Dh Chemicals

Analysis of Financial Statements DH Chemicals

2005-06

Prepared by: Zeeshan Adeel FA07-MBA-095

COMSATS Institute of Information Technology, Lahore

Financial Statements Analysis-DH Chemicals 2005-06

MANAFUCTURERS OF BUBBER SHER UREA FINANCIAL ANALYSIS OF ANNUAL REPORTS 2005-06

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Financial Statements Analysis-DH Chemicals 2005-06

I dedicate this report to Mr. Adnan Sheikh whose kind guideness has enabled me to complete this project.

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Financial Statements Analysis-DH Chemicals 2005-06

Table of Contents

Short term solvency ratios/liquidity ratios.................................... 1)Current Ratio.................................................................................................................. 2)Quick Ratio..................................................................................................................... 3)Cash Ratio...................................................................................................................... Long Term Solvency Ratios/Leverage Ratios................................................................... 1)Total Debt Ratio............................................................................................................. 2)Debt to Equity Ratio....................................................................................................... 3)Equity Multiplier............................................................................................................ 4)Interest Coverage Ratio.................................................................................................. 5)Cash Coverage Ratio...................................................................................................... Asset Management Turnover Ratios................................................................................. 1)Inventory Turnover Ratio............................................................................................... 2)Receivable Turnover Ratio............................................................................................. 3)Payable Turnover Ratio.................................................................................................. 1)Total Asset Turnover Ratio............................................................................................ 2)Capital intensity Ratio.................................................................................................... Profitability Ratios............................................................................................................... 1)Gross Profit Margin........................................................................................................ 2)Net Profit Margin........................................................................................................... 3)Return on Assets............................................................................................................. 4)Return on Equity............................................................................................................ 5)Earning per share............................................................................................................ 6)Book value per share...................................................................................................... ANALYSIS........................................................................................................................

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Financial Statements Analysis-DH Chemicals 2005-06

DAWOOD HERCULES Chemicals Limited Below is the ratio analysis of Dawood Hercules Chemicals Ltd. for the year 2005-2006.

Ratio Analysis of company report (2005-06) Short term solvency ratios/liquidity ratios 1)Current Ratio: Current Ratio =

Current assets = 8510130313 = Rs. 1.28

(2006) Current liabilities Current Ratio =

6671654086

Current assets = 6363623494 = Rs. 1.90

(2005) Current liabilities

3344830791

Industry Average: 2006 1.54 2005: 1.62 Analysis: The current ratio has decreased by Rs.0.62 in 2006 as compared to 2005.This ratio has decreased because current liabilities have increased at a higher rate as compared to the current assets. The firm’s short term borrowings have increased. But still it has Rs. 1.28 of current assets to pay Rs 1 of current liabilities. Simply to say the firm’s liquidity position is fair. The current ratio was higher in 2005 than the industry average but it fell below industry average because the firm’s borrowings have increased significantly in 2006 as compared to the rest of the firms in the industry. COMSATS Institute of Information Technology, Lahore.

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Financial Statements Analysis-DH Chemicals 2005-06 2)Quick Ratio: Quick Ratio =

Current assets-Inventory =

(2006) Quick Ratio =

Current liabilities

6671654086

Current assets-Inventory =

(2005)

8510130313 -237295434 = 1.24

6363623494-164432448 = 1.85

Current liabilities

3344830791

Industry Average: 2006: 0.92 2005: 0.87 Analysis: The quick ratio has decreased in 2006 because of two reasons: a) Current Liabilities have increased b) Inventory level has increased in 2006 The firm’s quick ratio has been excellent as compared with all other firms in the industry in both years. The firm is the most liquid in the industry because it can pay all the current liabilities with its current assets deducting inventory. 3)Cash Ratio: Cash Ratio = (2006)

Cash Current liabilities

Cash Ratio = (2005)

Cash Current liabilities

= 56294565 = 0.008 6671654086 = 398919136 = 0.12 3344830791

Industry Average: 2006: 0.049 2005: 0.061 Analysis:

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Financial Statements Analysis-DH Chemicals 2005-06 The cash ratio has decreased significantly in 2006 because it has significantly low amount of cash & bank balances. In 2006, DH chemicals had Rs0.0w08 of cash to settle down Rs. of current liabilities. The firm does not hold that too much cash like the other firms in the industry that’s why its cash ratio is below industry average in both years.

