Introduction

We have given a case study of awami super market to analyze his performance over three years. Some ratios have been calculated from its income statement and balance sheet which is listed below:

INCOME STATEMENT
Rs Million Rs Million Rs Million

2003
Sales Cost of Goods Sold Rs1,200 Rs 720

2004
Rs 1,280 Rs 780

2005
Rs 1,540 Rs.942

Gross Profits
Other Operating Income

Rs.480
Rs.0 Rs.180 Rs.108 Rs.72

Rs.500
Rs.0 170 128 Rs.72

Rs.598
Rs.0 Rs.165 Rs.164 Rs.84

Less: Operating Expenses:

Marketing Overheads Administrative Overheads Financial Overheads

Total Operating Expenses Operating Profits(Profit before Tax)

Less: Corporation Tax

Rs.360 Rs.120
Rs.48

Rs.370 Rs.130
Rs.52

Rs.413 Rs.185
Rs.74

Net Profits After Taxes

Add: Retained Earnings brought forward

Rs.72
Rs.8

Rs.78
Rs.30

Rs.111
Rs.44

Net Profit after appropriation

Taxes

Profit

available

for Rs.80
Rs.50

Rs.108
Rs.75

Rs.155
Rs.122

Less: Dividends

Retain Earnings Carried Forward

Rs.30

Rs.33

Rs.33

BALANCE SHEET
2003 2004
Cash and Bank Balances Accounts Receivable Inventories Rs.60 Rs.50 Rs.240 Rs.0 Rs.80 Rs.300

2005
Rs.0 Rs.126 Rs.440

Total Current Assets Gross Fixed an Long term Assets (at cost):
Vehicles, Furniture & Fitting & Equipment Land and Building

Rs.350
Rs.314 Rs.336

Rs.380
412 Rs.618

Rs.566
Rs.496 Rs.982

Total Gross Fixed and Long Assets

Less: Accumulated Depreciation

Rs.650
Rs.0

Rs.1,030
Rs.0

Rs.1,478
Rs.0

Net Fixed Assets and Long Assets

Rs.650

Rs.1,030

Rs.1,478

Total Assets
Current Liabilities:
Trade payables purposed dividend (mark up accrued) Bank Over Draft 15% Corporation Tax

Rs.1,000
2003
Rs.80 Rs.50 Rs.0 Rs.40

Rs.1,410
2004
Rs.120 Rs.75 Rs.40 Rs.42

Rs.2,044
2005
Rs.265 Rs.122 260 Rs.64

Total Current Liabilities

11% Callable Preference Shares 12% Debenture Paid up Share Capital(Rs 10 ordinary shares) Retained earnings (Accumulated profit/loss)

Rs.170
Rs.0 Rs.600 Rs.200 Rs.30

Rs.277
Rs.200 Rs.600 Rs.300 Rs.33

Rs.711
Rs.200 Rs.700 Rs.400 Rs.33

Total Stockholders' Equity

Number of supermarkets, at the end of year

Rs.230
80

Rs.333
100

Rs.433
130

Total Liabilities

Rs.1,000

Rs.1,410

Rs.2,044

Solution of 1st question

1. Pricing policy 40.00% 3.00 4 Months Gross Profit as % of Sales= GP/sale*100 2003 2004 39.06% Rate of Stock Turnover= GP/CGS*100 2003 2004 2.60 2005 38.83%

2005 2.14

Average Stock Retention Period= Average stock*period/CGs 2003 2004 2005 4.15 Months 4.7 Months

These ratios show us the pricing policy of this company. Due to increase in the fixed assets they have to increase their GP margin but here it is decreasing due to increase in the direct expenses of the company which is loss for them. They have to increase their gross profit margin to get desire profit.

