Comparative Analysis: the value of total assets has increased by
above 52.81% between 2014 to 2010. There could be a number of
reasons for this increase. Firstly the stock in trade increased
from 102733 to 1372741 in absolute terms which resulted in about
33.62% increase the stock in trade is a major Chunk of the total
assets as it constitute of raw material, work in progress, and
finished goods, with finished good contributing the most to the
increase in stock and trade. This situation, however, is not very
favorable since the increase from 2010 to 2014 would also means
high storage costs and increased in efficiency. Another reason for
this increase was due to increase in trade debts of the company.
Trade debts of the company continued to increase throughout the
period from 2010 to 2014 by 27.36% this increase is due to credit
sales to other companies. Property, Plant, and equipment that is
major portion of the total assets in absolute terms, only increased
by point 0.55 % from 2010 to 2014. Although, property, Plant and
equipment was purchased every year from 2010 to 2014 the absolute
figures declined due to depreciation. The long term investment
change was Zero since there was no long term investment after 2012.
This could mean that the company had no recourses to invest in
profit able opportunity. Over all the total liability decrease by
8.69%, even though, the total liabilities increase between 2012 and
2013 by 20% there were number of reasons for this over all declined
8.69% . Long term financing declined 37.97% which means that the
company is efficiently paying off its debts and is not borrowing in
excess. this is a good sign for the company since the over all debt
as percentage of total assets is also decreasing. Another reason
for a declined in total liabilities 49.24% in short term borrowings
since the company is moving towards an equity structure. Even
though short term borrowings increased between 2010 and 211 due to
increased cash and running finances from other banking companies.
The shift towards equity structure from debt is evident from the
increase in equity by 110.20% the company prefer to obtain its
fianc by issuing shares to the public. Net sales increased
continuously through out the 5 years span by 44.8% this is because
Pakistan is among the top cotton producers and there is a high
demand for Pakistan Textile products. This is evident from the fact
that there is an increased sales to local and foreign market
(exports). The cost of sales increased by 53.14% which was due to
increased Raw material consumed throughout the years and stocks
from the previous years. Total operating expenses continued to
increase throughout the years due to a continued increase in the
administrative expenses. Finally, the profit after tax increase by
29.17% which indicates that the company has done well during the
past 5 Years.
Trends Analysis : The companys total assets are increasing
through out the period to be more specific, the total assets
increase at decreasing rate between 2012 and 2011 and then
continues to increase at increasing rate. There could be multiple
reasons for this increase. Firstly, the stock in trade kept
increasing at inconsistent rates. For instance, the rate of
increase was negative between 2012 and 2011, and 2014 and 2013.
More over the declined in days sales inventory between 2012 and
2011, and 2014 and 2013 also proves this scenario.Secondly, the
trade debts continued to increase at increasing rate 2012 onwards
due to increased credit sales. Long term investments declined to
76.47% in 2012 and 2011 and ultimately became Zero. Total
liabilities showed a decreasing trend throughout the period.
However, it increased marginally between 2013 and 2012. This is a
good sign for the company. This declined could be due to an overall
decrease in the trend of long term financing. Even though long term
financing increased a marginally between 2013 and 2012 the overall
decrease had a major impact on the decrease in total liabilities.
Another reason for the decrease could be due to continuous decrease
in short term borrowings. The trend for short term borrowing shows
an upward movement only between 2010and 2011 due to high cash and
running finance. The company also favored long term financing
between 2012 and 2013 due to favorable interest rates. Since the
company is more equity finance the total equity is showing positive
movements from 2010 to 2014. Net sales continued to increase
throughout the period due to increase demand in the local and
foreign market . Due to continues increase in demand for textile
products, the manufacturing and raw material cost also increase
which results in a continues increasing trend for cost of sale.
Increase sale also result in increased administrative and
distribution cost which makeup the increasing trends for operating
cost.Even though operating cost is increasing at inconsistent rate,
the over all impact is positive. The profit after tax remained
positive but declined between 2013 and 2014, and 2011 and 2012
which explains the inconsistent trend. These declined resulted due
to high administrative cost (hiring staff), distribution cost , and
cost of sale to meet the increased demand. Balance Sheet Common
Size: The common figure for a common size balance sheet is total
assets. Based on accounting equation this also equals total
liabilities and shareholders equity. The common size strategy lands
insight in to a firms capital structure . Equity Structure :The
equity structure of the company shows that in 2014 about 71% is
financing $1 of investment in the company in the form of equity.
