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Pakistan State oil

Introduction of the Organization

Pakistan State Oil (PSO), the largest oil marketing company in Pakistan (with a market share of
80%), was formed in 1976 through the merger of Pakistan National Oil, Premiere Oil, and Esso.
PSO operates 3,600 retail outlets, including more than 1,600 New Vision Retail Outlets that
offer, besides the usual gas-station services, an Internet kiosk, car wash, and other amenities. The
company additionally sells a full range of petroleum and related products, including fuel oil,
industrial oils, and petrochemicals. The Government of Pakistan controls a majority stake in the
publicly traded PSO.

History of Pakistan State Oil

PSO came into being in the mid-1970s when the Government of Pakistan amalgamated three
“Oil Marketing Companies”: Esso Eastern, Pakistan National Oil (PNO) and Dawood Petroleum
as part of its “Nationalization Plan”. From 1999 to 2004, PSO had undergone radical changes,
both internal and external and has emerged with a new look and as a market leader with a long-
term vision. The company is the only public sector entity in Pakistan that has been competing
effectively with three foreign multinationals, Shell, Caltex and Total.

PSO is currently enjoying over 73% share of Black Oil market and 59% share of White Oil
market. It is engaged in import, storage, distribution and marketing of various POL products
including, mogas, high speed diesel (HSD), fuel oil, jet fuel, kerosene, liquefied petroleum gas
(LPG), compressed natural gas (CNG) and petrochemicals.

PSO also enjoys around 35% market participation in lubricants and is blending/marketing
Castrol brands, in addition to a wide array of its own. It is considered as one of the most
successful mergers in the history of Pakistan. The company has retail coverage of over 3,800
outlets, representing 80% participation in total industry network. The company has been the
winner of Karachi Stock Exchange Top Companies Award for many years and is a member of
World Economic Forum. PSO serves a wide range of customers throughout Pakistan including

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retail, industrial, aviation, and marine and government/defense sectors. PSO has been meeting
the country’s fuel needs by merging sound business sense with national obligation.

Vision Statement

To excel in delivering value to customer as an innovative and dynamic energy company that get
to the future first.

Mission Statement

We are committed to leaderships in energy market through competitive advantages in providing


the highest quality petroleum products and services to our customers based on.

 Professionally trained high quality motivated work force working as a team in an


environment which recognizes and rewards performance innovation and creativity and
provide for personal growth and development.

 Lowest cost operation and assured access to long term and cost effective supply sources.

 Sustain growth in earning in real terms.

 High ethical and safety environment and socially responsible business practices.

Petroleum Industry Overview


During FY10, oil prices remained relatively stable maintaining an average of $ 73.44/ bbl as
compared to a sharp fluctuation in international prices in FY09 which helped maintain the POL
prices in the country. In the period under review, POL consumption in the country was recorded
to be 20.8 million tons, as compared to 19.2 million tons last year. The primary reason for this
8% growth has been the increased consumption of Mogas and Fuel Oil.
Consumption of Black Oil grew to 9.3 million tons - an increase of 14% over the preceding
year. Black Oil demand picked up owing to supply constraints for natural gas. Reduced hydro-
electric potential also contributed to rise in Fuel Oil consumption. This trend in Fuel Oil
consumption is expected to continue in subsequent years.

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White Oil reported a slight increase from 10. Million tones to 10.2 million tones.
During FY10 consumption of HSD decreased by 3%. During the period under review, demand
for motor gasoline increased by over 27% over the preceding year mainly due to 50% increase in
cars sales and 44% increase in motor cycles’ sales, gas shortage in winters, one day holiday of
CNG per week and extraordinary increase in use of generators due to frequent power outages.
Demand of Jet A-1 (local) registered an increase of around 9% due to increase in domestic
carriers and technical landings. During FY10, local refineries produced 7.9 million tons while the
deficit requirement of around 11.3 million tons was imported. The major chunk of demand was
in FO and HSD for which 6.7 million and 3.75 million tons were imported respectively by PSO.
A significant reduction in the refining capacity of different refineries was witnessed mainly due
to the mounting circular debt and lower refining margins.

Pakistan State Oil Performance year 2010


During FY10, PSO sold 14.2 million tons of POL products as compared to 13.2 million tons
during the preceding year, the details of their products are as follows:

Black Oil
In Black Oil, PSO enhanced its market share appreciably from 85.8% in FY09 to 88.3%. PSO
registered a ever highest sales volumes of 8.2 million MTs for Furnace Oil (FO). The surge was
mainly due to increase in demand in power generation sector. PSO despite the mounting circular
debt responsibly met the demands of the power sector of the country. In the period under review,
the company remained committed to keep the homeland lit up.

White Oil
In White Oil, PSO reduced its market share from 59.4% in FY09 to 55.4% in FY10. Decrease in
PSO’s market participation in White Oil by 4% was mainly due to the overall economic
downturn and circular debt.

Mogas

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PSO lost 2.1% share in Mogas as compared to previous year bringing its market share in this
product to around 45.9%. PSO’s Mogas volumes increased by 22% whereas the industry
volumes grew by 27%. This increase in volumes was reported due to increase usage of
generators and more vehicles on the road. PSO registered a ever highest sales volume of 0.89
million MTs for Mogas as compared to previous Year’s 0.73 million MTS.

HSD
HSD sales by PSO during the year also witnessed a downward trend along with the industry’s
depreciating trend. The industry showed a negative growth of 3% whereas PSO showed a
negative volume growth of 10%. The reason behind this negative growth was the slow down of
economic activity. As a result, the company’s market participation decreased to around 56.8%
from 61.1% during the preceding year. Comparison with FY09 figures shows that during FY10,
the company achieved a sales volume of 4.2 million MTs against previous year’s figures of 4.7
million MTS.

