Financial Statement

Analysis
Bhanero Textile Mills Limited
Submitted By: Tabina Hassan (11U3016)
Submitted To: Miss Mehreen Furqan
Submission Date: 29 March' 14






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Executive Summary
For the purpose of my financial statement analysis project, I have chosen Bhanero Textile Mills
Limited. The purpose of performing this assignment and the whole analysis is to look at the trend
of growth of the company by assembling, comparing and assessing its past five years financial
data; including years from 2009 to 2013. After profoundly evaluating the financial statements of
the company it can be concluded that the corporation has been progressing well despite the
economic turmoil prevailing in the country for past few years. The analysis begins by
considering the basic statements of the company such as Profit and Loss Accounts, Balance
Sheets and Cash Flow Statements. These statements are then used to calculate various significant
ratios and percentages such as cash flow ratios, liquidity ratios, solvency ratios, returns on capital
ratios, profitability ratios and market measures, to obtain a more thorough understanding of the
operations of the company. In the end the report will discuss the decisions that a banker and an
investor make keeping in mind the performance of the company for the last five years. The
liquidity position and capital structure & solvency state of the company is reasonably satisfactory
and is exposed to less risk. The management of the company has been playing a remarkable role
managing its debt and equity appropriately and has also ensured full utilization of the companys
assets, to avoid inefficiency, resulting in increase in the return on assets (ROA) and return on
equity (ROE) present in the Textile sector. Over all the financial position of the company is
satisfactory.


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Contents
CC.2 Income Statements ............................................................................................................................... 4
CC.3 Balance Sheets ...................................................................................................................................... 5
CC.4 Statements of Cash Flows ..................................................................................................................... 7
CC.5 Five Year Growth Rates ......................................................................................................................... 9
CC.6 Common-Size Income Statements...................................................................................................... 10
CC.7 Common-Size Balance Sheets ............................................................................................................. 11
CC.8 Trend Index of Selected Accounts(Year 2009=100%) ......................................................................... 13
CC.9 Per Share Results ................................................................................................................................ 15
CC.11 Analysis of Cash Flow Ratios ............................................................................................................. 16
CC. 12 Short-Term Liquidity Analysis .......................................................................................................... 17
CC. 13 Common-Size Analysis of Current Assets and Current Liabilities .................................................... 18
CC. 18 Capital Structure and Solvency Ratios ............................................................................................. 19
CC. 19 Return on Invested Capital Ratios ................................................................................................... 20
CC. 20 Asset Utilization Ratios .................................................................................................................... 21
CC. 21 Analysis of Profit Margin Ratios ....................................................................................................... 22
CC. 22 Analysis of Depreciation .................................................................................................................. 23
CC.23 Analysis of Discretionary Expenditure .............................................................................................. 24
CC. 28 Market Measures ............................................................................................................................. 25
Conclusion ................................................................................................................................................... 26
As an Investor ......................................................................................................................................... 26
As a Banker.............................................................................................................................................. 26
References .................................................................................................................................................. 27
Appendix ..................................................................................................................................................... 28
Financial Statements For 2013 ...................................................................................................................
Rough Calculations .....................................................................................................................................


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CC.2 Income Statements

The Income Statement of the company also known as Statement of Profit and Loss depicts
revenues and expenses that are due to transactions incurred while conducting operations for a
given period of time. Revenues of the firm shows cash inflows and expenses shows cash
outflows. And the difference between the two represents Net income of a company. It can be
seen from the table above that the the total sales of the company have been increasing steadily
with an increase in 2011 but then again it decreased in 2012 and continued increasing. The Gross
Profit shows a similar trend. The profit before taxes fell drastically from 2011 to 2012 but then
gradually started increasing in 2012 till 2013. Likewise same trend in the net income is visible
that it fell drastically in 2012 but started to increase afterwards. The earnings per share of the
company has also shown a similar trend as NI and EBT has shown i.e. it decreased in from
287.73 in 2011 to 102.16 in 2012 and then increased to 195.67. Another important point is that
although expenses increased the management of the company was able to efficiently increase its
total income over the years.
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CC.3 Balance Sheets



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The Balance Sheet of a company is one of the most important financial statements which
describe where a company stands at a specific date in financial terms by listing down its total
assets, liabilities and owners equity.
The total assets of the company slightly decreased in 2011 from Rs. 3,794,691,686 to Rs.
3,630,854,231in 2012 and then rose to Rs. 4405622676 in 2013. On the other side of the balance
sheet i.e. the liability and owner equity side, we can see a general trend of decrease in the total
liability side. The overall decrease in total liabilities was mostly due to the decrease in the long-
term financing-secured and current portion of long term borrowings.
The Owners Equity section of the balance sheet shows a drastic increase from year 2009 to 2011
i.e from Rs. 984,716,498 to Rs.2, 203,752,076. This increase is mainly attributed to the increase
in the General Reserves. Another important thing that should be noted over here is that the
company has continued to increase its reserves as well as the unappropriated profit over the
course of five years. All of this shows the company to be financially stable. But as I examined
the liability part of the statement, I noticed that the liabilities have also increased in 2013.
However, this increase in total liabilities is set off due to the increase in the companys current
assets, reserves and unappropriated profits.
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CC.4 Statements of Cash Flows



