REPORT

ON
FINANCIAL STATEMENT
ANALYSIS

TOPIC Ratio Analysis

Submitted to Sir G.M. Malik

Submitted by Anwar-ul-Haq

Roll No. 08

BS (A&F) 7th sem

DEPARTMENT OF COMMERCE

BAHAUDDIN ZAKRIYA UNIVERSITY

MULTAN
Ratio Analysis
A tool used by individuals to conduct a quantitative analysis of information in a
company's financial statements. Ratios are calculated from current year numbers and are
then compared to previous years, other companies, the industry, or even the economy to
judge the performance of the company. Ratio analysis is predominately used by
proponents of fundamental analysis. A ratio without any standard of measurement is
useless.
Common-size Analysis
A Common-size financial statement displays all items as percentages of a common base
figure. This type of financial statement allows for easy analysis between companies or
between time periods of a company.
The values on the common size statement are expressed as percentages of a statement
component such as revenue. Formatting financial statements in this way reduces the bias
that can occur when analyzing companies of differing sizes. It also allows for the analysis
of a company over various time periods, revealing, for example, what percentage of sales
is cost of goods sold and how that value has changed over time.
Horizontal Financial Statement Analysis
It is conducted by setting consecutive balance sheet, income statement or statement of
cash flow side-by-side and reviewing changes in individual categories on a year-to-year
or multiyear basis.
A comparison of statements over several years reveals direction, speed and extent of a
trend(s). The horizontal financial statements analysis is done by restating amount of each
item or group of items as a percentage.

Such percentages are calculated by selecting a base year and assign a weight of 100 to the
amount of each item in the base year statement. Thereafter, the amounts of similar items
or groups of items in prior or subsequent financial statements are expressed as a
percentage of the base year amount. The resulting figures are called index numbers or
trend ratios.
Vertical financial statement analysis
In this type of analysis an item is used as a base value and other items are compared with
it. In the balance sheet, for example, total assets equal 100%. Each asset is stated as a
percentage of total assets. Similarly, total liabilities and stockholders' equity are assigned
100% with a given liability or equity account stated as a percentage of the total liabilities
and stockholders' equity. For the income statement, 100% is assigned to net sales with all
revenue and expense accounts related to it.
Advantages of Ratio Analysis
Ratio analysis can also help us to check whether a business is doing better this year than
it was last year; and it can tell us if our business is doing better or worse than other
businesses doing and selling the same things.
The list of categories of readers and users of accounts includes the following people and
groups of people:

• Investors

• Lenders

• Managers of the organization

• Employees

• Suppliers and other trade creditors

• Customers

• Governments and their agencies

• Public

• Financial analysts

• Environmental groups

• Researchers: both academic and professional

Types of Ratios
Mainly there are five types of ratios which are used to evaluate the performance of
company. These are
• Liquidity Ratios
• Activity Ratios
• Leverage Ratios
• Profitability Ratios
• Investment Valuation Ratios
Each of these ratios further has different ratios and we can gauge the performance of
company by analyzing those ratios.
Liquidity Ratios
Liquidity ratios use to determine company's ability to pay off its short-terms debts
obligations. Generally, the higher the value of the ratio, the larger the margin of
safety that the company possesses to cover short-term debts. The ratios which judge the
liquidity of company are:
• Current Ratio
• Quick Ratio
• Cash Ratio
• Sales to Working Capital
Activity ratios
An indicator of how rapidly a firm converts various accounts into cash or sales. In
general, the sooner management can convert assets into sales or cash, the more
effectively the firm is being run. The ratios which judge the activity of company are:
• Recievable Turnover Ratio
• Average Collection Period Ratio
• Accounts Payable turnover Ratio
• Average Payment Period
• Inventory Turnover Ratio
• Average Age of Inventory
• Operating Cycle
• Cash Cycle
Leverage Ratio
Any ratio used to calculate the financial leverage of a company to get an idea of the
company's methods of financing or to measure its ability to meet financial obligations.
There are several different ratios, but the main factors looked at include debt, equity,
assets and interest expenses.
The ratios which judge the leverage of company are:
• Time Interest Earned Ratio
• Debt Ratio
• Debt to Equity Ratio
• Gearing Ratio
Profitability Ratios
Profitability ratios discuss the different measures of corporate profitability and financial
performance. These ratios, much like the operational performance ratios, give users a
good understanding of how well the company utilized its resources in generating profit
and shareholder value. The ratios which judge the profitability of company are:
• Total Assets Turnover
• Fixed Assets turnover
• Gross Profit Margin
• Operating Profit Margin
• Net Profit Margin
• Return on Assets
• Return on equity
Investor’s Ratios
These are the ratios that can be used by investors to estimate the attractiveness of a
potential or existing investment and get an idea of its valuation. However, when looking
at the financial statements of a company many users can suffer from information
overload as there are so many different financial values. This includes revenue, gross
margin, operating cash flow, EBITDA, pro forma earnings and the list goes on.
Investment valuation ratios attempt to simplify this evaluation process by comparing
relevant data that help users gain an estimate of valuation. The ratios which come under
this category are:
• EPS
• Price\Earnings Ratio
• Dividend Payout Ratio
• Dividend Yield
• Book Value
Ratio Analysis of Lucky Cement
Current Ratio
The current ratio of the company tells about the short term debt paying ability of the
company. It is computed as follows:
Current Assets/ Current Liabilities
Current ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008

