General Tyres Financial Analysis

Balance Sheet AnalysisPresented to Miss Sidra Waheed

[General Tyres]

By: Hassan CheemaSection: B

Financial Analysis of General Tyres Section: B

Table of Contents

EXECUTIVE SUMMARY: 3

INTRODUCTION 4

Key Operating and Financial data 5

Balance Sheet 6

PROFIT AND LOSS 9

Cash flow statement 10

General Tyres Pak. 11

Capital Structure & Solvency Ratios 11

Return on Invested Capital Ratios 12

Profit Margin Ratios 14

Asset Utility Ratios 15

Liquidity Ratios16

FIVE YEARS GROWTH RATE 18

TREND INDEX 19

PER SHARE RESULTS 20

COMMON SIZE ANALYSIS OF CA AND CL 21

CASHFLOW RATIOS 22

Conclusion: 23

Formulas Used in Calculations 24

2 | P a g e Lahore School Of Economics


EXECUTIVE SUMMARY:

After analyzing the financial statements of three years. We come to know

that General Tyres are doing well in the industry but not up to the

expectations of stock holders. It is a very well-known company.

Profitability of the firm has decreased due to higher level of increase in

cost of goods sold as compared to increase in the sales. Company is not

getting good revenues and profits. Solvency ratios of the company are also

not very good and indicate that company is relying more on current or

short term debt instead of long term deb. However, company is facing

problem in liquidity measures and this might be because its focus is on

long-term profits not on short-term profits. Market measures indicate

decreasing trends in the value of the securities of the company But the

Company is paying good dividends to its shareholders. Company total

assets are also decreasing. In short we can say that company is not doing

well in the market and is not getting good revenues and sales to meet the

demand of shareholders and creditors. However focus should be made on

liquidity measures of the company.



INTRODUCTION

The company was incorporated in Pakistan on March 7, 1963 as a private

limited company and was subsequently converted into a public limited

company. The company's shares are quoted on the Karachi and Lahore

stock exchanges. The company is engaged in the manufacture of tyres

and tubes for automobiles. The company had entered into a Royalty

Technical Service Agreement dated September 1, 1984 (the 'TSA') with

General Tire International Company (GTIC), USA whereby the company

was allowed to use the GT1C's trademarks such as 'General' and 'General

Tire'. The TSA was last extended by mutual consent of the company and

GTIC on August 15, 1999 up to October 31, 1999. On October 29, 1999,

GTIC communicated its decision not to extend the TSA. According to the

provisions of the TSA the company could use the aforementioned

trademarks during a compliance period of three months after the

termination of the TSA.

However, upon the request of the company, GTIC has been extending the

compliance period of the TSA from time to time and the compliance period

was last extended upto August 31, 2000 which was accepted by the

company. GTIC has sent a compliance extention letter upto September

30, 2000 and has shown its willingness to extend the compliance period

further, in pursuance to the execution of a new TSA. However, the

compliance letters have not been executed subsequent to August 31,

2000. In the event that the TSA is not extended the company's status as a

'going concern' is not expected to be affected



General Tyres Pak.

Key Operating and Financial data Rs in million

2008 2007 2006Operating ResultsGross Sales 4348 3698 3267Net Sales 3732 3198 2803Gross Profit 522 598 627Profit B4 tax 210 328 377Profit After Tax 127 204 236Cash Dividends* 17.5% - -

Bonuses issued

Financial Position

Operating fixed assets

2620 2080 1526

Shared capital 598 598 598

Reserves and inappropriate profit

697 675 472

Shareholder’s equity 1295 1273 1070

Long term loans and liabilities

467 390 153

Analysis

I see that Operating and financial positions are showing that as company’s

sales are increasing but profits are decreasing and in the same time long

term loans are also increasing showing that company is relying on debt.



General Tyres Pakistan

Balance Sheet. As at June 30, 2008.

2008Rupees in

2007Thousand

s

2006

Share Capital And ReserveShare Capital.Authorised75,000,000 ordinary shares of Rs 10 each

