DH Chemicals

Analysis of Financial Statements
DH Chemicals
2005-06
Prepared by:
Zeeshan Adeel
FA07-MBA-095
COMSATS Institute of Information Technology,

Lahore
Financial Statements Analysis-DH Chemicals 2005-06
MANAFUCTURERS OF BUBBER SHER UREA

FINANCIAL ANALYSIS OF ANNUAL REPORTS 2005-06
COMSATS Institute of Information Technology, Lahore. 2

I dedicate this report to Mr. Adnan Sheikh whose kind

guideness has enabled me to complete this project.

Table of Contents
Short term solvency ratios/liquidity ratios....................................

1)Current Ratio..................................................................................................................
2)Quick Ratio.....................................................................................................................
3)Cash Ratio......................................................................................................................
Long Term Solvency Ratios/Leverage Ratios...................................................................
1)Total Debt Ratio.............................................................................................................
2)Debt to Equity Ratio.......................................................................................................
3)Equity Multiplier............................................................................................................
4)Interest Coverage Ratio..................................................................................................
5)Cash Coverage Ratio......................................................................................................
Asset Management Turnover Ratios.................................................................................
1)Inventory Turnover Ratio...............................................................................................
2)Receivable Turnover Ratio.............................................................................................
3)Payable Turnover Ratio..................................................................................................
1)Total Asset Turnover Ratio............................................................................................
2)Capital intensity Ratio....................................................................................................
Profitability Ratios...............................................................................................................
1)Gross Profit Margin........................................................................................................
2)Net Profit Margin...........................................................................................................
3)Return on Assets.............................................................................................................
4)Return on Equity............................................................................................................
5)Earning per share............................................................................................................
6)Book value per share......................................................................................................
ANALYSIS........................................................................................................................

DAWOOD HERCULES Chemicals Limited
Below is the ratio analysis of Dawood Hercules Chemicals Ltd. for the year 2005-2006.
Ratio Analysis of company report (2005-06)
Short term solvency ratios/liquidity ratios
1)Current Ratio:
Current Ratio = Current assets = 8510130313 = Rs. 1.28

(2006) Current liabilities 6671654086
Current Ratio = Current assets = 6363623494 = Rs. 1.90

Industry Average:
2006 1.54
2005: 1.62
Analysis:
The current ratio has decreased by Rs.0.62 in 2006 as compared to 2005.This
ratio has decreased because current liabilities have increased at a higher rate as compared
to the current assets. The firm’s short term borrowings have increased. But still it has Rs.
1.28 of current assets to pay Rs 1 of current liabilities. Simply to say the firm’s liquidity
position is fair.
The current ratio was higher in 2005 than the industry average but it fell below industry
average because the firm’s borrowings have increased significantly in 2006 as compared
to the rest of the firms in the industry.

2)Quick Ratio:
Quick Ratio = Current assets-Inventory = 8510130313 -237295434 = 1.24

Quick Ratio = Current assets-Inventory = 6363623494-164432448 = 1.85

Industry Average:
2006: 0.92
2005: 0.87
Analysis:
The quick ratio has decreased in 2006 because of two reasons:
a) Current Liabilities have increased
b) Inventory level has increased in 2006
The firm’s quick ratio has been excellent as compared with all other firms in the
industry in both years. The firm is the most liquid in the industry because it can pay
all the current liabilities with its current assets deducting inventory.
3)Cash Ratio:
Cash Ratio = Cash = 56294565 = 0.008

Cash Ratio = Cash = 398919136 = 0.12

Industry Average:
2006: 0.049
2005: 0.061
Analysis:

The cash ratio has decreased significantly in 2006 because it has significantly
low amount of cash & bank balances. In 2006, DH chemicals had Rs0.0w08 of cash to
settle down Rs. of current liabilities.
The firm does not hold that too much cash like the other firms in the industry that’s why
its cash ratio is below industry average in both years.
Long Term Solvency Ratios/Leverage Ratios
1)Total Debt Ratio:
Total Debt Ratio = Total Assets-Total Equity = 16162691046-9273143878 = 0.43

(2006) Total Assets 16162691046
Total Debt Ratio = Total Assets-Total Equity = 12787169524-9355239654 = 0.27

