PAKISTAN STATE OIL

Intrafirm Analysis
IBF
by
Razia Pukhraj
Submitted to: Mr Laiq-ur-Rehman
Samiya Illias
Course: Introduction to Business
2009A Finance
Pakistan Institute of Management
Contents
Introduction..........................................................................................................................3
Financial Ratios...................................................................................................................4
Intrafirm Analysis................................................................................................................5
Profitability Ratios...........................................................................................................5
Gross Profit Ratio........................................................................................................5
Net Profit Ratio............................................................................................................5
EBITDA Margin..........................................................................................................6
Return on Shareholders’ Equity...................................................................................6
Return on Total Assets.................................................................................................7
Return on Capital Employed.......................................................................................7
Profitability Ratios Analysis........................................................................................8
Asset Utilisation Ratios...................................................................................................9
Inventory Turnover Ratio............................................................................................9
Debtor Turnover Ratio.................................................................................................9
Total Assets Turnover Ratio......................................................................................10
Fixed Assets Turnover Ratio.....................................................................................10
Asset Utilization Ratios’ Analysis............................................................................11
Investment Ratios..........................................................................................................12
Earnings Per Share.....................................................................................................12
Market Value Per Share.............................................................................................12
Break Up Value.........................................................................................................13
Price Earnings (P/E) Ratio.........................................................................................13
Dividends Per Share..................................................................................................14
Bonus Share...............................................................................................................14
Dividend Payout........................................................................................................15
Dividend Yield...........................................................................................................15
Dividend Cover Ratio................................................................................................16
Investment Ratios’ Analysis......................................................................................16
Leverage Ratios.............................................................................................................17
Interest Cover Ratio...................................................................................................17
Current Ratio.............................................................................................................17
Quick Ratio................................................................................................................18
Leverage Ratios’ Analysis.........................................................................................18
Leverage Ratios’ Analysis

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

2
Introduction
Pakistan State Oil1 (PSO) is the largest Oil Marketing Company (OMC) in Pakistan
commanding over 70% of the market share. The Government of Pakistan (GOP) is a
major stake-holder in the company.

Pakistan State Oil Company Limited is a public company incorporated in Pakistan under
the repealed Companies Act, 1913 (now Companies Ordinance, 1984) and is listed on
Karachi, Lahore and Islamabad stock exchanges. The address of its registered office is
PSO House, Khayaban-e-Iqbal, Clifton, Karachi. The principal activities of the Company
are procurement, storage and marketing of petroleum and related products. It also blends
and markets various kinds of lubricating oils.2

Fluctuations3 in the international oil prices have severely affected the economy of
Pakistan. There are, at one hand, accusations of
outrageous profits by the OMCs, while on the other
hand, the oil industry is mired in circular debt and is
struggling for survival. Government directives for
uninterrupted supply of fuel to the power-generation
companies, irrespective of mounting receivables, have
put a major strain on the OMCs and the Oil
Refineries, as the GOP is unable to retire its debts to these companies.

Till April 2006, the fuel prices were set by Oil Companies Advisory Committee4 (OCAC)
as per the formula provided to them by the government. Now, Oil and Gas Regulation
Authority5 (OGRA) sets the fuel prices according to the information provided to them by
the oil companies.

Therefore, it would be interesting to study the financial ratios and do a trend analysis
using the main indicators to gain a better insight into the actual state of affairs.

PSO’s financial statements prepared for the year ended June 30, 2008 have been used for
this research, and the key documents are appended at the end of this report.

1 www.psopk.com
2 PSO Financial Overview 2008, Notes to the Financial Statements 1.1
3 Graph: International Crude Oil Price Trend for the past 5 years
4 www.ocac.org.pk
5 www.ogra.org.pk

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

3
Financial Ratios

2008 2007 Evaluation

Short-term solvency
Current Ratio 1.24 1.22 Improved
Quick Ratio 0.57 0.64 Low
Long-term solvency
Debt-Equity Ratio 0.76 0.72 Satisfactory
Times Interest Earned 16.63 7.15 Very Good
Fixed Charge Coverage6
Asset Utilization
Average Collection Period 21.2 12.0 Poor
Inventory Turnover Ratio 12.7 11.7 Good
Fixed Asset Turnover Ratio 74.3 52.0 Good
Profitability
Operating Profit Margin % 4 2 Good
Net Profit Margin % 2.4 1.14 Good
Book Return on Assets (ROA) 11.6 6.99 Good
Book Return on Equity (ROE) % 11.1 6.3 Good

6 Not relevant to PSO as they do not have Lease and Rental Payments as such

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

4
Intrafirm Analysis
The PSO yearbook contains the following ratios under the title PSO at a Glance. Using
the 10-year data provided there, graphs have been plotted and an analysis done to
interpret what these ratios tell us about the company.

