University of central punjab, faisalabad

Analysis of Financial Statements

Topic: financial ratio analysis

Submitted by:

Saira Khalid

Reg. No. 0201

Sana Riaz

Reg. No. 0185

Section: M.Com. 1A

Submitted to:

Sir MuzammilMurtaza

Date of submission:

20th-June-2014

Dedication

We like to dedicate our work to our teacher Sir Muzammal Murtaza and the people, who helped us in our project.

ACKNOWLEDGEMENT:

First of all, we are grateful Allah Al-mighty who gave us ability to accomplish this project. The completion of this project is a matter of pleasure for us but it was not possible without the support of our teacher, infact a mentor, Mr. Muzammal Murtaza , for he has provided us the useful knowledge of subject of Analysis of Financial Statements. So, we are thankful to our Sir Muzammal Mmurtaza . We are thankful to our parents also who helped and supported us.

Executive Summary:

In this projectwe make ration analysis of Azgard Nine Limited which is a subsidiary of Jahangir Saddiqui Company.We make Profitability Analysis ,Liquidity Analysis and Long Trem debt Paying ability alaysis.We choose 2 years for analysis purpose (2013 and 2014).One by one we calculate all the ratios but it is observed that the position of this company is very poor.It liquidity position is not good.It have no debt paying abilityand profitibility position is also not good.Management should take some strategis decisions to overcome the problems facing by the company.

INTRODUCTION:We have selected a subsidiary of Jahangir Siddiqui and company named “Azgard Nine limited” for ratio analysis. The statements considered for ratio analysis belong to year 2013.

What is Azgard Nine Limited:

Basic introduction of company:

Azgard Nine Limited ("the Company") was incorporated in Pakistan as a Public Limited Company and is listed on Karachi Stock Exchange (Guarantee) Limited. The Company is a composite spinning, weaving, dyeing and stitching unit engaged in the manufacture and sale of yarn, denim and denim products.

Mission:

“To retain a leadership position as the largest value added denim products’ company in Pakistan.”

Vision:

“To become a major global Fashion Apparel Company.”

Permissible company information:

The Company is a composite spinning, weaving, dyeing and stitching unit engaged in the manufacturing of yarn, denim and denim products.

Business Type

Exporters

Contact Person

Mr. NaeemYousaf Qureshi( Company Secretary)

Company Profile:

AZGARD NINE LTD. is one of the Textile Products in Lahore, Punjab, located in Ismail Aiwan-e-Science,Shahrah-e-JalauddinRoomi,Ferozepur Road.

Contact information:

Phone:(92 42) 35761794, 35751515Fax: +92 42-3576179 --- +92 42-35761794, 35751515,

RATIO ANALYSIS:

Liquidity Ratios:

Current ratio

Current ratio = current assets ÷ current liabilities

2013 = 5970155525 / 9732794035

= 0.613

2012 = 17,682,682,199 / 22,056,458,874

= 0.80

Interpretation:

This ratio shows that we are unable to pay short term obligations. It also shows that utilizing all of the current assets will pay nearly half of the obligations. So, this ratio is unfavorable for 2013 but when compared with 2012, it is good in 2012 as compared with 2013 but not favorable for payment of all short term liabilities.

Inventory turnover ratio

Inventory turnover ratio = cost of goods sold ÷ average inventory

2013 = 13258045955 / (2211143101+3027802430) /2

= 5.06 times

2012 = 12,642,326,813 / (3027802430+ 3,763,161,375)/2

= 3.72 times

Interpretation:

This ratio shows the number of times the inventory cycle of converting into finished goods is completed until sold. It shows that mostly, 5 times approximately the inventory is processed in a year to convert in to cost of goods sold. But in 2012, this ratio is unfavorable because we process inventory only 3.72 times in a year.

Inventory turnover in days

Inventory turnover in days = 365 ÷ inventory turnover

2013 = 365 / 5.06

= 72.1152 days

2012 = 365 / 3.72

= 98 days

Interpretation:

This ratio indicates the number of days the inventory takes to be processed. We can say that previous ratio tells the number of times and this ratio tells the number of days of same inventory for processing and conversion into finished goods. It is approximately 72 days to process inventory. While in 2012, it is quite high which is unfavorable.

Accounts receivable ratio

Accounts receivable turnover = net credit sales ÷ average gross receivables

2013 = 13719625585 / (2149837255+2384301663) /2

= 6.052 times

2012 = 11,524,279,419/(2,384,301,663 + 3,185,586,167) / 2

= 4.138 times

Interpretation:

This ratio tells that how many times we collect payment from debtors in a year. As per calculation, Azgard Nine takes the payment from debtors 6 times in a year. In 2012, it shows that company makes collection from debtors 4 times. Which shows that company has improved its policy for debt collection.