2.12:1 0.63:1 0.94:1 0.85:1 1.09:1

The current ratio of the company seems deteriorating. It is high in one year and low in the
next year. A company must maintain a current ratio of at least 2 but in this scenario
company is maintaining the current ratio of 2 in the only year of 2004. In the next years
till 2007, company is even not being able to pay its current liabilities through its current
assets. Thus the short term debt paying ability of the company is not satisfactory in the
year 2005, 2006 and 2007 as its current ratio is not 1.
Horizontal Analysis of Current Assets

2004 2005 2006 2007 2008

100.00 (32.13) 225.24 273.45 422.40

Horizontal Analysis of Current Liabilities

2004 2005 2006 2007 2008

100.00 230.19 510.49 682.41 825.76
It is evident from the above table that the current liabilities of the company show a very
increasing trend and they increase to seven times in the ending year of 2008. While the
current assets of the company increased three times in the ending year of 2008 as
compared to its base year. Although the trend of current assets is increasing except the
year 2005 but it’s not so high. We can say that the proportion with which the current
assets of the company is increasing is less as compared to the proportion with which the
current liabilities of the company are rising.
If we the current assets of the company in the years of analysis, we see that the proportion
of cash in current assets is more as compared to the other current assets except the year
2008. The other major component of the current assets is inventory. But stocks and spares
are also increasing in the current assets. It is desirable for a company that its current
assets mostly should include cash and other liquid assets.

Acid Test Ratio

This ratio relates the most liquid assets of the company with the current liabilities of the
company and is computed as follows:
Current Assets- Inventory/ Current Liabilities
Inventory is removed from the current assets because inventory is not considered to be a
liquid asset because it may be slow moving or may be obsolete. This ratio is also called
as quick ratio. In many cases the most conservative acid test ratio is also computed in
which only cash equivalents, marketable securities and net receivables are compared with
the current liabilities. While calculating the acid test ratio for Lucky Cement only
inventory is excluded from the current assets.
Acid test ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008

1.94:1 0.57:1 0.85:1 0.74:1 1:1

Normally the quick ratio of 1 is treated as good for a company. The quick ratio of the
company is up to the merit only in the year 2004 and 2008. As we also saw that company
wasn’t able to get a current ratio of 1 in the year 2005, 2006 and 2007 so obviously it
can’t attain a quick ratio of 1 in these years.
If we compare the current ratio and quick ratio of the company, we can say that the
company is not depending so much on its inventory. It means that the proportion of
inventory is not much in the current assets of the company and it is a good sign as
inventory is not considered to be liquid asset.

Horizontal Analysis of Inventory

2004 2005 2006 2007 2008

100.00 (33) 250 392 411

Proportion of inventory in current assets

2004 2005 2006 2007 2008

10.41% 8.6% 9.7% 12.5% 8.4%

Although the trend of the inventory is increasing but we can see that the proportion of
inventory in the current assets is not so much which is good as inventory takes
comparatively a longer time to get converted into cash.

Cash Ratio
This ratio is computed to evaluate the liquidity position of the company very critically. It
includes only the current assets which are cash or cash equivalents or marketable
securities and omits all other current assets. Normally this ratio is given less weight age
when analyzing the liquidity position of the company because it doesn’t show the true
picture of the liquidity. It is computed as follows:
Cash equivalent + Marketable Securities/ Current Liabilities
Cash ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008

 1.07 0.067 0.43 0.2 0.04

Normally a cash ratio of 1 is treated as good for the companies. The cash ratio of the
company is very low in the years of analysis except the year 2004. It means company has
less cash or cash equivalents to pay off its current liabilities.

