Intrafirm Trend Analysis Pso
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PAKISTAN STATE OIL
Intrafirm Analysis IBF by Razia Pukhraj Submitted to: Mr Laiq-ur-Rehman Samiya Illias
2009A Course: Introduction to Business Finance Pakistan Institute of Management
Contents Introduction..........................................................................................................................3 Financial Ratios...................................................................................................................4 Intrafirm Analysis................................................................................................................5 Profitability Ratios...........................................................................................................5 Gross Profit Ratio........................................................................................................5 Net Profit Ratio............................................................................................................5 EBITDA Margin..........................................................................................................6 Return on Shareholders’ Equity...................................................................................6 Return on Total Assets.................................................................................................7 Return on Capital Employed.......................................................................................7 Profitability Ratios Analysis........................................................................................8 Asset Utilisation Ratios...................................................................................................9 Inventory Turnover Ratio............................................................................................9 Debtor Turnover Ratio.................................................................................................9 Total Assets Turnover Ratio......................................................................................10 Fixed Assets Turnover Ratio.....................................................................................10 Asset Utilization Ratios’ Analysis............................................................................11 Investment Ratios..........................................................................................................12 Earnings Per Share.....................................................................................................12 Market Value Per Share.............................................................................................12 Break Up Value.........................................................................................................13 Price Earnings (P/E) Ratio.........................................................................................13 Dividends Per Share..................................................................................................14 Bonus Share...............................................................................................................14 Dividend Payout........................................................................................................15 Dividend Yield...........................................................................................................15 Dividend Cover Ratio................................................................................................16 Investment Ratios’ Analysis......................................................................................16 Leverage Ratios.............................................................................................................17 Interest Cover Ratio...................................................................................................17 Current Ratio.............................................................................................................17 Quick Ratio................................................................................................................18 Leverage Ratios’ Analysis.........................................................................................18 Leverage Ratios’ Analysis
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 2
Introduction Pakistan State Oil1 (PSO) is the largest Oil Marketing Company (OMC) in Pakistan commanding over 70% of the market share. The Government of Pakistan (GOP) is a major stake-holder in the company. Pakistan State Oil Company Limited is a public company incorporated in Pakistan under the repealed Companies Act, 1913 (now Companies Ordinance, 1984) and is listed on Karachi, Lahore and Islamabad stock exchanges. The address of its registered office is PSO House, Khayaban-e-Iqbal, Clifton, Karachi. The principal activities of the Company are procurement, storage and marketing of petroleum and related products. It also blends and markets various kinds of lubricating oils.2 Fluctuations3 in the international oil prices have severely affected the economy of Pakistan. There are, at one hand, accusations of outrageous profits by the OMCs, while on the other hand, the oil industry is mired in circular debt and is struggling for survival. Government directives for uninterrupted supply of fuel to the power-generation companies, irrespective of mounting receivables, have put a major strain on the OMCs and the Oil Refineries, as the GOP is unable to retire its debts to these companies. Till April 2006, the fuel prices were set by Oil Companies Advisory Committee4 (OCAC) as per the formula provided to them by the government. Now, Oil and Gas Regulation Authority5 (OGRA) sets the fuel prices according to the information provided to them by the oil companies. Therefore, it would be interesting to study the financial ratios and do a trend analysis using the main indicators to gain a better insight into the actual state of affairs. PSO’s financial statements prepared for the year ended June 30, 2008 have been used for this research, and the key documents are appended at the end of this report.
1 www.psopk.com 2 PSO Financial Overview 2008, Notes to the Financial Statements 1.1 3 Graph: International Crude Oil Price Trend for the past 5 years 4 www.ocac.org.pk 5 www.ogra.org.pk
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 3
Financial Ratios
2008
2007
Evaluation
1.24 0.57
1.22 0.64
Improved Low
0.76 16.63
0.72 7.15
Satisfactory Very Good
21.2 12.7 74.3
12.0 11.7 52.0
Poor Good Good
4 2.4 11.6 11.1
2 1.14 6.99 6.3
Good Good Good Good
Short-term solvency Current Ratio Quick Ratio
Long-term solvency Debt-Equity Ratio Times Interest Earned Fixed Charge Coverage6
Asset Utilization Average Collection Period Inventory Turnover Ratio Fixed Asset Turnover Ratio
Profitability Operating Profit Margin % Net Profit Margin % Book Return on Assets (ROA) Book Return on Equity (ROE) %
6 Not relevant to PSO as they do not have Lease and Rental Payments as such
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 4
Intrafirm Analysis The PSO yearbook contains the following ratios under the title PSO at a Glance. Using the 10-year data provided there, graphs have been plotted and an analysis done to interpret what these ratios tell us about the company.