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The purpose of Statement of Cash Flows is to help understand the purposes of the companys
investment and credit decisions. It doesnt only depicted the way cash changes over years but it
is also significant in terms of analyzing the prospects of future cash flows.
The Cash Flow from operating activities of the company also known as Free cash flows are
showing a decrease in 2013, this low cash from operations can be attributed mainly to large cash
outflow from deposits and prepayments in the first year. This simply suggests that a large
amount of cash was drained from the changes in working capital of the company.
The Cash Flow from investing activities remained negative throughout the 5 year time. The only
thing that changed in it was that overall it became more negative but then it became less negative
in 2013. This negative value is attributed to the Purchase of property, plant and equipment. The
only positive aspect of these negative values is that this shows that the firm is growing and
because of that its assets are increasing.
Cash flows from financing activities relate to the investors and creditors. It shows the amount
invested in the company or loaned out to it from its creditors. From year 2009 to 2012 we can see
negative cash flow values meaning that it is cash out flow. This negative value is mainly due to
payment of long term financing which over the years have increased.
The value of cash and cash equivalents has shown an initial general upward trend from 2009 to
2013.
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CC.5 Five Year Growth Rates


The growth rate of sales of Bhanero Textile Mills shows that its sales have been increasing by
13.10% over the period of five years which is very good. Net Income growth rate of the
company over the 5 year period is 48.65% which is a very good growth rate showing that the
company is enjoying increasing rates of profits every year.
The dividend and Equity over a five year period shows a growth rate of 58.44% and -5.23%
respectively. This means that the firm payment of dividends in increasing every year at a good
rate which is very attractive for investors but its equity is decreasing.
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CC.6 Common-Size Income Statements

The CommonSize Income Statement shows the percentage of every component of income
statement in terms of its Net Sales. From the table above we can see that the Cost of Goods Sold
makes up the major percent of the companys total sales i.e. on an average almost 85%. This
percentage showed an decreasing trend in 2009 and 2010 but afterwards it showed a increasing
trend till 2013 with the exception of 2012.
The Gross Profit showed a constant increase from 2009 till 2011 but decreased afterwards in
2012.
Profit before taxes and profit after taxes show a similar trend which is after 2009 they increased
and then increase till 2011. But there was a decrease in both of them in 2012 but it then later
increase in 2013.
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CC.7 Common-Size Balance Sheets


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The Common Size Balance Sheet helps analyze the composition of the components of the
balance sheet. On the Asset side of the balance sheet we can see that the current assets comprise
more than 50% of the total assets. Only in year 2009 and 2010 the non-current assets were more
than the 50% of the total assets. The composition of non-current assets have been showing a
decreasing value over the years and current assets showing an increasing value which is one of
the reason of the year 2011 value of current assets being more than the non-current assets. The
other reason of the drop in non-current assets was due to the decreasing value of Property, plant
and equipment and increasing value of current assets was due to the increasing value of Stock in
trade.
The Liabilities and Owners Equity section of the common size balance sheet show the changes
in the percentage of Liabilities and Equity in terms of its total shareholder's equity and total
liabilities. The total liability shows a decreasing trend mainly due to decrease in long term
financing secured and current portion of long term borrowings. Total equity has increased from
31.42% to 66.90% which is more than doubled. This shows that Bhanero Textile is moving more
towards internal financing rather than external financing which means that management is trying
to reduce the risk associated external financing.
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CC.8 Trend Index of Selected Accounts(Year 2009=100%)

For the purpose of observing the trend of the few selected accounts from Balance Sheet and
Income Statement we have considered the values of Year 2009 as base year values. Starting with
cash and cash equivalents we can see that over the years it is growing i.e. from 159.76% to
234.64%. This growth shows that the company will have more liquid asset in hand which can be
used in case of unforeseen circumstances. Accounts receivables show a normal growth pattern.
Inventories have had a overall growing trend. Total current assets have been growing on average
and total current liabilities of the company have been showing a decreasing trend which is good
for the company with the exception of 2013. Working capital showed an increasing trend which
showed that the firm have now more assets to deal with its current liabilities compared to
preceding years.
Plant asset show a decreasing trend. The long term debt and total liabilities have shown a
decreasing trend over the years. Shareowners equity has shown an increasing trend over the past
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5 years. The net sales also show a general upward trend. Cost of goods sold, administrative
expenses and marketing and all have a fluctuating trend as values are only positive for all these
accounts in 2010 and 2012. Interest expense showed a downward trend. Earnings before taxes
and Net income have been showing a general upward trend.
Overall, all of the components have increased in the last five years which shows that over this
time period the company has expanded capital and sales.