(2005) Total Assets 12787169524
Industry Average:
2006: 0.44
2005: 0.45
Analysis:
The total debt ratio has increased in 2006.In 2005 , the company was financing
73% of its assets from funds provided by debtors & remaining portion of total assets were
financed by the funds provided by shareholders but in 2006 , the company is financing
57% of its assets by debtors’ funds and 43% of its assets were financed by shareholders’
funds. The company is now using more of debtors’ funds to finance its assets.
The firm is relying more on shareholders’ provided funds in 2005 but in 2006, it is using
almost the same proportion of shareholders’ investment and debts as the other firms in
the industry.
2)Debt to Equity Ratio:
Debt to Equity Ratio = Total Debt = 16162691046-9273143878 = 0.743

(2006) Total Equity 9273143878

Debt to Equity Ratio = Total Debt = 12787169524-9355239654 = 0.37

(2005) Total Equity 9355239654
Industry Average:
2006: 0.947
2005: 0.74
Analysis:
The creditors are providing Rs 0.37 of financing for each Rs 1 provided by the
company’s shareholders in 2005 but the situation is quite opposite in 2006 where debt-to-
equity ratio has doubled because total debt ( Current liabilities & long term borrowings)
have increased significantly in 2006.
The firm is using more of the shareholders’ provided funds to finance its assets as
compared with other firms in the industry in 2005-06. The firm is not relying mainly on
the debts to finance its assets.
3)Equity Multiplier:
Equity Multiplier = Total Assets = 16162691046 = 1.743

(2006) Total Equity 9273143878
Equity Multiplier = Total Assets = 12787169524 = 1.37

(2005) Total Equity 9355239654
Industry Average:
2006: 1.95
2005: 1.74
Analysis:
The Equity Multiplier of the company has decreased in 2006 as compared to
2005.the company has decreased it equity multiplier but was not able to manage it
functions properly therefore it is earning loss.

4)Interest Coverage Ratio:
Interest Coverage Ratio = Earning before interest & tax = 1496657314 = 2.69 times
(2006) Interest 555469279
Interest Coverage Ratio = Earning before interest & tax = 2518638188 = 9.76 times
(2005) Interest 258059216
Industry Average:
2006: 2.30
2005: 7.91
Analysis:
The Interest Coverage ratio of the company has decreased in 2006 as compared
to 2005.In 2006 the company is able to pay interest payments for 2.69 times but the
company was able to pay its interest payments about 10 times in 2005. This happened
due to increase in the interest payments & decrease in the EBIT. The EBIT has decreased
in 2006 because of lower return from short term investments.
The company’s performance is very good in paying the interest payments in both years
because the interest coverage ratio is higher than the industry average.
5)Cash Coverage Ratio:
Cash Coverage Ratio = EBIT +Depreciation = 1496657314+81426153 =2.84 times

(2006) Interest 555469279
Cash Coverage Ratio = EBIT +Depreciation = 2518638188 + 75423348 =10.05 times

(2005) Interest 258059216
Industry Average:
2006: 2.83

2005: 8.11
Analysis:
The Cash Coverage ratio of the company has decreased in 2006 as compared to
2005 due to high depreciation charged to machinery & equipment and to the
administration.
The cash coverage ratio of DH chemicals is greater than the industry average which
demonstrates its good performance as compared the rest of the firms
Asset Management Turnover Ratios
1)Inventory Turnover Ratio:
Inventory Turnover Ratio = Cost of Goods Sold = 2570246167 = 10.83 times

(2006) Inventory 237295434
Inventory Turnover Ratio = Cost of Goods Sold = 2030603390 = 12.35 times

(2005) Inventory 164432448
Days sales in Inventory = 365 = 365 =33.70 days

(2006) Inventory Turnover Ratio 10.83
Days sales in Inventory = 365 = 365 =29.56 days

(2005) Inventory Turnover Ratio 12.35
Industry Average:
2006: 4.91 times
2005: 5.49 times
Analysis:
The Inventory Turnover Ratio of the company has decreased in 2006 as
compared to 2005; company was able to turnover its inventory 12.35 times in 2005 as
compared to 10.35 times in 2006. This decrease has happened due to high level of
inventory in 2006.