2. Expansion Strategy

 100

% increase in Total Assets= Current T. Assets - Last Year T. Assets Last Year's Total Assets 2003 2004 2005 41 44.9 % increase in Fixed Assets= Current Year F. Assets - Last Year F. Assets
Last Year's F. Assets 2003 2004 58.46 2005 43.49

100

The total assets increased for second year by 41% and this figure goes to 44.9% for the year three that shows the they have invested to the assets more in the last year. But when calculated the % increase in Fixed Assets ratio we come to know that the fixed assets are increased by 58.46 in second year and 43.49 in third years which shows that they have invested in fixed assets. 3. CREDIT CONTROL Debtor Turnover Rate= Total cr. Sale/ Total Debtor 2003 2004 4.8 3.9

2005 2.99

Debtor Turnover Rate is decreasing which shows that inflow of cash is decreasing.
2.5

Average Credit Allowed Period= Trade debtor*period/Total Cr. Sale 2003 2004 2005
3.0 4.01

Average Credit Allowed Period is increasing over the every year which shows that they dont get cash in the company because they give much time to give back their money.

4. STOCK CONTROL
3.00 Rate of Stock Turnover= Cost of sale/ A. stock 2003 2004 2.60 2005 2.14

Average Stock Retention Period= A. stock *period/total cost of sale 2003 2004 4.15 Months 2005 4.7 Months

4 Months

Rate of stock turnover ratio is decreasing year to year it shows that their cost of sale is increasing which leads to low rate of stock turnover. They are not efficient in their sales. And Average Stock Retention Period is increasing which shows that they cannot manage
to get their money on time from their customers.

5. RETURN ON CAPITAL EMPLOYED

12.7 Return on Capital Employed= EBIT/Capital Employed*100 2003 2004 10.09

2005 12.21

In second year it decreased and then again increased to 12.21. It can be due to increase and decrease in tax. In 2nd year it has not well used its long term loan but in 3rd year they improved. 1. Return on Equity= NP/ Equity 2003 34.78% 32.43%

2004 35.80%

2005

This ratio shows the profitability of company by the share holders point of view. In second year the profit was very low but in 3rd year it has increased to 35.85% which is good for share holder.

2. Return on Assets= NP/ Total Asset 2003

8.00% 7.66%

2004
7.58%

2005

This ratio shows that how well your company is using its asset to generate profit. So it is constantly decreasing which shows that they are not using their assets well.

Solution of 2nd question

1. Capital structure
Paid up Share Capital(Rs 10 ordinary shares) Retained earning (Accumulated profit/loss) Rs.200 Rs.30 Rs.300 Rs.33 Rs.400 Rs.33

Total Stockholders' Equity 11% Callable Preference Shares 12% Debenture

Rs.230 Rs.0 Rs.600

Rs.333 Rs.200 Rs.600

Rs.433 Rs.200 Rs.700

Ratios Formula for Calculation

Equity as % of Capital Employed/Equity * 100/Total Capital Employed Borrowed Capital as % of Capital Employed= Total Borrowed Capital * 100/ Total Capital Employed Debt To Equity Ratio= Capital Gearing Level= CWFR / CWVR/ Debt : Equity

CWFR * 100/Total Capital Employed

Interest Cover Rate= Interest Expense/Net Profit before Interest Fixed Assets as % of Capital Employed= Average Fixed Assets * 100/ Capital Employed Working Capital as % of Capital Employed= Working Capital * 100/ Capital Employed

Results
Equity as % of Capital Employed 27.7% 29.39% 32.48%

Borrowed Capital as % of Capital Employed 72.3% 70.60% 67.52% 47.2 67.51% 49.2 94.07%

Debt To Equity Ratio 43.5 42.3 Capital Gearing Level 72.3% 70.60% Interest Cover Rate 50 51.4

Fixed Assets as % of Capital Employed 78% 90.9%

Working Capital as % of Capital Employed 22% 9.09% -10.9%

This Company has most of its finance by borrowing capital which is 65% to 70 % of capital employed. So there is a high risk of company liquidation due to failure to pay off creditors. Secondly this company is highly geared company & its gearing ratio is also high. The increase in the company equity was due to right issue of the shares and not by floating the shares. Fixed Assets as % of Capital Employed Percentage of fixed asset as a % of capital employed is more than working capital as a % of capital employed. This means what so ever amount is brought into the company is invested by the management in fixed assets due to which working capital of the company is negative or very low .for this company can take following steps. Company should invest less amount of capital employed in fixed assts. They should reduce the percentage of capital employed invested on the fixed asset up to 55% & remaining 45% can be used in working capital in order to make it positive. DIVIDEND POLICY Ratios Formula for Calculation