Accounts receivable turnover in days

Average collection period = 365 ÷ accounts receivable turnover

2013 = 365 / 6.0517

= 60.3 days

2012 = 365 / 4.138

= 88.2 days

Interpretation:

It is the days taken for making collection of the receivables. Approximately, it takes 2 months to get the single payment. Note that these are the related to previous year only, previous years amy show different collection in days. In 2012, the number of days is in excess than in 2013 showing unfavorable outcomes.

Accounts Payable turnover:

Accounts payable turnover = Cost of goods sold ÷ average accounts payable

2013 = 13258045955 / (2526245640+4049064395) /2

= 4.03 times

2012 = 12,642,326,813 / (4,049,064,395+2,743,608,344) /2

= 3.72 times

Interpretation:

Accounts payable turnover tells the number of times we make payment to our creditors. We make the payment a time in a year. We make the payment earlier showing lower cash availability in 2012. The year 2013 is favorable.

Accounts payable turnover in days:

= 365 ÷ Accounts payable turnover

2013 = 365 / 4.03

= 90.51 days

2012 = 365 / 3.72

= 98.0565

Interpretation:

If we calculate the number of days we make the payment, it is about after a quarter. It is relevant to previous year only.

Average days in accounts payable:

= ending accounts payable ÷ (COGS ÷365)

2013 = 2526245640 / (13258045955 / 365)

= 69.5487 days

2012 = 4,049,064,395 / (12,642,326,813 / 365)

= 116.9 days

Interpretation:

On average, it takes about 70 days to make the payment. It shows that in last year, we made the payments earlier than previous years. Average days for 2012 are 116.9. which seems somehow good for the company.

Operating cycle:

Operating cycle = Inventory turnover in days + accounts receivable turnover in days

2013 = 72.1152 + 60.3

= 132.4152

2012 = 98 + 88.2

= 186.2

Interpretation:

It shows that we process inventory and receive payments from debtors in total after 132 days. It means that from raw material to recipt of sales, it requires 132 days approximately.

Cash Cycle:

Cash cycle = Operating cycle – Accounts payable turnover in days

2013 = 132.4152 – 90.51

= 41.9052 days

2012 = 186.2 – 116

= 70.2 days

Interpretation:

It tells that what is the days gap in receipt of cash from debtors and payment to the creditors. It is unfavorable because we make the payment after 90 days and collects after 132 days and fall short of cash. Then we need short term loan to finance the daily activities of the company. In 2012, it is also unfavorable and company needs to revise its credit policy.

Receipt from debtors

Payment to creditors

0 20 40 60 80 100 120 140

No .of days 2013

No .of days

Receipt from debtors

Payment to creditors

0 40 80 120

160

200

No. of days 2012

No. of days

Quick Ratio

CurrentAssets− (Inventories+PrepaidExpenses )

CurrentLiabilities

2013 = 5,970,155,525 – (2,211,143,101+629,344,302 )

9,732,794,035

= 3.21

2012 = 15,194,672,724−¿

2,753,455,935

= 4.11

Interpretation:

As compared to 2013 the firm have high quick ratio but excluding non liquid assets firm have more current assets in the form of receivables which is not a good sign.

Cash Ratio

Cas h Equivalents+MarketableSecurities

CurrentLiabilities

2013 = 132,259,604+700,000,000

9,732,794,035

= 0.085

2012 = 289,721,743+10,969,811,440

2,753,455,935

= 4.08

Interpretation:

The firm have not enough cash to pay its liability as its ratio is very low.But in 2013 its position is good enough because of high ratio.

Working Capital

2013 = CurrentAssets−CurrentLiabilities

= 5,970,155,525−9,732,794,035

= - 37626385510

2012 = CurrentAssets−CurrentLiabilities

= 17,682,682,199 - 22,056,458,874

= -4373776675

Interpretation:

In 2012, It shows a weak position of the firm because current liabilities are less than its current liabilities.Same is the position in 2013 as well.Firm have poor position.

