INTRODUCTION

The cement industry in Pakistan has come a long way since independence when the country had less than half a million cement tones units. per Later annum on production Pakistan capacity with four Industrial Development

Corporation (PIDC) established two plants and subsequently more plants were established in the private sector. The industry result annum of were was nationalized in a 1972 total and the State of 10 Cement cement SCCP Corporation of Pakistan (SCCP) was established. And as the nationalization, transferred to number units with an installed capacity of 2.8 million tones per the SCCP control then established five new units with an installed capacity of 1.8 million tones per annum. In 1985-86 private sector was allowed units to were establish of the cement in process plants. the of At that time in seven before 1991. established private sector

commencement

privatizations

During the regime of Nawaz Sharif the government privatized eight units. The SCCP at present controls less than 25% of the total installed with an capacity in the of country which in is the shrinking establishment more plants

private sector. The history of cement industry in Pakistan dates back to 1921 when the first plant was established at Wah. At the time of the independence of in 1947 there were four cement factories with the installed capacity of 470,000 tones per annum. Later on Pakistan Industrial Development Corporation (PIDC) established two plants and subsequently more plants were established in the private sector. The industry was nationalized in 1972 and the State Cement Corporation of

Pakistan installed

(SCCP)

was of

established. 2.8 million

And

as

the per

result annum

of

nationalization, a total number of 10 cement units with an capacity tones were transferred to the SCCP control then SCCP established five new units with an installed capacity of 1.8 million tones per annum. In 1985-86 plants. private At that sector time was seven allowed units to were establish cement

established in the private sector before commencement of the process of privatizations in 1991. During the regime of Nawaz SCCP Sharif at the government controls privatized than eight 25% of units. the The present less total

installed capacity in the country which is shrinking with an establishment of more plants in the private sector. The cement industry is indeed an important segment of the industrial sector that plays a vital role in the socioeconomic last development. year Although the industry is incurring loss for last many years, now it gains momentum. During the fiscal ending June 30, 2003 the industry had incurred a loss of Rs. 88 million and it operated only at 66 per cent of the installed capacity. In comparison it has net profit of RS 2000 million during current fiscal year. Similarly, cement sales during the period July 2003-March 2004 were to the tune of 9.790 million tons (as compared to 8.674 million the installed tons for the same period of the previous It is expected that during the fiscal year, whereas the industry operated at 78 percent of capacity. fiscal year 2003-04 the cement industry would achieve about 82 per cent capacity utilization, resulting in a growth rate of 15 per cent compared to last year. A number of factors attributed to this tremendous growth represented by various indicators. Cement exports, mainly to Afghanistan,

doubled demand

during for

the

three-quarter has been of due

period to

of

the

current economic and

year, attaining a level of 0.78 million tons. High rise in cement massive improved scenario, starter various development

infrastructure project at national level. As a result of market demand growth and improved investment climate the industry has embarked upon an ambitious plan to expand its present production capacity. Out of a total of 24 cement plants, being currently on 22 the units Karachi are operative, 17 companies At present listed Stock Exchange.

country has capacity of producing 17.55 million tons of cement per annum, mainly Portland cement, which is expected to reach at the level of 28.21 million per annum. Despite the fact of this tremendous growth in last few years some of the companies are still suffering from losses. In this study it would be analyzed why these firms are still suffering from losses and how they can come out of this adverse condition. For this purpose three firms are selected from cemented industry which is suffering from losses in order to analyze their financial performance for the last five years. Research is based on annul reports published by these firms.

Rationale of the study

Financial statements portray the operating performance and financial health of a business firm for periods such as quarterly reports and annual reports. Financial analysts study financial statements both to evaluate organizations past success in conducting their activities and to project their likely future performance. The study indicates the behavior of selected firms in cement industry which are suffering from losses. Through this study of it of will cement be beneficial This and to understand is in trend. It the depth is performance analysis industry. study

past

performance

future

helpful for student to understand the behavior of cement industry. This study specifies the role Pakistan can play due to its geographical placement. students how market condition It will give insight to affect profitability of

industry, and how profit can be achieved. This study gives insight to managers to review their production process. The cement industry in Pakistan uses two distinct production processes, the 'dry' and the 'wet' process. Both the processes use different types of kilns. In the wet form. process As of kiln it the in raw kiln dry materials more the to are fed into to levels kiln it in the is slushy consumes energy raise

temperature into the

required form

costly. In the dry process the ground raw materials are fed powder therefore energy consumption is low to raise the temperature to the required level (Javed, 1998).