We see that the DH chemicals are able to sell out its inventory much more times as
compared with the industry average & it is selling its inventory in one month approx. in
both years. The company’s selling & marketing policies are very effective & successful.
2)Receivable Turnover Ratio:
Receivable Turnover Ratio = Sales = 3881749695 = 1550.93 times

(2006) Account receivable 2502849
Receivable Turnover Ratio = Sales = 3290547342 = 854.61 times

(2005) Account receivable 3850344
Average Collection Period = 365 = 0.2353days

(2006) Receivable Turnover Ratio
Average Collection Period = 365 = 0.43 days

(2005) Receivable Turnover Ratio
Industry Average:
2006: 396.70 times
2005: 302.87 times
Analysis:
The Receivable Turnover Ratio of the company has increased significantly in
2006 as compared to 2005 which represent a great improvement in the credit policy of
the firm because it is now able to collect its receivables within 0.2353.days as compared
with 0.43 days in 2005.
If we observe & compare the Receivable turnover ratio with the industry average, we see
that it is much much higher than the industry average. By analyzing it, we can say that

the firm doesn’t sell its inventory on credit.
3)Payable Turnover Ratio:
Payable Turnover Ratio = Cost of goods Sold = 2570246167 = 1026.92 times

(2006) Account Payable 2502849
Payable Turnover Ratio = Cost of goods Sold = 2030603390 = 527.38 times

(2005) Account Payable 3850344
Days sales in Payable = 365 = 0.35 days

(2006) Payable Turnover Ratio
Days sales in Payable = 365 = 0.69 days

(2005) Payable Turnover Ratio
Industry Average:
2006: 263.10 times
2005: 178.67 times
Analysis:
The Payable Turnover Ratio of the company has increased in 2006 as compared
to 2005 which is not a good thing for company because now company is paying its
liabilities so early as compared previous year. Now company is not using the finances of
outsiders so efficiently because it is not able to hold the other people’s money for its
operations.
This ratio has increased due to decrease in A/P. The company is not holding the other
people’s money for its operations even for a single day.
Macro Level Ratios

1)Total Asset Turnover Ratio
Total Asset Turnover Ratio = Sales = 3881749695 = Rs 0.240

(2006) Total Assets 16162691046
Total Asset Turnover Ratio = Sales = 3290547342 = Rs. 0.26

(2005) Total Assets 12787169524
Industry Average:
2006: 1.145
2005: 1.09
Analysis:
The Total Asset Turnover Ratio of the company has decreased in 2006 as
compared to 2005 because of increase in Total Assets. The Rs 1 invested in assets
generated Rs 0.26 Sales in 2005 but the Rs .1 invested in total assets generated RS 0.24
of Sales in 2006.
dh chemicals is not utilizing its assets efficiently like the other firms in the industry
because the Rs1 invested by dh chemicals in assets generated sales of worth Rs 0.26 &
Rs 0.24 in 2005-06 respectively while the industry on the average is getting sales of
worth Rs 1.09 & Rs 1.145 in 2005-06.
2)Capital intensity Ratio:
Capital intensity Ratio = Total Assets = 16162691046 = 4.17

(2006) Sales 3881749695
Capital intensity Ratio = Total Assets = 12787169524 = 3.886

(2005) Sales 3290547342

Industry Average:
2006: 1.67 times
2005: 1.722 times
Analysis:
The Capital Intensity Ratio of the company has increased in 2006 as compared
to 2005 so now more amounts of assets is required for the generation of sales. In 2005,
DH chemicals required assets of worth Rs. 3.886 in order to generate Sales of worth Rs 1
but in 2006, the company required an investment of Rs 4.17 in its assets to generate Sales
of worth Rs 1.
The company has to utilize more assets for the generation of sales in 2006 as compared to
2005 which means that the company’s ability to manage & utilize its assets has a little bit
decreased in 2006 relative to 2005.
If we compare the capital intensity ratio with the industry average, we see that it is
utilizing more assets than the others to generate sales of worth Rs1. The firm is not
utilizing its assets efficiently.
Profitability Ratios
1)Gross Profit Margin:
Gross Profit Margin = Gross Profit = 1311503528 = Rs. 0.3378

(2006) Sales 3881749695
Gross Profit Margin = Gross Profit = 1259943952 = Rs. 0.3829

(2005) Sales 3290547342
Industry Average:
2006: 0.190
2005: 0.288
Analysis:

The Gross Profit Margin of the company has decreased in 2006 as compared to
2005 because , although., the sales have increased in 2006 but the cost of sales have
increased significantly that’s why Gross Profit has decreased in 2006 .
This ratio can be interpreted as:
The company gets Rs. 0.3378 of Gross Profit from the sales of Rs.1 in 2006 while the
company obtained Rs.0.3829 of Gross Profit from the sales of Rs.1.
The firm’s profitability is in a very good position as compared with the industry average
because the G.P. Margin ratio of DH chemicals is higher than the industry average in
both years. It means that the firm is getting more profit from its sales than the industry
average.
2)Net Profit Margin:
Net Profit Margin = Net Profit = 2054206794 = Rs. 0.53

