Lever Brothers Financial Analysis1

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<p>Lever Brothers Pakistan Limited</p> <p>GROUP OF FINANCIAL RATIOSFinancial ratios can be divided into following five major categories. 1. 2. 3. 4. 5. Liquidity ratio Activity ratio Debt analysis ratio Profitability ratio Marketability ratio</p> <p>LIQUIDITY RATIOSLiquidity of a business firm is measured by its ability to satisfy its shortterm obligations as they come due. Liquidity refers to the solvency of the firms overall financial position. The easier with which it can pay it bills. The following four ratios measure the liquidity of the firms. </p> <p>Networking Capital Current Ratio Quick (Acid-Test) Ratio Cash Ratio</p> <p>NETWORKING CAPITAL NWC 2004 2003 = = = = = Current assets current liabilities 3752573 3679974 72599Rs. 4871573-4635286 236287Rs.</p> <p>1</p> <p>Lever Brothers Pakistan Limited</p> <p>In 2003 current assets are greater than current liabilities but in 2001 current liabilities are greater that current assets. It indicate that company is not in a good position as compare to previous year. CURRENT RATIO CR 2004 2003 = = = = = Current Assets / Current Liabilities 3752573/3679974 1.02: 1 4871573/4635286 1.05: 1</p> <p>Current ration of Lever Brothers has decreased as compare to previous year. It indicate that company made no progress in this year. This decreased mainly due to reduction in trade debtors and stock in trade. QUICK (ACID TEST) RATIO Quick Ratio 2004 2003 = (Current Assets Inventory) / Current Liabilities = (3752573-1809077) / 3679974 =0.528: 1 = (4871573-2616903) / 4635286 = 0.486 : 1 Quick ratio of Lever Brothers has increased as compare to previous year it indicates that company has increased its quick assets. (cash and bank balance)</p> <p>CASH RATIOCash Ratio = (Cash +Cash Equilivant) / Current Liabilities 2004 2003 = 759356 / 3679974 = 0.206 : 1 = 1159603/4635286 = 0.250: 12</p> <p>Lever Brothers Pakistan Limited</p> <p>Cash ratio has increased in this year which shows that company has more liquid assets (cash + Marketable securities) then the last year.</p> <p>ACTIVITY RATIOSActivity ratios are used to measure the speed with which various accounts are converted into sales or cash. With regard to current accounts, measures of liquidity or generally inadequate and differences in compositions of a firms current assets and liabilities can significantly affect its true liquidity, so for that reasons we go for activity ratios analysis. </p> <p>Inventory Turnover Ratio Average Age of Inventory Average Collection Period Average Payment Period Accounts Receivable Turnover Accounts Payable Turnover Operating Cycle Cash Conversion Cycle Fixed Assets Turnover Total Assets Turnover</p> <p>INVENTORY TURNOVER RATIO Inventory Turnover= Cost of Good Sold / Inventory 2004 2003 = 12713885/1809077 = 7.02Times = 14676937 / 2616903 = 5.61Times</p> <p>3</p> <p>Lever Brothers Pakistan Limited</p> <p>Inventory turnover of the company increases from 6.600 times to 7.346 times in this year. This indicates that company converts its inventory into cash for more times in a year as compare to previous year. AVERAGE AGE OF INVENTORY Average Age of Inventory = No. of Working Days/Inventory Turnover 2004 2003 = 360 / 7.02 = 51.28 Days = 360 / 5.61 = 64.17 Days Average age of inventory has decreased as compare to previous year which indicates that company keeps its inventory for short days in its store as compare to previous year. AVERAGE COLLECTION PERIOD Average Sale Per Day 2004 2003 = Net Sales / No. of Working Days = 18238218 / 360 = 50661.72 Rs. = 21471724/ 360 = 59643.68 Rs. Average Collection