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We would like to thank Sir Mirza Imtiaz Askari, as our guide and
teacher, for assigning us this report for the better understanding and
gaining of knowledge of this course, and of the real financial environment.
This analysis has given us the ability to interpret financial scenarios of
industries which might not be as they may seem to public.
We would also like to thank our patients for their unlimited love and
support for us while we have been working on this report.
ANALYSIS OF FINANCIAL
STATEMENTS
Auto mobile industry (four Wheels) plays a major role in the Pakistan
automobile industry. It has largest share in overall Pakistan automobile.
Those products which are included in automobile industry (four Wheels)
are as under.
Passenger Car
Tractor
van
CURRENT RATIO
Current ratio = current assets / current liabilities
QUICK RATIO
Quick ratio = quick assets/ current liabilities
quick
Year C.A (Rs) quick assets (Rs) C.L (Rs) ratio
15,127, 9,693,627 10,770,
2005 089,000 ,300.00 697,000 0.9
18,982, 8,214,337 12,025,
2006 670,000 ,000.00 474,000 0.68
16,215, 5,484,052 7,125,
2007 508,000 ,000.00 302,000 0.77
11,807, 2,499,142 2,657,
2008 612,000 ,000.00 462,000 0.94
12,427, 3,545,621 3,325,
2009 633,000 ,000.00 134,000 1.07
A company’s quick ratio or acid test ratio shows that whether a firm has enough
short-term assets to cover its immediate liabilities without selling inventory. The
company has been fluctuating in its ability to cover short term liabilities which
was better in 2005, decreased in 2006 and 2007, and increased from 2008. This
shows that the company has made improvements in terms of paying its short
term debts. But only in 2009 has it reached a commendable ratio else
performance is below good.
WORKING CAPITAL
Working capital = Current assets – Current liabilities
Working Capital
year C.A (Rs) C.L (Rs) (Rs)
15,127, 10,770,6 4,356,
2005 089,000 97,000 392,000
18,982, 12,025,4 6,957,
2006 670,000 74,000 196,000
16,215, 7,125,3 9,090,
2007 508,000 02,000 206,000
11,807, 2,657,4 9,150,
2008 612,000 62,000 150,000
12,427, 3,325,1 9,102,
2009 633,000 34,000 499,000
ACTIVITY RATIOS
INVENTORY TURNOVER
Inventory turnover = CGS / inventory
A ratio showing how many times a company's inventory is sold and replaced over
a period. The sales of inventory actually improved from 2006 to 2008 but
decreased sharply in 2009. This is owing to the fact the inventory and cgs both
have been decreasing by a larger ratio.
OPERATING CYCLE
Operating cycle = inv t.o in days + a/r t.o in days
Operating Cycle
year (days)
2005
2006 95.5
2007 97.0
2008 190.5
2009 512.5
The company in 2006 could faster convert resource inputs into cash flows but till
2009 the trend shows poor performance, and now due to fewer sales and more
delay on part of creditors, it takes more days to sell the inventory and collect
receivables.
Total Assets
year Sales (Rs) (Rs) Asset Turnover Ratio
35,374, 18,747,84
2005 556,000 1,000 1.9
48,203, 23,274,08
2006 084,000 9,000 2.1
50,844, 21,201,33
2007 632,000 7,000 2.4
39,669, 16,956,14
2008 730,000 3,000 2.3
26,234, 17,655,73
2009 061,000 4,000 1.5
The company has been less efficient in generating sales from its assets but has
done well in 2007 and 2008. This may be due to the increase in sales in 2007
being the highest.
Indicates the relative portion of debt and equity used to finance assets. Less
debt is used to finance assets and more equity since 2005 to 2009.
Interest Times
Operating Expense Interest
YEAR Income (Rs) (Rs) Earned
2005
2006 5817174000 282605000 20.6
2007 4743147000 143786000 33.0
2008 1045646000 53470000 19.6
2009 440407000 12564000 35.1
A metric used to measure a company's ability to meet its debt obligations. TIE
declined in 2008 but increased again. This means that the company can meet its
debt obligations well.