This

study

gives

insight

to

government

to

make

policies which enhance the performance of cement industry and profitability. Under capacity operation, heavy taxation and other impediments to exports have created a glut of cement in Pakistan. Most of the plants have incurred heavy losses in the last three years with its adverse effects on the investors Since the cost of production in Pakistan is very high on account of fuel and energy charges, Pakistan cannot export cement even at variable cost without reasonable support of the government (Ahmed, 1997). Beside highlights performance the threats indicator by this study also Cement

faced

cement

industry.

industry in Pakistan faces two serious threats: closure of units based on wet process, and poor cash flow rendering the units incapable of debt servicing due to increasing cost of electricity, furnace oil and imported craft paper used for cement packing. The cost of furnace oil alone has increased by nearly 100% in the last 15 months alone. With the increase in furnace oil the increase in electricity tariff has also become inevitable (Javed 1997). This study highlights the critical factor of

profitability and components of cost of cement industry. Since the industry faces a situation where sales price will be fixed 40 by to mutual 45 consensus, energy cost is a major cement component of total cost of production. It contributes at an average percent towards total cost of production. Another significant cost component is packaging material (Jamal, 1996).

Limitation of study
Data is collected only from the balance sheet and profit and loss account of the selected companies. For ratio analysis only four year data is taken. The analysis tools include the only financial ratios that measure the liquidity, profitability, leverage, solvency and general performance. The time frame of study covers the year 2003. There is a limitation related to the analysis of the result, as researcher doesnt have modern software available to analyze the findings so the result is based on manual work. The availability of funds is the one of the limitations while doing this research as a student it is difficult for the researcher to manage the funds. The time period for the research is very short because it is difficult to conduct a full time research for a student. Time was limited to 10 month to complete the study.

Objectives of study
To analyze the financial statements of selected firms in cement industry. To determine why they are suffering from losses as the industry is performing well. To check the liquidity of these firms. To check the solvency of these firms. To check whether right mix of debt and equity is used. To appraise the financial position using the ratio

analysis. To determine the expense and investments of the company.

Definition of terms Return on Equity:

This ratio is used to determine the adequacy of the return on common shareholders investment.

Return on Assets:
This ratio measures the return that the company earned on its assets.

Gross loss Margin:

This ratio indicates the % of gross loss that is earned on each dollar of sales. This ratio indicates the % of net loss that is earned on each dollar of sales.

Total debt to asset ratio:

This ratio measures the level of support that is provided to the firm by its creditors.

Inventory Turnover:
The inventory turnover ratio indicates the number of times that an inventory is sold and replaced over a given time period.

Receivable Turnover:
The receivable turnover ratio measures the effectiveness of a firms credit and collection Policies.

LITRATURE REVIEW
To make rational decision in keeping view objective of the firms the financial managers have analytical tools. The firm itself and out side provider of capital and investors all undertake a financial analysis. This type of analysis varies according to the specific interests of the parties involved. Trade creditors involved are primarily interested in liquidity of the firm. Their claim is short term and the ability of paying this claim can easily be jugged by firm liquidity position. The claim of the bond holders are long term accordingly claim of bond holders are relevant to the firms ability to survive in the long run and to service debt over a longer period of time. They may evaluate this ability by analyzing the capital structure of the firm, major sources and uses of funds the profitability overtime, and projection of future profitability (Abraham, 1980). Internally management also employs financial analysis for the purpose of internal control and to better provide with capital suppliers seek in financial condition from the firm. From in renal control stand point management needs to undertake financial analysis in order to take control effectively. To plan for the future, the financial manager must asses firms present financial position and evaluate opportunities in relation to this current position. With respect to internal control financial manager is primarily concerned with return on investment provided by the various assets. To bargain effectively for outside funds, the financial manager needs to be attuned to all aspects of

financial analysis that out side supplier of capital use in evaluating the firm (Kenneth, 1998). Common preferred initial hearing, reasons For for performing financial statement

analysis include making investment in a firms common and stock. public or in valuing a firm in setting such as of in its common stock, as an court-directed action. Financial bankruptcy statements offering liquidity

acquisition

candidate,

portray the operating performance and financial health of a business firm for periods such as quarterly reports and annual reports (Clyde, 1990). Most financial analysts assess the profitability of a firm relative to the risk involved. Assessments of most recent profitability provide a basis for projecting likely future profitability and thus likely future returns from investing in the company (Clyde, 1990). Ratios are a valuable analytical tool only when used as part of a thorough financial analysis. They can show the standing industry. misleading. of a particular ratios are just company, alone one within can of a the particular be financial However, Ratios sometimes

piece

jigsaw puzzle that makes up a complete analysis (Leslie Rogers, 1997). Financial ratios can also give mixed signals about a company's financial health, and can vary significantly among companies, industries, and over time. Other factors should also be considered such as a company's products, management, competitors, and vision for the future (Fieldsend, Langford and McLeay, 1987). 10