(2006) Sales 3881749695
Net Profit Margin = Net Profit = 2867944955 = Rs. 0.87

(2005) Sales 3290547342
Industry Average:
2006: 0.180
2005: 0.334
Analysis:
This ratio can be interpreted as:
The company gets Rs 0.87 of net profit from the sales of Rs.1 in 2005 but it gets Rs. 0.53
Of net profit from the sales of worth Rs.1.This ratio has decreased because the other
income has decreased in 2006 as compared with 2005.
The Net Profit Margin of the company has decreased in 2006 as compared to 2005
because operating expense has increased in 2006. If we compare Gross Profit Margin
Ratios with the Net Profit Margin Ratios of both years, we see that Net Profit Margin

Ratios are greater because of significantly high amount of “other income” which
indicates that the company’s financial position is very good because its selling and other
expenses are lower than the income it receives from its other investments.
The firm’s profitability is in a very good position as compared with the industry average
because the G.P. Margin ratio of DH chemicals is higher than the industry average in
both years. It means that the firm is getting more net profit from its sales than the industry
average.
3)Return on Assets:
Return on Assets = Net Profit = 2054206794 = Rs. 0.1271

(2006) Total Assets 16162691046
Return on Assets = Net Profit = 2867944955 = Rs. 0.2243

(2005) Total Assets 12787169524
Industry Average:
2006: 0.110
2005: 0.174
Analysis:
The Return on Assets of the company has decreased in 2006 as compared to
2005. In 2005, Rs 1 invested in total assets generated Rs1 0.2243 of net profit but Rs. 1
invested in assets generated Rs.0.1271 of net profit in 2006.
The company is not able to manage its assets as efficiently as in 2005. The net profit has
decreased and the investment in total assets has increased.
But if we compare it with the industry average, we see that the firm’s performance is not
so bad because the firm’s ROA is higher than the industry average in both years.

4)Return on Equity:
Return on Equity = Net Profit = 2054206794 = Rs. 0.2215

(2006) Total Equity 9273143878
Return on Equity = Net Profit = 2867944955 = Rs. 0.3066

(2005) Total Equity 9355239654
Industry Average:
2006: 0.094
2005: 0.2552
Analysis:
The Return on Equity of the company has decreased in 2006 as compared to
2005. The one rupee invested by shareholders generated Rs.0.3066 of Net Income in
2005 but it generated Rs 0.2215 of Net Income in 2006. This decrease is caused by
decrease in Net Profit.
The firm is getting more profit from the funds provided by the shareholders than the
industry average.
5)Earning per share:
Earning per share = Net Profit = 2054206794 = 24.79

(2006) No. of shares outstanding 82866240
Earning per share = Net Profit = 286944955 = 39.80
Industry Average:
2006: 11.73
2005: 25.02
Analysis:
The firm’s EPS has decreased in 2006 because of two factors:

a) The Net Profit has decreased

b) The firm has issued more shares.
But still, the firm’s shareholders are in a good position because the industry average is
below the firm’s EPS.
6)Book value per share:
Book value per share = Total Equity = 122204 = 0.0345

Return on Equity can be expressed as the product of Return on Assets and Equity
Multiplier:
2006 2005
ROE = ROI * Equity Multiplier ROE = ROI * Equity Multiplier
= Net Income * Total Assets =Net Income * Total Assets

Total Assets Total Equity Total Assets Total Equity
= 2054206794 * 16162691046 =2867944955 * 12787169524

16162691046 9273143878 12787169524 9355239654
= 0.1271 * 1.743 = 0.2243 * 1.37
=0.2215 =0.3066

The ROE has decreased in 2006 due to decrease in ROA. Now we investigate the reason
for decrease in ROA, we see that the money invested in total assets have increased but
the net income has decreased as compared to 2005.
Now, we further divide ROE, into three components as:
ROE = Net Profit Margin * Total Asset Turnover * Equity Multiplier
= Net Profit * Sales * Total Assets

Sales Total Assets Total Equity
FOR 2005:
= 2867944955 * 3290547342 * 12787169524

3290547342 12787169524 9355239654
= 0.87 * 0.26 * 1.37
= 0.3066
FOR 2006:
ROE = 2054206794 * 3881749695 * 16162691046

3881749695 16162691046 9273.143878
= 0.53 * 0.24 * 1.743
= 0.2215
ANALYSIS:

We see that the ROE has decreased due to two reasons :

a) decrease in Net Profit Margin
b) decrease in Total Asset Turnover
Now, we try to find out the further reasons for the above described main resons
The net profit margin ratio has decreased in 2006 due to decrease in Net Income &
increase in sales. Simply, we can say that the sales have increased in 2006 but the Profit
after taxation has decreased as compared to 2005.
Secondly, the Total Asset turnover ratio has decreased due to inefficient utilization of
assets i.e. the investment in total assets have increased at a much higher rate as compared
to increase in sales.
Due to these reasons, the ROE has decreased in 2006.