Suraj cotton was already relying on equity financing, however, this
dependence continue to increase from 51.73% to 71.16% through out
the period. In 2014, about 71.6% of total assets were finance
through equity. This indicates that the company used aggressive
equity financing. Mostly companies use debts to finance to
operations. By doing so, a company increases its leverage because
it can invest in business operation without increases its equity.
In Suraj Cottons case however, the dependence on equity is high,
indicating low leverage. When the leverage ratio is low, principal
and interest payments do not command such a large portion of the
companys cash flow and the company is not as sensitive to changes
in interest rates from the creditors perspective . However,
decreasing leverage may also indicate the company has opportunity
to use leverage as a means of responsibly growing the business. In
general, increasing leverage indicates that a company may not be
able to generate enough cash to satisfy its debt obligation.
However, low leverage may indicate that the company is not taking
advantage of the increased profits that financial leverage may
bring . From a creditors perspective low leverage is more
preferable because the creditors interests are better protected in
the event of a business declined and the shareholders are more
likely to receive some of their original investment back in the
event of liquidation.Liability Structure :It is evident from the
vertical analysis that the major composition of the capital
structure of Suraj Cotton has been through equity financing
throughout the 5 years. Total liabilities, on the other hand, were
28.84% of the total assets as compared to 71.6% of the total
equity. The High level of equity of financing indicates lower
solvency risk from a creditors perspective. In the previous years,
dependence on total liability was a little higher as compared to
the preset year. However this proportion decreased which means
successful payment of liabilities and not borrowing in excess. Of
28.84% total liability in the current year, 20.41% belongs to
current liabilities. Same was the case in previous years. The
proportion current liabilities increase between 2010 and 2011 due
to increased short term borrowing, and then continued to decline.
This would also mean decreasing cost of debt for the company. When
we assess how costly these liabilities are, we see that total Non /
current liabilities are 8.43% while current liabiities are 20.84%
which means that the ability of the company not being able to meet
short term obligation is higher from the creditors perspective.
This is also because cash and bank balances account for only 3% of
the total balances in 2014. Total non current liabilities, also
continue during the years. from the table, it can be seen that
except 2010 and 2011, operating liabilities constitutes a major
portion of the total liabilities. Operating liabilities accounted
for 18.16% of the total assets where as non operating liabilities
accounted for 10.6%. This means that costs of liabilities are
significantly lower. This is evident from the income statement
common size where finance costs accounted for only 0.84% of the
total sales. Long terms financing as a part of the total assets
increase only between 2012-2013. Other than that, long term
financing declined over the years also indicating low finance cost.
Short terms borrowings also continued to decrees due to decrees in
secured case financing from banking companies. Asset Structure
Property, Plant, and equipment continued to decrees as a percentage
of total assets. This was not because of disposing of assets, but
due to accumulated depreciation. Long terms investment as a
percentage of total assets was almost zero during 2010 and 2011
since the absolute figure was very small. These investment were
made in Pakistan international air lines corporations. However
these investment were discontinued which could be due to
insufficient resources of the company. The stock in trade as a
proportion of total assets where inconsistent, however, it decrease
significantly from 33.93% to 24.7% in 2014. The value increase in
2010 to 2011 but decreased in 2013 due to increase in demand which
is evident from the increase in sales.The stock in trade declined
in 2014 to 24.7% even though the sales increased. This could be due
to increased efficiency and improved turn over 5.33 and fewer
number of days to get rid of the inventory that is. In Absolute
terms, trade debts decreased from 2011 to 2012 but then continued
to increase.However, as a percentage of total assets, trade debts
continued to decrease throughout the years marginally. Trade debts
in 2014 increased due to in increase in the unsecured portion of
the trade debts. The higher the unsecured debts, higher the
uncollectibles. The cash and bank balance as a percentage of total
assets had been increasing during the last three years from 0.15%
to 3.44% due to increases in the current accounts.