Profitability Ratios

Gross Profit Ratio

6
5
4
3
2
1
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Gross Profit Ratio

Net Profit Ratio

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

5
 3
2.5
2
1.5
1
0.5
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Net Profit Ratio

EBITDA Margin

4
3

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

EBITDA Margin

Return on Shareholders’ Equity

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

6
50

40

30

20

10

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Return On Shareholders' Equity

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

7
Return on Total Assets

14
12
10
8
6
4
2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Return On Total Assets

Return on Capital Employed

80
70
60
50
40
30
20
10
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Return On Capital Empolyed

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

8
Profitability Ratios Analysis

A closer look at the trends of the world oil prices7 shows that an OMC’s profit margins
fluctuate in a similar manner.

All ratios appear to have risen sharply in 2008. This is attributable to the steep rise in
world oil prices. As the profit margins were a percentage of the fuel price, thus gains and
losses were a direct function of fluctuations in international price, and thus impacted the
profitability.

The basic reason why all the profitability ratios are affected is a huge inventory gain.

7 http://en.wikipedia.org/wiki/File:Brent_Spot_monthly.svg

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

9
Asset Utilisation Ratios

Inventory Turnover Ratio

25

20

15

10

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Inventory Turnover Ratio

Debtor Turnover Ratio

50

40

30

20

10

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Debtor Turnover Ratio

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

10
Financial Ratios and Intrafirm Analysis of Pakistan State Oil
11
Total Assets Turnover Ratio

7
6
5
4
3
2
1
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Total Assets Turnover

Fixed Assets Turnover Ratio

80
70
60
50
40
30
20
10
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Fixed Assets Turnover

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

12
Asset Utilization Ratios’ Analysis

Compared to last year, inventory turnover was high due to increased sales volumes, and
debtor turnover decreased significantly. Total assets turnover trend is more or less the
same whereas fixed assets turnover shows a consistent rise. As Asset Utilization ratios
are a measure of management’s efficiency, this implies that the management is doing a
good job, and company resources are being used to optimize profits.

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

13
Investment Ratios

Earnings Per Share

100

80
60

40

20
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Earnings Per Share

Market Value Per Share

500

400

300

200
100

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Market Value Per Share

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

14
Financial Ratios and Intrafirm Analysis of Pakistan State Oil
15
Break Up Value

200

150

100

50

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Break Up Value

Price Earnings (P/E) Ratio

20

15

10

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Price Earnings Ratio(P/E)

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

16
Financial Ratios and Intrafirm Analysis of Pakistan State Oil
17
Dividends Per Share

40
35
30
25
20
15
10
5
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

DividendsPerShare

Bonus Share

25

20

15

10

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

BonusShare

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

18
Financial Ratios and Intrafirm Analysis of Pakistan State Oil
19
Dividend Payout

100

80

60

40

20

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

DividendPayout

Dividend Yield

12
10
8
6
4
2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

DividendYield

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

20
Financial Ratios and Intrafirm Analysis of Pakistan State Oil
21
Dividend Cover Ratio

4
3.5
3
2.5
2
1.5
1
0.5
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

DividendCoverRatio

Investment Ratios’ Analysis

As is evident from the Earnings per Share graph, the company has been highly profitable.
The consistent rise in the Break-up Value over the years is an indicator of credible
amount of assets and places the company in a very favourable position in potential
investors’ eyes. Even though investment ratios have taken a positive turn, the company
was not able to declare generous dividends due to the liquidity issues caused by the non-
retirement of debts due from the government on account of the power-generation
companies. Inspite of the economic crunch which has severely affected cash flows of all
players in the industry, PSO has done exceptionally well, as is evident from the Earnings
per share and Market value per share for 2008.

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

22
Leverage Ratios

Interest Cover Ratio

40
35
30
25
20
15
10
5
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

InterestCoverRatio

Current Ratio

1.4
1.35
1.3
1.25
1.2
1.15
1.1
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

CurrentRatio

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

23
Quick Ratio

1.2
1
0.8
0.6
0.4
0.2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

QuickRatio

Leverage Ratios’ Analysis

The relationship of owners’ equity to borrowed funds is an important indicator of

financial strength. Interest Cover is far stronger in 2008 (16.4) as compared to
2007(6.86). PSO mainly resorts to short-term financing and has no long term loan as of
2008. This financial year, it resorted to Rs10.9 bn of short-term borrowings. Thus,
inspite of high profitability, huge receivables have contributed to the negative cash flows.

There is a mild variation in the current ratio over the years indicating a more or less
continuation of the same trend, indicating that the company has been able to maintain the
balance between its current assets and liabilities, whereas the quick ratio is in a steady but
constant state of decline, which is probably due to the huge inventory, caused by the
steep rise in world oil prices.

Financial Ratios and Intrafirm Analysis of Pakistan State Oil

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Financial Ratios and Intrafirm Analysis of Pakistan State Oil
25