Horizontal Analysis of Cash

2004 2005 2006 2007 2008

100.00 (86) 206 224 (73)

Proportion of cash in current assets

2004 2005 2006 2007 2008

50.56% 10.5% 46.32% 22.9% 3.2%

We only did the horizontal analysis of cash and also computed the proportion of cash
because the company does not have other cash equivalents and any other marketable
securities.
The trend of cash is deteriorating and it shows a very low trend in the year of 2005 and
2008. Also if the proportion of cash in current assets is worked out then we can see that
company’s cash proportion also declined greatly in those years in which the trend of cash
declined.
Sales to Working Capital
This ratio relates the sales of the company with its working capital. It describes that how
much sales are being generated from the working capital. If the ratio is high then this
means that working capital is being used properly. It is computed as follows:
Sales/Working Capital
Sales to working capital ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008

 2.8 32.23 (14.68) (20.09) (147.86)

The working capital is being used effectively in all the years but in 2008 it is too much
high which means that the company is over trading which is not good for the company. In
the years 2006, 2007 and 20087 the average working capital is not in positive which
means that its sales need more funding and the company is generating them from the
current liabilities. Hence it should generate a positive working capital in the next years.

Conclusion about Liquidity

After analyzing the liquidity ratios of the company we see that the liquidity position of
the company is good only in the years 2004 and 2008. The company in future must try to
maintain greater current ratio by increasing its current assets and decreasing or
controlling its current liabilities. Also the company must try to increase the proportion of
its cash and invest in marketable securities to avail more liquid assets.

Activity Ratios
Recievable Turnover Ratio
This ratio tells that how many times a company collects its receivables in a year. It is
computed as follows:
Credit Sales/ Average Trade Recievables
Normally it is better that this ratio should be high and this means company collects its
receivables more in a year.
Recievable turnover ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008

177.78 203.25 132.90 43.56 28.34

This shows that the company is collecting its receivables very efficiently except the last
year. We can relate this recievable turnover with the trade recievables of the company
and hence analyze the efficiency of the company in collecting its recievables.
Horizontal Analysis of Trade Recievables

2004 2005 2006 2007 2008

100 119.7 370 1757.9 3659.7
Note: Average trade recievables are taken in the above trend
We see that the trend of trade recievables is very high and it is exceptionally high in the
last two years. Thus due to the increasing trend of trade recievables it was not able to
collect its recievables many a times in the last two years as it did in the early years.
It is better that company must have a high recievable turnover ratio because it will
decrease the average collection period of the company.

Average Collection Period Ratio

This ratio tells that in how many days company is able to collect its recievables. This
ratio is computed as follows:
360/ Recievable Turnover Ratio

Average collection period of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

2 2 3 8 13

It shows that the management of Lucky Cement is very efficient in collecting its
receivables and takes a very less time to collect the amount due from the customers. This
ratio shows an increasing trend. We can’t say that this is a bad sign for the company in
recovering its debts. The company might have used a lenient credit collection policy to
increase sales. However it must be kept in mind that payment time should be given to
those customers who have good credit worthiness. While doing the analysis of this ratio it
must be kept in mind that what are the credit terms of the company and thus the average
collection period of the company must be compared to those credit terms.
Note: The credit sales and credit terms of lucky cement are not mentioned in its annual
reports so above mentioned ratios are computed as if all sales are on credit.
Account Payable Turnover Ratio
This ratio tells that how many times the company was able to payoff its amounts which
were due to its vendors. It is computed as follows:
Credit Purchases/ Average Trade Payables
Account payable turnover ratio of Lucky Cement in the respective years is given below

2004 2005 2006 2007 2008

5.96 5.37 4.91 5.90 4.95

The company shows a dwindling trend in this respect of this ratio. We will see the trend
of company’s trade payables and then relate it with the payable ratio.
Horizontal Analysis of Trade Payables

2004 2005 2006 2007 2008

100 136.95 292.25 424.2 721.11
Note: Average trade payables are taken in the above trend
The trend of trade payables is increasing, but if we compare it with the payable turnover
ratio of the company we find that the payable turnover ratio is almost same although the
trend is high. It may be the case that the company is paying the trade payables of larger
amounts. It is desirable that this ratio should be less so that the company retains more
cash.
This ratio is further related with the average payment period.
Average Payment Period
This ratio tells that in how many days company pays its trade payables which it owed. It
is computed as follows:
360/Account Payable Turnover Ratio
Average payment period of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