Cash Flow Analysis Cash flow refers to the inflow and outflow of
cash in the company. This analysis is primarily used to evaluate
the sources and uses of funds. Such analysis provides insight into
how a company is obtaining its financing and deploying its
resources. It is also used in cash flow forecasting and as part of
liquidity analysis. The major activities contributing towards cash
flow are operating activities, investing activities and financing
activities which would be analyzed in the following paragraphs and
evaluated according to investors and creditors perspective.The Net
cash generated from operations remained positive throughout the 5
years. If discussed in detail, cash generated from operation
declined from 2010 to 2011, due to high amount of income tax paid.
Net cash from operations increased however from 2011 to 2012 by
more than 100% due to increased cash generated from operations.
This increase in operating cash was triggered due to a decrees in
stoke in trade. The value however again decreased by almost 40% due
to high income tax & dividend paid. Finally net cash increased
to 964367 from 563684 (62%) in 2014 due to increased cash from
operations (decreased stock in trade). Net cash generated from
investing activities remain negative through the period. This was
due to continues investment in property, plant and equipment in
order to increase their manufacturing capacity to meet excess
demand. The finance portion of the cash flow shows a negative
amount generated in 2010, 2012, and 2014. The net cash generated in
2013 and 2011 were positive. However the negative values resulted
due to a number of reasons. Firstly the company effectively paid of
its long term finance and short term borrowings as it can also be
seen from the vertical analysis of the balance sheet. However cash
from financing was positive during 2013 due to increase short terms
borrowing. Even though long term financing was issued in 2013, half
of fit was paid of along with the short term borrowings that caused
the negative value of 72798.
Income Statement common sizeThe common size analysis is applied
to the income statement to know about the production and/or
operating efficiency of the company. To measure the production
efficiency of the company, the cost of sales is to be analyzed.
Considering that in all the years the sale has been 100% the
production efficiency seems to be on a decreasing trend in the
years being analyzed. In 2014 the sales and the cost of sales both
experienced an upward trend in comparison and therefore, gross
profit margin also declined. Cost of sales as a percentage of
sales, however, decreased due to a dramatic increase in sales in
2013 by almost 16.5%. Sales increased because there was a higher
demand in the foreign market as exports constituted to about 32% of
the net sales. The gross profit margin for 2013 was also higher,
that is 15%, because cost of sales as a percentage of sales was
dropped to 84% of the sales.The operating efficiency of the company
remained inconsistent throughout the years. It deteriorated in 2011
(increased from 3.9% to 4.4%), improved in 2012, and then
deteriorated again. However the company achieved operational
efficiency in 2014 as sales increased to 9924609, but operating
costs declined from 4.7% to 4.5% of the Net sales. Therefore, 2014
was a good year for the company since the sales increased; the
operating costs did not increase.Other income of Suraj cotton
consists of income from financial assets and income from assets
other than financial assets. The latter contains gain on disposal
of operating assets. Other income as a percentage of sales
continued to increase throughout the period of 5 years. Major
causes included unrealized gain on investments and gain on disposal
of investments. This positive trend also contributed to an improved
EBIT in 2013.Even though EBIT remained positive throughout the
years, it declined initially from 2010 to 2012, both in absolute
terms, and as a percentage of sales. This was due to increase in
the cost of sales for the same period. EBIT, however, increased
from 6.5% to 11.5% during the year of 2013 due to decreased cost of
sales, and decline to 8.6% in 2014.Finance costs include the
payments for the borrowings the company has done to finance its
investments (operating assets and/or financial assets). Finance
costs of the company continued to decrease throughout the 5 years
span. Finance costs declined because total liabilities as a
percentage of total assets also declined. Long term and short term
borrowings declined for the year 2014 which further explains the
decreasing finance cost as a percentage of sales. Although, long
term finances were issued in 2013, the effect was offset by a
repayment of short term borrowings.Initially, the net income
declined from 2010 to 2012 due to production ineffecieny. The
company was operating at high cost of sales which therefore
decreased the net profit. Even though the operating expenses
increased in 2013, the net profit as a percentage of sales
increased from 4.2% to almost 9% exhibiting an almost 50% increase.
This was due to decline in cost of sales and an increase in sales
of the company.