Financial Performance of Pakistan State Oil


During my analysis of the PSO i observed for the year ended June 30, 2010, the Company
achieved an impressive performance with turnover Touching the Rs. 877 billion marks compared
to Rs. 719 billion in FY09, an increase of 22% mainly due to heavy reliance of the power sector
on PSO for the supply of Furnace Oil. During FY10, profit before tax was recorded at Rs. 17.96
billion versus a loss of Rs. 11.35 billion last year and profit after tax at Rs. 9.05 billion against a
loss Rs. 6.69 billion registered in previous financial year. The earning per share was Rs. 52.76
versus loss per share of Rs. 39.05 last year.

Dividends and Other Appropriations


Based on these results, the board announced a dividend of Rs. 5 per share. Combined with the
Earlier interim dividends aggregating Rs. 3 per share, the total dividend for the year stood at
Rs. 8 per share translating into a total payout of Rs. 1.37 billion to the shareholders.

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Circular Debt
Despite being profitable, the Company continued to face liquidity problems due to ever-
increasing Receivables throughout FY2010. As of June 30, 2010, various major power
generation companies including WAPDA, KAPCO, HUBCO and KESC and the PIA (Pakistan
International Airlines) owe our Company an aggregate amount of Rs. 111 billion. On account of
PDC Gop owes Rs. 11.86 billion. This has created such an acute financial crunch that we have to
struggle to meet our import payments. Consequently, the Company owed Rs. 81 billion to local
refineries and hence had to rely on short-term borrowings for its needs.

Financial Charges
The heavy bank barrowings resulted in high financial costs borne by the Company in terms of
interest payments, which dented your Company is profit margins. The Company ended up
incurring Rs 9.88 billion as financial charges during FY10 as compared
To Rs. 6.2 billion as financial charges in FY09.

Pak Rupee Devaluation


In addition to heavy financial charges borne by your Company, Pakistan Rupee devaluation of
4.9% against the US$ also adversely affected the profitability of the Company as more than 90%
of oil product imports in the country are carried out by PSO.

Associated companies of Pakistan State Oil

Asia Petroleum Limited (APL)


APL was incorporated in Pakistan as an unlisted public limited company on July 17, 1994. The
Company has been principally established to transport Residual Fuel Oil (RFO) to the Hub
Power Company Limited (HUBCO) at Hub, Baluchistan. For this purpose, the Company laid
an underground oil pipeline starting from Pakistan State Oil Company Limited (PSO)
Zulfiqarabad ,Terminal at Pipri to HUBCO at Hub. PSO holds a 49% equity stake in APL.

Pak Grease Manufacturing Company (Private) Limited (PGMCL)

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PGMCL was incorporated in Pakistan on March 10, 1965 as a private company. The principal
activity of the Company is to manufacture and sell petroleum grease products. PSO holds a 22%
equity stake in PGMCL.

Auditor’s Opinion
In the past five years the company changes two auditors. The reason which i observed during my
analysis of the PSO is that the auditor completes their audit tenor. In year 2006, 2007, 2008 the
company auditors are same I three years A.F. Fergusson & co, Ford Rhodes Sadat Hyder & co
audited the financial statements I these three years, after year 2008 the next year 2009 the Ford
Rhodes Sadat Hyder & co are replace with KPMG Tasser Hadi & co. In, year 2010 the Company
changes its another auditors A.F. Fergusson & co replace with M. Yusuf Adil Saleem &
Chartered Accountant Mushtaq Ali Hirani. All auditors show unqualified option. They further
described that all company accounts and financial statements are prepared according with the
general accepted accounting principles, ad the accounts shows true and fairs financial positions.

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Pakistan State Oil Limited
Horizontal Analysis
(Balance Sheet)
Current Assets: 2005 2006 2007 2008 2009 2 010
Stores, spares and loose tools 100 95.77 97.95648 88.70626 85.8945 86.1425
Stock-in-trade 100 136.85 143.6215 302.9644 197.7244 305.1415
Trade debts 100 174.34 200.2623 499.254 1185.524 707.1537
Loans and advances 100 127.88 171.619 185.8024 196.0229 197.5242
Trade deposits and short term
prepayments 100 191.97 218.1227 55.28185 75.98949 73.1725
Other receivables 100 139.22 152.0679 151.3978 123.6414 171.1425
Short term investments 100 0.00 0 0 0 0
Cash and bank balances 100 98.80 79.20534 157.0625 150.0111 163.1452
Total Current Assets 100 142.68 153.4657 284.474 340.473 345.1725
Fixed Assets
Property, plant and equip: 100 92.27 98.77747 91.97517 86.13747 89.1423
Intangibles 100 107.03 87.25518 72.93757 47.61385 71.2543
Long term investments 100 141.47 129.0266 116.5366 92.91158 103.2457
Long term loans, advances and receivables 100 81.90 81.58935 62.07108 52.72102 64.1542
Long term deposits and prepayments 100 88.17 62.67699 75.21467 79.54794 78.2542
Deferred tax 100 327.32 321.4983 326.5488 4035.011 508.0215
Total Fixed Assets 100 104.11 105.6208 97.04335 127.2916 109.1243
Total Assets 100 134.15 142.8796 243.0036 293.305 257.1245
Liabilities & Stockholders’ Equity
Current Liabilities
Trade and other payables 100 141.83 160.6467 314.335 426.9986 457.1247
Provisions 100 103.06 91.28711 96.27287 91.28711 99.1246
Accrued interest / mark-up 100 188.87 206.4342 340.9173 870.3773 647.1245
Short term borrowings 100 158.97 188.3941 228.5705 387.6986 395.1243
Taxation-net 100 143.65 5.162512 54.05938 0 0
Total Current Liabilities 100 143.62 156.835 286.0934 396.845 314.1422
Long Term Liabilities
Long-term deposits 100 110.19 113.7947 123.613 126.593 127.2147
Retirement & other Benefits 100 117.47 124.2032 118.9214 126.3908 123.1425
Total Long Term Liabilities 100 115.01 120.6875 120.5061 126.4591 127.1243
Stockholders' Equity
SHARE CAPITAL 100 100.00 100 100 100 100
RESERVES 100 120.65 121.4433 184.7792 121.011 165.1217
Total Stockholders' Equity 100 118.63 119.347 176.4912 118.957 145.1122
Total liabilities & Shareholder's
equity 100 134.15 142.8796 243.0036 293.305 308.1257