Sales to Working Capital Ratio

2013:

Sales

AverageWorkingCapital

= 13,719,625,585

−¿21000081095

= - 0.65

2012:

Sales

AverageWorkingCapital

= 13,719,625,585

222004060

= 61.76

Average Working Capital:

2011 = 19,589,673,534 - 14,771,888,734

= 4817784800

2012 = 17,682,682,199 - 22,056,458,874

= - 4373776680

2013 = 5,970,155,525−9,732,794,035

= - 37626385510

Average WC (2013) = ( -4373776680) + ( - 37626385510) / 2

= -21000081095

Average WC (2012) = ( -4373776680) + (4817784800 ) / 2

= 222004060

Interpretation:

This ratio is also negative as working capital is negative.There is negative contribution of assets in generation of sales for the firm.It was in better position in 2012 but become poor in 2013.

Long term debt paying ability

Time Interest Earned Ratio

NetIncome+ InterestExpense+TaxExpense+NonControllingInterest−EquityEarnings

÷

InterestExpense+ IncludingCapitalizedInterest

2013= 963,944,545+2,101,750,204+2,101,750,204+0−1,262,285,899

2,101,750,204+262,988,125

= 3905159054/ 2364738329

= 1.65

2012= −6,076,575,125+115,954,408+3,424,378,071+0−4,471,164,231

3,424,378,071+1,425,935,847

= -7007406877 / 4850313918

= - 1.44

Cash Base Time Interest Earned Ratio

= EBIT +Depreciation

Interest

2013 = 4,257,401,465+498,380,814

2,101,750,204

= 2.26

2012 = −2,536,242,646+517,909,929

3,424,378,071

= -0.58

Fixed ChargeCoverege Ratio

NetIncome+ InterestExpense+TaxExpense+NonControllingInterest−EquityEarnings+ InterestPortionofRentals

÷

InterestExpense+ IncludingCapitalizedInterest+ InterestPortionofRentals

2013 = 963,944,545+2,101,750,204+0−1,262,285,899 + 0

2,101,750,204+262,988,125 + 0

= 1803408850 / 2364738329

= 0.76

2012= −6,076,575,125+3,424,378,071+0−4,471,164,231+0

3,424,378,071+1,425,935,847+0

= -7123361285 / 4850313918

= - 1.46

Debt Ratio

= Total liabilities

TotalAssets

2013 = 15942846283

20,675,719,463

= 0.77

2013 = 24809914809

32,877,354,923

= 0.75

Interpretation:

In 2013, the Firm is financed with 77% assets and 23% liabilities which means that company is less dependent on outside investors.In 2012, it is financed 75% of debt and 25% of equity means more dependence on debt in 2012.Proportion of assets financed by debt.

Debt/Equity Ratio

= Total Liabilities

S hare holde r ' sEquity

2012 = 24809914809

12264884032

= 0.55

2013 = 9,732,794,035

7966372553

= 0.81

Interpretation:

It shows the capital structure of the firm.The Firm is 12.63 capitalizes with equity but in 2012it is capitalized 5.54 with equity.In 2013 it has more dependence on equity than in 2012.

Debt to Tangible Net Worth Ratio

= Total Liabilities

Sh are h olde r ' sEquity−IntangibleAssets

2013 = 15942846283

7966372553−1,302,407

= 2.002

2012 = 24809914809

4,471,164,231−3,907,224

= 5.55

Interpretation:

In 2013, the firm is financed by 1.26 of the current liabilities than by net worth and in 2012, 5.55 is financed of current liabilities than by net worth which is conservative approach and tell the true picture by excluding intangibles.In 2012, more dependent on equity.

Current Debt/Net Worth Ratio

2013 = CurrentLiabilities

NetWort h

= 9,732,794,035

4732873180

= 2.05

2012 = CurrentLiabilities

NetWort h

= 22 , 056 , 458 , 874

4732873180

= 2.05

Net Worth ( 2013) = Total Assets - Total Liabilities

= 20,675,719,463 - 15942846283

= 4732873180

Net Worth ( 2012) = Total Assets - Total Liabilities

= 17,682,682,199 - 24809914809

= 4732873180

Interpretation:

This ratio shows that firm is financed more by liabilities than its owner’s equity in both years.

Total Capitalization Ratio

2013 = Long Term Debt

TotalCapital

= 1,646,718,198

6195436898

= 2.67

2012 = Lo ng Term Debt

TotalCapital

= 24,020,739

4,471,164,231

= 0.0053

Interpretation:

It shows more investment of equity rather than creditors which may be less risky for the firm.

Fixed Asset/Equity Ratio

2013 = FixedAssets

Equity

= 12,953,017,078

1,262,285,899

= 10.26

2012 = FixedAssets

Equity

= 13,395,217,269

4,471,164,231

= 2.99

Interpretation:

In 2013, 10.26 funds are provided by shareholders to finance fixed assets.which is more than that of 2012.

