FINANCIAL STATEMENT ANALYSIS

FINAL PROJECT

TOPIC: FINANCIALRATIO ANALYSIS

OF MR. DENIM (PVT.) LTD.

SUBMITTED TO: MR. UMAR SAFDAR KAYANI

SUBMITTED BY: WAQAS SHABBIR

SP08-MBA-
098

ZOHAIB AFTAB
SP08-MBA-
100

SUBMISSION DATE: MAY29, 2009

SECTION “B”
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 RATIO ANALYSIS
Financial ratios are useful indicators of a firm's performance and
financial situation. Most ratios can be calculated from information
provided by the financial statements. Financial ratios can be used to
analyze trends and to compare the firm's financials to those of other
firms. In some cases, ratio analysis can predict future bankruptcy.
Financial ratios can be classified according to the information
they provide. The following types of ratios frequently are used:

LIQUIDITY RATIOS

Current Ratio Current Assets/Current Liabilities

Quick Ratio Quick Assets/Current Liabilities

Absolute Quick Ratio Cash/Current Liabilities

Net Working Capital

Ratio Current Assets-Current Liabilities

Defensive Interval Cash/One Year Projected Expenditure

ACTIVITY RATIOS

Inventory Turn Over Cost of Good Sold/Inventory

Inventory Turn Over In 360*Inventory/Cost of Good Sold

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Days

Debtor Turnover Sales/Trade Debtor

Collection Period 360*Receivable/Sale

Working Capital
Turnover Sales/Working Capital

Fixed Asset Turnover Sales/Fixed Assets

Total Asset Turnover Sales/Total Assets

Payment Period 360*Creditor/Purchase

Inventory Turn Over in Days + Receivable Turn

Operating Cycle Over in Days

SOLVENCY RATIOS

Times Interest Earned EBIT/Interest

Debt Ratio Total Debts/Total Assets

Equity Ratio Equity/Total Assets

Debt to Equity Long term debts/Equity

Debt To tangible net

worth Total Debts/(Equity-Intangible Assets)

PROFITABILITY
RATIOS

Net Profit Ratio Net Profit/Sale

Operating Profit Ratio Operating Profit/Sales

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Gross Profit Ratio Gross Profit/Sale

Operating Ratio Operating Expense/Sale

Return on Total Assets Net Profit/Total Assets

Return on Equity Net Profit/Equity

Return on Fixed Assets Net Profit/Fixed Assets

Net Profit/Total Assets-Investments-Deferred

Return on Investment Cost

MARKET ANALYSIS

Degree of Financial
Leverage EBIT/EBT

Price Earning Ratio Market Price per share/Earning Per share

Earning Per Share Net Profit/Number of Share issued

Book Value Per Share Total Equity/Number of Share issued

Dividend Yield Ratio Dividend Per Share/Market Value Per Share

Dividend Payout Ratio Dividend Per Share/Earning Per Share

Diluted Earning Per Stock Dividend Per Share/Diluted Earning Per

Share Share

Percentage of Retained
Earnings (Total Income-Dividend)/Total Income

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LIQUIDITY RATIOS

Liquidity ratios provide information about a firm's ability to meet its

short-term financial obligations. They are of particular interest to those
extending short-term credit to the firm. Two frequently used liquidity
ratios are the current ratio (or working capital ratio) and the quick
ratio.

Items Required in Liquidity Ratio:

 Current Assets
 Current Liabilities
 Inventory
 Cash
 Marketable Securities

CURRENT RATIO

Current Assets
Current Ratio =
Current Liabilities
QUICK RATIO

Current Assets - Inventory

Quick Ratio =
Current Liabilities

CASH RATIO/ ABSOLUTE LIQUID RATIO

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 Cash + Marketable Securities
Cash Ratio =
Current Liabilities

WORKING CAPITAL RATIO

Net Working capital Ratio=Working Capital/Total Assets

LIQUDITY ANALYSIS
RATIOS YEARS RESULTS REASON OF
CHANGE
2007 2006
CURRENT RATIO 1.12 1.03 Favorable Increase in Book
Debts, A/R and
Cash.
QUICK RATIO 0.86 0.68 Favorable Increase in Book
Debts, A/R and
Cash.
ABSOLUTE RATIO 0.05 0.012 Favorable Increase in Cash
WORKING 76,852,450 12,523,260 Favorable Increase in
CAPITAL current assets
NEW WORKING 0.067 0.01367 Favorable Increase in
CAPITAL RATIO working capital
by 513.67 %.

