Sir Abdullah Hafeez Report (2).docx

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TABLE OF CONTENT ACKNOWLEDGEMENT.…………………………………………………………………03. INTRODUCTION 1. VISION 2. MISSION

....………………………………………………………………..04. …………………………………………………………………..04. …………………………………………………………………..04.

LIQUIDITY RATIOS 1. CURRENT RATIO………………………………………………………………... 05. 2. QUICK RATIO ………………………………………………………………… 06. ASSET MANAGEMENT RATIO 1. 2. 3. 4. 5. 6.

RECEIVABLE ACTIVITIES……………………………………………………... 07. DAYS SALE OUTSTANDING………………………………………………….... 08. PAYABLE TURNOVER IN DAYS………………………………………………. 09. INVENTORY TURNOVER IN DAYS…………………………………………….09. FIXED ASSET TURNOVER………………………………………………………..09. TOTAL ASSET TURNOVER…………………………………………………....….09.

PROFITABILITY RATIOS 1. 2. 3. 4.

NET PROFIT MARGIN ON SALE………………………………………………....10. GROSS PROFIT MARGIN………………………………………………………….10. RETURN ON INVESTMENT……………………………………………………….11. RETURN ON EQUITY………………………………………………………………11.

DEBT FINANCE LEVERAGE RATIO 1. DEBT TO EQUITY RATIO………………………………………………………….12. 2. DEBT TO ASSET RATIO…………………………………………………………....12. 3. GEAR RATIO………………………………………………………………………...12. MARKET VALUE RATIO 1. PRICE EARNING RATIO…………………………………………………………..13. 2. BOOK RATIO………………………………………………………………………..14. CONCLUSION……………………………………………………………………………….14.

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ACKNOWLEGEMENT: In performing our assignment, we had to take the help and guideline of some respected persons, who deserve our greatest gratitude. The completion of this assignment gives us much pleasure. We would like to show our gratitude to SIR ABDULLAH HAFEEZ, BAHRIA UNIVERSITY ISLAMABAD for giving us a good guideline for assignment throughout numerous consultations. We would also like to expand our deepest gratitude to all those who have directly and indirectly guided us in writing this assignment. Many people, especially our classmates and team members itself, have made valuable comment suggestions on this proposal which gave us an inspiration to improve our assignment. We thank all the people for their help directly and indirectly to complete our assignment.

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FAUJI CEMENT COMPANY LIMITED

INTRODUCTION:A longtime leader in the cement manufacturing industry, Fauji Cement Company Limited, headquartered in Rawalpindi, operates a cement plant at Jhang Bahtar, Tehsil Fateh Jang, and District Attock in the province of Punjab. The company has a strong and longstanding tradition of service, reliability, and quality that reaches back more than 19 years. Sponsored by Fauji Foundation, the company was incorporated in Rawalpindi in 1992. Vision: To be a role model cement manufacturing company, benefitting all stakeholders and fulfilling Corporate Social Responsibilities while enjoying public respect and goodwill. Mission: FCCL while maintaining its leading position in quality of cement maximizes profitability through reduced cost of production and enhanced share in domestic and international markets. .

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RATIO CALCULATION AND ANALYSIS (a) LIQUIDITY RATIOS: “Ratios that show the relationship of a firm’s cash and other current assets to its current liabilities are known as liquidity ratios.” (1)CURRENT RATIO (2015): Formula: Current ratio = Current Assets / current liabilities Current Ratio = 6413596 / 4730377 Current Ratio = 1.36% (1)CURRENT RATIO (2016): Current Ratio = 7499669/4961181 Current Ratio= 1.51% Justification: The current ratio is a critical liquidity ratio utilized extensively by banks and other financing institution while extending loans to the businesses. Current ratio is a figure resulted from dividing current assets by current liabilities of a firm. It is assumed that higher the ratios are higher the liquidity. The Current ratio of FCCL increased from 1.36 to 1.51 which means that current assets are rising faster than the current liabilities or liabilities are decreasing. We can improve the current ratio through various decisions and implement them on company: 1) We can increase the current ratio by increasing the current assets of the company. We can take finance from shareholder who will increase current assets and current liabilities will remain constant. 2) Sell the unused assets will increase the cash which will affect the current assets. 3) Not only current ratio depend on current assets we can decrease the current liabilities by paying the liabilities as early as possible. This will decrease the current liabilities and an improvement in current ratios