Long Term Solvency Ratios/Leverage Ratios 1)Total Debt Ratio: Total Debt Ratio =

Total Assets-Total Equity =

(2006) Total Debt Ratio =

Total Assets

16162691046

Total Assets-Total Equity =

(2005)

Total Assets

16162691046-9273143878 = 0.43

12787169524-9355239654 = 0.27 12787169524

Industry Average: 2006: 0.44 2005: 0.45 Analysis: The total debt ratio has increased in 2006.In 2005 , the company was financing 73% of its assets from funds provided by debtors & remaining portion of total assets were financed by the funds provided by shareholders but in 2006 , the company is financing 57% of its assets by debtors’ funds and 43% of its assets were financed by shareholders’ funds. The company is now using more of debtors’ funds to finance its assets. The firm is relying more on shareholders’ provided funds in 2005 but in 2006, it is using almost the same proportion of shareholders’ investment and debts as the other firms in the industry. 2)Debt to Equity Ratio: Debt to Equity Ratio = (2006)

Total Debt Total Equity

=

16162691046-9273143878 = 0.743 9273143878

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Financial Statements Analysis-DH Chemicals 2005-06

Debt to Equity Ratio = (2005)

Total Debt

= 12787169524-9355239654 = 0.37

Total Equity

9355239654

Industry Average: 2006: 0.947 2005: 0.74 Analysis: The creditors are providing Rs 0.37 of financing for each Rs 1 provided by the company’s shareholders in 2005 but the situation is quite opposite in 2006 where debt-toequity ratio has doubled because total debt ( Current liabilities & long term borrowings) have increased significantly in 2006. The firm is using more of the shareholders’ provided funds to finance its assets as compared with other firms in the industry in 2005-06. The firm is not relying mainly on the debts to finance its assets. 3)Equity Multiplier: Equity Multiplier =

Total Assets

(2006)

Total Equity

Equity Multiplier =

Total Assets

(2005)

Total Equity

= 16162691046 = 1.743 9273143878 = 12787169524 = 1.37 9355239654

Industry Average: 2006: 1.95 2005: 1.74 Analysis: The Equity Multiplier of the company has decreased in 2006 as compared to 2005.the company has decreased it equity multiplier but was not able to manage it functions properly therefore it is earning loss.

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Financial Statements Analysis-DH Chemicals 2005-06

4)Interest Coverage Ratio: Interest Coverage Ratio = Earning before interest & tax = 1496657314 (2006)

Interest

= 2.69 times

555469279

Interest Coverage Ratio = Earning before interest & tax = 2518638188 = 9.76 times (2005)

Interest

258059216

Industry Average: 2006: 2.30 2005: 7.91 Analysis: The Interest Coverage ratio of the company has decreased in 2006 as compared to 2005.In 2006 the company is able to pay interest payments for 2.69 times but the company was able to pay its interest payments about 10 times in 2005. This happened due to increase in the interest payments & decrease in the EBIT. The EBIT has decreased in 2006 because of lower return from short term investments. The company’s performance is very good in paying the interest payments in both years because the interest coverage ratio is higher than the industry average.