Financial ratios are widely used to develop insights into the financial performance of companies by both the evaluators and researchers. The firm involves many interested parties, like the owners, management, personnel, customers, suppliers, competitors, regulatory agencies, and academics, each having their views in applying financial statement financial analysis ratios, in for their evaluations. to Evaluators the use instance, forecast future

success of companies, while the researchers' main interest has been to develop models exploiting these ratios. Many distinct areas of research involving financial ratios can be differentiated (Barne, 1986). Financial ratios can be divided for convenience into four basic groups or categories: liquidity ratios, activity ratios, debt ratios, and profitability ratios. Liquidity, activity, and debt ratios measure primarily return. The measure following risk; is a profitability ratios

listing of some of the ratios to be aware of in analyzing a company's balance sheet and income statement. These ratios fall into four categories liquidity, profitability, asset management (efficiency), and debt management (Perttunen and Martikainen, 1990). When a firm borrows money, it promises to make a series of interest payments and then to repay the amount that it has borrowed. If profits rise, the debt holders continue to receive a fixed interest payment, so that all the gains go to the shareholders. Of course, the reverse happens if profits fall. In this case shareholders bear all the pain. If times are sufficiently hard, a firm that has borrowed heavily may not be able to pay its debts. The firm

11

is

then

bankrupt

and

shareholders

lose

their

entire

investment. Because debt increases returns to shareholders in good times and reduces them in bad times, it is said to create financial leverage. Leverage ratios measure how much financial leverage the firm has taken on (Brealey, Myers, and Marcus, 2001). If you are extending credit to a customer or making a short-term bank loan, you are interested in more than the companys leverage. You want to know whether it will be able to lay its hands on the cash to repay you. That is why credit analysts and bankers look at several measures of liquidity. Liquid assets can be converted into cash quickly and cheaply (McLeay and Fieldsend, 1987). Once you have selected and calculated the important ratios, you still need some way of judging whether they are high or low. A good starting point is to compare them with the equivalent figures for the same company in earlier years. It is Also known as benchmarking or cross-sectional analysis in which the firms ratio values are compared to those of a key competitor or a group of competitors, primarily to isolate areas of opportunity for improvement (Gitman, 1997). Comparison of current to past performance, using ratio analysis, allows the firm to determine whether it is progressing as planned. Using multiyear comparisons can see developing sectional trends, analysis, and any knowledge of these trends should changes assist the firm in planning future operations. As in crosssignificant year-to-year can be evaluated to access whether they are symptomatic of a major problem. Time-series analysis is often helpful in 12

checking the reasonableness of a firms projected financial statements (Gittman, 1997). Financial statement analysis applies analytical tools and techniques to general-purpose financial statements and relates data to derive estimates and inferences useful in business decisions. It is a screening tool in selecting investment or merger candidates, and is a forecasting tool of future financial conditions and consequences. It is a diagnostic operating managerial statement guesses, and tool and in assessing and is financing, an investing, tool and for activities, other analysis evaluation decisions. reliance turn it on

business our in and

Financial hunches, our

reduces

intuition,

diminishes

uncertainty in decision-making. It does not lessen the need for expert judgment but rather establishes an effective and systematic basis for making business decisions (Bernstein and Wild, 1990). Income a period of in statement time. net Net measures income, of a a companys the financial (or

performance between balance sheet dates and hence, reflects shows increase decrease) worth company before considering

distributions to and contributions by shareholders (Brigham and Ehrhardt, 2001). A balance sheet summarizes the financial position of a company at a given point in time. Most companies are required under accepted accounting practices to present a classified balance sheet. In which assets and liabilities are separated into current and non-current accounts. Currents assets are expected to be converted to cash and used in operations within one year or the operating cycle, 13

which ever is longer. Current liabilities are obligations that the company must settle in the same time period. The difference between current assets and current liabilities is working capital (Gitman, 1997). There are certain issues which must be considered

while evaluating financial analysis. First, a single ratio does not generally provide the sufficient information from which to judge the overall performance and status of the firm. Only when a group of ratios is used can reasonable judgments be made. If an analysis is concerned only with certain specific aspects of a firms financial position, one or two ratios may be sufficient. Second, it is preferable to use audited financial statements for ratio analysis. If the statements have not been audited, there may be no reason to believe that the data contained in them reflect the firms true financial condition. Third, the financial data being compared should have been developed in the same way Comparison with industry averages is difficult for a conglomerate firm that operates in many different divisions. dressing better. distort Seasonal factors can make can distort ratios. and Window look a techniques Different comparisons. statements ratios