A measure of the physical worth of a company, which does not include any value
derived from intangible assets such as copyrights, patents and intellectual
property. It shows us the real picture in place of an inflated on of equity. In
comparison the company has more assets still financed from debt but the ratio
has a declining trend over the years.
PROFITABILITY RATIOS
2005 2006 2007 2008 2009
35,3 48,2 50,8 39,6 26,2
74,556,00 03,084,00 44,632,00 69,730,00 34,061,00
Net Sales 0 0 0 0 0
3,5 5,6 4,7 5 5
72,956,00 93,710,00 60,232,00 88,053,00 69,299,00
Gross Profit 0 0 0 0 0
Gross Profit
margin 10.1% 11.8% 9.4% 1.5% 2.2%
Number of
shares
Outstanding 54044400 79943300 82300000 82300000 82300000
Earnings per
share 41.4 41.95 33.7 7.6 3.1
The ratios show that the company experienced a growth in terms of profit in
2005-2006 which was the highest. In 2009 the gross margin is more but net
income is much lesser than in 2008. This might be due to an increase in fixed
costs.
FIXED ASSETS
AGE OF ASSETS
Buildings on leasehold lands - factory, office, test tracks and other
buildings
remaining life of age of asset Life of asset
YEAR asset (yrs) (yrs) (yrs)
2005
2005
Welding Guns
remaining life of age of asset Life of asset
asset (yrs) (yrs) (yrs)
2005
2005
2005
2006 2.9 5.8 8.6
Dies
remaining life of age of asset Life of asset
asset (yrs) (yrs) (yrs)
2005
2005
Vehicl
es
remaining life of age of asset Life of asset
asset (yrs) (yrs) (yrs)
2005
2005
2006 3.5 4.2 7.6
By calculating the age of fixed assets we can come to know of how much assets
are more useful for the company and how much service have the assets already
provided. This gives us an estimate of the quality of the assets utilized in the
company. Plant and machinery and buildings have served terms up to 8 years
and have still a good remaining life which means that they can be very useful for
the company for the next 3 years or so. Vehicles have a similar trend while other
assets have a life ranging on from 2 to 10 years. This means that the need for
financing new assets is relatively less.
With this method, assets are measured at their gross book value rather than at
net book value in order to produce a higher return on equity (ROE). It is also
known as "DuPont identity".
Profit margin tells us how much earning on sales has been there which as clearly
seen has been declining in the years. Asset turnover tells us how much utilization
of assets has been there in generating sales which has also declined till 2009.
Leverage helps us identify how much riskier the firm has become by borrowing
which has increased from 2008 but generally decreased. Removing the false
assumption by taking the capital work in process even, ROE has declined at a
huge rate which shows that the company’s efficiency has gone down a lot. It is
not generating enough sales on assets.
ROA is used to calculate the stability of the operating income of the firm in the
coming years. Operating leverage involves using a large proportion of fixed costs
to variable costs in the operations of the firm. The higher the degree of operating
leverage, the more volatile the EBIT figure will be relative to a given change in
sales, all other things remaining the same. Thus through break even we see how
far is the company doing well from its costs being made and how much stable is
going to be the operating income relative to the change in sales. DOL as can be
seen has increased from 2006 to 2009 for PSMCL which means that the
operating income is quite unstable with relation to change in sales. From 2006 to
2009 the difference between the sales and breakeven point has reduced.
Upon calculation it has been deduced that changes in CGS are mostly due to
price of raw materials. In sales and CGS it is a fluctuating trend. From 2006 the
sales price decreased till 2007 when it took the higher turn. The same has been
for CGS but the production volume has declined from 2006 consistently. This
means that the increase in sales price is due to the decrease in volume and of
course cost. Gross profit has decreased.
From the above table, it can be deduced that PSMCL can be said to be a growing
firm only in 2009 since from 2006 till 2008 its case from operation is negative
which means that operating activities aren’t generating profit.
Sector Overview
There are presently 82 vehicle assemblers in the industry producing
passenger cars, light commercial vehicles, trucks, buses, tractors and 2/3
wheelers. Besides these there are over 400 players in the vendor industry.
