Financial Analysis of Indus Motor Company 2005

8/8/2019 Financial Analysis of Indus Motor Company 2005

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Prepared by:

Asadullah Amin Shah

Samreen Javaid

Gulnaz Fatima

Submitted to:

The Chairman KUBS


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Financial Analysis of Indus Motor Company 2005

PURPOSE OF FINANCIAL ANALYSIS

In order to know that whether a firm is using its resources efficiently or not, financial

analysis is necessary. The information derived from these types of analysis should be used to

determine the overall financial position of the company. By studying annual report of Indus

Motor Company (IMC), we calculate certain ratios which will help us to determine the existing

strengths and weakness of IMC and also its last year performance and current years financial

condition. It provides the information about performance of IMC to the investor of funds

whether in the form of credit investor (short term or long term credit investors) or Equityinvestors as owner of the firm. On the other hand the investor is also looking for the risk

associated with his investment.

This analysis provides the investor information about the liquidity, creditability,

operational efficiencies and growth opportunity in the organization.

Liquidity is a firms ability to satisfy it short term obligations as they become due.

Liquidity of a business firm is measured by its ability to satisfy its short-term obligation as they

come due. Liquidity refers to the solvency of the firms overall financial positionthe ease with

which it can pay its bills.

Liquidity Ratios of Adil textile mills limited have been increased from previous year

which shows that companies liquidity that is the ability to pay short-term debts, is more that the

last year. It is a positive sign for the financial institutions (for the sake of giving loan) as well as

for perspective investors, that they can invest in the company with low risk as its liquidity is

increasing.


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The Income statement for last 5 years is given below which shows that the earning per

share is more or less increasing in last 5 years which ultimately pointing toward the company

growth in terms of sales and other respects

The balance for the last five years is provided sheet is provided below which also shows

that company total asset and equity is increasing in last five years which ultimately results in a

company growth.


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ACTIVITY RATIOSSr.no Ratios 2010 2009

1 INVENTORY TURNOVER:

CGS/ Ending Inventory1.5x 3.53x

2 AVERAGE AGE OF INVENTORY

360/Inventory Turnover

240days 102days

3 AVERAGE COLLECTION PERIODAccount receivable / Average credit sales per day

15.33days 100days

4 ACCOUNT RECEIVABLE TURNOVER360/Average Collection Period

23.48x 3.6x

5 AVERAGE PAYMENT PERIODAccount Payable/Average credit purchases per day

197.3days 138.2days

6 ACCOUNT PAYABLE TURNOVER360/Averge Payment Period

1.82x 2.60x

7 OPERATING CYCLEAverage Age Inventory + Average Collection Period

255.33dys 202days

8 CASH CONVERSION CYCLEOperating Cycle Average Payment Period

58.03days 63.8days

9 FIXED ASSET TURNOVER :Sales / Total Fixed Assets

0.65x 0.79x

10 TOTAL ASSET TURNOVER:Sales / Total Assets

0.42x 0.62x

11 SALES TO NETWORTHSales /Stockholder Equity

2.72x 3.13x

InterpretationActivity ratios measure the speed with which accounts are converted into sales or cash.

The inventory turnover ratio of the company decreased & average age of inventory is increased

from last year which shows that company is less efficient in selling its inventory in this year.

Average collection period has decreased from previous year, which is good sign for company. It

means account receivable conversion into cash is faster in 2004.

The increase in average payment period shows that we pay cash to our supplier quickly

than last year. The benefit lies with this is that we hold cash with us for maximum time periodbut it loses suppliers confidence. Companys cash conversion cycle is also increasing from 202

days to 255.33 days. It means that company is able to sell its inventory late and collect its

account receivable early as compare to previous year.

Firms fixed assets turnover ratio is decreasing in 2004 which shows that the fixed assets

are giving less turnover (productivity) than the turnover in last year.


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Total assets turnover has decreased which means the company is not utilizing its assets properly.

LEVERAGE/GEARING RATIOS

A)Degree of Indebt nessSr.no Ratios 2004 2003

1 DEBT RATIO:Total Liabilities / Total Assets*100

0.84x 0.80x

2 DEBT EQUITY RATIO:Total Liabilities / Stockholders Equity*100

500.45% 400.03%

3 EQUITY MULTIPLETotal Assets / Total Stockholders Equity*100

600.45% 502.03%

B) COVERAGE RATIO

Sr.no Ratios 2004 20031 TIME INTEREST EARNED RATIO

Earning Before Interest & Taxes/Interest0.04 2.66

RESULTS OF LEVERAGE RATIOS

Leverage ratio of a firm indicates the amount of other peoples money being used in

attempt to generate profits

Debt ratio is increased from the last year, which indicates that company is making less

investment in its assets by stock holders equity and using more money of creditors, by this,

dividend per share will acceptable.

