Ratio Analysis and Additional Fund needed

Group members:
Anum Ashrafi
Faiza Zafar
Madiha Ahmad
Mariam Shamim
Naveen Zuberi

Company Name:
UNILEVER PAKISTAN

Class:
BBA-4C (E)

Submitted to:
Mam Shumaila Israr

Date of submission:
26th May 2008
Ratio Analysis:

Ratio analysis will basically give you a clear picture of the company, i.e.
where the company is standing and it is the study of relationship
between income statement items and balance sheet accounts over a
period of time.

1. Liquidity Ratios:

• Current Ratio for 2006

Current Assets/Current Liabilities = 3685839 / 4237108 = 0.869

• Current Ratio for 2007

Current Assets/Current Liabilities = 4092116 / 5587649 = 0.732

The current ratio is 0.869 in 2006 which is less than one and as
compared to 2007 i.e. 0.732, but in both the years assets are on declining
trend where as liabilities see an increasing trend.

• Quick Ratio for 2006

(Current Assets-Inventory)/Current liabilities = (3685839 - 2156472)/

4237108 = 0.361
 • Quick Ratio for 2007

(Current Assets-Inventory)/Current liabilities = (4092116 - 2726064) /

5587649 = 0.245

Quick ratios are always less than current ratios; same is the case in both
the years. In 2006, the quick ratio is 0.361 and in 2007 the Quick ratio is
0.245, which is less than the previous year, indicating that the inventory
is less in 2007. Keeping excess inventory is not good for the company as
the capital amount is invested in carrying and holding cost. Quick ratio
in both the years is less than 1, which makes a company inefficient.

2. Asset Management Ratios:

• Inventory turnover for 2006

Sales/Average inventory = 20987885 / 2156472 = 9.73

• Inventory turnover for 2007

Sales/Average inventory = 23331666 / 2726064 = 8.56

The inventory turnover in 2006 was 9.73 where as in 2007 it was 8.56,
which reveals that unilever is not turning the inventory into cash and
cash into inventory quickly.
 • Days sales outstanding for 2006

(A/C Receivable/Sales)*365 = 174722 / 20987885 = 3.03

• Days sales outstanding for 2007

(A/C Receivable/Sales)*365 = 239313 / 23331666 = 3.743

In 2006 DSO was 3.03 and in 2007 it was 3.743, this tells the no. of days
which unilever takes to convert its A/C Receivable into cash.

• Fixed Asset Turnover for 2006

Sales/Fixed Assets = 20987885 / 2744007 = 7.649

• Fixed Asset Turnover for 2007

Sales/Fixed Assets = 23331666 / 3992060 = 5.85

Fixed Asset turnover will directly affect sales. The FAT of 2006 was
7.65 and the FAT of 2007 was 5.85, which indicates that unilever was
not utilizing their fixed assets either due to defect in machinery, non-
skilled labors, bad working conditions etc.

• Total Asset Turnover for 2006

Sales/total assets = 20987885 / 6429846 = 3.27

 • Total Asset Turnover for 2007

Sales/total assets = 23331666 / 8084176 = 2.89

TAT will help you identify the area in which the problem is occurring.
In this case, the problem occurs in the inventory turnover and in fixed
asset turnover.

3. Debt Management Ratios:

• Debt Ratio for 2006

Total Debt/Total Assets = 4584775 / 6429846 = 0.713

• Debt Ratio for 2007

Total Debt/Total Assets = 6090088 / 8084176 = 0.753

The debt ratio in 2006 was 0.713 and in 2007 was 0.753, i.e. it was more
than 50%, which shows the inefficiency of company because if unilever
cannot pay interest expense on time, then it will increase their riskness.
This will ultimately affect their profitability. Debt financing to some
extent is beneficent for the company but more is risky.
 • Times Interest Earned Ratio for 2006

EBIT/Interest = 2549762 / 63946 = 39.8

• Times Interest Earned Ratio for 2007

EBIT/Interest = 2638806 / 1092081 = 24.17

It is basically a coverage ratio which indicates that either company has

enough space to increase their interest funds through debt financing or
not. The TIER of 2006 was 39.8 and 24.17 of 2007, which reveals that
company has earned interest expense 15.63 times less than as compared
to 2006, which is not good for the company because in this case the
higher the ratio, the best it is for the company.

• EBITDA Ratio for 2006

(EBIT+ D&A+ lease payments)/ (Interest+ principal repayment+ lease

payments)
= (2549672+269291+16962) / (63946+14273+16962) = 29.8

• EBITDA Ratio for 2007

(EBIT+ D&A+ lease payments)/ (Interest+ principal repayment+ lease

payments)
= (2038806+3881807+17273) / (109208+52932+17273) = 16.97
It is also a coverage ratio and in this ratio, the numerator tells the
availability of funds and the denominator indicates where we have to
locate the funds. The EBITDA ratio of 2006 was 29.8 and 16.97 for
2007, which is 12.83 times less than the previous year, which is not
good for the company because if this ratio will be high then the
profitability will also be high.

