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FINANCIAL STATEMENT ANALYSIS OF Ghandara Industries Limited

Presented by: Qubaa Idrees

Executive Summary
The purpose of this project is to do a thorough analysis of the Financial Statements and the financial position of Ghandara Industries Limited in comparison with the Electrical Engineering Industry. The report includes detailed analysis of the Balance Sheet, Income Statement and the Statement of Cash Flows of Ghandara Industries Limited. Moreover, the cash flow position, liquidity standing, solvency, returns and profitability position is highlighted. Analysis of the Financial Statements of Hira Textile Mills and various financial measures was done. We discovered that the company has a current ratio of more than one which is good enough but the A/R turnover period is low, resulting in a low conversion period which could concern the company to a diminutive level. The company has been generating negative cash flows in recent years and further analysis highlighted concerns regarding it.The Cash flow adequacy ratio turned out to be much less than 1, signifying internal cash sources to be insufficient. The cost of debt financing increased cash outflows leading to less net cash available as it does not generate enough cash from operations to actually pay the finance costs off. Analysis of the solvency ratios indicated that the company is moderately solvent as its Total Debt ratio is less than one while the Long-term debt to equity ratio is far below 1 suggesting the long term debt to be almost insignificant. Short term borrowing is done to satisfy liquidating problems. Reviewing the returns we can see that the company is earning a good return on its net operating assets but is far worse when paying off to its shareholders. The fact that no dividends had been paid for the last 5 years is much of a concern to the shareholders too. The profitability review of the company was much favorable than that of the industry. The companys Gross and Operating

Profit Margin is higher than the industry average but net profit margin lower because of the finance costs and taxes to be paid off.

Contents
Income Statement-CC2 ................................................................................................................... 6 Balance Sheet-CC3 ......................................................................................................................... 7 Statement of Cash Flows-CC4 ........................................................................................................ 8 Growth Rates-CC5 .......................................................................................................................... 9 Common Size Income Statement-CC6 ......................................................................................... 10 Common Size Balance Sheet-CC7 ............................................................................................... 11 Trend Index-CC8 .......................................................................................................................... 12 Per Share Results-CC9 .................................................................................................................. 13 Common Size Statement of Cash Flows-CC10 ............................................................................ 14 Cash Flow Ratios CC11 ................................................................................................................ 15 Short term Liquidity Ratios-CC12 ................................................................................................ 16 Common Size Analysis of Current Assets & Current Liabilities-CC13....................................... 18 Capital Structure and Solvency Ratios-CC18 ............................................................................... 19 Return on Invested Capital Ratios-CC19...................................................................................... 21 Asset Utilization Ratios- CC20..................................................................................................... 22 Profit Margin Ratios-CC21 ........................................................................................................... 23 Analysis of Depreciation-CC22 .................................................................................................... 25

Discretionary Expenditures-CC23 ................................................................................................ 26 Market Measures-CC28 ................................................................................................................ 27 Conclusion .................................................................................................................................... 28 References ..................................................................................................................................... 30

Income Statement-CC2 Analysis


Sales of Ghandara Industries increased in 2010 from 2009 but decreased again in 2011, but then again increased in 2012 and 2013, being the highest in 2013. Energy crisis or demand could be a reason for the decrease in 2011. The same trend is followed by the gross profit. EBIT was negative in 2009 due to high costs from operating expenses leading to a net loss in the year. Moreover, net loss was incurred in 2012 again due to high finance costs. The company made the highest profit in 2010 despite having the highest sales in 2013; because the finance costs for 2010 were lower than that of 2013 and high costs were paid off in taxes.

Balance Sheet-CC3

Non-Current and Current Assets of the company have experienced an increasing trend over the past 5 years, 2009-2013, which resulted in a steady increase in Total Assets. However, the total liabilities of the company also increased over the same period which means that the company was using more debt to finance its assets. Equity of the company also increased for the first three years but decreased in 2012 but again rose up in 2013 mainly because the surplus revaluation of the assets went down and an un-appropriated loss was incurred.

