You are on page 1of 18

FINAL REPORT

Department of Management Sciences


Mohammad Ali Jinnah University
Islamabad, Pakistan

Zulfiqar Ali Shah


(Analysis of Financial Statements)

Group Members
Raheel Shaukat

MBE 103027

Rameez Raza

MBE 103004

Naeem Nazir

MBE 103007

Table of Contents
Abstract
Introduction

1)Companies Introduction
2)AFS
3)Users of Financial Statements
4)Why doing Analysis
5)Analysis with respect to users

Methodology
1)Ratio Analysis
2) Horizontal Analysis
3) Vertical Analysis
4)Trend Analysis
5)Earning Management
6)Z- Score

Results
Conclusion

Abstract:
This report includes analysis of financial statements with the help of Ratio
analysis. Horizontal analysis, Vertical analysis trend analysis, Trend analysis,
Trend analysis , Earning management and Z-Score.
With the help of different analysis we are in a position to give a
clear view about the companies financials with every perspective. We are
able to assess and make decision about the actual worth of company and
what things are needed to be adjusted in its operations.

Introduction
The Financial Statements are used to provide information to its stakeholders.
It represents the financial position of any organization and help management
while taking financial decisions. There are number of International
Accounting Standards which are being followed while making or keeping
accounting records. The Analysis of financial statements helps it
stakeholders to judge the financial position of that company, and every
individual stakeholder utilize the information according to its requirements.
There are tangible and non-tangible stakeholders every one use the
information according to its interest and requirements, so we can say that
analysis and use of financial statements is not limited to analysts, however,
managers, auditors, regulators, suppliers, distributers and educators also
benefited from the insights of analytical techniques.
Objective of the project :

To perform practically the analysis of financial statements.


To get exposure of the financial sector, that how the finance play roles
in real world.
To develop overall confidence of doing analysis of annual reports and
improving the judgments about the companies performances.
To enhance knowledge about the techniques that how to analyze the
company performance.

Ultimately the objective of this project is to make analytical thinking


that how a manager of a business analytically understand its
performance and on the basis of this performance he take decisions.

SCOPE:
The scope of this project is not limited however we are working on 9
companies, even though this project succeeds lots of knowledge for us. The
knowledge is based on the financial assessment analytically, and making
financial decision in better way that helps in future to the business.
The scope of this research project is to analyze the performance of the
selected companies in relation with the profitability. The scope of this
research focuses on the enhancement of understanding of financial reporting
in order to facilitate improved decision-making.
Significance of Project
The worth of the project can be measured as that every business in the world
utilizes these sources and techniques to make the financial decisions while
analyzing the performance. For students this project is worth more or having
more significance because it contains the experience of doing analytical
assessment of financial sector.

Companies Introduction
Following are the companies we selected for analysis.
1)
2)
3)
4)
5)
6)
7)
8)
9)

Sui Southern Gas Company Limited


HinoPak Limited
PIA
Murry Brewery Limited
Nishat Textile Mills Limited
Crestex Textile
Kohinoor Sugar mill
Wyeth Pakistan Limited
Kohat Industries Limited

Sui Southern Gas Company Limited:


Sui Southern Gas Company (SSGC) is Pakistan's leading integrated gas
company. The company is engaged in the business of transmission and

distribution of natural gas besides construction of high pressure transmission


and low pressure distribution systems.

HinoPak Limited:
Hinopak Motors Limited assembles, manufactures and markets world
renowned Hino diesel trucks and buses in Pakistan. The Company has held
the top position in the domestic market for medium and heavy-duty vehicles
for 17 consecutive years and is highly acclaimed for quality and
technological excellence.
Backed by Hino's expertise Hinopak has achieved standard of
quality and excellence that rival the best in the region. With over 60,000
vehicles on road, Hinopak has gained 65% market share making it the
largest manufacturer in medium and heavy-duty truck and bus industry in
Pakistan.
HinoPak's product range has been designed and built in Hino's
traditions of automotive excellence to be the leader in its category and the
main emphasis has been given to passengers' safety & comfort.