750,000 750,000 750,000

Issued, subscribed and paid-upReserve

597,713697,584

597,713675,186

597713650,168

1,297,297 1,272,899 1,257,536

Long term merhaba financing

200,000 300,000 400,000

LONG TERM LOANS 200,000 - -

LIABILITIES AGAINST ASSETS SUBJECT TO FINANCE LEASE

66,846 89,823 90,879

STAFF BENEFITS 119,350 107,269 101,368

DEFFERED CREDIT 430 577 600

DEFFERED TAXATION 33,298 7,726 5,246



LONG TERM DEPOSIT FRO, DEALERS

9,350 9,200 9,000

CURRENT LIABILITY AND PROVISIONSCURRENT MATURITY OFLong term merhaba financing

100,000 100,000 100,000

LIABILITIES AGAINST ASSETS SUBJECT TO FINANCE LEASE

22,950 12,820 10,124

SHORT TERM FINANCE

410,764 50,000 47,000

RUNNING FINANCES UNDER MARK UP ARRANGEMENTS

97,829 101,063 105,657

PAYABLES 708,207 528,237 478.543

ACCURED MARK UP 7,778 2,860 2,568

PROVISIONS 121,300 118,200 17,152

3,393,399 2,700,674 1972,212

ASSETSPROPERTY, PLANT AND EQUIPMENT

1,456,300

1,019,272

937,421

INTANGIBLE 482 554 598

INVESTMENTS - - -

LONG TERM LOANS AND ADVANCES

4,234 5,173 5,254



LONG TERM DEPOSITS AND PREPAYMENTS

7,559 8,514 9,213

CURRENTS ASSETS:

STOCK 1,012,679 880,196 720,210

TRADE DEBT 409,711 322,341 256,514

LOANS AND ADVANCES

15,367 10,336 9,621

DEPOSITS AND PREPAYMENTS

34,600 51,683 623,547

OTHER RECEIVABLES 32,047 33,651 33,920

TAXATION 40,158 15,278 10,152

CASH AND BANK BALANCE

78,975 79,556 80,102

1,924,8243,393,399

1,667,1612,703,161

1,477,214

1,972,212



PROFIT AND LOSS STATEMENT

FOR THE YEAR ENDED JUNE 30, 20082008

Rupees in

2007Thousan

dsNET SALESCOST OF SALES

3,731,9943,210,524

3,197,7172,614,233

2,802,669

2,521,313

GROSS PROFIT 521,470 583,484 626,591

ADMINISTRATION EXPDUSTRIBUTION COST

75,763156,398

90,009147,608

90,214138,923

OPERATING COST 267,923 319,042 384,156

FINANCE COST 83,085 124,662 132,958

PROFIT AFTER TAXATION

126,998 205,005 235,847

BASIC EPS 2.12 3.41 3.95



Cash flow statement

Cash flow from operating activities

Note

2008Rs in ,000

2007 2006

Cash from operations

40 371,970 258,162 217,874

Staff retirement gratuity paid

(5,612) (3,507) (2,140)

Compensated absence paid

(998) (84) (70)

Long term deposits from dealers

150 200 210)

Financial charges paid

(82,049) (15,157) (13,145)

Tax paid (82,393) (111,045) (132,211)Long term loans and advances

939 (1,509) (1,612)

Long term deposits and prepayment

955 (3,124) (4,114)

Net cash from operations

202,962 124,736 117,658

Cash flow from investing activitiesFixed capital expenditure

(547,673) (504,042) (487,125)

Proceed on disposal of FA

2,953 - -

Profit on bank deposits

543 189 170

Net cash from Investments

(544,177) (503,853) (447,745)

Cash flow from financing activitiesLong term murabaha financing

(100,000) 300,000 400,000

Liabilities against (12,847) (1,635) (1,125)



assetsLong term loans 476196 - 1070381Short term finances 360,764 50,000 47,256Dividends paid (104,049) (125) (104)Net cash from financing

343,868 343,240 342,958

Cash equivalent (+,-)

2,653 30,877 51,457

Cash equivalent at beg year

(21,507) 9,370 10,810

Cash equivalent at end year

41 (18,854) (21,507) (24,210)

General Tyres Pak.

Capital Structure & Solvency Ratios

2008 2007 2006Total debt/ equity

2,098,102 / 1,295297 = 1.62

1427775 / 1275,386 = 1.21

901,831 /1,070,381 = 0.843

Total debt ratio

2,098,102 / 3,393,399 = 0.62

1,427,775 / 2,703,161 = 0.53

901,831 / 1,972,212 = 0.457

Long term debt / Equity

476,196/ 1,295,297 = 0.368

399,023 / 1,275,386 = 0.893

162,050 / 1,070, 381 = 0.151

Equity / total debt

1,295,297 / 2, 098, 102 = 0.617

1,275,386 /1,427, 775 = 0.893

1,070,381/901,831 = 1.19

Fixed assets / Equity

1,468,828 /1,295297 = 1.13

1,036,000/1,275,386 = 0.64

601,961/1,070,381 = 0.56

C.L / T.L. 1,468,828/ 2098,102 = 0.7

931,810/ 1,427,775 = 0.71

639,497/901,831 = 0.71

Analysis

I see the debt to equity ratio is increasing indicating that the firm has

started to focus and rely on the debt financing instead of equity financing.