operating and accounting practices can Sometimes it is hard to tell if

ratio is good or bad. It is Difficult to tell whether a company is, on balance, in strong or weak position (Whites and Keith, 1993). Consider evaluating supplier? a qualitative factors while evaluating while

companys future financial performance. Are percentage of the firms business is

the firms revenues tied to 1 key customer, product, or What

14

generated overseas? Competition Future prospects Legal and regulatory environment (Brigham, 1987).

METHOD Type of study

This study is about financial statements analysis of the selected companies in the textile industry in Pakistan. The study is descriptive in nature. The researcher has utilized the descriptive method in acquiring information

for evaluating the financial performance of the selected companies.

Data
The research data is secondary in nature as for this particular research. The data taken for this study is four year annual accounts of three companies listed in stock exchange. Balance sheets and profit of loss accounts are used to analyze the financial ratios of these companies.

RESEARCH INSTRUMENT
This research is based on secondary source of data and consists of annual reports, articles, web sites, and books. Data is taken from different places in raw form. Annual accounts of four companies are taken from security exchange of commission Islamabad. And some other data is taken from other research journals. 15

RESULT AND DISCUSSIONS

All ratios are calculated from the values taken from annual accounts to view the current and future performance. The data of four Years of three cement firms were taken. This data consist balance of four year annual from profit the and loss of account, sheets. Starting analysis

balance sheet the ratio is calculated and then analyzed in detail and from the ratios of four years the performance of each year is measured and compared with previous year. The performance of each company is compared with other company and analyzed why they are suffering from losses. Then there is a trend analysis of each company of ratios and balance sheets. These all data were combined together from thee annual account of four year. As broad problem area is to check why these firms are not generating revenues loss to sales ratio were first analyzed were and then liquidity, Each firm efficiency was and leverage ratio discussed. evaluated

separately and then compared with other competitors.

16

Fauji Cement Limited Balance sheet

Rupees

('000)

('000)

('000)

('000)

Years capital Current liabilities Current assets Total assets Inventory Receivables Total liabilities Long term loan

2003

2002

2001

2000 7 99,129 3,03 8,713 391, 719 5, 5,13 9,739 173,836 198,908

1,624,986 2,166,367 228,673 535,2 472,332 721,338 4, 659,449 236,763 236,602 9,854,116 152,634 202,741 210,006 168,482 200,432 18 785,9 53 396,591 3,738,818

4,325,877 4,412,581 4, 188,487 4,180,095

4,588,028 3,723,455 1, 1,71 658,349 3,183

17

Fauji Cement Limited Income Statement

Rupees ('000) 2003 Sales G profit Operating 1,510,738 756,059 ('000) 2002 1,586,605 398,707 ('000) 2001 1,575,603 307,202 237,677 807,855 564,955 570,455 1,286,284 ('000) 2000 1,696,590 522,887 482,080 763,905 273,973 282,973 1,173,293

profit 122,212 317,023 Financial 463,40 charges Loss tax Loss after tax Cost of sales 9 before 523,730 531,380 1,335,456 929,468 110,479 1,187,352 416,731

Mustehkum Cement Ltd Balance Sheet

Rupees million million million million

18

Year Equity Current liabilities Current assets Long term loans Fix assets Total liabilities Total asset inventory Trade debt

1998 123.22 1014.22

1999 123.22 916.048

2000 123.22 903.1789

2001 123.22 734.344

212.566 53.22 283.289 1015.74 498.855 180.236 30.447

216.056 183.88 314.655 1099.036 530.724 180.525 29.189

218.787 150.84 298.456 1053.213 513.023 160.426 25.468

240.112 82.46 200.146 816.750 456.256 150.524 23.129

Mustehkum Cement Ltd Income statement

Rupees

('000)

('000)

('000)

('000)

19

Year sales Other income Gross profit Operating expenses Operating profit Financial charges Pre tax loss Tax After tax loss

2003 _ 9.422 _ 37.173 27.753 65.608 102.778 _ 102.778

2002 _ 1.905 _ 46.529 44.62 65.221 111.750 _ 111.750

2001 _ 2.277 _ 68.42 64.143 60.254 128.674 _ 128.674

2000 _ 19.796 _ 88.13 68.670 58.256 146.486 _ 146.486

Income statement Zeal Pak Ltd

Rupees year sales

('000) 2003 549.635

('000) 2002 581.300

('000) 2001 552.365

('000) 2000 568.123

20

Cost of sales Gross loss Operating expenses Operating profit Financial charges Pre tax loss Tax After tax loss