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Interpretation of Horizontal Analysis of Balance Sheet:

In horizontal analysis we take any one year as base year and compare all items balance sheet or
income statement with it. During my analysis the year which I take as a base is 2005 and
compares all balance sheet items with it. The current assets of the Pakistan state oil shows a
increasing trend, and the fixed assets shows are also shown a increasing trend in the horizontal
analysis of balance sheet. On the other side of the balance sheet the current liabilities of the
company increased every year when we take 2005 as base this shows the company borrows more
loans to fulfill its deficit. The stockholders equity section of balance sheet also shows increasing
trend with respect to year 2005 as a base.

Pakistan State Oil Limited


Horizontal
Analysis
PROFIT AND LOSS ACCOUNT
INCOME STATEMENT 2005 2006 2007 2008 2009 2010
Net sales /revenue 100 140.3505 164.5649 233.0682 288.3224 334.1524
Less: Cost of Goods Sold 100 141.4 169.7783 234.0819 306.7487 335.8527
Gross Profits 100 125.1769 89.18329 218.4119 21.89756 221.2425
other operating income 100 73.46221 98.80966 107.895 112.155 113.7412
Less: Operating Expenses:
Transportation costs 100 116.7671 117.8948 107.8581 163.9719 111.2514
Distribution and marketing
expenses 100 106.6963 118.4004 140.3224 169.5473 147.5124
Administrative expenses 100 105.9929 111.2437 129.9592 130.4867 129.9224
Depreciation 100 107.5517 112.824 114.9795 117.2974 115.2518
Amortization 100 332.8808 392.3603 446.4844 492.6037 472.1542
Other operating expenses 100 265.3561 81.45507 361.5423 430.7051 392.1241
Total Operating Expenses 100 134.789 110.457 170.5316 198.6767 185.1297
Add: Other income

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profit/Loss from operation 100 117.3639 82.83535 233.9353 (58.1078) 277.1524
Less: Interest Expense 100 23.8517 312.413 369.005 1681.163 374.225
100 112.4965 73.61136 228.5085 (127.988) 275.1234
Share of profit of associates
Net Profits Before Taxes 100 123.757 77.19137 231.6985 (123.091) 241.1432
Less: Taxes 100 110.0722 68.7577 207.0384 129.1465 215.1427
Net Profit/Loss After Taxes 100 132.2659 82.43522 247.0315 (119.326) 265.1425

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Interpretation of Horizontal Analysis of Income Statement:

In income statement we take 2005 as a base and compare all other income statement items with
that base year. The net income of the company increased every year which is a favorable sign for
the Pakistan state oil, on the other side of the coin cost of goods sold also increases which are not
a good signal for the company. The reason which I observed is the increase in the petroleum
prices in the international market that’s leads to high cost of goods sold. The net profit of the
Pakistan state oil shows a mixed trend, but in year 2009 they is in negative which are not a good
sign for the profitability, and long term growth of company. In year 2010 the net profit shows its
highest value than all previous five years. This is very good signal for Pakistan state oil growth
and development.

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Pakistan State Oil Limited
Vertical analysis
Balance Sheet
Current Assets: 2006 2007 2008 2009 20 10
Stores, spares and loose tools 0.178185 0.171121 0.091113 0.073095 0.062530
Stock-in-trade 40.14426 39.55461 49.05991 26.52703 28.972414
Trade debts 16.87298 18.19702 26.67353 52.47619 58.10142
Loans and advances 0.388626 0.48968 0.311714 0.272462 0.204471
Trade deposits and short term
prepayments 1.9866899 2.1193068 0.3158154 0.3596644 0.181225
Other receivables 20.55065 21.07541 12.33718 8.34744 7.201223
Short term investments 0 0 0 0 0
Taxation 0 0 0 0.462534 0.02021
Cash and bank balances 2.706191 2.036835 2.374825 1.879212 0.88151
Total Current Assets 82.82758 83.64399 91.16409 90.39763 95.6101
Fixed Assets
Property, plant and equip: 10.66636 10.72064 5.869363 4.554133 3.17224
Long term investments 4.672993 4.00147 2.125007 1.403657 1.000000
Long term loans, advances and
receivables 0.8984099 0.8402389 0.3758516 0.2644868 0.160223
Long term deposits and prepayments 0.13214 0.088193 0.062228 0.054526 0.064142
Deferred tax 0.581879 0.536595 0.32046 3.28068 0.00000
Total Fixed Assets 17.17242 16.35601 8.835911 9.602373 4.39122
Total Assets 100 100 100 100 100
Liabilities & Stockholder’s Equity
Current Liabilities
Trade and other payables 52.12966 55.43559 63.77748 71.77847 77.1512
Provisions 1.107727 0.921243 0.57125 0.448771 0.34211
Accrued interest / mark-up 0.172059 0.176566 0.171448 0.362648 0.16111
Short term borrowings 10.90078 12.12886 8.652275 12.15899 6.444455
taxation-net 2.752003 0.092856 0.571712 0.00 0.000000
Total Current Liabilities 67.06223 68.75512 73.74416 84.74888 84.0978
Long Term Liabilities
Long-term deposits 1.060296 1.028011 0.656595 0.557104 0.4714
Retirement & other Benefits 2.215941 2.199789 1.238414 1.090472 0.93233
Total Long Term Liabilities 3.276237 3.2278 1.895009 1.647576 1.40121
Stockholders' Equity
SHARE CAPITAL 2.444387 2.294958 1.349374 1.117958 0.8512
RESERVES 27.21715 25.72213 23.01145 12.48559 13.66 1
Total Stockholders' Equity 29.6615 28.0171 24.3608 13.6035 14.510
Total liabilities & Shareholder's
equity 100 100 100 100 100