This will also lead to an increase in the firm’s financial cost. We can also



judge by the ratios that the firm is relying more on current or short term

debt instead of long term debt. The increase debt level currently indicates

that the company has a reputable credibility in the market however if the

same trend continues to exist then this will eventually hurt the credibility of

the organization.

General Tyres Pak.

Return on Invested Capital Ratios

2008 2007 2006ROA[NI + int. exp(1-t)] / total assets

[126998+86967 (1-0.35)] / 3393399 = 5.40%

[205005+17082(1-0.35)] / 2703161 = 7.99%

[235847+7553(1-.35)] / 1972212 = 12.55%

ROCE(NI – preferred dividend) / equity +Long term debt

126998 /1295297+ 476196 = 9.80%

205005 / 1275386 = 16.07%

235847 / 1070381 = 22.03%

Return on LTD & Equity [NI + Int. exp (1-t)] / LTL + Equity

[126998+ 86967 (1- 0.35)] / 476196 + 1295297 = 10.36%

[205005 +17082(1-.35)] / 399023 + 1275386 = 12.91%

[235847 + 7553(1-0.35)] / 162, 050 + 1070381 = 19.53%

Financial Leverage Index ROCE / ROA

0.098 / 0.054 = 1.82

0.1607 / 0.0799 = 2.011

0.2203 / 0.1255 = 1.76



Analysis

These ratios show gloomy picture for the firma s both ROA and the ROE

has decreased meaning that the investor would be no longer willing to

invest in this firm as the return earned on it is decreasing with the passage

of time. The major reasons for decrease in both the ratios is that the

interest expense of the firm has dramatically increased and the due to this

and the increasing cost of good the net income has decreased hence the

ratio calculated show a decreasing trend.

Three years ago the roce was very healthy i-e 30% and investor could

invest in this company but company started relying on debt for financing its

long term investments and there is 95% increase in the long term asset in

last 3 years. This massive investment is supported by the debt. As a result

company is now at a position when profits are decreasing and share

holders may be reluctant to invest more money in company. So company

can face problem in getting equity finance. But company have to make

steps to keep the finance cost low to chance the position in coming years.



General Tyres Pak.

Profit Margin Ratios

2008 % 2007 % 2006 %

Gross profit

margin

521,470/ 3731994

= 14%

583484 / 3197717

= 18.2%

626591 /2802669 =

22.3%

Operating profit

margin

210083 / 3731994

= 5.6%

329667 / 3197717

= 10.3%

377459 / 2802669

= 13.47%

Net profit margin 126998 / 3731994

= 3.4%

205005 / 3197717

= 6.4%

235, 847 / 2802669

= 8.4%

Profitability of the firm has decreased due to higher level of increase in

cost of goods sold as compared to increase in the sales. Net profit margin

has decreased by double amount in the recent years due to significant

increase in the finance cost of the firm which is increasing due to higher

borrowing done by the firm in order to finance its operations on a daily

basis.



Long term loan have been increase by 20% from last year loan and

76.83% from last three year figure.. due to massive reliance on debt as

source of finance profitability figure in decreasing. So this company is

“struck in the middle

General Tyres Pak.

Asset Utility Ratios

2008 2007 2006

Sales / cash & equivalent

3731994/78975=47.26

3197717/79556=40.19

2802669/44811=62.54

Sales / receivables

3731994/47414=78.71

3197717/43987=72.70

2802669/49810=56.27

Sales /inventory

3731994/1313906=2.84

3197717/1154316=2.77

2802669/896978 =3.12

Sales / working capital

3731994/455996=8.18

3197717/753981=4.24

2802669/730754=3.84

Sales / fixed asset

3731994/1468575=2.54

3197717/1036000=3.09

2802669/601961=4.66

Sales / total Assets

3731994/3393399=1.10

3197717/2703161=1.18

2802669/1972212=1.42

Sales / 3731994/1468828=2.54

3197717/913180=3.50

2802669/639497=4.38



Short term liabilities

Table analysis how company’s asset are utilized in making sales or how

many times assets have been converted in to sales, the greater the

turnover the better will be for the company. Evaluating the general trend

we can say that the firm is efficiently and effectively utilizing the current

assets however the fixed assets are not contributing much towards sales

generations and are on a decreasing trend over the past three years.

General Tyres Pak.