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CC.9 Per Share Results

The sales per share of the company has increased over the period of five years from 1260.52 to
2332.47 which shows all the stakeholders involved in the company that the company is doing
well. The net income per share of Bhanero Textiles shows a growing trend with the exception of
2012. The book value per share depicts the value of a share of the common stock which as we
can see from the table showed an decreasing trend till 2012 and an upwards trend afterwards.


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CC.11 Analysis of Cash Flow Ratios

The cash flow adequacy ratio provides insight into whether a company generates sufficient cash
from operations to cover capital expenditures, investments in inventories, and cash dividends.
This ratio for Bhanero Textiles is 1.17, which indicates that funds generated from operations are
sufficient to cover capital expenditures, investments in inventories and cash dividends. Also this
is the combined average for the five years and the case might be different if we look at these
ratios in each separate year. The cash reinvestment ratio provides insight into the amount of cash
retained and reinvested into the company for both asset replacement and growth. This ratio is
negative for the company in 2013 which is because of the negative cash provided by the
operations in that year. Secondly, this ratio was highest in 2010 mainly due to a high cash from
the operations of the company. Coming to the industrial average in this table, we can see that the
adequacy ratio as well as the cash reinvestment ratio has remained above that of the average of
the company for almost all years. This indicates that the company has performed better than
most of the companies in the same industry.
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CC. 12 Short-Term Liquidity Analysis

The current ratio tells how much current assets are there to cover for the current liabilities. The
ratio is above 1 showing that there were no liquidity problems for the company. A/R turnover
has remained below the average value for the 5 years which shows that company is not as good
as other firm in converting its receivables into sales as other firms. Days sales in receivables
have been below the average value which is not a good for the firm. Days sales in inventory
shows that it went below average below the average in 2011 which was a good sign as it meant
that in comparison to other firm Bhanero Textiles converted its inventories to sales a bit quicker
than the other firms.
The approximate conversion period of the firm has been constantly below average. The cash to
CA ratio shows a general upward trend and has been above the average value of the industry.
The cash to CL ratio shows how much cash a company has in order to support its liabilities and
the higher the ratio the better and in this case the ratio has been well above the industrial average
value.
Working capital of the company has been above the industrial average value and positive
showing that now the company have the necessary funds to grow. Days purchases in A/P has
remained well below the average value showing that compared to others Bhanero pays for it
purchases quite early which is a good thing for its suppliers. The cash provided by operations to
current liabilities shows how much cash a company has in order to support its liabilities and it
has remained above the industrial average value.
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CC. 13 Common-Size Analysis of Current Assets and Current Liabilities


From the table, we can see that stock in trade and trade debts make up most of the component of
the current assets whereas other receivables contributes the least to the current assets side. As for
the current liabilities portion short-term borrowing-secured is the largest part of the current
liabilities side and the smallest contribution to current liabilities is mark-up accrued on loans and
other payables.
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CC. 18 Capital Structure and Solvency Ratios


The total debt-equity ratio of the company has remained below the industrial average of 5.63
over the 5 years. This shows that the risk of the company is lower compared to the other firms in
the industry. The total debt ratio of the company has also remained blow the industrial average
ratio of 0.79 for the 5 years which means that companys solvency situation is currently not at
risk. The long term debt to equity ratio has remained low. Equity to total debts ratio has
remained above the industrial average of 8.03 for the years 2011 and 2010 but before that it was
quite below the average value which means that after 2010 the risk for solvency and capital
structure has decreased and before 2010 it was quite risky.
The fixed assets to equity ratio has been below the industrial average of 4.31 and in from 2011-
2013 it was below 1 which meant that some of the fixed ratio were financed by liabilities which
is not a good sign for the company. The current liability to total liability ratio was below the
industrial average in all 5 years except 2011 which meant that in 2012 the current liabilities were
more which is much more risky compared to long term liabilities.
Earnings to fixed charges show the amount of earnings available to pay the fixed charges and in
this case it was above the negative industrial average of -6.8. For cash flows to fixed charges
ratio the value has below the industrial.
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CC. 19 Return on Invested Capital Ratios