LIQUIDITY RATIOSLiquidity refers to the availability of
resources to meet short term cash requirements. The short term
liquidity risk of company is affected by the timing of cash inflows
and outflows along with prospects for future performance. The
current ratio is a liquidity and efficiency ratio that measures a
firm's ability to pay off its short-term liabilities with its
current assets. The current ratio is an important measure of
liquidity because short-term liabilities are due within the next
year. This means that a company has a limited amount of time in
order to raise the funds to pay for these liabilities. The current
ratio also sheds light on the debt burden of the company and since,
Suraj Cotton is not weighted down with debt, it will not face cash
flow problems which is evident from the cash flow statement. The
current ratio of 3.04 in 2014 reveals that there are enough current
assets to meet short term liability requirements. This ratio
indicates to creditors that companys short term credit worthiness
is not high enough to call it a safe ratio because ideally this
ratio should be 2 or above to indicate liquidity soundness of the
company. Moreover, this ratio has increased over time and 2014 was
first year that it was greater than 3. There are a number of
reasons for the consistent increase in the current ratio throughout
the years. First, current assets in 2014 increased by almost 10%,
where as current liabilities decreased by 3%, which was enough to
lead to an increasing trend in the current ratio. The current
assets increased dramatically due to an increase in the short term
investments by the company in other companies such as National Bank
of Pakistan, Standard Chartered, Pakistan tobacco company, Pakistan
Oilfield Company, and so on. The Five year average of 2.21 is also
higher compared to that of the industrys 1.18. Apart from the
reason above, the stock in trade is also a major chunk of the
current asset and accounts for almost 33% and 24.7% of the total
assets in 2013 and 2014 respectively (vertical analysis). This can
also be proven from the fact that the five year average for quick
ratio was on 1 which means that the major portion consisted of the
stock in trade. The acid test ratio measures the liquidity of a
company by showing its ability to pay off its current liabilities
with quick assets. If a firm has enough quick assets to cover its
total current liabilities, the firm will be able to pay off its
obligations without having to sell off any long-term or capital
assets. In this case, the companys quick ratio is 1 compared to the
industries 0.62 which means that Suraj Cotton has $1 of quick
assets to pay off $1 of current liabilities. Since most businesses
use their long-term assets to generate revenues, selling off these
capital assets will not only hurt the company it will also show
investors that current operations aren't making enough profits to
pay off current liabilities. Higher quick ratios are more favorable
for companies because it shows there are more quick assets than
current liabilities. More assets will be easily converted into cash
if need be. This is a good sign for investors, but an even better
sign to creditors because creditors want to know they will be paid
back on time. However, in this case, quick assets are equal to
current liabilities. Looking at quick ratios of individual years,
they kept increasing at a positive rate due to rapid increases in
cash and bank balances and decline of current liabilities as a
percentage of Total assets (vertical analysis).Even though stock in
trade accounts for a major portion of the current assets, inventory
turnover increased for 5.2 to 5.3 marginally in 2014 and days to
sell inventory declined from 70 days to 68 days which means that
the company is effective in getting rid of their stock. Suraj
Cotton is effective in getting rid of their stock, however they are
not efficient since the turnover declined between 2012 to 2011 and
increased only marginally in 2014. Coming to the 5 years average,
inventory turnover was 5.25 compared to the industrys 5.45. This
means that the company is slightly behind the industry in turning
their inventory. The days to sell inventory increased from 2011 to
2012 which is evident from the decrease in turnover for that
particular year.The five year average for the receivables is 21.76
compared to the industrys 30.62 which means that the company is not
efficient in collecting their receivables. The turnover increased
slightly between 2013 and 2012 but then declined in 2014. Alow
receivables turnover ratioimplies that the company should re-assess
its credit policies in order to ensure the timely collection of
receivables. Suraj cotton, however, takes only 16 days on average
to collect their receivables. In 2014, it can be seen from the age
analysis of trade debts ( exhibit) that 312000 amount of debtors ie
67% of the total 459258 paid their debts within the due
date.Profitability ratio:The profit margin ratio directly measures
what percentage of sales is made up of net income. In other words,
it measures how much profits are produced at a certain level of
sales. The ratio declined from 2010 to 2012 from 7.3% to 4.2%
respectively. One reason for this decline was due to increasing
cost of sales as a percentage of sales (vertical analysis). The
ratio increased by almost 100% from 2012 to 2013 which indicates
improvement in both production efficiency and profitability.