The total direct employment in the sector is around 500,000. The auto
industry has played a significant role in the large scale manufacturing
industry as it contributes Contribution to GDP Rs. 153 billion to the
economy besides import substitution resulting in annual foreign exchange
savings of over $ 1 billion. An investment of over Rs. 100 billion as been
done in the automobile sector giving Revenues of above Rs. 50 billion that
accounts for 8% of the total. There is still potential in the auto industry
for more investment. During the period July-April 2006-07 automobile
industries recorded some what subdued growth in
assembling/manufacturing business.
Mission Statement
The mission of Dewan Mushtaq Group is to be the finest organization, and
to conduct business responsibly and in a straightforward way.Our basic
aim is to benefit the customers, employees and shareholders, and to fulfill
our commitment to the society.Our hallmark is honesty, initiative and
teamwork of our people, and our ability to respond effectively to change
in all aspects of life including technology, culture and environment.We will
create a work environment, which motivates, recognizes, and rewards
achievements at all levels of the organization, because in God we trust
and in people we believe.We will always conduct ourselves with integrity
and strive to be the best.
Corporate Philosophy
The Group’s corporate philosophy is based on following principles laid
down by its founders and predecessors:- Credibility, integrity and honesty
- Straight forward business dealings- Work as a worship - Spirit of social
service and human respectBy following the above philosophy, the Group
enjoys an excellent corporate image amongst business community, banks,
financial institutions, and governmental circles. The market price of Group
companies’ shares is the most prominent reflection of this confidence.
Financial Analysis
SHORT-TERM SOLVENCY
Table 1.1 and 1.2 give the liquidity ratios of Dewan motors Limited respectively
and are followed by the analysis of these ratios.
Interpretation
The current ratio of the company is been progressing from 2005 to 2007
but I think the company is facing a lots of problems facing related to
liquidity this could be the reason behind is the inventory problems or a
company might be facing problems in receiving their credits.2005 to 2007
shows increased in current ratio but there is suddenly drop in 2008 from
1.03 to 0.95 that shows the company fail to solve it inventory of
receivables problem. So it is been observed that company might have
highlighted their problems and trying to resolve them The past five year
performance of the company related to the quick ratio is telling us that
the company is highly involved in inventory problems and the reason
behind this that they are taking to much time in converting their inventory
into sales thus in such a way the company liquidity is below 1.0 this could
be a most dangerous sign for the company .this problems may lead
company towards liquidity crunch. Another reason could be that company
is taking too much time in receiving their credits.
Table 1.2: Efficiency Ratio
Interpretation
As we can see that the company is taking too much time in receiving their
credits and we can see that by this trend since past 5 year in 2005 and
2007 the company was quite efficient in collecting their receivables but
after year 2008 the company is facing hell lot of collection problems this
problem could lead the company towards inappropriate growth rate a
company should have a nominal collection period in order to get their
payments back and reinvest those amount.
LONG TERM SOLVENCY
Interpretation
The company debt ratio is been quite consistent from 2005 to 2007, it was
increased from 2008 that is quit positive sign because company improving
it debt.
The company debt/equity ratio from 2005 to 2007 is improving but after it
shows negative effect because company equity portion has fall down and
2009 it goes to negative figure, As it shows company has poor
performance in 2008 and 2009, may be many investors withdraw their
money or because of some other factor company equity has been down in
2008 and 2009
Time interest earn shows that company was capable enough with
covering their finance cost till 2005 but after this the company profitability
starts declining thus in such a way company was unable to cope with their
interest expenses and in such a ways the efficiency of recovering loans
has been decreased
PROFITABILITY RATIO
Interpretation
The company return in the beginning was quite nominal and going very
good in fact till 2005 it was progressing and increasing smoothly but after
2005 the company’s return on asset and on equity suddenly decreased
drastically and in such a ways the company start loosing their investor the
main reason could be high financing cost, and the problems in inventories
the company should utilize their assets and work on sales
The company gross profitability is been quite consistent and from 2005 to
2007 its been stable only slight changes have been occurred but we have
seen a decreased in Np margin in last 2 years it seems that the company
is highly debt finance and the interest expense of the company is hurting
company’s profitability the main reason could be that company is taking
high loans thus leads to high interest expenses
PRICE OR QUANTITY
Interpretation
The Company production capacity is 10,000 units per year. From 2005 to 2007
company have good production they achieved target and they have good sales
about 8.5 billion and 7.2 billion, afterward the production has down, sales reached to
5.2billion and 1.5 billion in 2008 and 2009. In 2009 company has serious problem,
they produced 23 % of the production capacity, and because they produced very low
quantity, having low sales. 5 year data shows that sales price is not the factor to
increase or decrease the sales; I think quantity is the factor that affects the sales.