5)Cash Coverage Ratio: Cash Coverage Ratio = EBIT +Depreciation = 1496657314+81426153 =2.84 times (2006)

Interest

555469279

Cash Coverage Ratio = EBIT +Depreciation = 2518638188 + 75423348 =10.05 times (2005)

Interest

258059216

Industry Average: 2006: 2.83

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Financial Statements Analysis-DH Chemicals 2005-06 2005: 8.11 Analysis: The Cash Coverage ratio of the company has decreased in 2006 as compared to 2005 due to high depreciation charged to machinery & equipment and to the administration. The cash coverage ratio of DH chemicals is greater than the industry average which demonstrates its good performance as compared the rest of the firms

Asset Management Turnover Ratios 1)Inventory Turnover Ratio: Inventory Turnover Ratio = (2006) Inventory Turnover Ratio = (2005) Days sales in Inventory

(2005)

= 2570246167 = 10.83 times

Inventory Cost of Goods Sold

237295434 = 2030603390 = 12.35 times

Inventory =

(2006) Days sales in Inventory

Cost of Goods Sold

365

164432448 = 365 =33.70 days

Inventory Turnover Ratio 10.83 =

365

=

365 =29.56 days

Inventory Turnover Ratio 12.35

Industry Average: 2006: 4.91 times 2005: 5.49 times Analysis: The Inventory Turnover Ratio of the company has decreased in 2006 as compared to 2005; company was able to turnover its inventory 12.35 times in 2005 as compared to 10.35 times in 2006. This decrease has happened due to high level of inventory in 2006.

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Financial Statements Analysis-DH Chemicals 2005-06 We see that the DH chemicals are able to sell out its inventory much more times as compared with the industry average & it is selling its inventory in one month approx. in both years. The company’s selling & marketing policies are very effective & successful.

2)Receivable Turnover Ratio: Receivable Turnover Ratio = (2006)

Sales Account receivable

Receivable Turnover Ratio = (2005) Average Collection Period (2006) Average Collection Period (2005)

= 3881749695 = 1550.93 times

Sales

2502849 = 3290547342 = 854.61 times

Account receivable =

365

3850344 =

0.2353days

Receivable Turnover Ratio =

365

=

0.43 days

Receivable Turnover Ratio

Industry Average: 2006: 396.70 times 2005: 302.87 times

Analysis: The Receivable Turnover Ratio of the company has increased significantly in 2006 as compared to 2005 which represent a great improvement in the credit policy of the firm because it is now able to collect its receivables within 0.2353.days as compared with 0.43 days in 2005. If we observe & compare the Receivable turnover ratio with the industry average, we see that it is much much higher than the industry average. By analyzing it, we can say that

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Financial Statements Analysis-DH Chemicals 2005-06 the firm doesn’t sell its inventory on credit.

3)Payable Turnover Ratio: Payable Turnover Ratio = (2006)

Account Payable

Payable Turnover Ratio = (2005) Days sales in Payable

Cost of goods Sold = 2570246167 = 1026.92 times

=

2502849

Cost of goods Sold = 2030603390 = 527.38 times Account Payable 365

3850344 =

0.35 days

(2006) Payable Turnover Ratio Days sales in Payable

=

365

=

0.69 days

(2005) Payable Turnover Ratio Industry Average: 2006: 263.10 times 2005: 178.67 times Analysis: The Payable Turnover Ratio of the company has increased in 2006 as compared to 2005 which is not a good thing for company because now company is paying its liabilities so early as compared previous year. Now company is not using the finances of outsiders so efficiently because it is not able to hold the other people’s money for its operations. This ratio has increased due to decrease in A/P. The company is not holding the other people’s money for its operations even for a single day.

Macro Level Ratios COMSATS Institute of Information Technology, Lahore.