Although, operational efficiency declined due to high distribution
costs and other operating costs such as workers profit
participation fund and provision for slow moving stores, decrease
in cost of sales improved the profitability. The increasing cost of
sales as a percentage of total sales has also decreased the gross
profit margin from 16.6% to 10% from 2010 to 2012 respectively.
This means that Suraj could not control its inventory costs and the
decreasing trend lead to a decrease in the net profit margins as
well for the same period. However, the 5 years average of 13.24%
compared to the industrys 4% suggests that the company has done
well overall. So overall, a higher gross profit margin would allow
Suraj cotton to retain more money to deal with the operating
expenses. Suraj cottons operating margin is 8.2% which means that
for every dollar of income, Suraj has 8.26 cents left to pay for
non-operating expenses. High cost of sales in 2014 lead to a
decline in the EBT and EBIT therefore, decreasing their ratios for
2014. Although EBIT/SALES declined from 11.5% to 8.6% in the
current year due to increased cost of sales, the 5 years average
for EBIT/SALES of 9.14% compared to the industrys 4.08% suggested
the company is in a good position to control its expenses.
Moreover, 8.26% of operating margin compared to EBIT/SALES suggests
that only a small portion consists of the financial costs which are
declining due to repayment of long term finances and short term
borrowings. EBITDA/SALES of 11.30% also remained high compared to
the industry average due to high depreciation. Hence, the overall
profitability of the company is satisfactory.
Solvency RatiosSolvency analysis is aided by financial leverage
ratios. Financial leverage refers to the extent of borrowedfunds in
a companys capital structure. Liability to equity ratio assumes
that current liabilities are covered by current assets and, thus,
only long-term debt must be funded from operating cash flows.
Accordingly, it is important to examine long-term debt relative to
the stockholders investment. Suraj cottons liability to equity
ratio continued to decline which means that the dependence on
liabilities is decreasing. As discussed earlier, it is evident from
the balance sheet common size that dependence on long term
financing and short term borrowings is decreasing and the company
is moving toward an equity based structure.Even though the total
liabilities decreased from 164837 to 1599727 from 2013 to 2014
respectively, the total leverage increased due to a decline in
EBITDA. One reason was due to decreased EBIT resulting from a high
cost of goods sold. Another reason was due to high administrative
expenses (salaries, wages, and other benefits). Compared to the
industrys average of 19.64, the companys total leverage of 1.74 is
remarkable. This indicates that unlike suraj cotton, the entire
industry is based highly on a liability structure.The times
interest earned is increasing over time which is a good sign for
the company. It considers how much income is available to service
debt given the debt level and its repayment terms. The ratio is
continuously increasing upto 2013 which means that the finance
costs are declining. This has also been discussed a few times
earlier as the finance costs are declining due to a movement
towards an equity structure. The decline in 2014, however, was due
to a decline in EBIT. The overall ratio of 7.477 compared to the
industrys 18.66 is very low which would indicate to the creditors
that the company does not have enough resources available to pay
off their debts. Moreover, lower times interest earned can also
make the business more vulnerable in case interest rates rise.
Asset utilizationThese ratios measure how much sales are being
generated per rupee of assets and indicating the efficiency of
company in deploying its resources. Asset turnover ratio measures
how efficiently a firm uses its assets to generate sales, so a
higher ratio is always more favorable. Higher turnover ratios mean
the company is using its assets more efficiently. Lower ratios mean
that the company isn't using its assets efficiently and most likely
have management or production problems. The average turnover ratio
of 1.95 compared to the industrys 7.66 is low, even though the
company had positive sales throughout the 5 years span. One reason
was that the company had management issues. One reason is that the
company is not efficiently disposing off their fixed assets which
can also be seen from the cash flows investing activities.
Secondly, the firm has a huge amount of stock tied up into the
business which is evident from the balance sheet common size. For
instance, stock in trade for the current year accounted for about
25% of the total assets. This ratio can also be compared to the
sales to fixed asset ratio which turns out to be 5 as compared to
the sales to total asset ratio of 1.7. it can be seen that the
non-fixed assets were more responsible to the low ratio of sales to
asset.Sales to NWC are decreasing throughout the period which is
due to increasing current assets and declining current liabilities.