645.680 96.045 20.300 116.345 88.984 193.277 0.282 192.45

636.644 55.344 14.934 70.278 98.473 112.506 2.907 115.413

640.123 54.256 12.985 68.256 100.245 100.268 2.54 98.145

654.263 46.256 10.256 56.256 97.123 98.365 .658 97.865

Balance sheet Zeal Pak Ltd

Rupees Year Current

('000) 1998

('000) 1999 976.150 768.340

('000) 2000 973.475 751.560

('000) 2001 696.207 567.008

liabilities 1150.244 Current assets 834.942

21

Long loans

term 393.268 323.446 1146.572 1447.704 871.20 325.262 221.975 868.464 205.300 1139.360 1332.256 871.20 315.458 19.258 796.546 254.654 992.798 1265.345 871.20 316.258 105.687 567.34

Total assets 1197.368 Total liabilities Equity Inventory Trade debt Fix asset 1551.031 871.20 329.861 321.726 987.345

Financial leverage Ratio

To assess the extent to which the firm is using borrowed money different ratios are used. Ratio of different firms will now be analyzed.

Zeal Pak Limited

Year Debt-equity ratio 2002 1.72 2001 1.49 2000 1.37 1999 1.03

22

Long-term Debt to equity Ratio Total debt to asset ratio

0.45 1.25

0.37 1.13

0.23 1.05

0.29 0.90

The

debt

to

equity

ratio

is

computed

by

simply

dividing the debt of the firm including current liabilities by its share holder equity. The ratio of the year 2003 tells that for each one rupee of financing creditors are providing 72 paisa. Creditor generally like this ratio to be lower but this ratio is high enough even for previous three years. Total debt of the company is exceeding its total assets this is the sign of danger. Company is not in position to pay its debts in case of solvency. Long term debt to equity ratio of firm shows that the creditors are providing 45% of financing. The lower the ratio the higher the level of firm financing that is being provided caution by in the the share event holder and larger the creditor of outright losses. This ratio is

slightly higher so company is in position to pay its long term debts. Long term debt to assets ratio is derived by dividing the firm total debt by its total assets. The ratio serves a similar purpose to debt to equity ratio it highlights the relative importance of debt financing thus the debt to equity ratio of firm is 1.25 for year 2003 and 1.13 for the year 2002. This shows that the debt of the company exceeds it total assets. Company is in no position to pay its debt but in the year 1999 its ratio is .90 which means 90% of the total assets are financed by debts. The trends show that the percentage of debts in assets is

23

increasing company.

every

year

which

show

inefficiency

of

the

Mustehkum cement limited

Year Long-term Debt to equity Ratio Debt-equity ratio Total debt ratio to asset 2002 1.43 8.25 2.03 2001 1.48 8.93 2.07 2000 1.20 8.55 2.05 1999 .66 45 1.88

The debt to equity ratio of the firm and even the long term debt to equity ratio of the firm show that there debts is exceeding their assets. Long term debt to equity ratio reaches to 1.48 and debt to equity ratio is 8.25 in year 2002. But in year 2003 it slightly decreases. This is due to the reason the firm pays out its debts. Share holders are loosing.the total debts to asset ratio are also higher that is 100%.

Fauji cement limited

Year equity Ratio to Longterm Debt Equity to debt ratio Total debt ratio to asset 2002 .40 .37 .92 2001 .51 .49 .90 2000 .58 .53 .87 1999 .68 .56 .71

24

In case of Fauji cement it is calculated equity to long term debt ratio instead of debt to equity ratio as equity of the firm is lower than its debt. The ratio shows that is year 20003 40 % percent of the firm financing is done through equity where as 60 % debt is being used. One thing to be noted here is that this ratio is decreasing every year. The reason behind is that as the company operation is going in loss there for loss is added to the firms equity which results in decrease of firm equity. And decrease in nominator causes decrease in ratio. Same is the case with equity to long term debt ratio, but this ratio is lower than long term debt ratio but slightly whish means firm is relying heavily on the long term debt. Total debt to asset ratio shows that about 90 % of the firm asset are financed by debt is last two years where as in year 2000 $ 2001 it was 71 % and 81% respectively. This shows that in last two years it take more debt.

Analyzing liquidity Ratio

Liquidity ratios are used to measure firm ability to meet short term obligation. Analysts compare short term obligation to short term assets from these ratios, much insight can be obtained into the present cash solvency of the firm and its ability to remain solvent in the event of adversity.