INTERPRETATION OF LIQUIDITY RATIOS

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After the Liquidity Ratio Analysis of MR. Denim I considered the
liquidity of Denim is improved as compare to its previous year and it
gives favorable results. Short-term creditors prefer a high current ratio
since it reduces their risk because less the current liabilities and higher
the current ratio which means less the accounts payables and short
term liabilities hence short term creditors will be paid soon.

Liquidity analysis of MR. Denim shows positive results. The contribution

of highly liquid assets is very much encouraging because increase in
cash is 422.5%. Increase in cash will also helpful for the company to
maintain the business operations effectively by paying the supplier in
time and get benefits of discounts. It will also enhance the credibility of
the company, which further helpful for the suppliers and customer’s
attraction Inventories are decreased by 2.05%. Decrease in inventory
means there are less produced goods for satisfying the customers,
which ultimately cause of decrease in sales of company. Account
Receivables and Book Debts are increased by 48% and 78 %, which
means the net sales of the company this year is increased because of
that cash in hand, is increased 422.5 % compared to last year.
One drawback of the current ratio is that it includes inventory is
difficult to liquidate quickly and that have uncertain liquidation values.
The quick ratio is an alternative measure of liquidity that does not
include inventory in the current assets.

Finally, the cash/Absolute Liquid ratio is the most conservative liquidity

ratio and the cash ratio of MR. Denim is improved very much as
compared to base year. The reason is sufficient increase in cash in

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hand. This healthy increase in ratio result will assure that MR. Denim
can be paid its suppliers any time if needed urgently.

Working Capital of MR. Denim is also increased by 513.67 % as

compare to base year, which is also a good sign, and show that
company has enough capital to maintain its business operations. This
will also produce the credibility among suppliers and customers of the
company. Overall Company has a good strong current asset ratio and
also maintained quick ratio along with the healthy working capital so
liquidity of MR. Denim (PVT) Limited is in better position.

ACTIVITY RATIOS

Activity ratios indicate of how efficiently the firm utilizes its assets.
They sometimes are referred to as efficiency ratios, asset utilization
ratios, or asset management ratios.

Items Required in Activity Ratios:

 Annual Sales
 Purchases
 Accounts Receivable
 Accounts Payable
 Net Fixed Assets
 Total Assets

ACCOUNT RECEIVABLES TURNOVER

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 Annual Credit Sales
Receivables Turnover =
Accounts Receivable

AVERAGE COLLECTION PERIOD

360
Average Collection Period =
Accounts Receivable Turnover

ACCOUNT PAYABLE TURNOVER

Purchases
Account Payables Turnover =
Accounts Payables

AVERAGE PAYMENT PERIOD

360
Average Payment Period =
Accounts Payable Turnover

FIXED ASSET TURNOVER

Sale
Fixed Asset Turnover =
Net Fixed Asset

TOTAL ASSET TURNOVER

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 Sale
Total Asset Turnover =
Total Assets