Current liabilities have declined due to the movement towards an
equity structure. The working capital turnover ratio is used to
analyze the relationship between the money used to fund operations
and the sales generated from these operations. In a general sense,
the higher the working capital turnover, the better because it
means that the company is generating a lot of sales compared to the
money it uses to fund the sales.In this case, since the ratio is
declining it is a negative sign since it means the company is not
able to generate sales from working capital. Market Value
Ratios:The price earnings ratio for the company is improving over
the years which are a good sign for the company. Suraj cotton is
currently(2014) trading at a multiple (P/E) of 3.40, the
interpretation is that an investor is willing to pay Rs 3.4 for Rs
1 of current earnings. One reason for this increase is that the
stock price of the company is increasing constantly over the
years.Investors want to know how much dividends they are getting
for every dollar that the stock is worth. The dividend yield of the
company declined dramatically from 2012 to 2013 due to a high
increase in the stock price of the company. The stock proce
increased by almost 200% in 2013. The market to book value remained
almost constant for the first few years but then increased due to
increase in stock prices.
DuPont AnalysisROE is defined as the amount of net income
returned as a percentage of shareholders equity. Return on equity
measures a corporation's profitability by revealing how much profit
a company generates with the money shareholders have invested. The
DuPont analysis is an excellent method to determine the strengths
and weaknesses of a firm. A low or declining ROE is a signal that
there may be a weakness. Even though the return on equity for Suraj
has been well above positive throughout the years, the return
declined from 2010 to 2012. These declines could be explained by
the declining trend in Net income which was caused by the increases
in cost of sales. Simply put, increases in cost of sales caused the
net income to decline which ultimately decreased the ROE. Moreover,
since total equity is a major component of the DuPont analysis, it
also leads to the decline. It has been mentioned in the balance
sheet common size that the company that even though the company is
based on an equity structure, it is continuously increasing its
dependence on Equity financing. Therefore, increasing equity
throughout the years also contributed to the decline in ROE in the
initial years. The ROE declined from 26.86% to 14.15%, a decrease
of almost 89.8%, from 2010 to 2012. However, the ROE increased from
14.15% to 30%, an increase of almost 100%. This was caused by an
increase of 123% increase in NI as a percentage of sales. This
increase in NI was due to increased production efficiency,
increased sales, which lead to an increased gross profit. Even
though Suraj cotton was operationally efficient in 2014 with
increased sales, the net income declined due to increasing cost of
sales. This can also be proven from the fact that cost of sales as
a percentage of sales increased from 83% to 84%. Total equity also
increased in 2014 further contributing to the increase. The
decreasing direction of the equity multiplier also shows that the
company is becoming more equity based since equity is rising and
contributing to the declining ROE in the initial years.Operating
Assets:The operating assets of the company continued to increase at
a consistent rate due to increase in trade debts and short-term
investments. 98% (Table) of the total assets consisted of Operating
assets in 2014 which means that the company is operating at a very
high scale. Operating assets are increasing with a constant trend.
The company has also increased its trade debts during the current
year and most of them are unsecured which may not be a very good
sign.
OA20142013201220112010
property plant 19816211988600186258318928521914206
investment property1000000000
long term investment00131317
cash(current)1440563383557051429221163
store spare parts8984612585010644610337576769
stock in trade13727411716673118398315674591027331
trade debts459258406138383246432174360603
trade deposits46184844267824326376
balance with statutory 7030666044398571674530943
loans and advances 5604639070421655384247302
other receivables817912307473304198
taxation-net30241178622015221110
short-term investments11858445829822768235978058692
assets held for sale115830000
Total operating costs54797604976734392858841724053547600
Non-operating Assets:Non-operating assets of the company
declined during the current year and the only constitute to 2% of
the total assets. Non-Operating assets20142013201220112010
long term loans1953118974186881281023506
cash in hand( deposits)4661761675491881078
Asset lease11601450980122657748
total NOA6730882099197171422482332
Operating LiabilitiesThe operating liabilities of the company
kept increasing which can also be seen as a percentage of total
assets. Operating liabilities of the company during the current
year were almost 18% and the total liabilities were 28%. This means
that even if the company is generating cash through liabilities,
the finance cost will not increase since no interest is paid on
operating liabilities. This can also be seen from the income
statement common size as finance costs are declining as a
percentage of sales (vertical analysis).