As company debt equity ratio has increased. This causes their earning per share to reduce.

Equity multiple of company is decreased than last year which shows that total assets against

stockholder equity are reducing than last year. It is not a good indication for share holders.

PROFITABILITY RATIOSSr.no Ratios 2004 2003

1 GROSS PROFIT RATIO:Gross profit / Sales*100

7.77% 1.73%

2 OPERATING PROFIT RATIO:Operating profit / Sale*100

0.38% 0.26%

3 NET PROFIT RATIO:Net Profit After Tax/Sales*100

0.16% 6.65%

4 RETURN ON INVESTMENT:Net Profit After Tax / Total Assets*100

0.06% 4.14%


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5 RETURN ON EQUITY:Net Profit After Tax / Total stockholders equity*100

0.004% 0.21%

RESULTS OF PROFITIABILITY RATIOSThese ratios measure firms efficiency in terms of earning profit by utilizing resources.

Due to more cost of goods sold & operating expenses, gross profit, operating profit & net profit

ratios have reduced, no matter sale also increased but not as much as cost of goods sold. The

company has to control its cost of goods sold & operating expenses, so as to increase profits.

As companys total assets (investment) has increased but company is not utilizing them

as efficiently as it can, so the profits in 2004 are not increasing as they could, which cause return

on investment to reduce from previous year.

As company is making investment through stockholders equity so the return on equity

has decreased. Company has to raise more credit for investment so as to increase the returns of

stockholders.

MARKETABILITY RATIOSSr.no Ratios 2004 2003

1 EARNING PER SHARENet Profit After Tax Dividend to Preferred Stock/ Outstanding

Common Stock

Rs.0.06 Rs.2.98

2 PRICE EARNING RATIOMarket price of Common Stock/Earning Per Share

3 MARKET PRICE TO BOOK VALUE RATIOMarket price of Common Stock/Book Value Per Share

4 DIVIDEND PER SHARETotal Dividend/ Outstanding Common Stock

Rs.8.94 Rs.4

5 DIVIDEND PAYOUT RATIODividend Per Share/ Earning Per Share

0.48 0.25

6 RETENTION RATE1-Payout Ratio

0.52 0.75

7 GROWTH IN TERMS OF RETURNPayout Ratio*Return on Equity

0.21 0.12

8 DIVIDEND YIELDDividend Per Share/Current Market Price

RESULTS OF MARKETIABILITY RATIOSIt measures the return earned on owners investment in the firm.


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The increase in EPS is due to increase in profits in 2004. it is attractive for new investors.

The EPS has been decreased and market price of shares has been increased. It caused

increase in price earning ratio. It is also very attractive for new as well as for the existing

shareholders. Dividend per share is more than double. It is very good sign for the company to

capture new investors as well as the confidence of existing investors. Also companys growth in

terms of return is about doubled, which shows that how quickly the companys return is growing.


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Common size analysis

HORIZENTAL ANALYSIS

Particulars 2004Rs in 000

2005

Rs in 000

Change in

Rs

%age

Change

Sales

Cost of SalesGross Profit

Other operating incomeDistribution cost

Administrative expenseProfit/Loss from operations

Finance costWorkers, profit participation

fundLoss before taxation

Income tax expanse Net profit/Loss for the

period

300006628

(276691385)23315243

1151709

(4101866)

(7562960)12802126

(11724869)(53863)

1023395(1500033)

(476639)

100%

92.2%7.7%

0.38%1.36%

2.5%4.2%

3.9%0.01%

0.34%0.49%

0.15%

346527690

(340525691)6001999

892475

(8294397)

(11264065)(12663988)

(8668213).

(21332201)(1726796)

(23058997)

46521062

63834306(17313244)

(259234)4192531

3701105(138138)

(3056650)(53863)

20308806226763

23011358

44.04%

47.00%25.50%

31.60%

24.36%

32.33%15.10%

17.10%15.00%

34.42%17.25%

17.45%

RESULTS OF INCOME STATEMENT ANALYSIS

This analysis of Adil Textile Mills Ltd. shows that Gross profit, Operating income,

financial cost, profit from operations are decreasing and all other items of income statement are

increasing.

The sales are increasing 44.04% than sales of 2003, which shows companys growth in

terms of its sales. Also companys cost of sales, operating expenses and other expenses are

increasing extensively, which the company should try to control as it can. But on the other hand

its gross profit is decreasing and net profits is increasing with acceptable rate.


