditors

• Lenders

• Owners

• Students
 Financial Statements Analysis
We will done our analysis in three Steps:

EconomY Analysis

Industry Analysis

Firm Analysis
• Common size analysis
• Vertical analysis
• Horizontal analysis
• Trend analysis
 Economy Analysis
• Business cycle
• Monetary and fiscal policy
• Economic indicators
• World events & foreign trade
• Inflation
• GDP growth
• Unemployment
• Productivity
• Capacity utilization
 Real GDP Growth
The real GDP growth in financial year 2009 is found to be 6.6 percent that is low as
it was targeted at 7.00 percent.
This deficiency is due to:

• Agriculture products such as cotton, sugarcane, and wheat falling below target
put some negative downstream effects on textile and sugar industries.
• Unexpected weakness in commodity producing sectors, especially agriculture,
leads to the revival of inflationary pressure.
• Impact of high energy cost.
• Strength of aggregate demand.
• Large external current account deficit.
• This deficiency is due to borrowing from central bank.
• Due to sharp rise in development expenditures.
• Declaration in exports
 How we can achieve our targets

• Recovery in agriculture producing commodities

• Recovery in industrial products.

• Government policy should be set

 Inflation
The inflation rate in the economy in financial year 2009 is
found to be 7.9 percent that was very high as compared to
the target of 6.5 percent.

• Continued strength of aggregate demand

• Inability to reduce prices of petroleum products.

• High international commodity prices

• Domestic demand for construction inputs (e.g. metal,

copper,etc.)
How government can reduce inflation rate

• By increasing interest rates.

• By sharp rupee depreciation.

Both these factors can reduce inflation rates at medium

run but at short run, both have significant costs.

High interest rates could risky because in this way the

growth momentum of the economy could be slow.
A sharp rupee depreciation could lead to destabilize the
economy.
 Business Cycle
Are a type of fluctuations found in the aggregate
economic activity of nations that organize their work
mainly in business enterprise: a cycle consists of
expansions occurring at about same time in economic
activity followed by similarly general recessions,
contractions and revivals which merge into the
expansion phase of next cycle.

At this time the economy of Pakistan is enjoying the stage of

“Revival” in business cycle.
 How Business Cycle is beneficial

• Appropriate in designing good stabilize policies

• Business cycle may guide researcher in choosing leading indictors for

economic activity and provide a set of “regularities”
 Duration of business cycle is identified
by…

• GDP
• Industrial production
• Output
• Average length of business cycle in Pakistan 11.2 quarters.
• In the world it is almost 10.2 quarters.
• Contraction period is longer than expansion period in Pakistan in
previous decades.
• The business cycle of Pakistan and other Asian counties is effected by
oil crisis at various points.
• Average duration of business cycle is shorter than industrialized
countries in developing countries.
 Unemployment
Unemployment is a central problem because when unemployment
is high, resources are wasted and people's incomes are
depressed; during such periods, economic distress also spills
over to affect people's emotions and family lives.

Unemployment in rural areas is higher then the unemployment in

urban areas due to industries. Mostly industries are established
in urban areas. That’s why the unemployment rate in urban
areas is low as compared to rural areas.
 Reasons
• Agriculture sectors is not absorbing them due to
adaptation of mechanical industries.
• Small scale industries are not working efficiently due to
worse economic conditions.
• Inflexibility of wages arise in Pakistan because of costs
involved in administering the compensation system.
• Government policies are also increasing unemployment
rate.
 Classification of unemployment
Unemployment is basically classified into three categories:

1. Frictional unemployment
workers who are simply moving between jobs
2. Structural unemployment
workers who are in regions or industries that are in persistent
slump
3. Cyclical unemployment
workers who laid off when the overall economy suffers a
downturn

In Pakistan, the unemployment is of cyclical and structural nature.

 Role of Government
• Loan arising from 10,000 to 500,000 for small businesses.
• Loan arising from 500,000 to 5,000,000 for small industries.
• A Small and Medium Enterprise Development (SMED) has
been setup for growth and development of self employment
scheme in Pakistan.
• The liberal and fiscal policies of the government are playing
their role in reducing unemployment rate.
• Construction of additional motorways and additional industrial
zones in the country will reduce the unemployment rate.
Industry Analysis
 Learning Objective in Industry Analysis
• To determine the opportunities and threats that exists for
firms within a competitive environment.