Operating Liabilities20142013201220112010
Trade and other Payables791840770582536709513595440966
Taxation-net00009557
Deferred taxation215535212186213386215943210978
total1007375982768750095729538661501
Non-operating liabilities:Non-operating liabilities as a
percentage of total assets are also declining because the company
is effective in paying their long term loans off and not borrowing
in excess (cash flow). The decreasing trend of Non-Operating
liabilities has also lead to a decline in the financial costs. As
explained earlier, this is due to the decrease in dependence on the
liability structure. Non Operating
liabilities20142013201220112010
Long-Term Financing251537336807216934241213405504
Liabilities against assets subject to finance
lease635854031111453
Accrued interest on loans1921321132262653509634945
Short-Term Borrowings205276224216287391778292404431
Current portion of non-current
liabilities115691840608783997350234174
total59235266706961842911522621090507
% of TA11%13%16%28%30%
RETURN ON INVESTED CAPITAL:The measures for return on invested
capital were analyzed for Sitara peroxide to compare companys
performance measures or net income with its level or sources of
financing. It determines a companys ability to succeed, attract
financing, repay creditors, and reward owners. It will help us in
determining managerial effectiveness, profitability and planning
and control.
Return on net-operating assets:Thereturn on net assetsmeasure
compares net profits to net assets to see how well a company is
able to utilize its asset base to create profits. The return on net
operating assets determines the impact of core business activities
on the profitability or return of the company. the company has been
able to maintain a positive return on its operating assets because
it has earned positive return on its operating activities i.e.
NOPAT has been positive and its operating or non financial expenses
have been lower than its operating profits. A high ratio of assets
to profits is an indicator of excellent management performance.
Through calculation of a firm's Return on Net Operating Assets
(RNOA), we can isolate the portion of ROE attributable to the
operations of the business (the portion that matters). For
instance, in the current year of 2014, only 58% of the ROE (10.3%
RNOA/17.74% ROE) is attributable to the operations. Moreover,
Surajs average of 14.92% is higher than that of other trading
companies which is satisfactory. RNOA declined initially due to
declining NOPAT, which in turn was caused due to a declining EBIT
as discussed earlier.Leverage:The financial leverage of the company
has been lower in five years due to higher dependence on equity
financing. This declining leverage means lower cost of financing
which has also been proven from net income. Lower leverage would
also have an impact on the ROCE as it would cause a decrease in it,
provided spread remains constant. Spread:Spread for the company has
been positive throughout the years which is a good sign. Also the
spread can be seen increasing from 2013-2014 which is a good sign
for the company. Since spread is a component of the ROCE, an
increase in spread of the company would cause the ROCE to increase
as well. Spread was only negative by a very small amount in 2012
because net borrowing costs for that particular year was high, that
is a positive 16%.
ROCE:Although the leverage for the company fell, a high return
on net operating assets and an increasing and a positive spread
contributed to a positive ROCE for the overall company. However, it
is noteworthy that the companys net financial expenses are
decreasing over time due to its decreasing dependence of debt
financing which is causing its net borrowing costs to decrease.
Decreasing dependence is due to the companys movement toward and
equity structure as discussed in the vertical analysis of the
company.Financial Regulation and distortion: International
Accounting Standards, as applicable in Pakistan, have been followed
in preparation of financial statements and any departure there from
has been adequately disclosed and explained The financial
statements of Suraj Cotton have been prepared in accordance with
approved accounting standards as applicable in Pakistan. Approved
accounting standards comprise of such International Financial
Reporting Standards (IFRS) issued by the International Accounting
Standards Board as are notified under the Companies Ordinance,
1984, provisions of and directives issued under the Companies
Ordinance, 1984. In case requirements differ, the provisions or
directives of the Companies Ordinance, 1984 shall prevail.
Key sources of estimation, uncertainty and critical accounting
judgments are as follows: Income taxes: The Company takes into
account relevant provisions of the current income tax laws while
providing for current and deferred taxes. Useful lives, patterns of
economic benefits and impairments: Management has made estimates of
residual values, useful lives and recoverable amounts of certain
items of property, plant and equipment. Any change in these
estimates in future years might affect the carrying amounts of the
respective items of property, plant and equipment with a
corresponding effect on the depreciation charge and impairment
loss. Provision for slow moving /obsolete items: Provision is made
for slow moving and obsolete items. Provisions are made against
those having no activity during the current and last three years
and are considered obsolete by the management. Provision for
doubtful debts: An estimate is made for doubtful receivables based
on review of outstanding amounts at the year end, if any.