 60 67 73 61 73

It is also showing an increasing trend except in the year 2007. Normally this ratio is
analyzed by the credit terms which are given to the company. It is better that a company
must payoff its trade payables in the credit terms which are allowed to it. If we consider
the credit terms allow Lucky Cement to pay its trade liabilities in 90 days then we can say
that it is able to pay its trade liabilities in the allotted time which is a good sign. If a
company is paying its trade liabilities in a given time, then this gives an edge to the
company and its credit worthiness increases. There is negative impact on the company’s
credit worthiness if its average payment period exceeds its credit time.

Inventory Turnover Ratio

This ratio tells that how many times company was able to sell its inventory in a year. It is
computed as follows:
CGS/ Average Inventory
Inventory turnover of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

12.58 18.06 18.54 15.97 18.18

The ratio is showing a deteriorating position and it has decreased in the year 2004 and
2007.
Horizontal Analysis of Cost of Goods Sold

2004 2005 2006 2007 2008

100 121.9 212.3 385.1 593.2

Horizontal Analysis of Inventory

2004 2005 2006 2007 2008

100 (16.41) 158.8 321.47 402.41
 Note: Average inventory is taken in the above trend
After doing the horizontal analysis of both CGS and inventory we can tell that why there
is low inventory ratio in the year 2007. It is due the fact that inventory has increased to
big extent as compared to the previous years but cost of goods sold has not shown a big
trend as compared to the inventory increase. Thus the decline in the inventory turnover
ratio was due to the fact that company had more inventory. Same was the problem for the
year 2004 in which inventory held was more and also there was low production which
resulted in less CGS.
It is desirable that this ratio must be high so that the company must sale its inventory
many a times in a year. However it must be kept in mind that the cost of goods sold
should not be so high and inventory should be kept low. The high inventory results in
wastage of inventory as well as increasing of storage cost.

Average Age of Inventory

This ratio tells that after how many days company sells its inventory. This ratio is
computed as follows:
360/Inventory Turnover Ratio
Average age of inventory of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

29 20 19 22 20

The company is able to sell its inventory almost in 20 days but it took more time to sell
its inventory in the year 2004 and 2007. This was due to low inventory turnover ratio in
the above mentioned years.

Operating Cycle
This ratio tells that how much time a company takes to acquire raw material, convert it
into finish product and realize the cash after the sale of finished product. It is computed
as follows:
 Average Age of Raw Material + Average age of Work in Process + Average Age of
Inventory + Average Collection Period
Operating life cycle of Lucky Cement
Average Age of Raw Material
This ratio tells that after how many days raw materials was issued to production by
management. It is computed as follows:
Raw Material Issued to Production/ Average Raw Material
Average age of raw materials of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

63 56 47 45 58
Note: Raw material and packing material were not separately told in the balance
sheet therefore both are considered as raw materials
Average age of Work in Process
This ratio tells that after how many days work in process was issued to production by
management. It is computed as follows:
Cost of Goods Manufactured/ Average WIP
Average age of work in process of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

18 9 11 12 9

Average age of inventory of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

29 20 19 22 20

Average collection period of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

2 2 3 8 13
Now adding average age of raw material, work in process, inventory and average age of
collection period we will get operating cycle of Lucky Cement.
Operating cycle of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

112 87 81 88 100

The company’s operating cycle is largely composed of the time it takes to manufacture
its product. The company is realizing cash quickly and hence it takes less time to collect
its recievables after the sales. In the last year the company had a big operating cycle than
the other years. This is because the average collection period was a bit greater than the
other years. The company is almost having a consistent operating cycle and this is good.

Cash Cycle
The cash cycle of a company tells about the cash disbursement and cash collection. The
cash cycle attempts to measure the amount of time each net input dollar is tied up in the
production and sales process before it is converted into cash through sales to customers It
is computed as follows:
Operating life cycle – Average Payment Period
Cash cycle of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

52 20 8 27 27

The cash cycle of the company is low so it is a good indication and it means that cash is
tied up for less amount of time.
Conclusion about company’s Activity
The company is realizing cash quickly and the inventory is sold quickly. The company is
a bit slow in the payment of its dues (considering the credit time as 30 or 60 days). The
company is mainly getting time in the manufacturing of its product and it should take
measures to increase the turnover of raw materials so that production of the company is
increased. However the company must keep in mind that excessive production may cause
it to decrease in the price of its product and in increased storage cost. The company must
not produce too much and too low amount of its product.