Profitability Ratios Gross Profit Ratio
6 5 4 3 2 1 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Gross Profit Ratio
Net Profit Ratio
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 5
3 2.5 2 1.5 1 0.5 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Net Profit Ratio
EBITDA Margin
5 4 3 2 1 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 EBITDA Margin
Return on Shareholders’ Equity
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 6
50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Return On Shareholders' Equity
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 7
Return on Total Assets 14 12 10 8 6 4 2 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2006
2007
Return On Total Assets
Return on Capital Employed
80 70 60 50 40 30 20 10 0 1999
2000
2001
2002
2003
2004
2005
2008
Return On Capital Empolyed
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 8
Profitability Ratios Analysis A closer look at the trends of the world oil prices7 shows that an OMC’s profit margins fluctuate in a similar manner.
All ratios appear to have risen sharply in 2008. This is attributable to the steep rise in world oil prices. As the profit margins were a percentage of the fuel price, thus gains and losses were a direct function of fluctuations in international price, and thus impacted the profitability. The basic reason why all the profitability ratios are affected is a huge inventory gain.
7 http://en.wikipedia.org/wiki/File:Brent_Spot_monthly.svg
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 9
Asset Utilisation Ratios Inventory Turnover Ratio 25 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Inventory Turnover Ratio
Debtor Turnover Ratio
50 40 30 20 10 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Debtor Turnover Ratio
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 10
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 11
Total Assets Turnover Ratio 7 6 5 4 3 2 1 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Total Assets Turnover
Fixed Assets Turnover Ratio 80 70 60 50 40 30 20 10 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Fixed Assets Turnover
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 12
Asset Utilization Ratios’ Analysis Compared to last year, inventory turnover was high due to increased sales volumes, and debtor turnover decreased significantly. Total assets turnover trend is more or less the same whereas fixed assets turnover shows a consistent rise. As Asset Utilization ratios are a measure of management’s efficiency, this implies that the management is doing a good job, and company resources are being used to optimize profits.
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 13
Investment Ratios Earnings Per Share
100 80 60 40 20 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2006
2007
2008
Earnings Per Share
Market Value Per Share
500 400 300 200 100 0 1999
2000
2001
2002
2003
2004
2005
Market Value Per Share
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 14
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 15
Break Up Value
200 150 100 50 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Break Up Value
Price Earnings (P/E) Ratio
20 15 10 5 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Price Earnings Ratio(P/E)
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 16
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 17
Dividends Per Share 40 35 30 25 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 DividendsPerShare
Bonus Share 25 20 15 10 5 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
BonusShare
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 18
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 19
Dividend Payout
100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 DividendPayout
Dividend Yield 12 10 8 6 4 2 0 1999
2000 2001 2002
2003 2004
2005 2006 2007
2008
DividendYield
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 20
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 21
Dividend Cover Ratio
4 3.5 3 2.5 2 1.5 1 0.5 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
DividendCoverRatio
Investment Ratios’ Analysis As is evident from the Earnings per Share graph, the company has been highly profitable. The consistent rise in the Break-up Value over the years is an indicator of credible amount of assets and places the company in a very favourable position in potential investors’ eyes. Even though investment ratios have taken a positive turn, the company was not able to declare generous dividends due to the liquidity issues caused by the nonretirement of debts due from the government on account of the power-generation companies. Inspite of the economic crunch which has severely affected cash flows of all players in the industry, PSO has done exceptionally well, as is evident from the Earnings per share and Market value per share for 2008.
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 22
Leverage Ratios Interest Cover Ratio 40 35 30 25 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 InterestCoverRatio
Current Ratio
1.4 1.35 1.3 1.25 1.2 1.15 1.1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 CurrentRatio
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 23
Quick Ratio
1.2 1 0.8 0.6 0.4 0.2 0 1999
2000 2001 2002
2003 2004
2005 2006 2007
2008
QuickRatio
Leverage Ratios’ Analysis The relationship of owners’ equity to borrowed funds is an important indicator of financial strength. Interest Cover is far stronger in 2008 (16.4) as compared to 2007(6.86). PSO mainly resorts to short-term financing and has no long term loan as of 2008. This financial year, it resorted to Rs10.9 bn of short-term borrowings. Thus, inspite of high profitability, huge receivables have contributed to the negative cash flows. There is a mild variation in the current ratio over the years indicating a more or less continuation of the same trend, indicating that the company has been able to maintain the balance between its current assets and liabilities, whereas the quick ratio is in a steady but constant state of decline, which is probably due to the huge inventory, caused by the steep rise in world oil prices.