Period = Accounts Receivable/Average Sale per day 2004 2003 = 83751/50661.72 = 1.65 Days = 469834/59643.68 = 7.88 Days Average collection period has decreased from the last year it is a good sign for a company because it indicates that firm collects its receivable early as compare to previous year.4</p> <p>Lever Brothers Pakistan Limited</p> <p>AVERAGE PAYMENT PERIOD Average Purchase Per Day = Net Purchases/No. of Working Days 2004 2003 = 10246126/ 360 = 28461.46 Rs. = 12483042 / 360 = 34675.12 Rs. Average Payment Period = Accounts Payable/ Net Purchases Per day 2004 2003 = 2106378/28461.46 = 74.00 Days = 3323715/34675.12 = 95.85 Days Average payment period has also increased as compare to previous year, which indicates that the company enjoys the cash of outsiders for more days or firm use cash of outside person for long period. Care should be taken that such delays in payments of accounts payable should not damage the firms credibility. ACCOUNT RECEIVABLE TURNOVER Account Receivable Turnover = No. of Working Days/Average Collection Period 2004 2003 = 360 / 1.65 = 218.18Times = 360 /7.88 = 45.69 Times ACCOUNTS PAYMENT TURNOVER Accounts Payment Turnover = No. of Working Days/Average Payment Period 2004 = 360 / 74 = 4.86Times5</p> <p>Lever Brothers Pakistan Limited</p> <p>2003</p> <p>= 360 / 95.85 = 3.76Times</p> <p>OPERATING CYCLE OC = Average Age of Inventory + Average Collection Period 2004 2003 = 51.28+1.65 = 52.93 Days = 64.17+ 7.88 = 72.05Days</p> <p>CASH CONVERSION CYCLECash Conversion Cycle = Operating Cycle Average Payment Period 2004 2003 = 52.93 74 = -21.07Days = 72.05 95.85 = -23.8Days As for as cash conversion cycle concern, it has decreased as compared to last year. It is a good sign for firm. It indicates that company only use outsiders debt to finance its activities more than last year and no use only 1% of equity.</p> <p>FIXED ASSETS TURNOVERFixed Assets Turnover = Net Sales / Net Fixed Assets 2004 2003 = 18238218/1523877 = 11.96 Times = 21471724/1444882 = 14.86 Times</p> <p>6</p> <p>Lever Brothers Pakistan Limited</p> <p>Fixed assets turnover has increased from the last year which indicates for firm because it shows that firm has utilized its fixed assets efficiently to generate sales. TOTAL ASSETS TURNOVER Total Assets Turnover = Net Sales / Total Assets 2004 2003 = 18238218/5892125 = 3.095 Times = 21471724/6820947 = 3.147 Times Total assets turnover has reduced from last year which indicates less utilization of total assets in order to generate sales.</p> <p>LEVERAGE (DEBT) RATIOSDebt Ratio </p> <p>Debt Equity Ratio Time Interest Earned Ratio</p> <p>DEBT-TO-TOTAL-ASSETS RATIO Debt Ratio = Total Liabilities / Total Assets 2004 2003 = 3769563/5892125 100 = 63.98% = 4787643/6820947 100 = 70.19% Debt ratio has increased as compared to previous year which indicating that in year 2001 the debts are more used in order to finance the total assets.</p> <p>7</p> <p>Lever Brothers Pakistan Limited</p> <p>DEBT EQUITY RATIO Debt Equity Ratio = Total Liabilities / Shareholders Equity 2004 2003 = 3769563 / 2122562 100 = 177.59 % = 4787943/ 2033004 100 = 235.51 % Debt equity ratio also increased as compared to previous year which indicates that less equity is used to finance the total assets. TIME INTEREST EARNED RATIO (COVERAGE RATIO) Time Interest Earned Ratio = Earning Before Interest &amp; Tax / Interest 2004 2003 = 2,202005 / 34909 = 63.08 Times = 2571869/ 50991 = 50.44 Times Time interest earned ratio has decreased as compared to previous year which is not a good sign for firm. Because it indicates that firm is less capable in regard to pay interest expenses of the year.