Long Term Ratios (Leverage Ratios)

Time Interest Earned Ratio
This ratio tells that how many times a company is able to pay its interest from its income.
The greater the ratio better is company’s position in paying long term debts. It is
computed as follows:
EBIT/ Interest
Time interest earned ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

95.38 59.67 33.45 3.55 24.27

This shows that company’s ability to pay its interest obligations decreased significantly
and it decreased very largely in the year 2007. We can compare the interest obligations
with the income of company and interpret the results.
Horizontal Analysis of Interest

2004 2005 2006 2007 2008

100 200 763.8 7958.37 1169.1

Horizontal Analysis of EBIT

2004 2005 2006 2007 2008

100 125.2 267.87 296.5 297

We can see from the above two tables that in 2007 the interest was very much high as
compared to the base year and this is due to large borrowings of the company in that year.
But the income of the company has increased in steady pace. Thus the income in the year
2007 didn’t grow as large as the interest grew. This was the reason due to which the ratio
was very low in that year.
It is advisable that the company must maintain a time interest earned ratio of at least 5.
Thus Lucky Cement is not up to the mark in the year 2007.

Debt Ratio
This ratio determines the percentage of assets financed by the creditors and also helps to
determine how well creditors are protected in case of insolvency. It is computed as
follows:
Total Liabilities/ Total Assets
Debt ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

38.5 65.3 70.07 63.64 45.5

It shows that company had financed its assets mainly from creditors in the year 2005,
2006 and 2007. It is desirable that the companies should have 60 percent financing of its
assets from creditors. Lucky Cement is almost up to the standard in all the years except
the year of 2006 in which ratio was a little bit high. Creditors feel secure in financing the
company when they see that company is financing a major portion of assets by itself. So
we can say that the debt ratio of Lucky Cement is satisfactory and creditors are secured in
case of its insolvency.
The earnings of company increased and it was indeed due to favourable leverage factor.
It is better for the company to follow a 50:50 policy because in doing so income
generated will be used to pay less interest and hence increasing the profit available to the
shareholders.

Debt to Equity Ratio

This ratio tells that how much a company has the ability to pay its liabilities. This ratio is
useful in determining that how well the creditors are secured in case of insolvency of the
company. It is computed as follows:
Total Liabilities/ Total Equity
Debt to equity ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

63 188 234 175 84

Vertical Analysis - % 2004 2005 2006 2007 2008

Share Capital & Reserve 61.42 34.67 29.93 36.35 54.49
Non Current Liabilities 25.30 50.86 49.96 38.96 23.06
Current Liabilities 13.28 14.47 20.11 24.69 22.45
Total Equity & Liabilities 100.00 100.00 100.00 100.00 100.00

It is evident that the company relied on the financing of creditors more in the year 2005,
2006 and 2007. The owner’s equity was more as compared to its debts in the year 2004
and 2008. Often it is advised that the company must maintain this ratio to low level so
that risk is less. The risk is increased when a company takes loan from the creditors
because creditors must be paid in any situation and thus high loan can take the company
to insolvency. So in this scenario company is getting a major portion of its funds from
creditors but at the same time it is utilizing the borrowed funds effectively and hence
increasing the income manifold. But creditors won’t feel so much secured to finance this
company because it is evident that proportion of borrowed funds is very high as
compared to the funds of shareholders

Gearing Ratio
This ratio takes into consideration only the long term debts of the company and tells
about the company’s ability to pay its long term liabilities. It is computed as follows:
Total Liabilities/ Total liabilities + Total Equity
Gearing ratio of lucky cement in the respective years is given below
 2004 2005 2006 2007 2008
22.8 56.5 59.5 47.6 26.8

Gearing ratio measures the proportion of funds contributed by the creditors. It means that
in year 2005, 2006 and 2007 the company mainly got its fund from long term debts.

Fixed Assets Equity Ratio

This ratio tells that what portion of fixed assets is being financed by its owners. If the
ratio is increasing it means that the assets are being financed by its creditors. It is
computed as follows:
Fixed Assets/ Total Equity
Fixed assets equity ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

116.8 178.8 271.12 217.2 138.4

The trend is increasing and hence we can say that assets are mostly being financed by its
creditors. But this ratio is less in the last year.