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Interpretation of Vertical Analysis of Balance Sheet:

In the vertical analysis of balance sheet of Pakistan state oil we take total assets as a base and
compare all other assets current or fixed with those total assets every year. The current assets of
the Pakistan state oil shows a increasing trend but the fixed assets shows a negative trend. In the
other side of the balance sheet we taker total liabilities and shareholders equity as a base and
compare all liabilities current or non-current with the total liabilities every year. The current
liabilities of the Pakistan state oil shows increasing trend this means that the company borrow
more and more loans. The stockholders equity section of the balance sheet shows mixed trend,
when we compare stockholders equity with total stockholders equity.

Pakistan State Oil Limited


Vertical Analysis
Income Statement

2010
INCOME STATEMENT 2006 2007 2008 2009
100
Net sales /revenue 100 100 100 100
81.35
Less: Cost of Goods Sold 79.73 82.09 79.77 84.76

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3.33
Gross Profits 4.88 2.98 5.15 0.42
0.86
other operating income 0.40 1.93 0.29 0.31

Less: Operating Expenses:


0.07
Transportation costs 0.10 0.09 0.06 0.07
0.59
Distribution and marketing expenses 0.97 0.91 0.76 0.71

0.13
Depreciation 0.31 0.28 0.20 0.17
0.28
Other operating expenses 0.70 0.18 0.57 0.56
1.07
Total Operating Expenses 2.08 1.46 1.59 1.50
3.12
profit/Loss from operation 3.20 1.93 3.85 -0.78
1.13
Less: Interest Expense 0.25 0.28 0.23 0.87
0.06
Share of profit of associates 0.29 0.08 0.05 0.06
2.05
Net Profits Before Taxes 3.24 1.73 3.67 -1.58
- 1.02
Less: Taxes 1.10 0.59 1.26 0.65
1.03
Net Profit/Loss After Taxes 2.13 1.14 2.41 -0.93

Interpretation of Vertical Analysis of Income Statement:

In the vertical analysis of income statement of Pakistan state oil we take net sale as a base and
compare all other income statement items with the net sale. The gross profit of the Pakistan state
oil shows a mixed trend, but in year 2009 gross profit shows a less value then all other previous
five years. The reason which i observed is the cost of goods sold raises because of the increase in
the petroleum prices in the international market that’s why gross profit shows less value. The net
profit of the company shows a negative trend this shows how profitable are Pakistan state oil.
This is not a good sign for Pakistan state oil future growth and development.

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Ratios of Pakistan
State Oil

14
2010
Ratios 2006 2007 2008 2009

Liquidity Ratio
1.14
Current Ratio 1.24 1.22 1.24 1.07
0.79
Quick Ratio 0.64 0.64 0.57 0.75
29.29
Average collection period 34.47 30.85 45.96 24.25
29.97
Average age of Inventory 36.58 31.98 48.92 24.36
32.64
Operating cycle 71.06 62.83 94.88 48.61
1.22
Cash ratio 1.23 1.22 1.24 1.20
8.9
A/R turnover 38.1 32.5 24.6 12.57
14.37
Inventory turnover 11.5 11.7 10.1 11.83
1097809 1112754 2214247 866640
23297632
Working capital 7 6 2 1
31.89
Sales to working capital 27.17 31.43 22.37 70.69
6.1
A/P Turnover 12.5 10.81 9.60 6.32

Leverage Ratio
2.80
Time Interest Earned 12.74 6.86 16.41 (0.89)
0.85
Debt Ratio 0.70 0.72 0.76 0.86
5.87
Debt-to-Equity 2.37 2.57 3.10 6.35
5.90
Debt to tangible net worth 2.54 2.58 3.12 6.37

Profitability Ratios
0.01
Net profit Margin 0.03 0.01 0.03 (0.01)
4.93
Total Asset Turnover 4.25 4.68 3.89 3.99
0.05
Return on Assets 0.10 0.06 0.11 (0.04)
0.031
Operating Income Margin 0.038 0.022 0.045 (0.009)
0.308
Return on Total Equity 0.361 0.224 0.454 (0.325)

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0.033
Gross Profit Margin 0.058 0.035 0.060 0.004
130.3
Sales to fixed assets 44.3 52.0 74.3 98.38
31.10
Return on common equity 54.1 35.4 68.1 15.47

Market Value ratios


52.76
EPS 43.90 27.30 81.90 (39.05)
15.16
Dividend payout 77.5 76.8 28.7 ------
0.0307
Dividend yield 0.11 0.054 0.056 0.023
8
Dividend per share 34 21 23.5 5
171
Book value per share 121 121.7 180 121.34
Percentage of earnings
0.43
retained 0.51 0.46 0.69 0.56