• When analyzing an industry, taking all factors into

account, should we as a corporation, enter this industry?
The end result will be an understanding of what it takes to
compete successfully.
 Definition of Industry

The people or companies engaged in a

particular kind of commercial
enterprise; "each industry has its own
trade publications"

Concerns primarily engaged in the

same kind of economic activity are
classified in the same industry
regardless of their types of ownership
(such as sole proprietorship,
partnership or corporation).
 Definition of Textile
Industry

Companies that manufacture and/or

distribute textile , including basic,
intermediate, and specialty
chemicals; petrochemicals; plastic
resins and materials used in
synthetic fibers; agrochemicals; and
paints and coatings.
 
 Nature of the Business

The nature of the textile industry is

of manufacturing concern.
 Customers of the chemical industry

• Other Textile industries in case of yarn

• Garment industries

• Whole sellers

• Retailers

• Foreign buyers

• Consumers
 Major Products
• yarn

• cloth

• wool

• etc
 Changing chemical industry
• Decline of Multinationals

• The rise of textile contractors

• Flexibility in productions

• Globalization of textile industry

• Advances in process technology and techniques

 Sales and Distribution channel

Sales and distribution channel consists of this industry may

be of following types:
• Textile industry wholesaler Retailers
End customers
• Textile industry Retailers
• Textile industry End customers
 Obstacles of Growth of Local industry

• Expensive New Technology

• Lack of Trained Teachers

• Lack of skilled Personnel

• Government Regulations

• Economic Situations
 Attract New Firm in Industry
• Government Rules & Regulations

• Policy must be set for the investors in the industry in case

of taxation.

• Availability of skilled Labor

• Cheaper new technology

 Competition
Firms are under too much high competition because the
already the number of firms which are producing Textile
are low in numbers.
However companies uses three types of strategy to compete
within industry with some other firms.

• Differentiation
• Cost Leadership
• Focus
Firm Analysis
 Learning Objective of Firm Analysis

The learning objective for the firm analysis is to

determine the strength and weaknesses of a firm and
to determine core competence that can be built on to
establish a competitive advantage. The final step is to
develop a business plan that will align the capabilities
of the firm with the requirements of the competitive
environment. How a firm’s performance is defined is
left to the students.
 Outline that should be for Firm Analysis
• Current Situation
• Brief firm history
• Strategic Posture
• External Environment (Opportunities and Threats)
• Socio Culture
• Task Environment
• Internal Environment (Strength and Weaknesses)
• Management
• Marketing
• Operations/ Productions
• Finance
• Human Resource Management
• Management Information System
 Balance Sheet
SHARE CAPITAL AND 2007 2008 2009
RESERVE
Authorized share capital 2,000,000,000 2,000,000,000

Issued subscribed and paid up 1,260,000,000 1,260,000,000 1,262,000,000

capital
Unappropriated profit 591,084,975 1,036,930,146 1,366,238,322

Cont.
 NON CURRENT LIABILITES
2007 2008 2009
Long Term financing 1,297,285,266 929,404,053 1,062,660,834

Long term leased liabilities 517,349,140 552,156,375 131,974,931

18.97

3,742,101 4,726,766 6,432,260

Long term deposits

DEFERRED LIABILITIES 54,935,953 75,926,476 369,311,011

 CURRENT LIABILITES 2007 2008 2009

Trade and other payables

327,251,907 475,767,672 7,268,824
Markup accrued
Short term borrowing 56,360,964 49,773,010 209,794,195
Current Portion of 2,278,326,654 2,584,145,991 303,604,049
Non current liabilities 278,066,281 270,480,778 3,564,367,388
Long term morabaha 166,582,578 191,634,384 95,808,491
Taxation
7,316,374
109 19,430,753 563,514,788