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(2)QUICK RATIO (2015): Formula: Quick Ratio = Current Assets – Inventories / Current Liabilities Quick Ratio = 6413596 - 888536 / 4730377 Quick Ratio = 1.17% (2)QUICK RATIO (2016): Quick Ratio = 7499669 – 540588 / 4961181 Quick Ratio= 1.40% Justification: Quick ratio relates the most liquid asset to pay current liabilities. Here inventory is removed from CA. So it’s a measure of the firm’s ability to pay off short term obligation without relying on the sale of inventories. Here the quick ratio also increased from 1.17 to 1.40 which means that company is managing its short term or current liability more effectively than the previous year. 1.

If you have unproductive assets that the business is just storing, then it's time to get rid of them.

2. Monitor accounts receivables effectively to ensure that you're billing your clients properly and that you're receiving prompt payments.

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ASSET MANAGEMENT RATIOS:

RECEIVABLE ACTIVITIES: Formula: Annual sales/Receivables 2015 18,624,358/1,556,110=11.96 2016 20,044,438/567,082=35.34 Justification: The receivables turnover ratio measures a business' ability to efficiently collect its receivables. As we can see that the ratio was 11.96 during 2015 which grew to 35.34 in 2016. As it had increased from previous year it’s favorable for the company. Higher ratios mean that companies are collecting their receivables more frequently throughout the year. Higher efficiency is favorable from a cash flow standpoint as well. If a company can collect cash from customers sooner, it will be able to use that cash to pay bills and other obligations sooner. DAYS SALE OUTSTANDING: Formula: (Receivables*days in year)/Annual sales. 2015 1,556,110*365/18,624,358=30.49 2016 567,082*365/20,044,438=10.32 Justification: Day’s sales outstanding (DSO) is a measure of the average number of days that a company takes to collect revenue after a sale has been made. So as we can see that the average number of days in 2015 was 30.49 days which decreased to the great difference at 10.32 in 2016. A low Days Sales Outstanding value means that it takes a company fewer days to collect its accounts

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receivable. A high Days Sales Outstanding number shows that a company is selling its product to customers on credit and taking longer to collect money. PAYABLE TURNOVER IN DAYS: Formula: (Payables*days in year)/Annual purchases 2015 4,961,181*365/10,879,156=166.44 2016 4,730,377*365/11,615,261=148.64 Justification: The accounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. As we can see that pay off rate in 2015 were 166.44 which got low in 2016 which is 148.64 which shows that company is paying off their supplier more by taking more time than previous year. If the company is taking not much time in paying their suppliers that can mean that they are not investing in other projects that could generate return.

INVENTORY TURNOVER IN DAYS: Formula: (Inventory*days in year)/CGS 2015 540,588*365/10,879,156=18.13 2016 888,563*365/11,615,261=27.92 Justification: Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period of time. So as we can see the company’s turnover had increased over a

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year it was 18.13 in 2015 and now it’s 27.92 in 2016. This shows that either they have made strong sales or large discounts after 2015.

FIXED ASSET TURNOVER: Formula: Sales/Net fixed assets. 2015 18,642,358/24,114,694=0.77 2016 20,044,438/21,857,983=0.92

Justification: The fixed turnover ratio measures how effective the firm uses plant and equipment. The role of fixed asset is to support the sales. The fixed turnover ratio of the year 2015 was 0.77 and in 2016 is 0.92, this shows that a high turnover indicates that assets are being utilized efficiently and large amount of sales are generated using a small amount of assets. It could also mean that the company has sold off its equipment and started to outsource its operations.