Liquidity Ratios

Measure 2008 2007 2006 UNITSCurrent Ratio 1.31 1.83 2.14 RatioAcid-test ratio 0.086 0.135 0.148 RatioAccounts receivable turnover

78.71 72.70 56.27 Times

Inventory turnover 2.44 2.77 3.12 TIMESDay’s sales in receivable

4.57 4.95 6.40 Days

Day’s sales in inventory

126.74 126.95 115.22 Days

Approximate conversion period

131.31 135.9 121.62 Days

Cash to current assets

0.041% 0.048% 0.033% %

Cash to current liabilities

0.054% 0.087% 0.070% %

Liquidity Index 794.10 86.01 104.55 Days Working capital 455996 753981 730754 $



Day’s purchase in accounts payable

75.65 66.22 69.85 Days

Average bet trade cycle

55.66 68.68 51.77 days

Cash provided by operation to avg. current liabilities

0.253 0.283 0.264 %

The short term liquidity analysis is very crucial for the company, as it determines its

current liquidity position. This will help the financial analyst make a better decision about

the need for money to finance company’s operations from any external sources or is the

company in a state to do it internally. The liquidity position of the firm is crucial as shows

the decrease current assets and a decreasing acid test ratio. The turnover and the day

sales ratio has also increased which signifies that the firm has started a lenient credit

policy which is why their cash is stuck with the creditors and in the form of inventory for a

longer period of time. Working capital is also decreasing which indicates that the firm will

eventually face liquidity problems in running its daily operations if the trends continue to

exist.

Common size income statement:

Majority of the revenue generate are distributed in the CGS. We see

that the CGS has increased over the period of time however

administrative and distribution expenses are decline hence we expect

that the net income would increase but the CGS is growing at higher

rate as compared to the decline of other expense. We also see that

the finance cost has increased significantly which indicates that debt

has been increased in order to finance the operations of the firm.



GENERAL TYERS PAKISTAN

FIVE YEARS GROWTH RATE

3year growth rate %

net sales 56.45845093

net income 79.77114418

equity 22.57393932

dividends 85.22134201

Net sales are growing at the 56% rate. Net income also shows rapid

growth of 79% over the years. Dividends are growing which shows that

company is paying high dividends to share holders. Equity is growing at

22%.



GENERAL TYRES

TREND INDEX

Trend index of selected accounts 2008 2007 2006

Cash and bank balances 106.52% 96.52% 100%

Other receivables 512.50 467.56 100

Stock-in-trade 156.05 124.90 100

total current assets 131.95 112.49 100

total current liabilities 116.02 104.45 100

Long-term loans 435.47 165.81 100

total equity 185.22 132.48 100

Net sales 156.46 122.56 100

Cost of sales 156.80 125.96 100

Distribution costs 162.96 120..49 100



Administrative expenses 5.84 46.31 100

Finance costs 213.11 157.96 100

Profit before taxation 179.71 101.62 100

Profit after taxation 179.77 100.77 100

This is the trend analysis which shows that cash, total current assets,

current liabilities, long term financing, finance cost, share holders equity,

net sales, CGS, interest expense, EBT, net income and total cost and

expense are on rising trends. They are increasing with passage of time.

On the other hand other administration expense decreased.

GENERAL TYRES

PER SHARE RESULTS

per share results 2008 2007 2006

Net sales 44.83 35.12 28.65

Profit after taxation 3.37 1.89 1.87

Dividend paid 1.10 0.90 0.89

book value 7.96 5.69 4.30



These are all per share results. Sales per share is increasing from 2006-

2008. Net income shows a rise. Dividends per share also rise because

company paid more dividends. Book value of the company is increasing

per share which is good for the company. As equity contribution increases

book value also increases.

GENERAL TYRES

COMMON SIZE ANALYSIS OF CA AND CL

CURRENT ASSETS 2008

2007 2006

Stores and spares 1.60%

1.14% 1.04%

Stock-in-trade 28.09

26.37 23.75

Trade debts 5.24 3.20 4.11Current maturity of finance under musharika arrangements

0.04 0.24 0.27

Loans, advances and prepayments 2.94 2.52 2.90short term prepayments 0.06 0.04 0.00accrued mark up 0.54 0.39 0.00Other receivables 8.87 9.49 2.28Taxation – net 0.00 0.69 0.47Cash and bank balances 52.6

155.92 65.1

7



total current assets 100.00

100.00

100.00

CURRENT LIABILITIESCurrent portion of liabilities against assets subject to finance lease

0.08 0.43 0.46

Short-term running finances 0.00 0.00 0.00Advances from customers and dealers 96.7

399.41 66.0

0accrued markup 0.33 0.16 0.00Creditors and accrued liabilities 0.00 0.00 18.7

4provision for other liabilities 0.00 0.00 8.67provision for taxation-net 2.86 0.00 0.00Dividends 6.71total current liabilities 100.