TOTAL LIABILITES AND 6,838,302,193 7,450,376,404 8,942,975,093

SHARE HOLDER’S EQUITY
 Assets Side
Non Current Assets 2007 2008 2009

Property, Plant & Equipment 4,886,344,978 5,112,207,059 4,023,719,183

Long Term Investment 3,048,800 3,391,000 13,031,129

Long Term Loans and 9,517,500 8,460,000 8,460,000

Advances
Long Term Deposits 20,197,650 105,472,723 106,160,070

Cont.
 Current Assets 2007 2008 2009

Stores, spares and loose tools 265,165,744 166,201,392 239,669,499

Stock in trade 1,531,570,691 1,888,948,644 2,711,840,721

Trade Debts 786,087,508 1,065,590,472 1,482,768,710

Loans and advances 234,134,023 254,771,373 159,761,321

Trade deposits and short term 6,233,741 17,403,788 147,188,053

prepayments
Other Receivables 102,049,743 226,677,725 4,065,000

Cont.
 Current Assets 2007 2008 2009

Cash and bank balances 37,758,739 18,463,222 37,651,299

Total Assets 6,838,302,193 7,450,376,404 8,942,975,093

 Profit & Loss A/C
2007 2008 2009
Sales 5,070,609,172 6,089,983,558 8,647,863,371
Less: Cost of goods sold (3,873,689,944) (4,589,379,497) 6,823,849,067
Gross profit 1,196,919,228 1,154,132,533 1,824,014,304
Add: Other operating income 2717623 58377021 19233234

Distribution cost (165,806,582) (176,616,643) 445,836,513

Administrative expenses (133,516,461) (123,925,176) 289,933,227
Other operating expenses (26,243,662) (26,977,531) 39,778,023
Finance cost
(355,092,922) (345,484,578) 530,481,698

Profit before Taxation 498,629,586 58,377,021 537,218,077

 2007 2008 2009

Profit Before Taxation 498,629,586 58,377,021 537,218,077

Less: provision for taxation (65,260,901) (66,727,913) 81,909,901

Profit for the year 433,368,685 445,845,171 455,308,176

 Liquidity Ratios
Ratios 2009 2008 2007

Current Ratio

The increase in ratio is resulting due to the increase in

different current assets.i.e the major change in the current
assets (cash) and trade Receivables and inventory is also
increased.
 Analysis of Profitability
Profitability can be analyzed by using different ratios:

Gross profit Margin Ratio 2009 2008 2007

Gross Profit/Sales 18.50 22.84

The ratio of Gross profit is decreasing due to the following

reasons:

Decrease in sales of Textile division

Increase Cost of Goods Sold due to:
Hyper prices of Funance Oil
Fuel and Gas
Electricity
Freight and Transportation
Net Margin Ratio 2009 2008
2007
Net profit/Sales 7.00% 7.50%

The decrease in net margin ratio is due to decrease in sales

and ultimately low profits.
But if we look at the operating expenses, we have come to
know that one expense named as “EXCHANGE LOSS” is
additionally incurred in 2006
 Operating Margin 2009 2008 2007
Operating Profit/Sales 13.36 17.94

One reason of decreasing in the ratio of operating profit is

already discussed that sales are decreasing and cost of goods
sold is increasing.
Other reason is that administrative expenses are also
increasing. The expenses which are decreasing are:
Directors’ remuneration
Staff salaries and benefits
Retirement benefits
Printing & stationary
Electricity
Repair & maintenance
Entertainment
Assets Turnover Ratio 2009 2008 2007
Net Sales/Average Total Assets 0.87 1.46

The main reason in decreasing the ratio is an increase in the

value of assets and decrease in sales of the company for the
year 2006
 Long Term Debt Paying Ability

The Long term debt paying ability of the company

can be checked by using different ratios:

Debt To Equity 2009 2008 2007

51:49 37:63
The company long term debt paying ability
decrease in 2006 because the ratio
represents that company are using more
debt as compared to its equity. And this
also shows that company has to pay more
outside the firm as compared to the inside
of the firm
Common Size Analysis
 Balance Sheet
SHARE CAPITAL AND 2007 (%) 2008(%) 2009(%)
RESERVE
Authorized share capital 29.24 26.84

Issued subscribed and paid up 18.42 16.91 14.11

capital
Unappropriated profit 8.64 13.92 15.28

Cont.
 NON CURRENT LIABILITES
2007 (%) 2008(%) 2009 (%)
Long Term financing 18.97 12.47 11.88