Calculations:
2009
Production Cost Per unit cost
Cost of
production 2323 2380760000 1,024,864.40
Opening
inventory 69,330,000.00
Total 2,450,090,000.0
available 2390.647974 0 1,024,864.40
Ending
inventory 125.42 128535000 1,024,864.40
Cost of good 2,321,555,000.0
sold 2,265.23 0
sale 1557016000
2008
Production Cost Per unit cost
Cost of 4,777,317,000.0
production 8,854.00 0 539,565.96
Opening
inventory 186,450,000.00
Total 4,963,767,000.0
available 9,199.56 0 539,565.96
Ending
inventory 128.49 69,330,000.00 539,565.96
Cost of good 4,894,437,000.0
sold 9,071.06 0
5,282,895,00
sale 0.00
9,
sold production 071.06
582,3
sale price 90.04
2007
Per unit
Production Cost cost
Cost of
production 10334 5017490000 485,532.22
Opening
inventory 1,022,189,000.00
Total available 12439.296 6,039,679,000.00 485,532.22
Ending
inventory 384.01 186,450,000.00 485,532.22
Cost of good
sold 12,055.28 5,853,229,000.00
sale 7235462000
12
sold production ,055.28
600,
sale price 190.29
2005
Per unit
Production Cost cost
Cost of 6,981,066,000.0
production 15010 0 465,094.34
Opening
inventory 546,670,000.00
Total 7,527,736,000.0
available 16185.39595 0 465,094.34
Ending
inventory 265.79 123,617,000.00 465,094.34
Cost of good 7,404,119,000.0
sold 15,919.61 0
sale 8785858000
sold
production 15,919.61
55
sale price 1,889.02
ASSET VALUATION
Asset: Building
Interpretation
Dewan motors’ plant and machinery are in acceptable position life is half
consumed which means company need to focus these asset to earn profit.
Asset: Vehicles
Dewan’s motor office equipment and motors are also having good position
Overall interpretation
Cash flow
activities 2009 2008 2007 2005
Investing (298,272,00 (67,266,000
activities 70,007,000 0) ) 1,089,373,000
Operation (227,747,000 623,830,00 368,111,00 (1,368,301,00
activities ) 0 0 0)
Financing (456,657,00 (149,227,00
Activities 181,126,000 0) 0) 136,667,000
Interpretation
Interpretation
Honda Pakistan
Financial Analysis
Short-term solvency
Table 1.1 and 1.2 give the liquidity ratios of Honda Pakistan Limited respectively and are followed by
the analysis of these ratios.
The current ratio of the company showed varied trends and it kept on shifting while touching the
lowest in year 2006 and the highest in 2008. The main reason behind this can be the company
liquidity problems and the high inventory turnover rates. The liquidity problems are quite evident in
the quick ratio which became least in the year 2009. The working capital of the company is in the
negative throughout the five year period. This shows that Honda Pakistan relies heavily on the
creditors and borrowings for their operation. This also indicates that there is a marked difference in
the assets and the liabilities under operations.
Inventory Analysis
The inventory turnover of the past 5 years shows a variable trend in the performance. The
company is facing liquidity crisis due to which inventory ratios keep fluctuating. In 2006, the
inventory turnover rate reached 8.73 which shows that the sales in that year did not perform
well.
Receivable Analysis
In 2005, the receivable rate was low which shows that company was getting its receivables on
time. While from 2006-20087, the company faced problems in this regard. However in 2009,
this ratio seems to have stabilized with a receivable of 17%.
Debt ratio:
The company debt ratio is been quite consistent from 2006 to 2008. In 2005 and in 2009, the
company borrowed capital which increased its debt ratio. This increase in borrowings made
the company more risky. The debt equity ratio, on the other hand shows that in 2007, the
company heavily relied on the stockholders finance but in the rest of the years, the
debt/equity ratio was quite stable.