Statement of Cash Flows-CC4 Analysis


Cash generated from Operations show a mixed trend over the past 5 years, 2009-2013. It appeared to be negative in 2009, 2011, 2012 and 2013 indicating more outflows than the inflows for the year with the highest outflow in 2012. Cash was used up in investing activities throughout the above mentioned period and even became an outflow in 2010 too, from financing activities. The company was financed through debts, incurring the highest outflow in 2013 mainly due to around 64% carrying off from the previous year.

Growth Rates-CC5 Analysis


The 5 year growth rates show a promising future for the company but not very promising for its shareholders. Net Income shows a massive increase over the past 5 years, almost 138% increase over the 5 years. Growth in sales is second to Net Income with an increase of 9.56% over the past 5 years. Then is the growth in equity at almost 9%, followed by the growth in Dividends which stands at 1.24%. Although, the Sales, Equity and Dividends, have shown an increase, it is much lower as compared to the growth in Net Income for the same period.

Common Size Income Statement-CC6 Analysis


Cost of Sales represents the major portion of sales, staying over around 80% throughout the 5 year period under consideration. Higher cost of sales results in a lower gross profit, which represents less than 20% of sales over the past 5 years. The company was able to reduce its Finance Costs in 2010 and 2011, with constituting maximum 8% of sales in the five year period. Total Comprehensive Income represents a very low portion of sales, maximum of 10.5% in 2009 and minimum of 0.47% in 2011 of sales.

Common Size Balance Sheet-CC7 Analysis


Non-Current assets represent the major portion of Total Assets, being over 50% for year 2009 and 2010; however, for year 2011-2013, the Current Assets represent more than 50% of Total assets. Reviewing the Liabilities and Stockholders Equity portion, it can be seen that the Owners equity portion represents the major portion of Total Liabilities and Shareholders Equity, being over 50% for 2009 and 2010, but current liabilities being over 50% for the rest of the three years. As the current liabilities represent a higher percentage than non-current liabilities, the company is facing liquidity issues.

Trend Index-CC8 Analysis


In the trend analysis, we used 2009 as our base year, on the basis of which we study the trend in various items up to the year 2013. Total current assets, total current liabilities, Interest expenses showed an upward trend throughout the five years. Cash and Cash equivalents showed an upward trend from 2011 to 2012, but it declined majorly from 2010 to 2011 and from 2012 to 2013, being the lowest in 2011. Inventory declined a little in 2011, so did the sales hence the sales but the administrative expenses increased. Net income and EBT dropped in 2011 to a great extent but got better by 2013.

Per Share Results-CC9 Analysis


Sales per share increased throughout except for in 2011 in which it declined. Net income per share shows a mixed trend over the last 5 years, as it went down from 0.0064 in 2010 to 0.0004 in 2011 but then it increased over the last two years, being negative in 2013 due to the loss incurred. The company only paid dividends in 2009 which accounts to be of Rs. 0.001 per share. The equity per share increased from 0.05 to 0.08 which remained constant throughout 2010-2012, slightly increasing to 0.09 in 2013 because of un-appropriated profit.

Common Size Statement of Cash Flows-CC10 Analysis


All the components of the Cash Flow Statement are analyzed in respect to the total cash inflows for the respective year. The comparison of net cash generated by operating activities with the total cash inflows shows a large diversity. The inflows are far less than the outflows which account for a negative value for all the years except 2010. The ratio exceeds to more than 250 in 2013 which is mainly due to high finance costs incurred and more cash needed for carrying out operations of the business. Same holds true for net cash from investing activities as in comparison to the total cash inflows with its highest in 2013 at (7.20) mainly due to addition of plant and fixed asset. The net cash from financing activities as compared to the total cash inflows was negative throughout the five year period mainly due to liabilities against assets subject to financial lease. The company only paid dividends in 2009 despite having a net loss for the year. Cash and cash equivalents at the end of the year are too high but indicating outflows mainly hence negative. This means that the company needs finance to carry out its activities and the inflow of cash is less.