TOTAL ASSET TURNOVER: Formula: Annual sales/Total Assets. 2015 18,642,358/30,528,290=0.61 2016 20,044,438/29,357,652=0.68

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Justification: The final asset management ratio, the total asset turnover helps to identify when problem occur that there is a problem in fixed asset or in current assets. As we can see the ratio was 0.61 in 2015 and it grew to 0.68 in 2016. As higher ratio is always more favorable. So the company is using its assets more efficiently. PROFITABILITY RATIOS: “Profitability is the net result of a number of policies and decisions. These are the ratios that relate profits to sales and investment.” (1)NET PROFIT MARGIN ON SALES (2015): Net Profit Margin on Sales = Net Income / Sales Net Profit Margin on Sales = 4116165 / 18642358 Net Profit Margin on Sales = 0.22 or 22% (1)NET PROFIT MARGIN ON SALES (2016): Net Profit Margin on Sales = Net Income / Sales Net Profit Margin on Sales =5367200 / 20044438 Net Profit Margin on Sales =0.26 or 26% Justification: It gives the profit per dollar of sales. Net profit margin on sales of FCCL increased from 22% to 26% in this year which means that senior management has made the efficient policies and they measured the profitability of sales after taking the account of all expenses and income taxes. FCCL has contributed Rs. 6.352 Billion to the National Exchequer in the form of taxes and duties for the year under review. Concurrently, FCCL earned USD 21Million through export of cement. Tax expense was higher in 2016 which is Rs. 2464106 as compared to 2015 which was Rs.1536726 and the reason for this is the higher profit in 2016. Interest income decreased in 2016 which was Rs. 155019 in 2015 and it was 116553 in 2016 which resulted in increase in net income. (2)GROSS PROFIT MARGIN (2015): Gross Profit Margin = Gross Profit / Net Sales Gross Profit Margin = 7027097 / 18642358 Gross Profit Margin = 0.3769 or 37.69%

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(2)GROSS PROFIT MARGIN (2016): Gross Profit Margin = Gross Profit / Net Sales Gross Profit Margin =9165282/ 20044438 Gross Profit Margin = 0.4572 or 45.72% Justification: Profitability Gross Profit ratio in 2016 was 45.72% as compared to 37.69% during the last year. FCCL has earned a profit after tax of Rs. 5367 Million as compared to the last year’s profit of Rs. 4116 Million. Cost of production decreased by 14%. Company successfully managed debt servicing of Rs. 2.613Billion during this financial year from operational cash flows. Tax expense was higher in 2016as compared to 2015 due to higher profit. (3)RETURN ON INVESTMENT (2015): Return on Investment = Net Income / Total Assets Return on Investment = 4116165 / 30528290 Return on Investment = 0.1348 or 13.48% (3)RETURN ON INVESTMENT (2016): Return on Investment = Net Income / Total Assets Return on Investment = 5367200 / 29357652 Return on Investment = 0.1828 or 18.28% Justification: It provides an idea of the overall return on investment earned by the firm. The return on investment ratio of FCCL was 13.48% in 2015 which increased to 18.28% in 2016. This ratio is favorable for the company as the net income has increased and the value of total assets have decreased which means that company has acquired less assets to generate dollar of sales and by efficiently using those assets it is earning greater return on investment as compared to the previous year. (4)RETURN ON EQUITY (2015): Return on Equity = NPAT / Shareholder’s Equity Return on Equity = 4116165 / 17418984

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Return on Equity = 0.2363 or 23.63% (4)RETURN ON EQUITY (2016): Return on Equity = NPAT / Shareholder’s Equity Return on Equity = 5367200 / 18427855 Return on Equity = 0.2912 or 29.12% Justification: It measures the rate of return on common stockholder’s investment. Return on equity of FCCL increased from 23% to 29% which means that firm has accepted stronger investment opportunities and effective expense management than the previous year.