Conclusion about Leverage

The company is quite good enough to pay its long term debts except the year 2007 in
which its time interest earned ratio was bit low. Along with the capital provided by the
owners, the company’s most funds comprise of long term debts and it is also utilizing the
debt effectively as evident from the profit generated.

Profitability Ratios
Net Profit Margin
This ratio determines the income generated by sales. The income taken in this ratio is
before tax. It is computed as follows:
Net Profit before Tax/ Net Sales
Net profit margin ratio of lucky cement in the respective years is given below
 2004 2005 2006 2007 2008
33.4 30.4 31.7 21.5 13.6

The ratio is showing a deviating trend and it has increased significantly in the last two
year. This decline can be explained by doing the vertical analysis of income statements of
each year.

Vertical Analysis -% 2004 2005 2006 2007 2008

Turnover 100.00 100.00 100.00 100.00 100.00
Cost of Sales 62.16 65.34 63.00 70.65 74.27
Gross Profit 37.84 34.66 37.00 29.35 25.73
Distribution Cost 0.67 0.60 1.28 3.97 6.81
Administrative Cost 1.61 1.54 1.33 0.89 0.77
Operating Profit 35.56 32.52 34.39 24.49 18.14
Finance Cost 0.37 0.54 1.03 6.89 0.75
Other Income/Charges 0.04 0.02 0.02 (0.04) 0.04
Profit before Taxation 33.40 30.40 31.70 21.49 13.60

Horizontal Analysis of Turnover

2004 2005 2006 2007 2008

100 136.87 276.9 430.6 583.2

Horizontal Analysis of CGS

2004 2005 2006 2007 2008

100 143.89 280.7 489.5 696.9

Horizontal Analysis of Gross Profit

2004 2005 2006 2007 2008

 100 125.4 270.82 333.9 396.4

Horizontal Analysis of Distribution Cost

2004 2005 2006 2007 2008

100 116.5 506.4 2435.3 5651.5

Horizontal Analysis of Admin Expenses

2004 2005 2006 2007 2008

100 133.6 232.5 242.4 285.9

Horizontal Analysis of Operating Profit

2004 2005 2006 2007 2008
100 125.2 267.8 296.5 297.5

Horizontal Analysis of Interest

2004 2005 2006 2007 2008

100 200.0 763.8 7958.37 1169.1

Horizontal Analysis of EBT

2004 2005 2006 2007 2008
100 124.6 262.9 277.04 273.5

Now with the help of horizontal analysis we can more clearly define that why profit was
low in last two years. In the year 2007 and 2008, the cost of goods sold and the
distribution cost increased greatly as compared to its previous years. While the sales of
company didn’t increase too much as the proportion of cost of goods sold and distribution
cost increased. The company should control its distribution cost and cost of goods sold to
get more profit. Also in the year 2007, company utilized its most of profit in paying
interest. The company should avoid in taking too much loan because the net profit
decreases largely.

Total Assets Turnover

This ratio measures the activity of the assets and the ability of firm to generate its sales
through the use of its assets. It is computed as follows:
Sales/ Total Assets
Total assets turnover ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

4.14 2.68 3.40 4.86 4.95

The company was not able to utilize its assets effectively in the year 2005. This was due
to the fact that company held more assets idle and wasn’t able to utilize these assets
effectively.
Vertical Analysis -% 2004 2005 2006 2007 2008
Non Current Assets 71.79 90.93 81.14 78.98 75.60
Current Assets 28.21 9.07 18.86 21.02 24.40
Total Assets 100.00 100.00 100.00 100.00 100.00
The vertical analysis of the company shows that its total assets mostly comprise of fixed
assets. The year in which turnover ratio was low is due to the above mentioned fact as it
is evident with the help of vertical analysis.
Horizontal Analysis of Turnover

2004 2005 2006 2007 2008

100 136.87 276.9 430.6 583.2

Horizontal Analysis of Total Assets

2004 2005 2006 2007 2008

100 111.15 236.88 266.93 388.27
The horizontal analysis shows that sales didn’t increase too much as compared to the
increase of assets. Thus it is evident that assets were not fully utilized in the year 2005.

Fixed Assets Turnover Ratio

This ratio tells about the activity of fixed assets and the ability of a firm to generate its
sales through its fixed assets. It is computed as follows:
Sales/ Fixed Assets
Fixed assets turnover ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

5.76 2.95 4.21 6.16 6.55

Horizontal Analysis of Fixed Assets

2004 2005 2006 2007 2008

100 167.46 280.74 303.66 414.15

If we compare this ratio with total assets turnover ratio we find that sales are being
generated by the efficient use of its fixed assets. The ratio is down in the year 2005 and
this fact is told above.