Long term leased liabilities 7.57 7.41 1.48

18.97

0.06 0.07
Long term deposits 0.05

DEFERRED LIABILITIES 0.80 1.02 4.13

 CURRENT LIABILITES 2007 (%) 2008(%) 2009 (%)
Trade and other payables 4.79 6.39 0.08
Markup accrued
0.82 0.67 2.35
Short term borrowing
Current Portion of
Non current liabilities 4.07 3.63 3.39
Long term morabaha 2.44 2.57 3.98
Taxation
0.11109 0.26 1.07

TOTAL LIABILITES AND 100 100 100

SHARE HOLDER’S EQUITY
 Assets Side
Non Current Assets 2007 (%) 2008(%) 2009 (%)
Property, Plant & Equipment 71.46 68.62 45.01

Long Term Investment 0.04 0.05 0.15

Long Term Loans and 0.14 0.11 0.09

Advances
Long Term Deposits 0.30 2.30 1.19

Cont.
 Current Assets 2007 (%) 2008(%) 2009 (%)
Stores, spares and loose tools 3.88 2.23 2.68

Stock in trade 22.40 25.35 30.34

Trade Debts 11.50 14.30 16.59

Loans and advances 3.42 3.42 1.79

Trade deposits and short term 0.09 0.23 0.10

prepayments
Other Receivables 1.49 3.04 1.65

Cont.
 Current Assets 2007 (%) 2008(%) 2009 (%)
Cash and bank balances .55 0.25 0.42

Total Assets 100 100 100

 Profit & Loss A/C
2007 (%) 2008(%) 2009 (%)
Sales 100.00 100 100.00
Less: Cost of goods sold 69.56 75.36 78.91
Gross profit 23.61 18.95 21.09
Add: Other operating income 0.46 0.95 0.22

Distribution cost 2.42 2.03 5.16

Administrative expenses 1.95 0.44 3.35
Other operating expenses 0.38 5.67 0.46
Finance cost
60.07 0.96 6.13

Profit before Taxation 7.29 8.42 6.21

 2007 (%) 2008(%) 2009 (%)
Profit Before Taxation 7.29 8.42 6.21
Less: provision for taxation 0.95 1.10 0.95

Profit for the year 6.34 7.32 5.26

Index Analysis
 Balance Sheet
SHARE CAPITAL AND 2007 (%) 2008(%) 2009(%)
RESERVE
Authorized share capital 100 100 100

Issued subscribed and paid up 100 175 100

capital
Unappropriated profit 100 72 231

Cont.
 NON CURRENT LIABILITES
2007 (%) 2008(%) 2009 (%)
Long Term financing 100 107 82

Long term leased liabilities 100 126 126

18.97 126

100 138 172

Long term deposits

DEFERRED LIABILITIES 100 145 672

 CURRENT LIABILITES 2007 (%) 2008(%) 2009 (%)
Trade and other payables
100 88 2
Markup accrued
Short term borrowing 100 113 372
Current Portion of
Non current liabilities 100 97 13
Long term morabaha
100 115 128
Taxation
100126
107 266 770

TOTAL LIABILITES AND 100 109 131

SHARE HOLDER’S EQUITY
 Assets Side
Non Current Assets 2007 (%) 2008(%) 2009 (%)
Property, Plant & Equipment 100 105 82

Long Term Investment 100 111 427

Long Term Loans and 100 89 89

Advances
Long Term Deposits 100 522 526

Cont.
 Current Assets 2007 (%) 2008(%) 2009 (%)
Stores, spares and loose tools 100 63 90

Stock in trade 100 123 177

Trade Debts 100 136 189

Loans and advances 100 109 68

Trade deposits and short term 100 279 139

prepayments
Other Receivables 100 222 144

Cont.
 Current Assets 2007 (%) 2008(%) 2009 (%)
Cash and bank balances 100 49 100

Total Assets 100 109 131

 Profit & Loss A/C
2007 (%) 2008(%) 2009 (%)
Sales 100 120 171
Less: Cost of goods sold 100 130 (193
Gross profit 100 96 152
Add: Other operating income 100 214 708

Distribution cost 100 107 269

Administrative expenses 100 93 217
Other operating expenses 100 103 152
Finance cost
100 97 149

Profit before Taxation 100 103 108

 2007 (%) 2008(%) 2009 (%)
Profit Before Taxation 100 103 108
Less: provision for taxation 100 102 126
Profit for the year 100 103 105
Thank You Very
Much