Price/earning ratio 4.9 (5.47)

INTERPRETATIONS OF RATIO’S

Liquidity Ratios

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CURRENT RATIO = Current Assets
Current Liabilities

year 2006 2007 2008 2009 2010


Current ratio 1.24 1.22 1.24 1.07 1.24

Current Ratio shows a firm’s ability to cover its current liabilities with its current assets. They is
mixed trend in current ratio. In year 2009 they is more decrease in current ratio, the reason which
i observed during my analysis of the financial statement is because of the increase in the current
liabilities, the item which increase current liabilities in year 2009 is the shot term borrowing of
the firm. In year 2010 they is increase in the current ratio because of the increase in inventory,
and account receivables. The shot term borrowing of the company is lower than the year 2009. In
spite of the mixed trend that the current ratio follows the company has in position to its current
liabilities from its current assets.

QUICK RATIO = current assets-Inventory


Current Liabilities

Year 2006 2007 2008 2009 2010


0.79
Quick ratio 0.64 0.64 0.57 0.75

Quick ratio of the Pakistan state oil follows a mixed trend. The quick ratio of the Pakistan State
Oil in the year 2008 is decreasing because the inventory cost was increased up to the 49% result
of that Quick Ratio was decreased. In the year 2010 the quick ratio is on top which is 0.79
because in this year the value of the inventory is increased, but on the other side the value of the
trade payables are also increased, and they is decreased in the shot term borrowing of the firm.

Average collection period = Average Gross Receivable

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Net Sale / 365

year 2006 2007 2008 2009 2010


Average collection period 34.47 30.85 45.96 24.25 29.29

The average collection period of the Pakistan state oil is following the mixed trend. Average
collection period states that how efficiently the company is managing its receivables. The lower
the ratio the better for the firm. When we compare average collection period from the last five
years in 2008 this ratio were increases from 30 days to 45 days which are not a good sign for the
firm, but again decrease to 24 days in 2009 and then increase to 29 days in 2010. It means that
firm is working efficiently monitoring its credit sale properly due to which this ratio is constantly
decreases and there is less chance of bad debt.

Average age of inventory = Average Inventory

Cost of Goods Sold / 365


Year 2006 2007 2008 2009 2010
Average age of inventory 36.58 31.98 48.92 24.36 29.97

Average age of the inventory shows a relationship between the inventory and the cost of goods
sold. The value of the Inventory is taken from the balance sheet of the firm while the cost of
goods sold is obtained from the income statement of the organization. This ratio states us that
how often the company places an order for the inventory. When we compare it with the previous
years we have found that this year company is placing more orders than the previous years. It
means there is mixed trends is shown from 2006 to 2010. This ratio was decreased for the 2008
because in this year the value inventor was increased more than double but in the recent year
2009 this ratio is again decreased dramatically and then increase in the year 2010.

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OPERATING CYCLE= Account Receivable in Days + Inventory Turnover in days
Year 2006 2007 2008 2009 2010
Operating cycle 71.06 62.83 94.88 48.61 32.64

Operating cycle of the Pakistan state oil shows a mixed trend. It shows how many are required
to receive cash from customers and to convert inventory into cash. If this ratio is low it is good
signal for the firm. When we compare operating cycle with the previous years we found that
there is decreasing trend was shown in the operating cycle from 2006 to 2010 except for year
2008 in which operating cycle ratio was increased from 73% to 98% because in this year the
Days in inventory turnover ratio and days sales account receivable was increased dramatically
and ultimately increase in the operating cycle ratio. Again this ratio was decreased in the year
2010 which is positive sign for the Pakistan state oil.

Cash Ratio = Cash equivalents + marketable Securities


Current liabilities

Year 2006 2007 2008 2009 2010


Cash ratio 1.23 1.22 1.24 1.20 1.22

Cash ratio of the Pakistan state oil shows the mixed trend. In the year 2007 and year 2010 cash
ratio is constant, and in year 2009 they is more decrease in cash ratio. The reason which i
observed during my analysis of the balance sheet in year 2009 current liabilities of the firm is
increased, the shot term borrowings is increased which leads to low cash ratio. Overall Pakistan
state oil in position to pay its obligations from its cash.

Account Receivables Turnover = Net sales


Average Gross Receivables

Year 2006 2007 2008 2009 2010


A/R Turnover 38.1 32.5 24.6 12.57 8.9

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Account receivables turnover gives the number of times account receivables is collected during
the year. The account receivables turnover shows a decreased trend. In the year 2010 the account
receivables turnover is lower then all previous five years. This shows very negative signal for the
firm, and the chances of the bad debts is increased.

Inventory turnover = Cost of goods Sold


Average Inventory
Year 2006 2007 2008 2009 2010
Inventory turnover 11.5 11.7 11.75 11.83 14.37

The inventory turnover ratio of the Pakistan state oil shows a increasing trend .Inventory
turnover means that the number of times the inventory is purchased during the year. In year 2010
the ratio of the inventory turnover is the highest which means that inventory is purchased more
than all previous five years. The value of the stock is the highest in all other previous five years.

Net Working Capital = Current Assets – current liabilities


Year 2006 2007 2008 2009 2010
Net working capital 10978097 11127546 22142472 8666401 23297632

Working capital of the Pakistan state oil is shows a increasing trend, except for the year 2009 inn
which working capital is lower then all previous five years. The only reason which I observed
that in year 2009 the current liabilities is more then all previous five years. So that the firm
working capital is decreased in that year, but in year 2010 the working capital of Pakistan state
oil is increased, which is a very positive sign for the Pakistan state oil.