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VERTICAL ANALYSIS

Particulars 2003Rs in 000

%age

OfAssets

2004

Rs in 000

%age

Of

Assets

Change

inRs

%age

Change

ASSETSNON CURRENT

ASSETSOperating fixed assets

Intangible fixed assetsLong-term loans

Long-term depositsFinance under Musharika

agreements

CURRENT ASSETSStores & spares

Stock-in-tradeTrade debtsCurrent maturity of

finance under Musharikaagreements

Loans, advances &prepayments

Other receivablesTaxation-net

Cash & bank balances

TOTAL ASSETS

9896924810

1605449

-71511

1802270518820

-59897

191300

-742537111069280

8.94%0.0004%

0.000014%0.0005%

0.0065%16.28%

4.70%

0.54%

1.73%67.10%

100%

860501-

2345254

7874110923

2537213439532

28701310108

243947

50176696200511556468

7.45%0.002%

0.046%0.068%

0.96%21.96%

3.8%0.25%

2.70%2.10%

0.43%

60.24%100%

(129191)(4810)

74(195)

787439412

734943(79288)

28701250211

52647

50176(463366)487188

13.05%100%

46.25%3.58%

55.11%40.78%

15.28%

417.74%

27.52%6.24%

4.40%

RESULTS OF ANALYSIS OF BALANCE SHEETThis analysis of Adil textile limiteds balance sheet shows that what the change in its

assets is in 2004 with respect to assets in 2003. This asset analysis shows that all the assets

including non-current, fixed assets and current assets are growing positively. Only the major

things reducing in assets are accounts receivable & cash. Reduction in accounts receivable is

favorable for company that shows that more sale is on cash in 2004 than 2003. It also reduces the

risk associated with account receivable & their carrying cost. But reduction in cash and bank

deposits is not a positive sign for the company. It basically shows that the outflows of cash in

year 2004 are more than its inflows of the year. The company can reduce its outflows by

controlling its expenses.


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INFORMATION FROM CASH FLOW STATEMENT

The cash flow statement gives us the complete information about cash inflows & cash

outflows of the company for the year. The above cash flow statement of company shows that the

outflows of the company in year 2010 are more than the its inflows in that year. It is a bit

awkward for Indus motors that its inflows for the year are less than its outflows. The company


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should try to reduce its cost of goods sold and operating expenses which can mainly reduce its

outflows.


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Answers To Analytical Questions

Q#1: would you like to invest as an equity investor in IMC?

Yes, I would like to invest in the shares of the company due to following reasons:

y The company is the biggest automobile company in Pakistan.y Its shares have a good market price. (Rs., as on June 30, 2010)y Very good P/E ratio (i.e.)y Earning per share is Rs. 43.81y Companys78,600,000 shares have backing of reserves and un appropriated profit of Rs.

2,592,595,000/-; this gives an extra equity of Rs.33 per share. As the share is available

around Rs.96. I will prefer to invest in it.

y The company is expanding and improving in quality and output quantity to becompetitive in coming post WTO implementation scenario. This effort on the part of the

management also strengthens the share and makes it attractive to invest.

y Dividend per share is Rs. 8.94 per share in this year which is very attractive.y Its return on equity is about 43.6% which is very high and also its return on investment is

about 12.7% which is also very attractive.

Q#2: would you like to extend a long-term loan to IMC?

Yes, I would like to extend long term loan to the company, despite the fact that company

fianc port-folio has already been loaded with debt quite heavily. My decision is backed by

following vindications:

y Companys time interest ratio is highly increasing. This indicates that further investmentin the business shall further improve the profitability.

y Company has a good equity built up, which they are using effectively in their expansionplans.

y With backing of good reputation of IMC, my decision gets reinforcement.y The company is continuously growing from last many years and according to my

forecasting on the basis of certain facts like market situation, product demand, countrys

circumstances and other such factors, it will extensively grow in upcoming years.


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However, my final decision would depend on negotiations over terms of loan, amount of

loan and collateral.

Q#3: would you like to extend a short-term loan to IMC?

I would like to lend short term finances to the company. My decision is due to following

facts:

y The companys liquidity ratios are very attractive that shows that the loan is backed byhuge amount of liquid assets.

y The risk is fairly mitigated by backing of IMC.y The company has fairly improved in cash flow from operations.y IMCs profitability ratios are also very attractive.y Increasing sales, profits and total fixed assets turnover all give green signal to extend

short-term loan to IMC without any hesitation.

Financial Analysis of Indus Motor Company 2005

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