ACTIVITY ANALYSIS
RATIOS YEARS RESULTS REASON OF
CHANGE
2007 2006
INVENTORY 6.20 4.68 Favorable Decrease in
TURNOVER Times Times Inventory more as
compare to CGS
INVENTORY 58 77 Favorable Decrease in
TURNOVER IN DAYS Days Days Inventory more as
compare to CGS
DOBTORS 4.32 6.03 Unfavorable Increase in sales by
TURNOVER 27.10%
COLLECTION 84 58 Unfavorable Increase in sales by
PERIOD Days Days 27.10%
CREDITORS 32 20.03 Favorable Creditors decreased
TURNOVER by 20.82.
PAYMENT PERIOD 11 18 Favorable Creditors decreased
Days Days by 20.82.
FIXED ASSETS 2.58 2.18 Favorable Increase in Fixed
TURNOVER Assets by 4.02%
TOTAL ASSETS 0.90 0.88 Favorable Increase in Total
TURNOVER Assets by 24.41%.
WORKING CAPITAL 13.43 65 Unfavorable Working capital
TURNOVER RATIO Times Times increased by
513.67%

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OPERATING CYCLE 142 135 Unfavorable High average
Days Days collection period.

INTERPRETATION OF ACTIVITY RATIOS

Activity ratios are also known as efficiency or turnover ratios, measure

how effectively and efficiently the firm is utilizing its assets. Activity
ratios are also known as management ratios. Some of the aspects of
activity analysis are closely related to liquidity analysis. In this
session we will primarily focus on how effectively the firm is managing
two specific groups receivables and inventories and its total assets in
general.

Management of MR. Denim Limited is very efficient to operate its fixed

assets and overall efficiency of management has gone better as
compared with base year. Total assets, current assets, fixed assets;
working capital and cash all are increased with decent percentage,
which gives the proof of efficient management. Overall management
has been very successful in deploying its resources for the best of
company, which will definitely contribute to higher profits for company.

Also management is very much efficient to pay its payables because

average collection period is higher than average payment periods which
mean management can use idle funds. Higher collection period shows
too liberal and inefficient credit collection performance and a lower
payment period shows in time payments to various stakeholders and

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built repute about the company among its stakeholders. Less inventory
period will also helpful for the company to increase its sales volume.

SOLVENCY RATIOS

The solvency ratios measure business risk, which shows the ability if
the business to pay its long term debts. Investors are very interested
in these ratios because they indicate the amount of debt your company
can handle. They also indicate the amount of investment you have in
your company

Items Required in Solvency Ratio:

 EBIT
 Interest Expense
 Total Debts
 Total Assets
 Net Profit
 Equity

TIMES INTEREST EARNED

EBIT
Times Interest Earned =
Interest Expense

DEBT RATIO

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 Total Debts
Debt Ratio =
Total Assets
EQUITY RATIO

Equity
Equity Ratio =
Total Assets

DEBT TO EQUITY RATIO

Total Debt
Debt to Equity Ratio =
Equity

SOLVENCY ANALYSIS
RATIOS YEARS RESULTS REASON OF
CHANGE
2007 2006
TIME INTEREST 1.61 1.01 Favorable Increase in profit
EARNED margin
DEBT RATIO 0.626 0.636 Favorable Increase in total
assets by 24.41 %
PROPERITY/EQUITY 37.35% 36.1% Favorable Increase in equity
RATIO by 28.7% & Total
Assets by 24.41%
DEBT TO EQUITY 1.678 1.76 Favorable Increase in Equity
RATIO by 28.7%

INTERPRETATION ON SOLVENCY RATIOS

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Solvency Analysis of MR. Denim (PVT) Limited is favorable because all
the ratios provided the favorable result which is a good strong and
positive indication towards firm’s ability to fulfill its long-term debts.

Time interest earned ratio shows that although financial cost is

increased but Earning before interest and tax increased by 28.58%
which means management has utilized the debt funds efficiently which
produced high profits and hence percentage of earnings through debts
are more than percentage of financial cost (interest payable) which is
14.8%.

Debt ratio is also decreased which is favorable for the company

because it means less contribution of external debts in business and
ultimately less interest will be paid and hence more profits will be
achieved. Result also shows that total equity of the company has
increased with 28.7% and total debts reduced by 4.3% which is also a
good sign for the company and it means that most of the working of
the company is done by equity rather than to use of external debts
which also reduced the fixed cost and financial burden on company. It
also indicates that more percentage of the assets is being financed by
owner’s equity. Company’s current liabilities also increased by 32.7 %
but long term liabilities (loans) has decreased by 28.7% which is a
major contribution and because of this financial cost of business is
decreased. Company should try to reduce its current liabilities.
Although current year debt ratio result is favorable but this is because
of increase in current liabilities. Company’s Long Term debts paying
worth/ability is also improved.