Ratio Formula 2009 2008 2007 2006 2005
Gross profit rate Gross profit/net sales 1.2% 4.2% 3.2% 2.2% 1.5%
Operating expense Operating 4.0% 2.2% 3.5% 2.1% 3.4%
ratio expenses/net sales
Net income as a % Net income/net sales (2.82)% (2.0)% (2.5)% (2.6)% 2.1%
of net sales(Profit
margin)
Earning per share Net income/average 2.79 2.08 2.4 2.3 2.7
number of shares
outstanding
Return on Operating income/ 1.0% 1.2% 1.3% 2.1% 1.2%
Assets(ROA) average total assets
Return on Net income/ average 1.4% 1.7% 1.3% 1.4% 1.8%
equity(ROE) total equity
PRICE OR QUANTITY
Quantity 18240
produced
12,780 15080 31476 20040
Cost of goods
manufactured 400,312,00 17,954
14373456000 0 ,027,000 24,535,584,000 16377238000
Per unit cost 93,42 485,532.22
5,93,360.25 1.75 77,745.5 81358.19
Quantity sold 92,555 2399.
11658.38 2267.31 .92 0 79676.75
Sale Price 6,49,0 32 10,
1213688.86 28.80 95,777.62 68,724.3 2,08,181.39
Cost 14,088,001
13,973,144,000 ,000 16,882,200,000 24,471,184,000 16304182000
The increase in sales over the past 5 years indicates that these increased sales are due to the
increase in the sale price of the cars. Moreover, there is a marked increase in the price in the
year 2007, due to increased number of production and the highest level of sold quantities in
the current trend.
Calculation
2009
sale 14,149,646,000
sold production 11658.38
2008
sale 14715495,000
2267.
sold production 31
6,49,028
sale price .80
2007
sale 17,055,115,000
sold production 5,174.84
3,29577
sale price 7.62
2006
sale 25638698000
2005
sale 16587217000
sold production 79676.75
sale price 2,08,181.39
DEGREE OF OPERATING LEVERAGE (RISK OF THE
ORGANIZATION)
ASSET VALUATION
Working capital
Current assets Current liabilities working capital
2009 16,715,319,000 9,884,850,000 6,830,469,000
2008 9,664,784,000 3,779,631,000 5,885,153,000
2007 13,560,329,000 7,410,926,000 6,149,403,000
2006 14,095,657,000 9,444,554,000 4,651,103,000
2005 12,016,361,000 8,502,483,000 3,513,878,000
Positive working capital means that the company is able to pay off its
short-term liabilities. Negative working capital means that a company
currently is unable to meet its short-term liabilities with its current assets
(cash, accounts receivable and inventory). The working capital is
increasing over the years as we can see in the table which means the
company can pay off its short term obligations.
Activity Ratios
Trade debt turnover ratio
Trade debt are the A/R. An accounting measure used to quantify a firm's
effectiveness in extending credit as well as collecting debts. The receivables
turnover ratio is an activity ratio, measuring how efficiently a firm uses its
assets. The ratio here has been decreasing from 2005 to 2009 which shows that
the company’s performance is poor in collecting it’s credit from sales on credit
which is also due to the fact that more sales on credit is done.
A ratio showing how many times a company's inventory is sold and replaced over
a period. The performance of the company in selling its inventory became better
till 2008 but in 2009 they took a swift turn and decreased performance by half.
Now it takes more days to sell the inventory which is not a good sign.
The company has been less efficient in generating sales from its assets but has
done well in 2008. This may be due to the increase in sales in 2008 being the
highest.
Indicates the relative portion of debt and equity used to finance assets. Less
debt is used to finance assets and more equity since 2005 to 2008 but the ratio
turned up in 2009.
A metric used to measure a company's ability to meet its debt obligations. The
company could meet its obligations in 2008 the best but declined due to more
borrowing.