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 24
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 25
Intrafirm Analysis IBF by Razia Pukhraj Submitted to: Mr Laiq-ur-Rehman Samiya Illias
2009A Course: Introduction to Business Finance Pakistan Institute of Management
Contents Introduction..........................................................................................................................3 Financial Ratios...................................................................................................................4 Intrafirm Analysis................................................................................................................5 Profitability Ratios...........................................................................................................5 Gross Profit Ratio........................................................................................................5 Net Profit Ratio............................................................................................................5 EBITDA Margin..........................................................................................................6 Return on Shareholders’ Equity...................................................................................6 Return on Total Assets.................................................................................................7 Return on Capital Employed.......................................................................................7 Profitability Ratios Analysis........................................................................................8 Asset Utilisation Ratios...................................................................................................9 Inventory Turnover Ratio............................................................................................9 Debtor Turnover Ratio.................................................................................................9 Total Assets Turnover Ratio......................................................................................10 Fixed Assets Turnover Ratio.....................................................................................10 Asset Utilization Ratios’ Analysis............................................................................11 Investment Ratios..........................................................................................................12 Earnings Per Share.....................................................................................................12 Market Value Per Share.............................................................................................12 Break Up Value.........................................................................................................13 Price Earnings (P/E) Ratio.........................................................................................13 Dividends Per Share..................................................................................................14 Bonus Share...............................................................................................................14 Dividend Payout........................................................................................................15 Dividend Yield...........................................................................................................15 Dividend Cover Ratio................................................................................................16 Investment Ratios’ Analysis......................................................................................16 Leverage Ratios.............................................................................................................17 Interest Cover Ratio...................................................................................................17 Current Ratio.............................................................................................................17 Quick Ratio................................................................................................................18 Leverage Ratios’ Analysis.........................................................................................18 Leverage Ratios’ Analysis
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 2
Introduction Pakistan State Oil1 (PSO) is the largest Oil Marketing Company (OMC) in Pakistan commanding over 70% of the market share. The Government of Pakistan (GOP) is a major stake-holder in the company. Pakistan State Oil Company Limited is a public company incorporated in Pakistan under the repealed Companies Act, 1913 (now Companies Ordinance, 1984) and is listed on Karachi, Lahore and Islamabad stock exchanges. The address of its registered office is PSO House, Khayaban-e-Iqbal, Clifton, Karachi. The principal activities of the Company are procurement, storage and marketing of petroleum and related products. It also blends and markets various kinds of lubricating oils.2 Fluctuations3 in the international oil prices have severely affected the economy of Pakistan. There are, at one hand, accusations of outrageous profits by the OMCs, while on the other hand, the oil industry is mired in circular debt and is struggling for survival. Government directives for uninterrupted supply of fuel to the power-generation companies, irrespective of mounting receivables, have put a major strain on the OMCs and the Oil Refineries, as the GOP is unable to retire its debts to these companies. Till April 2006, the fuel prices were set by Oil Companies Advisory Committee4 (OCAC) as per the formula provided to them by the government. Now, Oil and Gas Regulation Authority5 (OGRA) sets the fuel prices according to the information provided to them by the oil companies. Therefore, it would be interesting to study the financial ratios and do a trend analysis using the main indicators to gain a better insight into the actual state of affairs. PSO’s financial statements prepared for the year ended June 30, 2008 have been used for this research, and the key documents are appended at the end of this report.
1 www.psopk.com 2 PSO Financial Overview 2008, Notes to the Financial Statements 1.1 3 Graph: International Crude Oil Price Trend for the past 5 years 4 www.ocac.org.pk 5 www.ogra.org.pk
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 3
Financial Ratios
2008
2007
Evaluation
1.24 0.57
1.22 0.64
Improved Low
0.76 16.63
0.72 7.15
Satisfactory Very Good
21.2 12.7 74.3
12.0 11.7 52.0
Poor Good Good
4 2.4 11.6 11.1
2 1.14 6.99 6.3
Good Good Good Good
Short-term solvency Current Ratio Quick Ratio
Long-term solvency Debt-Equity Ratio Times Interest Earned Fixed Charge Coverage6
Asset Utilization Average Collection Period Inventory Turnover Ratio Fixed Asset Turnover Ratio
Profitability Operating Profit Margin % Net Profit Margin % Book Return on Assets (ROA) Book Return on Equity (ROE) %
6 Not relevant to PSO as they do not have Lease and Rental Payments as such
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 4
Intrafirm Analysis The PSO yearbook contains the following ratios under the title PSO at a Glance. Using the 10-year data provided there, graphs have been plotted and an analysis done to interpret what these ratios tell us about the company.