Return on Assets
It measures the firm’s ability to utilize its assets to create profits by comparing profit with
the assets that generate profit. It is computed as follows:
Net Profit/ Total Assets
Return on assets ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

13.84 8.2 10.8 10.5 6.7
The decrease in return on assets in the year 2005 is due to the fact that company was not
able to utilize its assets efficiently while in the year 2008, its profit margin decreased.
The return on assets is explained properly by the DuPont analysis of return on assets.

DuPont Return on Assets

This ratio explains more about the return on assets by considering both the net profit
margin and total assets turnover ratio. It is computed as follows:
Net Profit Margin * Total Assets Turnover
Net profit margin ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

33.4 30.4 31.7 21.5 13.6

Total assets turnover ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

4.14 2.68 3.40 4.86 4.95

DuPont Return on assets ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

13.82 8.17 10.78 10.44 6.73

Thus it is evident that return on assets has decreased in the year 2005 due to less efficient
use of assets, and decreased in the year 2008 due to low net profit margin. The company
must control its cost of goods sold and should improve its net profit margin to avail more
return on its assets.

Return on Equity
This ratio measures the return to its equity holders. It is computed as follows:
Net Profit/ Total Equity
Return on equity ratio of lucky cement in the respective years is given below
2004 2005 2006 2007 2008
22.54 23.56 36.54 28.76 12.37

This shows that the equity holders are almost consistent return. The return on equity is
exceptionally high in the year 2006 and exceptionally low in the year 2008. This different
trend would be explained more apparently by DuPont return on equity.

DuPont Return on Equity Ratio

This ratio tells more clearly about the return on equity of the company. It is computed as
follows:
Return on Assets * Financial Multiplier
Financial multiplier tells that how much leverage a company is using. Its formula is
Total Assets/ Total Owner’s Equity
Now we will calculate DuPont Return on equity.
Net profit margin ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

33.4 30.4 31.7 21.5 13.6

Total assets turnover ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

4.14 2.68 3.40 4.86 4.95

Financial Multiplier of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

1.63 2.88 3.34 2.75 1.83

Return on equity ratio of lucky cement in the respective years is given below
 2004 2005 2006 2007 2008
22.49 23.57 36.55 28.77 12.36

Now we can tell that why the company was able to have very high and very low return on
equity in the year 2006 and 2008 respectively. In the year 2006 company gained good
profit margin and utilized its assets very efficiently along with the usage of high financial
multiplier. In the year 2008, company wasn’t able to generate adequate profit margin but
it utilized its assets efficiently. Also the leverage factor was low as compared to the other
years.

Gross Profit Margin

This ratio compares gross profit with the sales of the company. It is computed as follows:
Gross Profit/ Sales
Gross profit margin ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

37.84 34.66 37.00 29.35 25.73

We see that gross profit margin of the company is decreasing except the year 2006. This
downward trend can be explained by doing the vertical analysis of the company’s income
statement.
Vertical Analysis -% 2004 2005 2006 2007 2008
Turnover 100.00 100.00 100.00 100.00 100.00
Cost of Sales 62.16 65.34 63.00 70.65 74.27
Gross Profit 37.84 34.66 37.00 29.35 25.73
Horizontal Analysis of Turnover

2004 2005 2006 2007 2008

100 136.87 276.9 430.6 583.2

Horizontal Analysis of CGS

 2004 2005 2006 2007 2008
100 143.89 280.7 489.5 696.9

Horizontal Analysis of Gross Profit

2004 2005 2006 2007 2008

100 125.4 270.82 333.9 396.4

Thus decline in the ratio is due to the fact that company’s cost of goods sold is increasing.
In the year 2006, the company was able to control its cost of goods sold and hence earned
high gross profit.

Operating Profit Margin

This ratio compares the operating profit of the company with its sales. It is computed as
follows.
Operating Profit/ Sales
Operating profit margin ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

35.56 32.52 34.4 24.48 18.2

The trend of this ratio is similar to gross profit margin ratio. In the last two years there is
a big difference between gross profit and operating profit ratio. This can be explained by
vertical analysis of the income statement of company.