Profitability ratios
2009 2008 2007 2006 2005
37,864,604, 41,423,843, 39,061,226, 35,236,535,0 27,601,034,0
net sales 000 000 000 00 00
2,324,186,0 3,848,487,0 4,440,594,0 4,147,629,00 2,706,178,00
gross profit 00 00 00 0 0
gross profit
margin 6.1% 9.3% 11.4% 11.8% 9.8%
number of
shares
outstanding 78,600,000 78,600,000 78,600,000 78,600,000 78,600,000
earnings per
share 17.62 29.15 34.93 33.70 18.89
The ratios show that the company experienced a growth in terms of profit in
2006-2007 which was the highest. In 2009 the ratios are the lowest generating
the least marginal profit for the firm.
Motor vehicles
accumulate book remaining life age of
Cost d dep dep value of asset asset
174,095, 29,944, 108,331,
2009 000 65,764,000 000 000 3.6 2.2
175,899, 25,408, 115,725,
2008 000 60,174,000 000 000 4.6 2.4
114,270, 17,520, 79,555,0
2007 000 34,715,000 000 00 4.5 2.0
119,039, 16,701, 82,222,0
2006 000 36,817,000 000 00 4.9 2.2
52,476,0 11,782, 21,297,0
2005 00 31,179,000 000 00 1.8 2.6
By calculating the age of fixed assets we can come to know of how much assets
are more useful for the company and how much service have the assets already
provided. This gives us an estimate of the quality of the assets utilized in the
company. Plant and machinery and factory have served terms up to 8 years and
have still a good remaining life which means that they can be very useful for the
company for the next 3 years or so. Vehicles have served a life up to 4 years and
3 years more of quality remain. This means that the need for financing new
assets is relatively less.
financial
year net margin assets turnover leverage ROE
2009 3.7% 1.8 2.0 13.5%
2008 5.5% 3.0 1.5 24.3%
2007 7.0% 2.5 1.9 34.1%
2006 7.5% 2.2 2.5 42.3%
2005 5.4% 2.1 2.9 33.2%
capital work in assets- capital net assets financial RO
progress work in progress margin turnover leverage E
20 13.
09 1,006,646,000 19,678,877,000 3.7% 1.9 1.9 6%
20 24.
08 2,017,940,000 11,730,169,000 5.5% 3.5 1.2 1%
20 34.
07 599,761,000 15,065,289,000 7.0% 2.6 1.9 0%
20 42.
06 787,940,000 15,034,528,000 7.5% 2.3 2.4 2%
20 33.
05 278,590,000 12,754,348,000 5.4% 2.2 2.8 3%
With this method, assets are measured at their gross book value rather than at
net book value in order to produce a higher return on equity (ROE). It is also
known as "DuPont identity".
Profit margin tells us how much earning on sales has been there which as clearly
seen has been declining in the years. Asset turnover tells us how much utilization
of assets has been there in generating sales which has also declined till 2009.
Leverage helps us identify how much riskier the firm has become by borrowing
which has increased from 2008 but generally decreased. Removing the false
assumption by taking the capital work in process even, ROE has declined at a
considerable rate which shows that the company’s efficiency has gone down a
lot. It is not generating enough sales on assets. As regards to leverage after
decreasing indicating a good performance the firm grew slightly more riskier in
2009 but less as compared to 2005.
Operating risk
Break even and DOL
This ratio is useful as it helps the user in determining the effects that a given
level of operating leverage has on the earnings potential of the firm. This ratio
can also be used to help the firm determine the most appropriate level of
operating leverage in order to maximize the company's EBIT.
ROA is used to calculate the stability of the operating income of the firm in the
coming years. Thus through break even we see how far is the company doing
well from its costs being made and how much stable is going to be the operating
income relative to the change in sales. DOL as can be seen has increased from
2006 to 2009 after a decline in 2005, which means that the operating income is
quite unstable with relation to change in sales. The company has remained well
above its break even point.
Upon calculation it has been deduced that changes in CGS are mostly due to
price of raw materials. In sales and CGS it is a fluctuating trend. From 2005 the
sales price increased till 2006 when it took the lower turn. Then again decreased
in 2007 but increased in 2008 and 09. The same has been for CGS but the
production volume has increased from 2005 when it decreased in 2009. This
means that the increase in sales price is due to the decrease in volume and of
course cost. Gross profit increased from 2005 to 06 but then again kept on
decreasing. This low profit margin in 2009 is due to the increase in costs and
decrease in volume.