PIA:
Pakistan International Airlines Corporation (commonly known as PIA, is
the flag carrier airline of Pakistan. The airline has its head office on the
grounds of Jinnah International Airport in Karachi and operates scheduled
services to 24 domestic destinations and 38 international destinations in 27
countries across Asia, Europe and North America. Its main bases are at
Karachi, Lahore and Islamabad/Rawalpindi. PIA has been ranked as a 3-star
airline by Skytrax, the world's official airline and airport review

Murry Brewery Limited:


Murree Brewery was established in 1860 in response to the ever
increasing demand for beer by the personnel of the British Raj, and is
currently the oldest continuing enterprise in Pakistan.
The Murree Brewery at Ghora Galli was among the first modern
beer breweries established in Asia. The virtues of beer brewed from barley
malt & hops as a light alcoholic beverage were not lost on the local
population
who
rapidly
became
avid
consumers.
By the turn of the 20 century, the name "Murree" was famous for its beer in
keg and bottle in the bars, beer halls and army messes of British India.
Murree Beer was first awarded a medal for product excellence at the

Philadelphia Exhibition in 1876, followed by numerous awards over the past


150 years.

Nishat Textile Mills Limited:


Nishat has grown from a cotton export house into the
premier business group of Pakistan with 5 listed companies, concentrating on
4 core businesses; Textiles, Cement, Banking and Power Generation. Today,
Nishat is considered to be at par with multinationals operating locally in
terms of its quality products and management skills.

Kohinoor Sugar mills:


Kohinoor Sugar Mills Limited is one of the first Sugar Factories established in
Pakistan since the country's independence.A Saigol Family project, KSML is a
public limited company, listed on the Karachi and Lahore Stock Exchanges
Kohinoor Sugar Mills is located in Jauharabad,
District Khushab in the Punjab province. The plant has the capacity of
crushing over 6,000 Metric Tons of Cane per Day (TCD).

Wyeth Pakistan Limited:


Wyeth Pakistan Limited engages in the manufacture and marketing
of research based ethical specialties and other pharmaceutical products in
Pakistan, the Philippines, Kuwait, and Sri Lanka. The company was
incorporated in 1949 and is headquartered in Karachi, Pakistan. Wyeth
Pakistan Limited is a subsidiary of Wyeth LLC.

Kohat Industries Limited:


Kohat Textile Mills Limited engages in the manufacture and
sale of yarn in Pakistan. The company was incorporated in 1967 and is
headquartered in Islamabad, Pakistan.

Analysis of Financial Statements


We already had studied about the preparation of financial statements i.e. Balance
Sheet and Trading and Profit and Loss Account. After studying this subject we are now able to
analyze the financial statements with the help of different tools such as ratio analysis, Trend
analysis, Horizontal analysis, Vertical analysis, Z-Score, Earning Management
In order to ascertain the financial status of the business every enterprise
prepares certain statements, known as financial statements. Financial statements are mainly
prepared for decision making purposes. But the information as is provided in th financial
statements is not adequately helpful in drawing a meaningful conclusion. Thus, an effective
analysis and interpretation of financial statements is required.

Users of Financial Statements


What do the Users of Accounts Need to Know?
The users of accounts that we have listed will want to know the sorts of things we can
see in the table below: this is not necessarily everything they will ever need to know, but
it is a starting point for us to think about the different needs and questions of different
users.
Investors

to help them determine whether they should buy shares in the


business, hold on to the shares they already own or sell the
shares they already own. They also want to assess the ability of
the business to pay dividends.

Lenders

to determine whether their loans and interest will be paid when


due

Managers

might need segmental and total information to see how they fit into
the overall picture

Employees

information about the stability and profitability of their employers to


assess the ability of the business to provide remuneration,
retirement benefits and employment opportunities

Suppliers and
other trade
creditors

businesses supplying goods and materials to other businesses will


read their accounts to see that they don't have problems: after all,
any supplier wants to know if his customers are going to pay their
bills!