Cash Flow Ratios CC11 Analysis


The cash flow adequacy ratio is a measure of a companys ability to generate sufficient cash from operations to cover capital expenditures, investments in inventories and cash dividends. The companys cash flow adequacy ratio stands at 0.15, which is below the industry average of 0.28. It suggests that the companys internal cash sources were insufficient to maintain dividends and current operating growth levels but still not bad enough. The cash reinvestment ratio provides insight into the amount of cash retained and reinvested into the company for both asset replacement and growth. Year 2012 shows the highest percentage of cash reinvestment suggesting that the company is investing in Non-current assets and is also spending to achieve higher growth. However, it was negative in 2009, 2011 and 2013 as the company had more cash outflows from operating activities. In comparison to the industry average the company doesnt really show a satisfactory picture.

Short term Liquidity Ratios-CC12 Analysis


The current ratio for the company has been greater than 1 over the last 5 years, which represents a good liquidity position but is still below the industry average of 1.26. The company has enough liquid assets to pay off its short-term liabilities. The acid-test ratio for the company stands adequately at 41% throughout the past 5 years as compared to the industry average of 97%. This is due to the proportion of inventories that constitute the Current Assets of the company. Inventories constitute a very higher percentage of current assets, resulting in a very low acid-test ratio. Accounts receivables turnover explains how often receivables are created and collected. The higher the A/R turnover, the better liquidity position for the company as their debtors pay off rather quickly. It was the highest in 2010 around 22% but still on average, lower than the industry average. Collection and creation of A/R is satisfactory. The inventory turnover explains how often inventory is bought and used in the production process. The inventory turnover was also the highest in 2010 but still below the industry average suggesting that the company only buys and uses up its inventory twice or thrice a year. When we compare it with the industry average, our company is not that worse off as the industry average stands at 4.89, which means that the whole industry buys and uses up its inventory no more than 4 to 5 times a year. The days sales in receivables states the no. of days it takes the company to collect money from its debtors, while the days sales in inventory states the no. of days it takes the company to use its

raw material inventory and then sell the final product off. The lower both the ratios, the better picture it presents of the company in terms of liquidity. For days sales in receivables, the industry average was over 40 days and the company had an average of around 25 days, which reflects a prosperous picture. Whereas, days sales in inventory has been very high for the past 5 years, being over 100 days at all times, while the industry average was at 88 days, which is a serious concern for the company. The approximate conversion period is better if its low, but for Ghandara Industries, this period has been around 175 days on average throughout the past 5 years, while the industry average was below 130 days, therefore it poses a threat to the liquidity position of the company. Net Trade Cycle shows the relation between credit terms from the suppliers and the credit term extended to debtors. The lower the Net Trade Cycle, the better it is for the company. The net trade cycle is good enough for the company as it was around 22 days over the past 5 years, and the industry average stayed below 18 days.

Common Size Analysis of Current Assets & Current Liabilities-CC13 Analysis


The Common Size analysis of Current Assets and Current Liabilities show some areas of major concern for Ghandara Industries Limited in terms of liquidity issues. Analyzing the Current assets, it can be seen that Spares and loose tools, Taxation and Cash and bank balances represent a very low percentage of the Total Current Assets, less than 5% throughout the five year period. Receivables were only high by around 20% in 2009, but then jumped down to less than 1% after that till 2013. Also, the Stock in trade represent the highest percentage, being over minimum 40% throughout, followed by trade debts, loans and advance and prepayments which surprisingly exceeded 37% in 2011 leading to high sales eventually. As interpreted earlier, it takes a very high no. of days for the company to convert its inventory into cash resulting in a higher portion of Current assets being inventory and a very low portion being cash. Analyzing the Current Liabilities we can see that trade and other payables represent the major portion of Total Current Liabilities, followed by short term borrowings. This draws attention towards liquidity problems, as the company has a major proportion of current liabilities being borrowings and such high payable indicating not enough money to pay them off.