Zeal Pak Limited

Year Current Ratio 2003 1.38 2002 1.27 2001 1.26 2000 1.22

25

Quick Ratio

1.34

1.10

1.11

1.09

Current ratio of zeal pak limited for the year 2003 is 1.38 this is higher than one to one ratio it means company is in position to pay its short term obligation. This ratio is increasing every year. Quick ratio of the firm in the year 2003 is 1.34. This means that company can even meet its short term obligation after deducting its relatively less liquid short term assets. This ratio is also increasing every year and there is much increase in last year. This is due to the fact that company ahs decrease its inventory level.

Mustehkum Cement Limited

Year Current Ratio 2003 .20 2002 .23 2001 .24 2000 .32

The current ratio of the Mustehkum limited shows that it is no position to meet its short term obligation, there for it is in much danger. The reason is obvious that firm 26

is not carrying out its operation from the last five years as advised by the Pakistan privatization commission.

Fauji Cement Limited

years Current Ratio Quick Ratio 2003 1.53 1.22 2002 1.47 1.10 2001 1.05 1.09 2000 .12 .09

The current ratio of Fauji cement limited is 1.53 in year 2003 whereas in year 2000 it was only .12 there is huge increase in this ratio which shows that company is approving its liquidity. From the last two years ratio of the firm, it can be seen that company is in position to meet its short term obligation. Firms quick ratio shows that after deducting its relatively less liquid assets firm can still pay its short term obligation.

Analyzing profitability ratio

Profitability ratios are of two types; those showing profitability profitability in in relation to sales and those showing relation to investment. Together, these

ratio the firms over all effectiveness if operation. Since the firms under analysis are not earning profits therefore loss margin ratios are calculated instead profit margin ratio.

27

Zeal Pak Limited

years gross profit (loss)margin operating profit(loss) margin Net profit(loss) margin Total asset turnover Return on assets 16% 10% 8% 9% .45 .50 .48 .57 (.35) (.29) (.30) (.26) (210) (.120) (.11) (.09) 2002 (.174) 2001 (.094) 2000 (.095) 1999 (.08)

Since Zeal pak is making loss, therefore gross loss margin is calculated by dividing gross loss to sales. The gross loss margin of the firm is increasing gradually and reached to 17 percent every year. This ratio indicates that the company is is producing loss its even product before at the 17% loss. So of company bearing deduction

operating, and other expenses; this means its cost of sales is very high, even higher than its sales. This is because in cement industry prices is set by mutual agreement of the producers so companies with higher production cost suffers losses. The trend of the ratio shows that gross loss margin is increasing which indicate that its cost of sales is increasing every year. Due to selling and administration

28

expenses its operating loss margin further increases; it calculated by dividing operating loss to sales but there is little increase in that which means company is incurring less operating expenses. which But is its net loss by margin is net significantly high, calculated dividing

profit after taxes with net sales. As the firm is paying it cost of funds it borrowed so due to interest expenses it further expense company because increases also is in & reaches to to net it 35 percent margin paying which means the company is loosing 35 paisa on each rupee of sales. Tax contribute loss loss is since tax enjoying Pakistan but expanse

if firm doesnt make profit tax is

calculated on sales which is .05% sales.

Mustehkum Cement Limited

years gross profit (loss) operating profit(loss) Net profit(loss) Total asset turnover

2002 _ 37.173 102.8 _

2001 _ 46.429 111.7 _

2000 _ 68.42 128.6 _

1999 88.13 146.4 _

29

Return on investment

Due

to

closure

of

its

operations,

firm

does

not

involve in selling its product. So profit margin cannot be calculated but it can be analyzed in terms of figure. Firm is enjoying losses which are transfer to the next year, with each year it is decreasing. On the basis of going concern it is running its business, therefore incurs some operational costs, there its operating loss increases. It is also paying its interest expenses on long term borrowed funds therefore net loss margin further increases. But there is gradual decrease in net loss with passage of each year. Firm will re start its operation, though at present its operation are closed but on the basis of going concern its account are not closed. It also to be noted here that company is still paying its debt and it never declare itself bankrupt.