Sales to working Capital = Sales


Average working Capital
Year 2006 2007 2008 2009 2010
Sales to working capital 27.17 31.43 22.37 70.69 31.89

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Sales to working capital ratio of the Pakistan state oil shows a mixed trend. In year 2009 the ratio
of sales to working capital is highest, which means that the firm is undercapitalized. Any change
in the business economy creates major problem for the Pakistan state oil. In year 2010 sales to
working capital is reduced.

Account Payables Turnover Ratio = Net Purchases


Average Gross Payables
Year 2006 2007 2008 2009 2010
Account payable turnover 12.5 10.81 9.60 6.32 6.1

The account payables turnover ratio indicates a decreasing trend. The account payables ratio of
Pakistan state oil is continuously decreasing from year2006 to 2010, which are not a good sign
for the Pakistan state oil. The current liabilities of the firm are continuously increasing. In year
2010 ratio is lowest in all previous five years which are not a good sign for Pakistan state oil.
Leverage Ratios

Recurring Earnings, Excluding Interest Expense, Tax


Expense, Equity Earnings, and Minority Earning
TIME INTEREST EARNED= Interest Expense, Including Capitalized Interest

Year 2006 2007 2008 2009 2010


Time interest earned 12.74 6.86 16.41 (0.89) 2.80

The times interest earned ratio reflects the number of times before- tax earnings cover interest
expense. This ratio shows how many times we are able to pay the amount of interest of loan
which we borrowed for the annual earning. If it is increases then it is good sign for business. The
investors show more confidence. When we look at the time interest earned ratio of the Pakistan
state oil from 2006 to 2010, there is mixed trends were shown because the cost of goods sold
was increased due to increased in price of petroleum price in international market result of that
the EBIT was decreased an ultimate effect this ratio in the year 2009 this ratio was negative
which is not good sign for the company from investor point of view. In the year 2010 times

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interest ratio is also decrease which is not a not sign for the firm, this mean that less earnings are
available to meet interest charges.

Debt ratio = Total Liabilities / Total Assets

Year 2006 2007 2008 2009 2010


0.85
Debt ratio 0.70 0.72 0.76 0.86

This ratio indicates the firm long term debt paying ability. Debt ratio of Pakistan state oil follows
increasing trend except fir the year 2010 when the ratio is lower then the previous year. Creditor
would rather see a low debt ratio because there is a greater cushion for creditor losses if the firm
goes bankrupt. Lower debt ratio shows better company positions .if we look at the trends of this
ratio from 2006 to2009 there is increasing trend it means company has acquired more and more
debt especially the item which i observed during my analysis the shot term borrowing of the
Pakistan state oil is increased every year and more assets are financed by debt result in this ratio
was increased and in year 2010 the ratio is lower the only reason of the reduction in the shot term
borrowing the Pakistan state oil made during that year.

Debt to equity ratio = Debt / Equity

Year 2006 2007 2008 2009 2010


5.87
Debt to equity 2.37 2.57 3.10 6.35

This ratio is a significant measure of solvency since a high degree of debt in the capital structure
may make it difficult for the company to meet interest charges and principal payments at
maturity, from long term debt paying ability point of view the lower this ratio is better, the
company debt position. When we look at the Debt to Equity ratio of Pakistan state oil there is
increasing trend was shown from 2006 to 2009 it means the long term debt paying ability of PSO
is decreasing from 2005 to2009 and creditors are less protected in case of solvency, but in year

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2010 debt ratio of the Pakistan state oil is decreasing which is a positive sign for the Pakistan
state and also for the creditors.

Debt to Tangible Net Worth = Total liabilities

Shareholders’ equity – Intangible Assets

year 2006 2007 2008 2009 2010


5.90
Debt ratio 2.54 2.58 3.12 6.37

Debt to tangible net worth ratio of the Pakistan state oil shows a mixed trend. The Debt to
tangible net worth ratio is more conservative ratio than other debts ratio like debt ratio or debt to
equity ratio. The only reason is that they exclude intangibles assets in its computation, because
they provide not provide resources to pay creditors debts. In the year 2008 and 2009 the ratio of
the debt to tangible net worth goes extremely high the reason of increasing such ratio is the
increase in the shot term borrowing of the Pakistan state oil, but in year 2010 the ratio is lower
then previous year. The only reason is the reduction of the shot term borrowing and on the other
side increase in the value of the reserve.

Profitability Ratios

Net Profit Margin = Net Income

Net Sales

year 2006 2007 2008 2009 2010


0.01
Net profit Margin 0.03 0.01 0.03 (0.01)

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The ratio of net income to net sales is called the net profit margin. It indicates the profitability
generated from revenue and hence is an important measure of operating performance. It also
provide clues to a company s' pricing, cost structure, and production efficiency. The net profit
margin of Pakistan state oil shows a mixed trend. If this ratio is high, it shows that the firm is
earning more profit and this is beneficial for the organization. This ratio is mainly concern with
the income statement of the business. When we compare this ratio with the previous year’s 2006
to 2010 ratios. We have found that the net profit margin is declining so this is not a good sign for
the organization. In year 2009 the net profit margin of the Pakistan state oil is goes in negative,
because of the loss the organization incurred in that particular year. The reason, which I observed
during my analysis, is that in all previous five years and in year 2009, the cost of goods sold and
operating expenses is extremely high, and increased in prices of crude oil in the international

market from last few years so it is very difficult to control the cost of goods sold . However, in
year 2010 the Pakistan state oil comes from a great danger and shows a positive figure of net
profit margin.