Dividend Declared * 100 Dividend Declared as a % of Profit after Tax Net Profit after Tax Net Profit after Tax & Preference Dividend Ordinary Dividend Declared

Dividend Cover For Ordinary Shares

Ratios
Dividend Declared as a % of Profit after Tax Dividend Cover For Ordinary Shares

2003
Rs.69 Rs.2 Rs.96 Rs.1

2004
Rs.110 Rs.1

2005

As company is in its initial stages of development so it is necessary to retain a larger part of profits in the business to help it grow. Company declared large portion of its net profit after tax as dividend that is sign of pleasure for the shareholders but as company is in its initial stages & it need to make investment in its fixed assets, it should declared only 25% of its net profit after tax as dividend for next 3 years at least and remaining 75% of net profit after tax can be reinvested. This will help the company also in making the working capital positive and making more investment in fixed assets and in working capital through retained earnings. The positive side of this strategy could also be that as the company declares large portion of its net profit as dividend so because of that the market price of the shares will increase and whenever company wants to issue new share that can be easily sold on premium.

WORKING CAPITAL CONTROL Ratios

Current Ratio in number

Formula for Calculation

Current Assets Current Liabilities

Quick Ratio or Acid Test Ratio Debtor Turnover Rate

Quick Assets: Current Liabilities Total Annual Credit Sales Average Trade Debtors Trade Debtors * No. of months/weeks/days in a year Total Annual Credit Sales Credit Purchases Trade Creditors Average Trade Creditors * No. of months/weeks/days in a year Total Annual Credit Purchases Annual Cost of Sales Average Stock Average Stock * No. of months/weeks/days in a year Total Annual Cost of Sales

Credit Allowed Period

Creditor Turnover Rate

Average Credit Received Period

Rate of Stock Turn over Average Stock Retention Period

Ratios
Current Ratio in number Quick Ratio or Acid Test Ratio Debtor Turnover Rate

2003
2.06 0.65 4.8 times 1.37 0.29

2004
0.80 0.18 3 times

2005

3.93 times 3.04 months 7.8 times 1.53 times 2.60 4.15 Months 51.42857143

Average Credit Allowed Period Creditor Turnover Rate Average Credit Received Period Rate of Stock Turn over Average Stock Retention Period

2.5 months 9 times 1.33 times 3.00 4 Months 60.00

4.02 months 4.89 times 2.45 times 2.14 4.7 Months 88.17005545

Average Payment Period Average Collection Period

15.00

22.50

29.45

2. Working Capital Control: In the first year of the companys operation its working capital was positive that can be seen by the current ratio of 2.05 which means that working capital was positive in that year. In the 2nd year it was also positive but it was low as compare to the previous years. And finally in the 3rd year working capital become less than one. All this happened due to the loose credit policy. Company was not good in collection debts from debtors but is good enough in making payments to the creditors. On the other side the rate of stock turnover is has been decreased during last years.

Solution for question no 3

Operating leverage

DOL = Op+ FOE/Op 2003

4 3.8

2004
3.5

2005

This ratio shows that this company has operating leverage of 4 times, 3.8 times and 3.5 times which means that if that increase their sale 1 % their profit will increase 4 times, 3.8 times and 3.5 times respectively. So it can be a way for increasing profit because it is an edge for this company. Financial leverage

DFL = EBIT/NP 2003

1.5 1.2

2004
1.19

2005

This ratio shows that this company has following financial leverage. It means tht if EBIT of this company is increased by 1 % its NP will increased by 1.5 times, 1.2 times & 1.19 times. According to its capital structure and performance their CGs are very high which is one of the cause of the low profit. Its pricing policy is not better. They have above 70

% of their capital is borrowed because of which they are highly geared and highly leverage company as you can see in the above table. So they are not using it properly. They should increase their sale up to their maximum fixed expenses. Or if they cant then they should try to decrease their loans and issue shares to the public. Secondly their fixed assets are very high in contrast to current assets. They should increase their current assets in order to increase their working capital of the company. They can reduce the average stock retention period by increasing the stock turnover rate. They can strict their credit policy & reduce their average credit allowed period. They need to increase their credit received period in order to reduce the working capital cycle low.

Solution for Question No. 4