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PROFITABILITY RATIOS

Profitability ratios offer several different measures of the success of the

firm at generating profits.

Items Required In Profitability Ratios:

 Sales
 Cost of Goods Sold
 Net Profit
 Total Assets
 Shareholder’s Equity

GROSS PROFIT MARGIN

Sales - Cost of Goods Sold

Gross Profit Margin =
Sales

OPERATING PROFIT MARGIN

Operating Profit
Operating Profit Margin =
Sales

NET PROFIT MARGIN

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 Net Profit After Tax
Net Profit Margin =
Sales

OPERATING RATIO

Operating Expenses
Operating Ratio =
Sales

RETURN ON ASSETS

Net Income
Return on Assets =
Total Assets

RETURN ON EQUITY

Net Income
Return on Equity =
Shareholder Equity

RETURN ON INVESTMENT

Net Income
Return on Investment =
Investment

RETURN ON FIXED ASSET

Net Income
Return on Fixed Asset =
Fixed Assets

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 PRIFITABILITY ANALYSIS

RATIOS YEARS RESULTS REASON OF

CHANGE
2007 2006
NET PROFIT RATIO 9.18% 9.4% Unfavorable N.P increased
with less % as
compare to sales
GROSSPROFIT RATIO 22.12% 22.8% Unfavorable G.P increased
with less % as
compare to sales
OPERATING PROFIT 9.23% 9.77% Unfavorable O.P increased
RATIO with less % as
compare to sales
OPERATING RATIO 12.88% 13.02% Favorable Increase in sales
by 27.10%.
RETURN ON 8.32% 8.33% Unfavorable N.P increased
TOTALASSETS with less % as
compare to Total
Assets
RETURN ON EQUITY 22.3% 23% Unfavorable N.P increased
with less % as
compare to
Equity
RETURN ON FIXED 23.76% 19.88 Favorable Increase in fixed
ASSETS assets by 4.02%

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INTERPRETATION ON PROFITABILITY RATIOS

After calculating all the ratios of Profitability of MR. Denim I considered

that profitability of the company is in unfavorable condition.
Profitability is a tool to check the final outcome of the firm. As ratios
include in Profitability are calculated by use of Sales and profits also it
includes ROA, ROI and ROE ratios that’s why potential customers,
investors, creditors, Govt., owner and even all of the stakeholders of
the company have shown their deep interest in Profitability analysis.

The company’s profitability analysis shows the Unfavorable result. The

main reason of favorable condition is Increase in GP, NP, and OP with
less percentage as compare to sales in the comparative years.
Company also earns profit but comparing to its base year this profit is
decreased. This decrease in ratios is also because of increase in admin
and selling expenses. Inefficient utilization of resources is also one
reason of unfavorable results. Return on equity and total asset is also
decreased which may damage the credibility of the company.

Trend Analysis
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 “The analysis of the changes in a given item of information
over a period of time or a comparative analysis of a
company's financial ratios over time”

Trend analysis is basically used to determine the trend of the firm. It

provides trend of items involved in Income statement and Balance
Sheet. E.g. how much percentage of sales is increased this year
comparing to base year. Considering these trends in mind management
takes the future decisions. Trend analysis is not only useful for
management but also for potential investors of the company who can
evaluate the performance of the company by comparing with previous
years performance. Basically there are two types of Trend analysis,
which are:

1. Horizontal Analysis

2. Vertical Analysis (Common size Financial

Statement)

Horizontal Analysis 19

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Horizontal analysis is basically compares horizontally the items of
income statement and balance sheet with previous years keeping one
base year as 100%. At least four years data is required for conducting
Horizontal Trend Analysis. When an analyst compares financial
information more than three years for a single company, the process is

referred to as HORIZONTAL ANALYSIS.