Total Asset Turnover = Net Sales


Average Total Assets

year 2006 2007 2008 2009 2010


4.93
Net profit Margin 4.25 4.68 3.89 3.99

The total asset turnover ratio is helpful in evaluating a company s' ability to use its asset base
efficiently to generate revenue. This shows that how much the company is generating sales by
the utilizing the assets of the firm. The total asset turnover ratio of the Pakistan state oil shows a
mixed trend. One item like sale is related to the income statement of the company while the
average total assets are related to the balance sheet of the firm. When we compare this ratio with
the previous years from 2006 to 2010. We have found that this ratio is going to increase from
2006 to 2007 but in 2008, it is decreases and again in 2009 however in year 2010 they again
increase. The reason, which I observed in the decline of ratio from 2008 and 2009, is that sale is
not increase with respect to increase in total assets that is why ratio is decreasing. However in
year 2010 the ratio is increasing which is a positive sign for the Pakistan state oil.

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Return on Assets = Net Income
Total Assets
year 2006 2007 2008 2009 2010
0.05
Average collection period 0.10 0.06 0.11 (0.04)

Return on assets indicates the efficiency with which management has used its available resources
to generate income. This ratio gives a general relationship between net income and the average
total assets of the company. This ratio shows a mixed trend. However, in year 2009 this ratio
goes into negative because the organization is in loss in that particular year. The reason, which I
observed during my analysis, is that in all previous five years and in year 2009, the cost of goods
sold and operating expenses is extremely high, and increased in prices of crude oil in the
international market from last few years so it is very difficult to control the cost of goods sold .
As this ratio decreases from this is a negative indicator for the firm. When we compare this ratio
with the previous year ratio, we found that the company is going to decline because this ratio is
less. This cause due to net income because we have found that the operating expenses are high
for this reasons the net income decline and this ratio is also decreases.

Operating Income Margin= Operating Profit


Net Sale
Year 2006 2007 2008 2009 2010
0.031
Average collection period 0.038 0.022 0.045 (0.009)

The operating income margin of the Pakistan state oil shows a mixed trend. This ratio shows the
relationship between operating profit and net sales. Both items are concerned with income
statement. If operating profit increases it is good sign for the organization. In general, higher, this
ratio is beneficial for the organization. As compared this ratio from 2006 to 2010 this ratio is
decreases and in year 2009 goes into negative except for the 2008 in which this ratio is increased.
Overall decreased in this ratio is not because in these years the operating cost was increase or
because of the increase in petroleum prices in the international market. As the negative trend was
shown in the past few years this decreasing trend is not good sign for Pakistan state oil.

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Return on Total Equity = Net income

Total Equity

year 2006 2007 2008 2009 2010


0.308
Average collection period 0.361 0.224 0.454 (0.325)

It shows the percentage earned on equity, it include both common and preferred shareholders.
The return on total equity of the Pakistan state oil show a mixed and negative trend as well. This
ratio shows the relationship between net income and total equity. The net income is concerned
with the income statement while the equity is equity is concerned with balance sheet. If this ratio
increases, it is good signal for organization. When we see this there is decreasing tend were
shown from 2006, 2007, and 2009.In year 2009 the ratio goes into negative because the loss
faced by the Pakistan state oil. This is not good sign for the growth of Pakistan state oil. This
ratio was decreased because net income was also decreases in these years. In year 2010, the ratio
shows some growth, which is slightly a good sign for the Pakistan state oil.

Gross Profit Margin = Gross Profit


Net Sale
year 2006 2007 2008 2009 2010
0.033
Average collection period 0.058 0.035 0.060 0.004

The gross profit margin of the Pakistan state oil shows a mixed trend. This ratio shows a
relationship between the gross profit and the net sales of the organization. Gross profit is concern
with the income statement while the net sales are also concern with the income statement. In
general higher this ratio is higher is the benefit for the organization. When we compare it with
the previous five year’s gross profit margin, we have found that there is negative and positive
trend are shown. However, in year 2009 ratio is more decreasing the reason, which i observed is
that the cost of goods sold of the organization is increased too much that’s why they earn low
gross profit. In year 2010 they is a great move shown in the gross profit margin of the Pakistan
state oil. So it is recommended that the company should have to reduce their costs and increase
this margin to earn high profit.

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Sales to Fixed Assets = Net Sales
Average Net Fixed Assets
(Excluding Construction in Progress)
year 2006 2007 2008 2009 2010
130.3
Average collection period 44.3 52.0 74.3 98.38

This ratio shows the firm ability to use its fixed assets effectively in generating the revenue. The
sales to fixed assets of the Pakistan state oil shows a increasing trend. Construction in progress is
not included in the computation of the sales to fixed assert ratio. As shown from the above-
mentioned table the ratio is continuously increasing. In year 2010 the ratio in its peak the reason
which I during my analysis is that the value of net sales is increased with great pace as compared
with the value of net fixed assets.

Return on Common Equity = Net income Before Nonrecurring Items- preferred dividends
Average Common Equity

year 2006 2007 2008 2009 2010


31.10
Average collection period 54.1 35.4 68.1 15.47

The return on common equity measures the rate of return earned on the common equity. The
return on common equity of the Pakistan state oil shows a mixed trend. In year 2009 the ratio is
decreasing with a great pace the reason, which I observed, is that in 2009 the organization is in
loss because of the increase in the cost of goods sold and high operating expenses the
organization faced in that particular year. However, in year 2010 the ratio is moved up again
which is favorable sign for the growth of the Pakistan state oil.