4. Profitability Ratios:

Profitability ratios gives the combining effect of liquidity, asset and debt
financing ratios which shows the net results of all the business
operations. In this case, we have 3 ratios:

Net Profit Margin for 2006

Net Income/Sales = 1632484 / 20987885 = 0.078

• Net Profit Margin for 2007

Net Income/Sales = 1687358 / 23331666 = 0.072

The Net profit margin in 2006 was 7.8% whereas in 2007 was 7.2%,
which means that it has declined in 2007 by 0.6%, either by taxation or
by some other problem but it is not too bad as compared to the previous
year.

• Gross Profit Margin for 2006

Gross Profit/Sales = 7743206 / 20987885 = 0.37
 • Gross Profit Margin for 2007

Gross Profit/Sales = 9083085 / 23331666 = 0.39

The gross profit margin in 2006 was 0.37, while in 2007 was 0.39,
which is good for the company because it indicates that in 2006 the cost
of goods sold was 63% and profit was 37%, whereas in 2007 the cost of
goods sold was 61% while the profit was 39%, which is good for the
company.

• Operating Profit Margin for 2006

EBIT/Sales = 2549672 / 20987885 = 0.121

• Operating Profit Margin for 2007

EBIT/Sales = 2638806 / 23331666 = 0.113

The operating profit margin in 2006 was 12.1% and in 2007 it was
11.3%, which is not good as compared to the previous year, because in
2007, the operating expenses are higher as compared to the previous
year.

• Basic earning power (BEP) for 2006

EBIT/total assets = 2549672 / 6426846 = 0.396

 • Basic earning power (BEP) for 2007

EBIT/total assets = 2638806 / 8084176 = 0.326

Basic earning power shows that how much operating assets will generate
operating profit. The BEP in 2006 was 39.6% and in 2007 it was 32.6%,
which means that it declines by 7% in 2007 which is not good for the
company because the company is not utilizing their operating assets
efficiently to generate operating profit.

• Return on assets (ROA) for 2006

Net Income/Total Assets = 1632484 / 6426846 = 0.25

• Return on assets (ROA) for 2006

Net Income/Total Assets = 1687358 / 8084176 = 0.21

The two ratios; BEP and ROA are interrelated. And the higher the ROA
ratio the good is the company is but the ROA in 2006 was 25%, whereas
in 2007 it was 21%, which is not good for the company because the ratio
of ROA declines by 4%.

• Return on equity for 2006

Net Income/Common equity = 1632484 / 1845071 = 0.89

 • Return on equity for 2007

Net Income/Common equity = 1687358 / 1994088 = 0.85

This ratio is high of the company, whose per share market value is high.
The ROE in 2006 was 89% and in 2007 it was 85%, which means that it
declines by 4%

5. Market Value Ratios:

• P/E Ratio for 2006

Price per share/Earning per share = 1968 / 123 = 16

• P/E Ratio for 2007

Price per share/Earning per share = 2286 / 127 = 18

The price earning ratio in 2006 was 16 and 18 in 2007, which is good for
the company because the price per share increased in 2007 as compared
to 2006, and this ratio is high for the company which possesses a good
financial position, earning per share and future growth prospects.
 • P/C.F Ratio for 2006

Cash flow per share = (Depreciation+Amortization+Net Income) / No.

of shares

=> (269291+1632484) / 13272 = 143.292

Price per share/cash flow per share = 1968 / 143.292 = 13.76

• P/C.F Ratio for 2007

Cash flow per share = (Depreciation+Amortization+Net Income) / No.

of shares

=> (388180+1687358) / 13286 = 156.22

Price per share/cash flow per share = 2286 / 156.13 = 14.64

The ratio in 2006 was 143.292 and in 2007 was 156.22 which is good
for unilever and this ratio is greater than EPS.

• P/B.V Ratio for 2006

Book value per share = Common equity/outstanding shares = 1845071 /

13272 = 139.019

Price per share/Book value per share = 1968 / 139.019 = 14.16

 • P/B.V Ratio for 2007

Book value per share = Common equity/outstanding

shares = 1994088 / 13286 = 150

Price per share/Book value per share = 2286 / 150 =

15.24

The ratio was 14.16 in 2006 and 15.24 in 2007, which

is good for the company because we retained the
earning of shareholders, and the common equity is also
of shareholders and by adding retained earning, the
equity of shareholders increases.
Additional Fund Needed

=> P.V=F.V/(1+i) ^n

=> 20987885 = 23331666 / (1+i) ^1

=> (1+i) ^n = 1.11

=> i = 11.16%

Sales increase by 11.16% and company is operating at 50% capacity

AFN= (A*/S) (change in S)-(L*/S) (change in S)-MS (1-DPO)

M=Profit Margin=Net Income available to common

stockholders/current sales

M=1687358 / 23331666 = 7.23

DPO=Current dividend/income available to common stockholders =

63 / 127 = 49.6

AFN=(4092/20988)(2343)-(4754/20988)(2343)-(0.0723)(23331)(0.504)

AFN=456.885-531.861 = -850.162

Since the calculated AFN is negative, this indicates that there is no need
to raise additional funds.