</p> <p>PROFITABILITY RATIOS </p> <p>Gross Profit Ratio Operating Profit Ratio Net Profit Ratio Return on Investment (ROI) Return on Equity (ROE)</p> <p>8</p> <p>Lever Brothers Pakistan Limited</p> <p>GROSS PROFIT RATIO Gross Profit Ratio = Gross Profit / Net Sales 100 2004 2003 = 5524333 / 18238218 100 = 30.29 % = 6794787/21471724 100 = 31.65 % Gross Profit ratio has increased from last year which indicates that firm has made more sales in year 2001 and also control cost of goods sold. OPERATING PROFIT RATIO Operating Profit Ratio = Operating Profit / Net Sales 100 2004 2003 = 2202005/ 18238218 100 = 12.07% = 2571869/ 21471724 100 = 11.98 % Operating profit ratio has also increased as compared to previous year which is a healthy sign for the firm. NET PROFIT RATIO Net Profit Ratio = Net Profit After Tax / Net Sales 100 2004 2003 = 1724943 / 18238218 100 = 9.45 % = 1599332 / 21471724 100 = 7.45% Net profit ratio has just decreased as compared to previous year which is a not a good symbol for owners.</p> <p>9</p> <p>Lever Brothers Pakistan Limited</p> <p>RETURN ON INVESTMENT (ROI) Return on Investment = Net Profit After Tax / Total Assets 100 2004 2003 = 1724943 / 5892125 100 = 29.28 % = 1599332 / 6820947 100 = 23.45 % RETURN ON EQUITY (ROE) Return on Equity = Net Profit After Tax / Shareholders Equity 100 2004 2003 = 1724943 / 2122562 100 = 81.27 % = 1599332 / 2033004 100 = 78.67 % Return on investment and return on equity, both ratios show decreasing trend as compared to previous year. Which means that firm earned less return on its investment as compared to previous year.</p> <p>MARKETABILITY RATIOS </p> <p>Earning Per Share Price Earning Ratio Breakup Value</p> <p>EARNING PER SHARE (EPS) Earning Per Share = Net Profit After Tax Dividend to Preferred Stock / Outstanding Shares 2004 2003 = 1,724,943,000 239,000 / 13,293,869 = Rs. 129.73 = 1,599,332,000 239,000/ 13,293,869 = Rs. 120.2910</p> <p>Lever Brothers Pakistan Limited</p> <p>Earning per share of the company has decreased as compared to previous share, which is not a good sign for a firm and it is a bad effect on firm to attract more investors. PRICE EARNING RATIO Price Earning Ratio = Market Price of Stock / Earning Per Share 2000 2001 = 900 / 129.73 = 8.937 = 900 / 120.28 = 9.785 BREAKUP VALUE Breakup Value = Shareholders Equity / Outstanding Shares 2004 2003 = 2,122,562,000 / 13,293,869 = 159.66 = 2,033,004,000 / 13,293,869 = 152.93</p> <p>11</p> <p>Lever Brothers Pakistan Limited</p> <p>CONCLUSIONAs a whole if we see that the repute of Lever Brothers Pakistan Limited is very good but as a finance manager we take decisions according to the analysis of the accounts. So according to the financial analysis of this firm I will not like to invest for short-term due to negative net working capital, decrease in current ratio and increase in average payment period and also not like to invest for long-term due to increase in debt and debt equity ratio and decrease in time interest earned ratio. So according to these results and reduction in earning per share I will not like to purchase its shares. So I conclude that firms current position is not very bad for existing shareholders but very risky condition for new investors. So I would like to suggest that firm should increase its current assets and decrease to some extent in average payment period to gain the confidence of short-term investors. Secondly, company should decrease up to some extent its debt ratio and increase times interest earned ratio to gain the confidence of long term investors. And at least company should increase its earning per share to attract more investors to purchase its shares.</p> <p>12</p>