DH Chemicals

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Analysis of Financial Statements

COMSATS Institute of Information Technology,

MANAFUCTURERS OF BUBBER SHER UREA

COMSATS Institute of Information Technology, Lahore. 2

I dedicate this report to Mr. Adnan Sheikh whose kind

COMSATS Institute of Information Technology, Lahore. 3

Short term solvency ratios/liquidity ratios....................................

COMSATS Institute of Information Technology, Lahore. 4

DAWOOD HERCULES Chemicals Limited

Ratio Analysis of company report (2005-06)

Short term solvency ratios/liquidity ratios

Current Ratio = Current assets = 8510130313 = Rs. 1.28

Current Ratio = Current assets = 6363623494 = Rs. 1.90

COMSATS Institute of Information Technology, Lahore. 5

Quick Ratio = Current assets-Inventory = 8510130313 -237295434 = 1.24

Quick Ratio = Current assets-Inventory = 6363623494-164432448 = 1.85

Cash Ratio = Cash = 56294565 = 0.008

Cash Ratio = Cash = 398919136 = 0.12

COMSATS Institute of Information Technology, Lahore. 6

Long Term Solvency Ratios/Leverage Ratios

1)Total Debt Ratio:

Total Debt Ratio = Total Assets-Total Equity = 16162691046-9273143878 = 0.43

Total Debt Ratio = Total Assets-Total Equity = 12787169524-9355239654 = 0.27

Debt to Equity Ratio = Total Debt = 16162691046-9273143878 = 0.743

COMSATS Institute of Information Technology, Lahore. 7

Debt to Equity Ratio = Total Debt = 12787169524-9355239654 = 0.37

Equity Multiplier = Total Assets = 16162691046 = 1.743

Equity Multiplier = Total Assets = 12787169524 = 1.37

COMSATS Institute of Information Technology, Lahore. 8

4)Interest Coverage Ratio:

5)Cash Coverage Ratio:

Cash Coverage Ratio = EBIT +Depreciation = 1496657314+81426153 =2.84 times

Cash Coverage Ratio = EBIT +Depreciation = 2518638188 + 75423348 =10.05 times

COMSATS Institute of Information Technology, Lahore. 9

Asset Management Turnover Ratios

1)Inventory Turnover Ratio:

Inventory Turnover Ratio = Cost of Goods Sold = 2570246167 = 10.83 times

Inventory Turnover Ratio = Cost of Goods Sold = 2030603390 = 12.35 times

Days sales in Inventory = 365 = 365 =33.70 days

Days sales in Inventory = 365 = 365 =29.56 days

COMSATS Institute of Information Technology, Lahore. 10

2)Receivable Turnover Ratio:

Receivable Turnover Ratio = Sales = 3881749695 = 1550.93 times

Receivable Turnover Ratio = Sales = 3290547342 = 854.61 times

Average Collection Period = 365 = 0.2353days

Average Collection Period = 365 = 0.43 days

COMSATS Institute of Information Technology, Lahore. 11

the firm doesn’t sell its inventory on credit.

3)Payable Turnover Ratio:

Payable Turnover Ratio = Cost of goods Sold = 2570246167 = 1026.92 times

Payable Turnover Ratio = Cost of goods Sold = 2030603390 = 527.38 times

Days sales in Payable = 365 = 0.35 days

Days sales in Payable = 365 = 0.69 days

Macro Level Ratios

COMSATS Institute of Information Technology, Lahore. 12

1)Total Asset Turnover Ratio

Total Asset Turnover Ratio = Sales = 3881749695 = Rs 0.240

Total Asset Turnover Ratio = Sales = 3290547342 = Rs. 0.26

2)Capital intensity Ratio:

Capital intensity Ratio = Total Assets = 16162691046 = 4.17

Capital intensity Ratio = Total Assets = 12787169524 = 3.886

COMSATS Institute of Information Technology, Lahore. 13

1)Gross Profit Margin:

Gross Profit Margin = Gross Profit = 1311503528 = Rs. 0.3378