Customers

the continuance of a business, especially when they have a long


term involvement with, or are dependent on, the business

Governments and the allocation of resources and, therefore, the activities of


their agencies
business. To regulate the activities of business, determine taxation
policies and as the basis for national income and similar statistics
Local community

Financial statements may assist the public by providing


information about the trends and recent developments in the
prosperity of the business and the range of its activities as they
affect their area

Financial analysts they need to know, for example, the accounting concepts
employed for inventories, depreciation, bad
debts and so on
Environmental
groups

Many organizations now publish reports specifically aimed at


informing us about how they are working to keep their
environment clean.

Researchers

researchers' demands cover a very wide range of lines of enquiry


ranging from detailed statistical analysis of the income statement
and balance sheet data extending over many years to the
qualitative analysis of the wording of the statements

LIQUIDITY

Methodology:

Current Ratio
C. A / C. L
The completion of the project is depends on methods and techniques, before applying those
2
methods we required some data. We take the data of 9 listed non-Financial Companies for 5
Absolute Quick Ratio
Q. A A / R /C.L
years and assumed these companies of the same industry. However the following methodology is
Profitability Ratios
used in building the project.
4 Net Profit Margin
N.P / Sales
5 Gross profit Margin
G.P / Sales
6 Operating Profit Ratio
O.P / Sales
Data
analysis
Techniques:
O.E / Sales
7 Operating Expense Ratio
on Equity
N.I after tax / Sh. E
8 Return
The
process of analysis includes the calculation of following financial parameters/standards in
on Capital employed
9 Return
order
to measure
the performance of the selected companies; N.I / T.A C.L
N.I / T.A
1 Return on Assets
0 Financial Ratios
Common size analysis
Index analysis
Trend Analysis
Earning Management
Z-score model

Financial Ratios
A tool used by individuals to conduct a quantitative analysis of information in a company's
financial statements. Ratios are calculated from current year numbers and are then compared to
previous years, other companies, the industry, or even the economy to judge the performance of
the company.

Activity Ratios
12
13
14
15

Total Asset Turnover


Debtors Turnover
Debtors Turnover in Days
Creditors Turnover

T.S / T.A
C.S / Avg. D
360 / D.T.O
C.P / Avg. C

16
17
18
19
20

Creditors Turnover in Days

360 / C.T.O
COGS / Avg. Inv

Inventory Turnover
Inventory Turnover in Days
Operating Cycle
Cash Cycle

360 / I.T.O
I.T.O in Days+ D.T.O in Days
O.C C.T.O in Days
Solvency Ratios

21
22

Debt to Equity
Long Term Debt to Total Assets

23

Long Term Debt to Capital Employed

L. D / Sh. E
L. D / T.A
L. D / Sh. E + L.D

MEANING OF RATIO ANALYSIS:


Ratio analysis is the method or process by which the relationship of items or group of
items in the financial statement are computed, determined and presented.
A) Ratio analysis is an attempt to derive quantitative measure or guides concerning the
financial health and profitability of business enterprises. Ratio analysis can be used both
in trend and static analysis. There are several ratios at the disposal of an analyst but their
group of ratio he would prefer depends on the purpose and the objective of analysis.
OBJECTIVE OF RATIOS
Ratio is work out to analyze the following aspects of business organizationA) Solvency1) Long term
2) Short term
3) Immediate
B) Stability
C) Profitability
D) Operational efficiency
E) Credit standing
F) Structural analysis
G) ffective utilization of resource

BASED ON USER

Ratios for short-term creditors

Current ratios, liquid ratios, stock working capital ratios

Ratios for the shareholders

Return on proprietors fund, return on equity capital

Ratios for management

Return on capital employed, turnover ratios, operating ratios,


expenses ratios

Ratios for long-term creditors

Debt equity ratios, return on capital employed, proprietor


ratios

ROLE OF RATIO ANALYSIS:


It is true that the technique of ratio analysis is not a creative technique in the sense that it
uses the same figure & information, which is already appearing in the financial statement. At the
same time, it is true that what can be achieved by the technique of ratio analysis cannot be
achieved by the mere preparation of financial statement.
Ratio analysis helps to appraise the firm in terms of their profitability & efficiency of
performance, either individually or in relation to those of other firms in the same industry. The
process of this appraisal is not complete until the ratio so computed can be compared with
something, as the ratio all by them do not mean anything. This comparison may be in the form of
intra firm comparison, inter firm comparison or comparison with standard ratios. Thus proper
comparison of ratios may reveal where a firm is placed as compared with earlier period or in
comparison with the other firms in the same industry.