In Horizontal Trend Analysis the analyst computes percentage changes

from year to year for all financial statement items, such as cash and
inventory. Trend analysis involves calculating each year's financial
statement balances as percentages of the first year, also known as the
Base year. When expressed as percentages, the base year figures are
always 100 percent, and percentage changes from the base year can
be determined.

As we know that minimum four years data is required to conduct the

Horizontal Trend Analysis of a company, so here this analysis could not
be performed due to unavailability of financial data.

Vertical Analysis
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Vertical Analysis is basically vertically analyze or compare the items
include in Income Statement and Balance Sheet. Mainly one of the
item is consider as base and keep that item equal to 100 all the
remaining items are divided by that base and evaluating the answers.

In VERTICAL ANALYSIS analyst uses base of income statement is

net sales revenue, while in balance sheet it is total assets. This
approach to financial statement analysis, also known as component
percentages, produces common-size financial statements.
Common-size balance sheets and income statements can be more
easily compared, whether across the years for a single company or
across different companies. Vertical Analysis requires minimum two
years data.

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 Vertical Analysis of MR. Denim’s INCOME
STATEMENT

FACTOR 2006 2007 SPEED DIRECTION RESULT

Sales 100 100

Unfavorable
C.G.S 77.2 77.88 (0.68) Upward
Unfavorable
Gross Profit 22.8 22.12 (0.67) Downward
Unfavorable
Selling Expense 3.98 4.04 0.066 Upward
Favorable
Admin Expense 3.18 2.77 (0.40) Downward
Unfavorable
Operating Profit 9.78 9.23 (0.54) Downward
Other Operating
0.41 0.86 0.45 Upward Favorable
Income
Profit Before
15.63 15.3 (0.33) Downward Unfavorable
Interest & Tax

Financial Cost 5.85 6.07 0.22 Upward Unfavorable

Profit Before Tax 10.2 10.1 (0.1) Downward Unfavorable

Tax 0.8 0.91 0.11 Upward Unfavorable

Net Income 9.4 9.12 (0.21) Downward Unfavorable

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Vertical Analysis of MR. Denim’s BALANCE SHEET

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 ITEMS 2006 2007 SPEED DIRECTION RESULT

CURRENT ASSETS

Cash
0.65 2.73 2.08 Upward Favorable
Prepayments,
Advances and 20.8 24.81 4.01 Upward Favorable
Deposits
Book Debts 14.71 21 6.28 Upward Favorable

Stock in Trade 14.61 11.50 (14.05) Downward Unfavorable

Stores and
3.63 3.3 (0.33) Downward Unfavorable
Spares
Total Current
54.41 63.33 8.92 Upward Favorable
Assets

FIXED ASSETS
Property, Unfavorable
Plant and 41.11 32.81 (0.83) Downward
Equipment
Fixed Assets Subject Favorable
To Finance 0.76 2.21 1.45 Upward
Lease
Capital Work in
2.45 1.46 (0.98) Downward Unfavorable
Progress
Total Fixed
44.33 36.49 (7.84) Downward Unfavorable
Assets
Long Term
1.24 0.17 (1.07) Downward Unfavorable
Deposits
TOTAL ASSETS 100 100 - - -

EQUITY

Share Capital 1.91 1.54 (0.37) Downward Unfavorable

Un-appropriated
34.18 35.8 1.62 Upward Favorable
Profit

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Total Equity 36.1 37.34 1.24 Upward Favorable

NON CURRENT LIABILITIES

Long term Loans 10.58 6.08 (4.52) Downward Favorable

CURRENT LIABILITIES
Short term
46.61 55.05 8.44 Upward Unfavorable
Borrowings
Long term
4.01 0 (4.01) Downward Favorable
financing
Trade & Other
2.41 1.53 (0.87) Downward Favorable
payables
Current
53.04 56.6 3.55 Upward Unfavorable
Liabilities

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