(D)DEBT/FINANCIAL LEVERAGE RATIO: “The debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage, i.e., money borrowed from and/or owed to others.” DEBT/FINANCIAL LEVERAGE RATIO 2015: Debt to Equity Ratio =

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡(4730377) 𝑆𝑡𝑜𝑐𝑘ℎ𝑙𝑜𝑑𝑒𝑟 𝐸𝑞𝑢𝑖𝑡𝑦(17418984)

x 100=27.15%

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡(4730377)

Debt to Asset Ratio= 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠(30528290) x 100= 15.4% 𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡(4000119)

Gearing Ratio=𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑡𝑖𝑡𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛(4000119+17418984) =18.67%

DEBT/FINANCIAL LEVERAGE RATIO 2016: Debt to Equity Ratio =

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡(3475003) 𝑆𝑡𝑜𝑐𝑘ℎ𝑙𝑜𝑑𝑒𝑟 𝐸𝑞𝑢𝑖𝑡𝑦(18427855)

x 100=18.8%

𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡(3475003)

Debt to Asset Ratio= 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠(29357652) x 100= 11.8% 𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝐷𝑒𝑏𝑡(1486178)

Gearing Ratio=𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑡𝑖𝑡𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛(18427855+1486178) =7.46%

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Ratio Analysis: 1. Debt to equity ratio : This ratio is favorable as it will have to bear not so much of difficulty as they have more investment from shareholders equity and reduced total debt from creditors which gives company a cushion or leverage of safety as they would not have to pay so much of financial cost (interest cost). 2. Debt to total assets ratio: This ratio is favorable as its debt to total assets has decreased which means its assets have increased and its total debt from creditors reduced giving a cushion of safety against creditors losses on the event of liquidation. Payment to shareholders could be delayed but interest would be paid to creditors on regular intervals .Therefore company has a leverage from his debt problem. 3. Gearing ratio: This ratio is favorable as its long term debt to total capitalization has decreased which means that company has a cushion of safety from the bankruptcy as they would not have to pay so much interest on their debt from the creditors. They can improve even further or maintain by financing their business from shareholders through issuing shares and preventing or reducing loans.

(e)MARKET VALUE (OR INVESTMENT) RATIO: “The market value ratios represent a group of ratios that the firm’s stock price to earnings and book value per share.” (1)P/E (PRICE EARNING) RATIO (2015): Formula P/E Ratio =Market price per share / EPS P/E Ratio = 26.46/ 2.91 P/E Ratio =9.092 (1)P/E (PRICE EARNING) RATIO (2016): P/E Ratio =36.76 / 3.98 P/E Ratio = 9.236

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Justification: P/E ratio shows how much investor is willing to pay per rupee of reported profits. There is a slight increase in this ratio. This shows that the company is growing rapidly and has a good will in the market, which in turn makes it less risky than other companies and investors are willing to invest. (2)BOOK RATIO (2015): Formula Book Ratio = Market Price / Book Value per Share Book Ratio = 26.46/13.09 Book Ratio = 2.021 (2)BOOK RATIO (2016): Book Ratio =36.76 / 13.09 Book Ratio = 2.8082 Justification: This ratio tells us how well investors regard the company. The higher the ratio the efficiently the company is utilizing its assets. As the ratio has increased from past year, it means the company is now earning high rates of return on their assets.

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Conclusion: FCCL performance was more satisfactory as compared to the previous year as the comparative production figures of the company were Rs. 2344715 in 2015 which were increased to Rs. 2580732 in 2016 for clinker and were Rs.2565547 in 2015 which were also increased to Rs.2822230 in 2016 for cement. Capacity utilization also increased from 75% to 82% in 2016. By this ratio analysis we found out that the performance of company is more satisfactory than previous year as the current ratio, quick ratio, gross profit ratio and many other ratios are more favorable than the previous year.