Interpretation of Ratios:
The ratio and their interpretation is given in the next page in detail.

Common Size Analysis


Common Size Analysis is used to compare financial statements of different-size companies or of
the same company over different periods. By expressing the items in proportion to some sizerelated measure, standardized financial statements can be created, revealing trends and providing
insight into how the different companies compare.
The common size ratio for each line on the financial statement is calculated as follows:

Item of Interest
Common Size Ratio

=
Reference Item

The ratios often are expressed as percentages of the reference amount. Common size statements
usually are prepared for the income statement and balance sheet, expressing information as
follows.

Income statement items - expressed as a percentage of total revenue

Balance sheet items - expressed as a percentage of total assets

EARNINGS MANAGEMENT
Earnings Management occurs when managers use judgment in financial reporting and in
structuring transactions to alter financial reports to either mislead some stakeholders about the
underlying economic performance of the company, or to influence contractual outcomes that
depend on reported accounting numbers.
From Discretionary Accruals calculations we identify that which company is managing its
earnings, It means that the company whose Discretionary accruals are more near to 0 is least
managing its earnings,

For 2010

Interc
ept

X
Varia
ble 1

X
Varia
ble
2

0.557
68
0.557
68
0.557
68
0.557
68
0.557
68
0.557
68
0.557
68
0.557
68
-

0.311
02
0.311
02
0.311
02
0.311
02
0.311
02
0.311
02
0.311
02
0.311
02
-

Companies
Sui Southern Gas
Company Limited

0.1460
626

HinoPak Limited

0.1460
626

PIA

0.1460
626

Murry Brewerry
Limited

0.1460
626

Nishat Textlie Mills


Limited

0.1460
626

Crestex Textile

0.1460
626

Kohinoor Sugar mill

0.1460
626

Wyeth Pakistan
Limited
Kohat Industries

0.1460
626
0.1460

in
sales* ppe*c
coef of oef
sales
0.1112
55
0.0771
37
0.0612
5
0.0506
8
0.0836
2
0.0003
1
0.0036
8
0.0829
2
-

NDA

DA

0.002
93
0.052
3

0.260
24

0.14
23

0.088
37
0.004
9
0.075
6
0.001
6

0.173
18

0.170
92

AB
S

0.1
42

0.20
68
0.01
97

0.2
07

0.1
45

0.144
18

0.14
52
0.07
58
0.17
45

0.024
04

0.166
43

0.05
8

0.0
58

0.006
97
-

0.070
12
-

0.07
82
-

0.0
78
0.0

0.090
47
0.013
2

0.0
2

0.0
76
0.1
75

Limited

Interpretation

626

0.557
68

0.311
02

0.0836
2

0.075
6

0.013
2

0.07
58

76

Industry Average of earning management is 0.108 all the companies whose discretionary
accruals are near are less managing earnings however others are doing more. Results and

Discussion
We have analyzed 9 companies out of which SSGPL is performing well whose ROCE
is 3.65, N.P 4.03, Murry Brewery is also performing well whose ROCE is 2.33, N.P 6.63,
there operating expenses are less than industry there Return on assets is more. As
there return ratios are high its good but their solvency ratios are needed to be
decreased as it is above the industry.
Companies we chose were from different sectors therefore there is huge
fluctuation in the ratios. Companies may be performing better in their own industry but
showing different results here.

Conclusion

The main focus of our project is the analysis of companies performance. We are
mainly paying attention on the comparison of these analyzed companies with industry.
As we consider the industry a bench mark and standard of performance for all
companies. It is a part of our study; the course title is Analysis of Financial Statements
so the purpose of this is to practically make the analysis so the objective of the course is
achieved. For the completion of the project we find the data through internet web site of
the companies.
For practical implementation of the work we selected the 9 Non-financial
companies from the We select those companies randomly from the Karachi stock
exchange web site above companies. The methodology we used in making the analysis
is the Horizontal Analysis, Vertical Analysis, Ratio Analysis, Earning Management model
and Z-Score Model.