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Financial Statements Analysis-DH Chemicals 2005-06

1)Total Asset Turnover Ratio Total Asset Turnover Ratio = (2006)

Total Assets

Total Asset Turnover Ratio = (2005)

Sales

Sales Total Assets

= 3881749695 = Rs 0.240 16162691046 = 3290547342 = Rs. 0.26 12787169524

Industry Average: 2006: 1.145 2005: 1.09 Analysis: The Total Asset Turnover Ratio of the company has decreased in 2006 as compared to 2005 because of increase in Total Assets. The Rs 1 invested in assets generated Rs 0.26 Sales in 2005 but the Rs .1 invested in total assets generated RS 0.24 of Sales in 2006. dh chemicals is not utilizing its assets efficiently like the other firms in the industry because the Rs1 invested by dh chemicals in assets generated sales of worth Rs 0.26 & Rs 0.24 in 2005-06 respectively while the industry on the average is getting sales of worth Rs 1.09 & Rs 1.145 in 2005-06. 2)Capital intensity Ratio: Capital intensity Ratio = (2006) Capital intensity Ratio = (2005)

Total Assets = 16162691046 = 4.17 Sales

3881749695

Total Assets = 12787169524 = 3.886 Sales

3290547342

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Financial Statements Analysis-DH Chemicals 2005-06 Industry Average: 2006: 1.67 times 2005: 1.722 times Analysis: The Capital Intensity Ratio of the company has increased in 2006 as compared to 2005 so now more amounts of assets is required for the generation of sales. In 2005, DH chemicals required assets of worth Rs. 3.886 in order to generate Sales of worth Rs 1 but in 2006, the company required an investment of Rs 4.17 in its assets to generate Sales of worth Rs 1. The company has to utilize more assets for the generation of sales in 2006 as compared to 2005 which means that the company’s ability to manage & utilize its assets has a little bit decreased in 2006 relative to 2005. If we compare the capital intensity ratio with the industry average, we see that it is utilizing more assets than the others to generate sales of worth Rs1. The firm is not utilizing its assets efficiently.

Profitability Ratios 1)Gross Profit Margin: Gross Profit Margin = (2006) Gross Profit Margin = (2005)

Gross Profit = 1311503528 = Rs. 0.3378 Sales

3881749695

Gross Profit = 1259943952 = Rs. 0.3829 Sales

3290547342

Industry Average: 2006: 0.190 2005: 0.288 Analysis:

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Financial Statements Analysis-DH Chemicals 2005-06 The Gross Profit Margin of the company has decreased in 2006 as compared to 2005 because , although., the sales have increased in 2006 but the cost of sales have increased significantly that’s why Gross Profit has decreased in 2006 . This ratio can be interpreted as: The company gets Rs. 0.3378 of Gross Profit from the sales of Rs.1 in 2006 while the company obtained Rs.0.3829 of Gross Profit from the sales of Rs.1. The firm’s profitability is in a very good position as compared with the industry average because the G.P. Margin ratio of DH chemicals is higher than the industry average in both years. It means that the firm is getting more profit from its sales than the industry average. 2)Net Profit Margin: Net Profit Margin = (2006) Net Profit Margin = (2005)

Net Profit = 2054206794 = Rs. 0.53 Sales

3881749695

Net Profit = 2867944955 = Rs. 0.87 Sales

3290547342

Industry Average: 2006: 0.180 2005: 0.334

Analysis: This ratio can be interpreted as: The company gets Rs 0.87 of net profit from the sales of Rs.1 in 2005 but it gets Rs. 0.53 Of net profit from the sales of worth Rs.1.This ratio has decreased because the other income has decreased in 2006 as compared with 2005. The Net Profit Margin of the company has decreased in 2006 as compared to 2005 because operating expense has increased in 2006. If we compare Gross Profit Margin Ratios with the Net Profit Margin Ratios of both years, we see that Net Profit Margin

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Financial Statements Analysis-DH Chemicals 2005-06 Ratios are greater because of significantly high amount of “other income” which indicates that the company’s financial position is very good because its selling and other expenses are lower than the income it receives from its other investments. The firm’s profitability is in a very good position as compared with the industry average because the G.P. Margin ratio of DH chemicals is higher than the industry average in both years. It means that the firm is getting more net profit from its sales than the industry average. 3)Return on Assets: Return on Assets = (2006) Return on Assets = (2005)

Net Profit = 2054206794 = Rs. 0.1271 Total Assets

16162691046

Net Profit = 2867944955 Total Assets

= Rs. 0.2243

12787169524

Industry Average: 2006: 0.110 2005: 0.174

Analysis: The Return on Assets of the company has decreased in 2006 as compared to 2005. In 2005, Rs 1 invested in total assets generated Rs1 0.2243 of net profit but Rs. 1 invested in assets generated Rs.0.1271 of net profit in 2006. The company is not able to manage its assets as efficiently as in 2005. The net profit has decreased and the investment in total assets has increased. But if we compare it with the industry average, we see that the firm’s performance is not so bad because the firm’s ROA is higher than the industry average in both years.