Fauji cement limited

years gross profit (loss)margin operating profit(loss) margin Net profit(loss) margin (.34) (.26) (.36) (.16) .08 .19 .15 .i4 2003 .50 2002 .24 2001 .19 2000 .20

30

assets turnover Return on investment Return on equity

.93 11% 32%

.16 9.5% 42%

,29 !!% 45%

.33 5% 40%

Gross profit of the firm is gradually increasing each year from 20 % it has reached; to 50 percent in the last year it shows an increase of 100%.in the previous this ratio was significantly low but it is now improved. This ratio was low due to higher cost of production, so decrease in production cost can further increase this ratio. Surprisingly it is seen that gross profit margin of the firm has increased gradually but it operating profit margin had decreased. But this decrease was in the year 2003 only this is due to the reason that in year 2003 there was an amortization of deferred cost. Due to which its operational cost has increased, which resulted a decrease in operating profit margin. Since the firm earns loss therefore e net loss margin is calculated. As the company is using huge amount of debt, the cost of the borrowed money is high enough and it contributed to expense. Although this company is suffering from loss but it pay taxes, this tax is .05% to sales, this further increase the expense of the company. Hence company went into the loss and its net loss margin is 34% in year 2003. It means the company is loosing 34 paisa on each one rupee sale.

Efficiency ratio

31

Efficiency measured how effectively the firm is using its assets. It can be seen some aspects of efficiency ratio is closely related to liquidity analysis.

Zeal pak Limited

years Inventory turnover Receivable turnover 2003 1.96 2 2002 1.95 3 2001 2.03 5 2000 2.06 3

Receivable collecting its

turnover account

ratio

provides It is

insight

about by

quality of receivable and how successfully the firm is in receivable. calculated dividing receivable to annual net credit sales. The ratio tells that the number of times relievable have been turned into sales. The ratio of Zeal Pak Limited shows that it takes the almost typical twice sale a year converts its receivable Pak is into not cash. The lower the ratio shorter will be the time between cash as collection. converting Zeal 2 performing efficiently times receivable

into cash is not a good ratio company has tied up so much cash in its receivable. There is need to tighten the credit policy, times. sales so It with that is cash to It released can be used efficiently. Inventory turnover ratio of the Of Zeal Pak is also about 2 used determine how effectively firm is is computed Pak by is dividing not cost of its Zeal managing managing inventory.

inventory.

inventors efficiently and only twice a year it converted

32

its inventory into sales. There is need to improve this ratio. This will be helpful in releasing the cash tied up in the inventory. It also increases cost of sales.

CONCLUSION AND RECOMMENDATION Conclusion

Financial statement analysis focuses on one or more elements of a companys financial conditions or operating results. Researcher emphasizes following areas of inquiry, with varying degrees of importance. Short-Term obligations. Efficiency: Leverage: With which firm uses its assets The capital structure of the firm Liquidity: Ability to meet short-term

33

Operating minimizing

performance revenues

and and

Profitability: minimizing

Success

at

expenses

from

operating activities over the long run.

SHORT-TERM LIQUIDITY
Important four year ratios. measures have 2000 of short-term analyzed current 2003 The its liquidity the use have current have for of the last each by

years from

been t0

by

liquidity

Fauji

cement 60%.

assets assets

increased increased

approximately

companys

liabilities

remained high up till 1999 and did reduced for two years then again increases in 2002, as they have more short-term borrowings for the last year. much better than other two Fauji cement position is far firms under analysis. Fauji

cement can easily pay out its short term obligation out of its current liabilities. Zeal Pak limited current assets also show an increasing trend, but that is slow with respect to increase in current liabilities. Current liabilities have accelerated for the reason of more creditors, accrued expenses and other liabilities, even than company is in position to meet its short term obligations. Mustehkum cement liquidity position is not favorable as its operation is closed by the order of Pakistan privatization commission. It ahs its short term obligations as its is paying its short term debt principal payments

34

and

interest

payments

but

dont

have

resources

to

meet

short term obligations.

OPERATING PERFORMANCE AND PROFITABILITY

Fauji cement gross-profit margin has increased for the years 2003 at about 100 % rate. But in previous years its gross profit margin was significantly low, which results in very low operating profit margin and ultimately firm went into loss, as it was unable to meet its cost of debt. Although the gross profit margin of Fauji cement was 50 % in the year 2003 but still it suffers loss amortization of huge differed cast this year. Firm earn loss because its too much relied on debt and therefore incurred huge interest expenses, which resulted in net loss. In order to become a profitable venture firm need to decrease its cost of capital. Zeal Pak limited cost of production is so high even higher than its sale price. There fore it incurred gross loss, the loss margin of the firm reaches to 17% in the year 2003. Its operating expenses are relatively low than Fauji cement limited. But like Fauji cement its interest expenses are huge therefore incurred huge net loss, its net loss margin I increasing every year. Firm must cut off its cost of production and cast of capital in order to become a profitable venture. As Mustehkum Cement is not running its operation, it will start its operation in future but it is incurring its

35

operating

expenses

and

paying

its

interest

expenses.