Profitability of the firm:

On the basis of net income

Net Profit Margin:

= Net profit ÷ Net sales

2013 = 963944545 / 13719625585

= 0.07026 or 7.02%

2012 = -6,076,575,125 / 11,524,279,419

=-52.73%

Interpretation:

This ratio shows the percentage profit that we have earned from selling one unit of goods or services. It shows that we earn only 7% profit on sales which is quite lower as compared to any other business. There is 52.73% of loss in 2012. The dramatic and drastic change in profit percentage, indicates something was wrong in 2012 in the company. But now company is trying to revive.

Total assets Turnover

= net sales ÷ average total assets

2013 = 13719625585 / {(206755719463-700000000-16600910)+(32877354923-10969811440) /2}

= 13719625585 / (206039118500 + 21907543480) /2

= 13719625585 / 113973331000

= 0.12 times

2012 = 11,524,279,419 / (17,682,682,199 + 19,589,673,534) /2

= 0.65 times.

Interpretation:

This ratio shows the sales that can be generated from the use of total assets in the business. Azgard Nine’s ratio is quite lower it means it is not making the efficient use of the assets to generate sales. The turnover in 2012 was 0.65 times more than 2013.

Return on assets

= net income ÷ average total assets

2013 = 963944545 / 113973331000

= 0.00845 or 0.845%

2012 = (6,076,575,125) / (32,877,354,923 + 36,146,856,458) /2

= -0.17 or -17%

Interpretation:

It tells that how much return the company generates form the use of its assets. The higher the return the better it will be. But for Azgard Nine, it is quite lower that is 0.0084.while in 2012, there was a loss showing negative trends. But in 2013, company is trying to take its position.

Return on assets by Dupont analysis:

= (net income ÷ net sales) x (net sales ÷ average total assets)

2013 = (963944545 / 13719625585) x (= 13719625585 / 113973331000

= 0.07026 or 7.02% x 0.12 times

= 0.0084 or 0.84%

2012 = -6,076,575,125 / 11,524,279,419 x (6,076,575,125) / (32,877,354,923 + 36,146,856,458) /2

= -0.17 x -0.52

= -0.089

Interpretation:

Dupont ratio is the combination of net profit margin and total asset turnover. It tells shorting the return the company is generating. It is quite lower. In 2012, there was a loss of 8.9% which indicates poor condition.

On the basis of operating income

Operating income margin

= operating income ÷ net sales

2013 = 1054167199 / 13719625585

= 0.077

2012 = (2,536,242,646) / 11,524,279,419

= -0.22

Interpretation:

The ratio tells the operating profit to sales available.Azgard Nine is not in a good position, infact it is generating an operating loss in 2012 which is not good for any company. It also shows that the company is not able to pay its debt charges and is not in a position to pay dividends. But company is reviving in 2013 for earning is 7% now.

Operating assets turnover

= net sales ÷ average operating assets

2013 = 13719625585 / 20517676860

= 0.67times

2012 = 11,524,279,419 / 14370389290

= 0.80 times

Interpretation:

This ratio tells that how much about of net sales is generated through operating assets. The operating assets include only the assets that are used to perform the operations. It generates sales only 0.7 times in a year using the operating assets. This was the condition in 2013. But in 2012, its operating assets are helping to generate profits 0.8 times better than 2013.

Return on operating assets

= operating income ÷ average operating assets

= -1054167199 / 20517676860

= 0.513

2012 = (2,536,242,646) / 14370389290

= 0.17

Interpretation:

The ratio is very important to measure the operating income generated using operating assets. But this ratio tells that operating assets are used in-efficiently so that they are generating losses and negative percentages. In 2013, it generates 0.51 loss and 0.17 loss in 2012. Situation is worse in 2013.

Operating assets

= total assets – (intangibles + investment + construction in progress)

2013 = 20675719463 – (700000000 + 16600910)

= 19959118550

2012 = 32,877,354,923 – (10,969,811,440 + 831,308,310)

= 21076235170

2011 = 19,589,673,534 – (955,318,688 + 10,969,811,440)

= 7664543402

Operating assets includes those assets only that generate operating profits and facilitates operations.

Return on assets by Dupont Analysis:

= (operating income ÷ net sales) x (net sales ÷ average operating assets)

2013 = -0.077 x 0.6874

= -0.05

2012 = -0.22 x 0.8

= -0.176

Interpretation:

Dupont is the combination of the operating profit and operating assets turnover. This ratio is very useful to easy and quick calculations of return on operating assets. It shows that operating assets are generating negative returns or losses in 2012 and 2013 both. Which shows poor position of the company.