Provisions are made against those having no activity during the
current period and are considered doubtful by the management.
Balances considered bad and irrecoverable are written off when
identified.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe Company has
adopted the following amendments to IFRSs which became effective
for the current year: IAS 19 Employee Benefits (Revised) IFRS 7
Financial Instruments : Disclosures (Amendments) Amendments
enhancing disclosures about offsetting of financial assets and
financial liabilities IFRIC 20 Stripping Costs in the Production
Phase of a Surface Mine
Improvements to Accounting Standards Issued by the IASB IAS 1
Presentation of Financial Statements - Clarification of the
requirements for comparative information IAS 16 Property, Plant and
Equipment Clarification of Servicing Equipment IAS 32 Financial
Instruments: Presentation Tax Effects of Distribution to Holders of
Equity Instruments IAS 34 Interim Financial Reporting Interim
Financial Reporting and Segment Information for Total Assets and
Liabilities
ERRORS AND OMISSIONS The restated earnings per share were
calculated by using the current number of shares rather than the
previous years shares. In the annual report of 2013, income from
the financial assets was given to be 8990, where as in the restated
value it said 79306. This was due to the omission of income from
investments in other companies. No explanation was given.
Creditors perspective:Throughout the report it has been
emphasized that the companys overall debt is declining since the
company is moving towards an equity structure. Total liabilities of
the company as a percentage of total assets have decreased from 48%
in 2010 to 28% which means that the company is aggressively paying
their debts off and financing themselves through equity. Not only
long term financing is decreasing, but also short term borrowings
which further decrease the net financial expense of the company.As
a loan officer in assessing prospective borrowers, I would
typically use the five Cs of credit as their main criteria: current
capital structure, cash flow, collateral, conditions, and
character.The availability, pricing, and other aspects of capital
depend on the nature of the prospective borrowers existing debt. As
mentioned earlier, Suraj cottons debt structure is satisfacorty
since they are not relying on liabilities in order to finance their
company. In trying to grasp a prospective borrowers total debt
capacity, creditors will also assess the companys ratio of total
debt to earnings before interest, taxes, depreciation, and
amortization (EBITDA), as well as total debt to equity. In this
case, however, the companys EBITDA and times interest earned are
positive throughout which would give the creditors a green signalIn
evaluating current and future cash flow, lenders will generally
look at three years of past financial performance. That includes
income statement and balance sheet trends, as well as financial
ratio analysis, cash flow, and so on. If we take a look at the
current years cash flow (cash flow statement), we can see that the
company has been achieving positive cash flows throughout the year
from operating activities. Moreover, the financing section shows
that the company has been effectively paying off their long term
loans along with the short term borrowings. Moreover, the current
ratio is greater than 2 which means that the company has enough
current assets to pay their liabilities off. The companys
profitability ratios suggest that the company is earning positive
returns throughout the 5 years which would also attract
creditors.Lastly, the character of the company can also be accessed
through its cash flows and balance sheet common size. Cash flows
and balance sheet common size for Suraj can help the creditors
identify that the company is effectively paying their debts off
along with their finance costs. All these factors, as a whole,
would make a good impression on the creditors.
Investors PerspectiveThe current value of the firm is increasing
at a positive rate along with the stock price. This is a good sign
for the company since it would attract higher investments. The
market value of Suraj cotton increased by almost 291% since its
stock price increased by more than 200%. Apart from the market
value of the firm, the price earnings ratio is also increasing
throughout the years. This indicates that earnings for the company
are increasing constantly. Moreover, the dividend yield has been
positive throughout the years. JCR-VIS Credit Rating Company
Limited (JCR-VIS) has reaffirmed the medium to long-term entity
rating of A (Single A) and short-term rating of A-2 (A Two)
assigned to Suraj Cotton Mills Limited. The outlook on the medium
to long-term rating is Stable.The reaffirmation of the ratings
takes into account the historically strong cash flow generation of
the company. All these factors signal towards a strong sell of the
shares due to a bullish market that would result in high profits
for the investors.