Vertical Analysis -% 2004 2005 2006 2007 2008

Turnover 100.00 100.00 100.00 100.00 100.00
Cost of Sales 62.16 65.34 63.00 70.65 74.27
Gross Profit 37.84 34.66 37.00 29.35 25.73
Distribution Cost 0.67 0.60 1.28 3.97 6.81
Administrative Cost 1.61 1.54 1.33 0.89 0.77
Operating Profit 35.56 32.52 34.39 24.49 18.14
Horizontal Analysis of Turnover

2004 2005 2006 2007 2008

100 136.87 276.9 430.6 583.2

Horizontal Analysis of CGS

2004 2005 2006 2007 2008

100 143.89 280.7 489.5 696.9

Horizontal Analysis of Gross Profit

2004 2005 2006 2007 2008

100 125.4 270.82 333.9 396.4

Horizontal Analysis of Distribution Cost

2004 2005 2006 2007 2008

100 116.5 506.4 2435.3 5651.5

Horizontal Analysis of Admin Expenses

2004 2005 2006 2007 2008

100 133.6 232.5 242.4 285.9

Horizontal Analysis of Operating Profit

2004 2005 2006 2007 2008
100 125.2 267.8 296.5 297.5
In the last two years the distribution cost increased largely and therefore decrease in
operating profit has occurred. The company must try to minimize its distribution cost so
that its operating profit should be high.

Conclusion about Profitability

The company is earning a relatively stable profit and the return on the assets and equity is
satisfactory. The utilization of assets is also good except the year of 2005. The company
should also consider decreasing its cost of goods sold and operating expense because its
trend is increasing.

Investment Ratios
Earning Per Share (EPS)
It tells the amount of income earned on a common stock share in a year. It is computed as
follows:
Net Income – Preferred Dividends/ Total Outstanding Share
EPS ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

2.80 3.14 7.35 9.67 9.84

Earning per share of the company is increasing and it is very good sign for company’s
growth and helps to attract more investors. When more money is invested in the company
then it is able to flourish. EPS also tells that the profit of the company is increasing.
Hence after seeing the EPS ratio of the company we can say that the profit of company is
increasing.

Price/ Earnings Ratio

This ratio expresses the relationship between the market price of common stock share and
earnings per share of stock. It is computed as follows:
Market Price per Share/ EPS
Price/ earnings ratio of lucky cement in the respective years is given below
 2004 2005 2006 2007 2008
13.97 13.51 13.66 12.72 9.96

The ratio of the company is almost consistent but it drops significantly in the last year.
This can be due to the fact that investors are losing hope in the growth of the company or
we can also say that this was due to political and economical position of the country due
to which investors didn’t invest (year 2008 brought many fluctuations at KSE-100 index
and it shattered the confidence of investors).

Book Value per Share

It indicates the amount of stockholder’s equity that relates to each share of outstanding
common stock. It is computed as follows:
Total Stockholder’s Equity – Preferred Stock/ Outstanding Shares
Book value per share of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

17.57 20.95 30.23 35.51 70.83

The book value of the company’s stock is increasing and hence we can say that the profit
of the firm is increasing. The book value of the company is compared with its market
price to know that what investors feel about the company. If the stock is selling below the
book value then investors are optimistic about the growth of the company and vice versa.
Market value per share as on 30th June 09

2004 2005 2006 2007 2008

39.10 42.39 100.42 123.04 97.93

This shows that investors are optimistic in the growth of the company and are ready to
invest in the company as book value is quite low than its market price.
Dividend Yield
It tells about the relationship between the dividends per common share and the market
price per common share. It is computed as follows:
Dividend per Share/ Market price per common share
Dividend yield of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

- - 1.00 1.02 -

The company didn’t declare any dividend in the years 2004, 2005 and 2008. While it
declared dividend in the rest of years. Company’s dividend policy is deteriorating and it
might be the case that company is reinvesting its profit rather than distributing it in the
form of dividends. Those who want a consistent dividend won’t invest in this company.

Payout Ratio
It measures the portion of earnings that is distributed as dividends. It is computed as
follows:
Dividend per Share/ EPS
Payout ratio of lucky cement in the respective years is given below

2004 2005 2006 2007 2008

- - 13.61 12.93 -

The company’s dividend policy is not consistent and the investors will only invest in this
company if its earnings are more. Such type of investors will prefer that company should
reinvest its profit and then pay to them a large amount in the years when high profit is
attained.

Conclusion from Investor’s Point of view

The company is inconsistent in payment of its dividends and the investors who want a
consistent dividend would not like to invest in the company. However the market price of
the company is quite high which shows that investors are quite optimistic about the
growth of company.