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Financial Statements Analysis-DH Chemicals 2005-06 4)Return on Equity: Return on Equity = (2006)

Net Profit = 2054206794 Total Equity

Return on Equity = (2005)

= Rs. 0.2215

9273143878

Net Profit = 2867944955 = Rs. 0.3066 Total Equity

9355239654

Industry Average: 2006: 0.094 2005: 0.2552 Analysis: The Return on Equity of the company has decreased in 2006 as compared to 2005. The one rupee invested by shareholders generated Rs.0.3066 of Net Income in 2005 but it generated Rs 0.2215 of Net Income in 2006. This decrease is caused by decrease in Net Profit. The firm is getting more profit from the funds provided by the shareholders than the industry average. 5)Earning per share: Earning per share = (2006) Earning per share = (2005)

Net Profit No. of shares outstanding Net Profit No. of shares outstanding

= 2054206794 = 24.79 82866240 = 286944955 =

39.80

72057600

Industry Average: 2006: 11.73 2005: 25.02 Analysis: The firm’s EPS has decreased in 2006 because of two factors:

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Financial Statements Analysis-DH Chemicals 2005-06 a) The Net Profit has decreased b) The firm has issued more shares. But still, the firm’s shareholders are in a good position because the industry average is below the firm’s EPS.

6)Book value per share: Book value per share = (2006)

Total Equity

= 122204 = 0.0345

No. of shares outstanding

3540460

Return on Equity can be expressed as the product of Return on Assets and Equity Multiplier: 2006

2005

ROE = ROI * Equity Multiplier = Net Income * Total Assets Total Assets

Total Equity

= 2054206794 * 16162691046 16162691046

9273143878

ROE = ROI * Equity Multiplier =Net Income * Total Assets Total Assets =2867944955 * 12787169524

Total Equity 12787169524 9355239654

= 0.1271 * 1.743

= 0.2243 * 1.37

=0.2215

=0.3066

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Financial Statements Analysis-DH Chemicals 2005-06

The ROE has decreased in 2006 due to decrease in ROA. Now we investigate the reason for decrease in ROA, we see that the money invested in total assets have increased but the net income has decreased as compared to 2005. Now, we further divide ROE, into three components as: ROE = Net Profit Margin * Total Asset Turnover * Equity Multiplier = Net Profit * Sales

Sales

* Total Assets

Total Assets

Total Equity

FOR 2005: = 2867944955 * 3290547342 * 12787169524 3290547342

12787169524

9355239654

= 0.87 * 0.26 * 1.37 = 0.3066 FOR 2006: ROE = 2054206794 * 3881749695 * 16162691046 3881749695

16162691046

9273.143878

= 0.53 * 0.24 * 1.743 = 0.2215

ANALYSIS:

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Financial Statements Analysis-DH Chemicals 2005-06

We see that the ROE has decreased due to two reasons : a) decrease in Net Profit Margin b) decrease in Total Asset Turnover Now, we try to find out the further reasons for the above described main resons The net profit margin ratio has decreased in 2006 due to decrease in Net Income & increase in sales. Simply, we can say that the sales have increased in 2006 but the Profit after taxation has decreased as compared to 2005. Secondly, the Total Asset turnover ratio has decreased due to inefficient utilization of assets i.e. the investment in total assets have increased at a much higher rate as compared to increase in sales. Due to these reasons, the ROE has decreased in 2006.

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