Profitability Ratios Gross Profit Ratio
6 5 4 3 2 1 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Gross Profit Ratio
Net Profit Ratio
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 5
3 2.5 2 1.5 1 0.5 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Net Profit Ratio
EBITDA Margin
5 4 3 2 1 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 EBITDA Margin
Return on Shareholders’ Equity
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 6
50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Return On Shareholders' Equity
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 7
Return on Total Assets 14 12 10 8 6 4 2 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2006
2007
Return On Total Assets
Return on Capital Employed
80 70 60 50 40 30 20 10 0 1999
2000
2001
2002
2003
2004
2005
2008
Return On Capital Empolyed
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 8
Profitability Ratios Analysis A closer look at the trends of the world oil prices7 shows that an OMC’s profit margins fluctuate in a similar manner.
All ratios appear to have risen sharply in 2008. This is attributable to the steep rise in world oil prices. As the profit margins were a percentage of the fuel price, thus gains and losses were a direct function of fluctuations in international price, and thus impacted the profitability. The basic reason why all the profitability ratios are affected is a huge inventory gain.
7 http://en.wikipedia.org/wiki/File:Brent_Spot_monthly.svg
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 9
Asset Utilisation Ratios Inventory Turnover Ratio 25 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Inventory Turnover Ratio
Debtor Turnover Ratio
50 40 30 20 10 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Debtor Turnover Ratio
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 10
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 11
Total Assets Turnover Ratio 7 6 5 4 3 2 1 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Total Assets Turnover
Fixed Assets Turnover Ratio 80 70 60 50 40 30 20 10 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Fixed Assets Turnover
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 12
Asset Utilization Ratios’ Analysis Compared to last year, inventory turnover was high due to increased sales volumes, and debtor turnover decreased significantly. Total assets turnover trend is more or less the same whereas fixed assets turnover shows a consistent rise. As Asset Utilization ratios are a measure of management’s efficiency, this implies that the management is doing a good job, and company resources are being used to optimize profits.
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 13
Investment Ratios Earnings Per Share
100 80 60 40 20 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2006
2007
2008
Earnings Per Share
Market Value Per Share
500 400 300 200 100 0 1999
2000
2001
2002
2003
2004
2005
Market Value Per Share
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 14
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 15
Break Up Value
200 150 100 50 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Break Up Value
Price Earnings (P/E) Ratio
20 15 10 5 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Price Earnings Ratio(P/E)
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 16
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 17
Dividends Per Share 40 35 30 25 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 DividendsPerShare
Bonus Share 25 20 15 10 5 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
BonusShare
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 18
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 19
Dividend Payout
100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 DividendPayout
Dividend Yield 12 10 8 6 4 2 0 1999
2000 2001 2002
2003 2004
2005 2006 2007
2008
DividendYield
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 20
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 21
Dividend Cover Ratio
4 3.5 3 2.5 2 1.5 1 0.5 0 1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
DividendCoverRatio
Investment Ratios’ Analysis As is evident from the Earnings per Share graph, the company has been highly profitable. The consistent rise in the Break-up Value over the years is an indicator of credible amount of assets and places the company in a very favourable position in potential investors’ eyes. Even though investment ratios have taken a positive turn, the company was not able to declare generous dividends due to the liquidity issues caused by the nonretirement of debts due from the government on account of the power-generation companies. Inspite of the economic crunch which has severely affected cash flows of all players in the industry, PSO has done exceptionally well, as is evident from the Earnings per share and Market value per share for 2008.
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 22
Leverage Ratios Interest Cover Ratio 40 35 30 25 20 15 10 5 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 InterestCoverRatio
Current Ratio
1.4 1.35 1.3 1.25 1.2 1.15 1.1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 CurrentRatio
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 23
Quick Ratio
1.2 1 0.8 0.6 0.4 0.2 0 1999
2000 2001 2002
2003 2004
2005 2006 2007
2008
QuickRatio
Leverage Ratios’ Analysis The relationship of owners’ equity to borrowed funds is an important indicator of financial strength. Interest Cover is far stronger in 2008 (16.4) as compared to 2007(6.86). PSO mainly resorts to short-term financing and has no long term loan as of 2008. This financial year, it resorted to Rs10.9 bn of short-term borrowings. Thus, inspite of high profitability, huge receivables have contributed to the negative cash flows. There is a mild variation in the current ratio over the years indicating a more or less continuation of the same trend, indicating that the company has been able to maintain the balance between its current assets and liabilities, whereas the quick ratio is in a steady but constant state of decline, which is probably due to the huge inventory, caused by the steep rise in world oil prices.
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 24
Financial Ratios and Intrafirm Analysis of Pakistan State Oil 25
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