Capital Structure and Solvency Ratios-CC18 Analysis


Total Debt to Equity shows the representation of total debt in terms of the owners equity of the company. Higher this ratio is, the riskier the company gets. We can see that the ratio has increased in the five year period. As the ratio approached over 1 in recent years, this suggests that the company is becoming risky. However, when compared to the industry, Ghandara Industries (average 0.93) presents a somewhat better picture than the industry (average of 1.2). Total Debt ratio shows the relationship between the total debt and the total assets of the company. This ratio has also been increasing over the past 5 years suggesting more use of debt financing but has stayed below 1 which is a good sign. However, the ratios stayed over 0.48 for all years, which suggests that more than 48% of the total assets were financed by debt. The industry average is stated at 0.58, which means that we are our company is operating in line with the industry when it comes to Total Debt ratio. Long-Term Debt to Equity measures the relation of Non-Current Liabilities to Equity Capital. A ratio in excess of 1 indicates greater long-term debt financing as compared to equity. Over the years 2009-2013, the ratio stayed between 0.02 and 0.04, which represents a good picture for the company, as the industry average was 0.07. This also indicated that the Total Debt consists more of Current Liabilities than Non-current Liabilities. Earnings to fixed charges focus on the relation between debts related fixed charges and a companys earnings available to meet those charges. This ratio tells us whether enough earnings will be available for debt servicing or not. The lower this ratio, highly solvent the company gets,

and lowers the risk of default. Earnings-to-fixed charges ratio on an average of five year is lower than the industry its operating which is a good sign. The only difference between Cash flow to fixed charges and Earnings to fixed charges is that Cash flow to fixed charges is computed using Cash from Operations rather than earnings. This ratio represents the cash that the company has to pay off its fixed charges. We can see that the ratio has been over 1 over the past 5 years suggesting that the company generates enough cash from its operations to pay off its fixed charges. However, while comparing this ratio to the industry average of 32.03, the company has some serious concern regarding its cash generation operations. Equal amount of fixed charges with respect to the cash generated, indicating high concerns for the company.

Return on Invested Capital Ratios-CC19 Analysis


The return on net operating assets takes into account the after tax operating income of the company and compares it with net operating assets of the company. The higher the return, the better it is for the company. RNOA increased in 2010 but fell again in 2011, and increasing after being the highest in 2013. When compared to the industry average of 7.67%, the average for the five year ratio was higher than that of the industry showing a better position of the company. The return on common equity takes into account the after tax income of the company and compares it with the equity capital of the company. A higher ROCE indicates more efficient use of capital. ROCE has been too low for Ghandara. ROCE of 8% in 2010, shows that it has earned around 8% on its equity capital. However, in comparison to the industry average of 7.13 it is as low as 0.22, indicating too low return on equity owned. Return on Long-term Debt and Equity takes into account the after tax income of the company and compare it with the Non-current Liabilities and Shareholders Equity. It showed a mixed trend over the past 5 years, as it grew in 2010, 2012 and 2013 and was 5 points above the industry average of 7.16 over the five year period. The company basically grew at the rate of RNOA, because no dividends were paid out except for in year 2009 indicating zero growth with respect to dividend yield. When compared to the industry average of 5.29%, the five year period doesnt signify sufficient growth in the sector.

Asset Utilization Ratios- CC20 Analysis


Most prominent amongst the Asset Utilization ratios for Ghandara Industries, is the Sales to Cash and Cash Equivalents. It shows a massive increase in 2011 approaching 171 as the highest and 13.94 as the lowest ratio. The difference in the variation defines the degree of usage of assets over the last five years. Lowest sales in 2010 hence the lowest ratio but the highest sales were made in 2013 so should be the ratio for 2013 but it is not the case. It can be justified by the fact that cash available in 2011 was lower than that of 2013 as more deposits came in 2011. In comparison to the industry average, the ratio was significantly higher showing a good position for the company. Asset turnover decreased in 2011 but has been increasing ever since. However, it being less than one shows sales made are less than the worth of the total assets available. As compared to the industry average of 1.34, the company was worse off throughout the five years struggling as hard and reaching only 0.74 in 2009. Another major concern for the company is the Sales to Inventories. With an industry average of 5.2, the company only reaches up to half of the set criteria. Sales are needed to be increased.atio when compared to the industry. Sales to short term liabilities is average and a little more effort could help achieve the industry average.