Therefore its net loss margin is increasing every year.

Leverage
Leverage analysis of Zeal Pak Limited shows that in case of solvency firm is unable to pay its total debt, where as its long term debt to equity ratio indicates that it can pay easily pay its long term debt. Total debt of the firm exceeds its assets. This is due to consecutive loss earning of the firm. Leverage analysis of Mustehkum Cement Limited

indicates that it cannot pay its debt due to the reason that debts are exceeding its total assets. Leverage ratio of the Fauji Cement shows that shows that it is using heavy amount of debt. Its equity to long term debt ratio indicates that long term debt are about 60% of its equity. Where as its total debt is around 70 % of it total shareholder equity. Creditors of the firm like this ratio to be lower in future Fauji cement are in no position to get more loans. Its reliance on more loans results in higher interests expense and hence company went into loss.

Market analysis
The the cement industry in Pakistan uses two distinct

production processes, the 'dry' and the 'wet' process. Both processes use different types of kilns. In the wet process raw materials are fed into kiln in slushy form. As

36

it consumes more energy to raise the temperature of the kiln dry to the required levels it is costly. In is the low dry to process the ground raw materials are fed into the kiln in powder form therefore energy consumption raise the temperature to the required level. The cement industry in Pakistan faces two serious

threats: closure of units based on wet process, and poor cash flow rendering the units incapable of debt servicing due to increasing cost of electricity, furnace oil and imported craft paper used for cement packing. The cost of furnace oil alone has increased by nearly 100% in the last 15 months alone. With the increase in furnace oil the increase in electricity tariff has also become inevitable. Energy cost is a major component of total cost of production. It contributes at an average 40 to 45 percent towards total cost of cement production. Energy cost is even higher in case of those plants which use wet process. A cement plant based on wet process consumes 165 kg of furnace oil to produce one tone of clinker as compared to 85 kg of furnace oil used in dry process to produce the same quantity of clinker. Since cement plants use both furnace oil and electricity, any increase in the prices of these two products is detrimental to profitability of the industry. Ever since October 1995, however, there has been more than 60% increase in the price of furnace oil.

37

Recommendations
Researcher analyzed financial performance of the

selected firms in cement industry which are Fauji Cement Limited, Zeal Pak Limited and Mustehkam Cement Limited. All these firms are at present enjoying losses. During the last fiscal year ending June 30, 2003 the industry had suffered a loss of Rs. 88 million and it operated only at 66 per cent of the installed capacity. In comparison it earns net profit of RS 2000 million during current fiscal year. But the these past three firms are still in loss based on the financial statement analysis of these companies and from research researcher recommended following improvements to these firms, to government & to the general public.

Recommendation to firms
Since the industry faces a situation where sales price will be fixed by mutual consensus, the cost of production will be the most critical factor of profitability. As these firms are using traditional manufacturing process, therefore must change their production from Wet to Dry. Energy is a significant cost of production, as these firms are using furnace oil as fuel which cost them expensive so they must use coal as energy. Another significant cost component of production cost is packaging material. Cement is rarely sold in bulk in Pakistan - almost all cement sales are in four-ply paper

38

sacks. Cost of paper sacks has gone up by almost 90% since December 1994. Another significant component of cost decreasing cost of sales is handling efficiently inventory i.e. cost related to inventory if these firms improve their inventory turnover they can reduce cost of sales. High use of debt increases interest expense and danger of insolvency so there is need to decrease leverage. These firms must cut off administrative expenses to become a profit able venture. There is need to use resources at their optimal level. These companies must use their assets in efficient way to generate revenue, as their asset utilization rate is very low.

Recommendation to government
Government must privatize the firms, as it is seen that firms in public sectors are all incurring loss. Whereas firms in private sector are making profits At the current On must the also point inputs the look cement side, into manufacturers necessary energy case of and the are The

government have to take solid steps even to keep units in production. required government to steps cost. contain increasing the

providing

39

subsidy on freight to the exporters of clinker and cement. The prescription is to optimize capacity utilization. Instead of providing any relief in the budget, the sector was further penalized with a 3% increase in sales tax to 18% and an increase in excise duty to 35%. Reduction in price of cement can reduce profit margins of all the units. Therefore government must provide tax rebate to cement industry Government must cot off direct taxes on cement

industry that are being charged, in case loss, on sales.

Recommendation to general public

It is recommended to general public that investment in the securities of these firms is not risk free.

40

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