Sales to fixed assets ratio

= net sales ÷ average net fixed assets (excluding construction in progress)

2013 = 13719625585 / 20675719463

= 0.6635 or 66.35%

2012 = 11,524,279,419 / 15,194,672,724

= 0.76

Interpretation:

This ratio tells that efficiency with which the fixed assets are used to generate sales for the products of the company. It is obvious that the sales are generated when the products are prepared. And the products are prepared using the fixed assets. Assets co-operate about 66% to generate sales in 2013 and 76% contribution in 2012.

Return on investment

= {net income + interest * (1 – tax rate)} ÷ Average (long term liabilities + equity)

2013 = 963944545 +137539517 * (1- 0.125) / (6210052248+1262285899) + (4471164231+2753455935) /2

= 1084979320 / 7472338147 + 7224620166 /2

= 1084979320 / 7348479157

= 0.1476

2012 = (6,076,575,125) + 3,424,378,071* (tax relief 1.9%) / (15,194,672,724+ 4,548,718,700)+ (4,548,718,700+ 16,557,182,924) /2

=-6141638308 / 30296342230

= -0.203

Interpretation:

This ratio measures the return that we are able to pay to the investors of debt and equity security. It uses the income available to be distributed to the creditors and shareholders. We have about 0.1476 (in percents) the income to make payment in 2013. In 2012, return on operating assets is -0.203lesser than 2013 and poor.

Return on equity

= (net income – dividends on redeemable preferred stock) ÷ Average total equity

2013 = (963944545 – 0) /4,471,164,231

= 0.22

2012 = ((6,076,575,125) – 0) / 10,269,064,145

= -0.59

Interpretation:

The return available to the equity shareholders. It must be remembered that dividends paid to redeemable preferred stock must be subtracted before calculation so as to show the actual income available to equity holders (both ordinary and preferred). We are able to pay 22% of the equity holders. While in 2012, the -60% return is generated for equity shareholders.

Return on common equity

= (net income – preferred dividend) ÷ Average common equity

2013 = (963944545 – 9413535) / 10115628290

= 0.094 or 9.4%

2012 = ((5,960,620,717)–0) / 7370114186

= -0.81

Interpretation:

The income available to be distributed to the equity investors is calculated here. It tells that about 9.4% of equity holders can be paid dividend in 2013. Negative return is generated in 2012.

Average common equity:

Share capital + retained earnings – treasury stock

2013 = 4548718700 + 3417653853 = 7966372553

2012 = 4548718700 + 7716165332 = 12264884030

Average = 10115628290

2011 = 4,548,718,700 + 7,566,084,048 = 12114802750

Average = 12189843390

Return on total assets variation

= (net income + interest expense) ÷ average total assets

2013 = 963944545+2101750204) / 26776537190

= 3065694749 / 26776537190

= 0.1145 or 11.45%

2012 = (6,076,575,125) + 3,424,378,071 / 34512105690

= -0.78

Interpretation:

The ratio of Azgard Nine is 11.45% for both creditors and shareholders in 2013. While in 2012, the negative 78% in 2012.

Gross profit margin

= gross profit ÷ net sales

2013 = 461579630 / 13719625585

= 0.03364 or 3.36%

2012 = (1,118,047,394) / 11,524,279,419

= -0.097 or -9.7%

Interpretation:

This ratio tells that Azgard Nine earns about 3.36% of the net sales in gross in 2013. It is quite lower for proper survival of the company in the industry. In 2012, the negative profit or loss is generated showing poor condition.

OVERALL SUMMARY:

Considering the year 2012, the position of the company was very miserable because company was not generating enough revenue and was earning a huge loss. This might be due to following reasons:

In-efficient management Unrelated policy decisions Unfavorable conditions in market Large number of scandals

While, year 2013 is better than 2012, because the company is making profits.Although these profits are not huge but company is trying to revive. If the company wants to stay in the market then it must improve its profit ratios.

Azgard Nine Limited (ANL) is not in a good position for the survival. Management must take decision for its betterment which may be its joint venture or divestiture with other companies or its liquidation if management can’t be made better.

References:

http://azgard-nine-ltd.pakbd.com/about_us#sthash.IzOHRwqD.dpuf

http://www.azgard9.com/financial_information.php

http://www.lahoreindustry.com/azgard-nine-ltd-co10378

http://www.pakistanbusinessjournal.com/b2b-directory/azgard-nine-ltd_84570.html