00100.0

0100.

00

This table shows the current assets an liabilities. The percentage of each

asset item to total current asset and each current liability item to total

current liability. In assets side the greater contribution is of stock in trade

and cash and bank balances. In liabilities the percentage of advances from

customers is higher to total liabilities.

GENERAL TYRES ANALYSIS OF

CASHFLOW RATIOS

Cash flow adequacy ratio= 3 year sum of sources of cash flow

3 year sum of capital exp/inv/cash div

=0.640



This ratio gives insight into whether company generates sufficient revenues to

cover its capital expenditures, investment in inventories and cash dividends.

This ratio shows that cash generated from operations are insufficient and there

is a need for external financing

Cash reinvestment ratio= cash by operations-dividends

FA+inv+nwc

2008=28.4%

2007=4%

2006=9.5%

This ratio gives insight into the amount of cash reinvested into the

company for both asset replacement and growth. This ratio is on an

increasing Trend which is good for the company.

Conclusion:

From the point of view of the investor I would not invest in the company as

the returns on investment are decreasing. Until the firm is able to control its

cost the net income will continue to decreasing resulting in a marginal

return to the investor. From the point of view of the creditors the company



is in need for external financing hence it is search of debtors but looking at

the liquidity position of the company there isn’t any risk that the company

might default. There is no risk that company will default as company has

good base of assets and reserve in hand. Company is sales are increasing

and products are in demand, though profit is not in line with sale. But it is

not a good short term investment as company not seem to produce good

short term profit The company earning is decreasing and seem to

decrease more in coming years that’s due to massive increase in debt as

source of finance. As it’s a fixed cost and company need to change either

its source of finance or to increase it sales to nullify the fixed cost effect

Hence financially the company is not strong enough and in a more

efficient manner in order to improve it’s financial

Formulas Used in Calculations

Profit Margin Ratios

Formulas to calculate profit margin ratios: Net Profit Margin Ratio (After Tax Margin Ratio) = net profit after tax / sales. Pretax Margin Ratio = net profit before taxes / sales. Operating Profit Margin (Operating Margin) = net income before interest and taxes /



sales. Profit Margin Ratios definitions and explanations:These three profit margin ratios state how much profit the company makes for every dollar/Rs of sales. The net profit margin ratio is the most commonly used profit margin ratio. A low profit margin ratio indicates that low amount of earnings, required to pay fixed costs and profits, are generated from revenues. A low profit margin ratio indicates that the business is unable to control its production costs. The profit margin ratio provides clues to the company's pricing, cost structure and production efficiency. The profit margin ratio is a good ratio to benchmark against competitors. The net profit margin ratio is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio

Debt to Equity Ratio (Financial Leverage Ratio)

Formula to calculate debt to equity ratio (financial leverage ratio): Debt to Equity Ratio = Short Term Debt + Long Term Debt Total Shareholders’ Equity Debt to equity ratio definition and explanation:Debt to Equity Ratio is also referred to as Debt Ratio, Financial Leverage Ratio or Leverage Ratio. The debt to equity (debt or financial leverage) ratio indicates the extent to which the business relies on debt financing.

Return On Invested Capital – ROIC

What Does Return On Invested Capital - ROIC Mean?A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns. Comparing a company's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively.

The general equation for ROIC is as follows:

Also known as "return on capital"



More Accurately

Calculating ROA (Return on assets)

The simplest way to determine ROA is to take net income reported for a period and divide that by total assets. To get total assets, calculate the average of the beginning and ending asset values for the same time period.

ROA = Net Income/Total Assets OrROA = EBIT/Total Assets

ROCE (return on capital employed)

ROCE is calculated by determining what percentage of a company's utilized capital it made in pre-tax profits, before borrowing costs. To calculate ROCE, you determine what percentage of a company's invested capital it made in pre-tax profit before borrowing costs. The ratio looks like this:

= Profit Before Interest and Taxation Capital Employed

NWCRequired Net Working Capital = Cash + Account Receivable + Inventory - Account Payable - Accrued Liability




General Tyres Financial Analysis

Documents

ni int

taxes sales

page lahore school

general tyres pak

profit margin ratio

financial leverage ratio

short term debt

invested capital