Profit Margin Ratios-CC21 Analysis


The gross profit margin of the company shows a mixed trend over the last 5 years. GP was higher in 2010 due to less sales and low cost of sales, resulting in a good profit but fell by around5% in 2011due to increased sales making the denominator to increase more than the profit which is the numerator. However, the sales increased with increased in profit for the following years to come. Nevertheless, when compared to the industry average of 8.01%, Ghandara seems to be doing better than the other companies operating in the field of Electrical Engineering. The operating profit margin for the same reason as mentioned above goes up as high as 8% in 2010 declining after that and then again rising up showing better profits in recent years. However, when compared to the industry, the companys operating profit margin has been higher than the industry average which indicates that the company was successful in controlling expenses as compared to other industries in the sector. The net profit margin showed a massive increase in 2010 from -10.46% to 6.50% however it fell heavily in 2011 and 2012 due to rising finance costs. In 2013, the net profit margin increased because the company was able to control its finance costs and also lower profits meant lower taxes and a higher net profit as compared to previous years. When compared to the industry average of 1.63%, Ghandara was operating way off the line, showing a negative net profit margin average for the five years.

Analysis of Depreciation-CC22 Analysis


Accumulated depreciation as a percentage of gross plant and assets and depreciation expense as a percentage of gross plant and assets shows a mixed trend over the past 5 years. Accumulated depreciation as a percentage of gross plant assets grew from 2009 to 2010 but fell in 2011 declining further till 2013 probably due to disposal of some plant assets and investing in new assets. Depreciation expense as a percentage of gross plant assets declined from 2009 to 2010, rose up around 15% or so in 2011, but fell off again in 2012 and 2013. Depreciation expense as a percentage of sales show a decline in 2010, rose up in 2011 and further decreased in the last two years. However, there is no evidence that earnings quality is affected due to changes in depreciation

Discretionary Expenditures-CC23 Analysis


Money spent on maintenance and repair, advertising and research and development show a mixed trend, as the need for occurrence of such events cannot be controlled. Although the maintanence costs are increasing from 2009-2011 and then decreasing in 2012 and 2013, the ratio with sales and plant assets decreases in 2010. The ratio dealing with plant assets is more significant and useful for us, because thats what maintainance is linked to. Advertising costs are the lowest in 2010, giving off the least ratio with sales. Over the last 5 years, money spent on repair represents less than 0.5% of plant assets which is a good indicator of the health of the companys plant assets. Recenly, more emphasis is laid on the research in order to minimize future costs.

Market Measures-CC28 Analysis


The price to earnings ratio was highest in 2011 as the average market price of the companys shares was as high as Rs.13.26. The ratio fell drastically in 2012 to 5.07 from 36.47 mainly due to the share price falling to Rs. 7.40 over the year and company incurring a loss due to high debt costs. When compared to the industry average of 5.62 the companys average P-E ratio was slightly higher showing good growth and better functionality in the sector. The price to book ratio shows a decreasing trend over the past 5 years. This is mainly due to an increase in the owners equity per share over the year mainly due to the surplus revaluation of the fixed assets. In comparison to the industry average of 1.50, Ghandaras Price to book ratio was way lower. The price offered in the market is lower than the actual worth or the cost incurred. The earning yield is the opposite of price to earnings ratio. It shows how much the stock of the company earns with respect to its current position in the market. Earning yield drastically fell in 2011 due to higher market prices as talked about earlier. When compared to the industry average, its really worse off and depicts a bad picture for the company in the industry. Dividend yield shows how much dividend the company pays in respect to the stocks current market standing, and dividend payout shows how much dividend the company actually paid with respect to its earnings. The company only paid dividends in 2009 and nothing after that, having almost no effect on the industry and is zero in comparison to the industry average. It was mainly because the company was making enough money infact had been incurring heavy losses in the last two years or so.

Conclusion
As a Banker A banker would first analyze the income statement of the company. Through the income statement we can see that the company had been struggling with the profits and losses for the past five years incurring heavy losses in 2009 and 2012 despite increasing its sales. The major cause for the loss in 2012 mainly was the increased finance cost to be paid on liabilities owned. By reviewing the cash flow statements, we can see that the company has hardly been generating a positive cash flow from operations over the past 5 years; in fact the only year it did have a positive cash flow was 2010. The same holds true for investing activities and even the only positive becoming negative for the financing activities.

References
Financial Statement Analysis 10th Edition by John J. Wild http://www.kse.com.pk/ http://www.brecorder.com http://www.gil.com.pk/