RNOA shows how much the amount generated is because of the utilization of the assets of the
company. The RNOA value in our case has been above the industrial average value of 49.9%,
showing that our firm uses more assets to generate its returns compared to the other firms in the
industry. The ROCE was above the industrial average value. Due to the increasing value of
ROCE creditors and equity financers are quite encouraged. A further analysis in the
disaggregation of return on common equity shows that the main reason for the increase in the
return is the increase in total asset turn over which means that the company is not only increasing
sales but is efficiently using its assets for this purpose and the increase in the equity multiplier.
Lastly, the growth rate of equity shows a general upward trend. This indicates that the company
will continue its growth in sales and earnings.
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CC. 20 Asset Utilization Ratios


The sales to cash and cash equivalents shows how much of the total sales of the company are
present in cash. The ratio in this analysis has been below the average of the industry. Sales to
receivables have remained below the average value throughout the 5 years which shows that
there is a long time between sale and collection of receivables. Sales to inventory have remained
below the industrial average value of 5.57. Sales to working capital ratio has remained way
above the average industrial value of 13.96 for 2009 and 2010 which means that compared to
others our firm has more than adequate working capital for the business but it was below average
from 2011 to 2013. Sales to fixed assets remained below the average value till 2010 after that it
increased indicating that assets were being fully utilized. For sales to total assets the value was
below the industrial average value in 2009 showing that only fixed assets were properly utilized
not the total amount of assets but it increased after that indicating that all assets were being
optimally utilized. Sales to short term liabilities were below industrial average in 2009 but after
that it increased above the average.

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CC. 21 Analysis of Profit Margin Ratios


Gross Profit Margin has remained above the industrial average indicating that the company has
adequate resources to pay for the additional expenses compared to the other companies in the
industry. Operating margin profit shows the effectiveness of a company in controlling its costs. It
has remained well above the average showing that the company improved its cost management
compared to other companies in the industry. Net profit margin shows the amount of total
revenue converted into profits and in this case above the industrial average.








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CC. 22 Analysis of Depreciation

The annual depreciation has been decreased from 10.26% in 2009 to 1.03% in 2013. Annual
Depreciation expense as a percent of sales has also shown a decreasing trend over the years
dropping from.








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CC.23 Analysis of Discretionary Expenditure

Maintenance and repair have continued to increase over the years for the company, which points
to the fact that the company is growing and employing more assets. The expense for maintenance
and repairs as a percentage of total sales have been showing a general downward trend. The
expense for maintenance and repairs as a percentage of plant assets has shown the same trend as
the expense for maintenance and repairs as a percentage of total sales.




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CC. 28 Market Measures

The P/E ratio has remained well above the industrial average value of indicating that the future
growth prospects of the firm are increasing. The P/B ratio is well below the average value of the
industry showing that the stock is undervalued compared to other firms. The earning yield of the
company has remained above the average value. The dividend payout ratio of the company has
also remained below the industrial average value of 0.41.

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Conclusion
As an Investor
After the analysis of all the ratios calculated, considering it from the perspective of an investor, I
conclude that investing in the company is not a good option. Compared to other firms in the
industries it has managed its assets very. The general upward trend of ROCE and return on long
term debt and equity has shown a growth and is also above the industrial average which makes it
a superior choice for investing.
The ratios indicate that proper cost management is being done and assets are optimally utilized.
But the company's P/B ratio is below industrial average indicating stocks to be undervalued and
even though the company is getting profits, its profit ratios are below industrial average. Also the
dividend payout ratio is decreasing over the years and is below industrial average which shows
that the company is paying less dividends and is retaining the profits to reinvest in company. So I
will not invest in Bhanero Textiles.
As a Banker
Considering it from the perspective of an banker, I will provide Bhanero Textiles loan because
their current ratios are above average showing that enough current assets are available to pay
current liabilities. Also the company is not facing any serious liquidity problem. The Accounts
Receivables turnover for the company have remained above the average value which shows
company can easily convert it receivables into sales as compared to other companies. The
approximate conversion period however is below the average which is a good thing as it shows
company is better than other companies in industry. The cash to current liabilities of Bhanero
Textiles is higher than average which shows that the company compared to other firms has more
cash to support its liabilities.
Lastly, the cash flow from operation to current liabilities shows how much cash a company has
in order to support its liabilities but for Bhanero Textiles, this value has remained above the
industry average for the last 3 years of analysis showing that it is increasing its cash to provide
for its liabilities. Considering the liquidity, solvency and capital structure of the company I will
give a loan to this company.
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References

http://www.kse.com.pk/
http://www.umergroup.com/bhanero-financial-reports.html#/financial_reports/1
http://www.umergroup.com/bhanero-financial-reports.html
http://www.scstrade.com/StockScreening/SS_CompanySnapShotHP.aspx?symbol=BHAT

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Appendix(Financial Statements of 2012 and Rough Work)