Market Value ratios


Earnings per Share = Net income- preferred dividends
No of common share outstanding

year 2006 2007 2008 2009 2010

27
52.76
Average collection period 43.90 27.30 81.90 (39.05)

Earnings per share indicate the amount of earnings for each common share held. Earning per
share is s a useful indicator of the operating performance of the company as well as of the
dividends that may be expected. Higher earning per share is better for shareholders and they
consider the organization as a healthy company. As we analyze this ratio from 2006 to 2010 we
find that there is big ups and down. This ratio in its peak forms in year 2008 because the
company shows more net income in that particular year than no of share outstanding. The one
important thing, which I observed during my analysis in the earning per share, is that the
company common share outstanding remains same in last previous five years. The company
issues no common shares outstanding. When we look at the 2009 figure this figure is negative
because in this year Pakistan state oil was in the loss so this figure is negative which is not
healthy sign for the company.In year 2010 the ratio shows better position which is a favorable
sign for the growth of the Pakistan state oil.

Dividend payout = Dividend per common share


Diluted earnings per share
year 2006 2007 2008 2009 2010
15.16
Average collection period 77.5 76.8 28.7 ------

The dividend payout ratio of the Pakistan state oil shows a negative trend. This is not a good sign
for the growth of the Pakistan state oil. Dividend payout ratio means the portion of the earning
per common share are being paid in dividends to the shareholders. As shown from the above
mentioned table they is continuously decline in the dividend payout ratio, which are not good for
investor point of view. In year 2009 the the company dividend payout ratio is zero, because in
that year the earning per share is negative and then we compute the dividend payout ratio the
value goes into negative which means they paid no dividend in the portion of earning per
common share. In year 2010 the ratio goes up which are good sign for the Pakistan state oil in
that difficult financial crisis
.

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Divided yield = Dividend per common share
Market price per share
year 2006 2007 2008 2009 2010
0.0307
Average collection period 0.11 0.054 0.056 0.023

The dividend yield of the Pakistan state oil shows a mixed trend. In year 2009 the ratio shows
more decreasing value then all previous five years the reason which I observed is that in that year
the company paid less dividend from its retained earnings because of the loss they face d in that
particular year. In year 2010, the dividend yield ratio increases, which are a good for the
organization.
Divided per share = Total dividend
No of Common Share Outstanding

year 2006 2007 2008 2009 2010


8
Average collection period 34 21 23.5 5

The dividend per sha2re of the Pakistan state oil shows a mixed trend. In year, 2009 dividend per
share goes into more decreasing value than all previous five years, which are not a good signal
for the Pakistan state oil. The main of decreasing dividend per share is that observed is that in
that year the company paid less dividend from its retained earnings because of the loss they faced
in that particular year. In 2010 the dividend per share of the Pakistan state oil is moved up
slightly as compared to the previous five years, which are slightly better sign for the Pakistan
state oil.
Book value per share = Total stockholders Equity- Preferred stock Equity
Number of Common Shares Outstanding

year 2006 2007 2008 2009 2010


171
Average collection period 121 121.7 180 121.34

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The book value per share of the Pakistan state oil shows a increasing trend, except for the year in
2009 when book value per share goes down as compared to all previous five years. The no of
common shares outstanding are remains same for the last five years. The company issues no
other common shares outstanding. In year 2010 the book valu2e of the company goes again
increasing which is very good sign for the future growth of the Pakistan state oil.

Percentage of earnings retained = Net income – All Dividends


Net Income
year 2006 2007 2008 2009 2010
0.43
Average collection period 0.51 0.46 0.69 0.56

The percentage of earnings retained of the Pakistan state oil shows a decreasing trend except for
the year in 2008 when the ratio of the retained earnings is hightest. Percentage of retrained
earning means proportion of retained earnings for internal growth of the company. In year, 2009
and 2010 the ratio of percentage of earnings retained decreased respectively.

Price/Earning ratio = Market price per share

Diluted Earning per share

year 2006 2007 2008 2009 2010


Average collection period 14.3 7.0 5.1 (5.47) 4.9

Price/Earning ratio is equal to the market price per share of stock divided by the earnings per
share. A high price /earning ratio are good because it indicates that the investor considers the
company in a favorable light. The Price/Earning ratio of the Pakistan state oil shows a negative
trend, which are not a positive sign for the Pakistan state oil and the investors. In year 2009, the
ratio is in negative and in next year 2010 the ratio is improving but less than the all previous five
years.

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Recommendations:
In the above analysis of Pakistan State Oil (PSO) for the year 2006 to 2010, we found that the
earning per share of the Pakistan state is decreases and even in the year 2009 it is negative. It is
not a good sign for Pakistan State Oil Company Limited (PSO). The net sales are increases but
cost of goods sold with a higher rate are also increases because of the increase in petroleum
prices in the international market that’s why the Gross profit, profit from operation and net profit
decreases. In year 2010 the finance cost of Pakistan state oil is very much increase from all
previous five years. This shows company borrows more loans. The shot term borrowings of the
Pakistan state oil increased every year. During my analysis of the Pakistan state oil i observed
that the market share of the company is continuously increasing, also when they face difficult
financial crisis in previous years. The company used that opportunity as a competitive edge and
attracts more investors. The company paid dividends to their shareholders and attract more
investors to invest in the Pakistan state oil. In year 2009 the company is in loss, but they paid
dividends to the share holders. This shows the strength of Pakistan state oil that’s why their
market share is continuously increasing. After brief and comprehensive discussion we may
safely conclude that the overall performance of Pakistan is not good, but market Share increased
which is positive sign for the future long term growth.

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Reference
www.pso.com

www.business.recorder

Analysis of Financial statement by Charles H Gibson

www.wickypedia.com

www.kse.com.pk

Financial Management by Vein Hon

www.google.com

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