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Financial accounting Final project

Group Members: Aruba Anwar

Fanny Fayaz

Mahnoor Turk

Warda Shams

Submitted To: Ms. Anum Tariq

Major: BBA (Hons.)

Semester: 8

Section: B

Date: 13-07-2020

Project Topic: Financial Analysis of Packages LTD


Packages Limited is a Pakistani packaging company based in Lahore, Pakistan. The company
was founded in 1956. The company is known for their tissue brand, Rose Petal. Packages
Limited was founded as a joint venture between the Wazir Ali Group and Swedish companies
Akerlund and Rausing of which 73% shares were owned by Wazir Ali Group.

‘The long and rich tradition of packages has its roots in humble beginning’
.

Over 60 years of being market leaders in packaging solutions.


We’ve come a long way to become one of the leading packaging companies in the region.
But it all began with a dream to change the way consumers view our packaged products
 Mission Statement:
To be the market Leaders we serve our clientele by providing quality products and services,
while encouraging feedback to ensure even higher standards. To be a Company that relies on
continuous enhancements of its technological competence to seek innovative solutions for
customer needs. To be an organization that attracts and retains outstanding professionals by
maintaining a culture of openness and innovation, by promoting individual growth and by
rewarding initiatives and performance. To be a company that offers profitable growth for its
investors by bringing together its people, management systems, technology and opportunities. To
be a company that strives to serve the society by setting the highest possible standards for
corporate ethics.

 Vision :
We position ourselves to be regional player of quality packaging and consumer.

Since 1982, Packages Limited has a joint venture with Tetra Pak International in Tetra Pak Pakistan
Limited to manufacture paperboard for liquid food packaging and to market Tetra Pak packaging
equipment. In 1996, a joint venture agreement was signed with Printcare (Ceylon) Limited for the
production of flexible packaging materials in Sri Lanka. This project Packages Lanka Private Limited
commenced production in 1998. Packages Limited now owns 79% of this company.
To be a company with combine its people, technology, management systems and market
opportunities to achieve profitable growth while providing fair returns to its investors. To be a
company that endeavors to set the highest stand Packages Limited is Pakistan’s leading
packaging solution provider. Its job is to deliver high quality packaging in the most efficient,
profitable and sustainable way. They are primarily a “business to business” company and their
customer base includes some of the world’s best-known branded consumer products companies
across industries. It is also a leading manufacturer of tissue paper products. Leadership position
in tissue products is a result of their ability to offer products manufactured under highest
standards of hygiene and quality to meet the household and cleanliness needs of their consumers.
They provide a complete range of tissue paper products that are convenient, quick and easy to
use.
Packages Limited has built a reputation for conducting its business with integrity in accordance
with high standards of ethical behavior and in compliance with the laws and regulations that
govern our business. This reputation is among our most valuable assets and ultimately depends
upon the individual actions of each of our employees all over the country.
Packages Limited code of conduct has been prepared to assist each of us in our reports to not
only maintain but enhance this reputation. It provides guidance for business conduct in a number
of areas and references to more detailed corporate policies for further direction. The adherence of
all employees to high standards of integrity and ethical behavior is mandatory and benefits all
stakeholders including our customers, our communities, our shareholders and ourselves.
The Company carefully checks for compliance with the Code by providing suitable information,
prevention and control tools and ensuring transparency in all transactions and behaviors by
taking corrective measures if and as required. Packages Limited Code of Conduct applies to
affiliates, employees and others who act for us countrywide, within all sectors, regions, areas and
functions.
The following displays the financial ratios of Packages Ltd for the years 2015
to 2019.
Financi Years
al
Ratios
Formula 2017 2018 2019
Liquidity Ratios

Current Assets/
Current Liabilities
Current 1.52 1.71 1.67
Ratio

(Current Assets –
inventory) / Current
Quick 1.07 1.20 0.67
Liabilities
Ratio
Activity Ratios

Inventor CGS / Inventory 7.47 7.35 5.57


y
turnover
Account Sales/ Account 5.28 5.20 5.44
Receivabl Receivables
e
Turnover

Inventor 48.8 49.6 65.5


(Inventory/CGS)×3
y days days days
65
turnover
in days

Average Account 70
collectio Receivables/ Daily 69 days 67
Credit Sales
n period days days
in days
Financing Ratios
35.6% 27.2% 23.3%
Debt Total Assets/Total
ratio Liabilities

Debt to Total Liabilities/


equity Common 93% 95% 96%
Stockholder’s
ratio
Equity

Interest
coverage EBIT/Interest 6.43 17.96 7.87
ratio

Profitability Ratios

Gross Gross Profit/ Sales 21% 20% 16%


profit
margin

Operatin Operating 41.34 39.99 16.64


g profit Profit/Sales % % %
margin

Net Net income after 14.41 12.72 8.55%


tax/ Sales
profit % %
margin

Return Net income after 3.92 4.07 3.67


sales/ total sales
on total
assets
(ROA)

Return Net income after


tax/common stock
on total 10.60 9.47 4.85
holder equity
equity
(ROE)
Graphs and Ratios Interpretations

1. LIQUIDITY RATIOS

Current Ratio

1.75

1.7

1.65

1.6

1.55

1.5

1.45

1.4
2017 2018 2019

 The current ratio is a liquidity ratio that measures a company's ability to pay short-term


obligations or those due within one year. It tells investors and analysts how a company
can maximize the current assets on its balance sheet to satisfy its current debt and other
payables. The current ratio for packages limited from the year 2017 to 2019 is 1.52, 1.71
and 1.67.
 Quick ratio

Quick Ratio

1.2

0.8

0.6

0.4

0.2

0
2017 2018 2019

The quick ratio or acid test is a calculation that measures a company's ability to meet its short-
term obligations with its most liquid assets. Packages limited quick ratio from 2017 to 2019 is
1.07, 1.20 and 0.67. There is a slight increase in the ratios.

2. ACTIVITY RATIOS

 Inventory Turnover
Inventory turnover

8
7
6
5
4
3
2
1
0
2017 2018 2019

Inventory turnover is a ratio showing how many times a company has sold and
replaced inventory during a given period. A company can then divide the days in the period by
the inventory turnover formula to calculate the days it takes to sell the inventory on hand.
Inventory turnover of packages limited from 2017 to 2019 is 7.47, 7.35 and 5.57 which is slight
decrease in the inventory turnover.

 Average collection period

Account Receivable Turnover

5.45
5.4
5.35
5.3
5.25
5.2
5.15
5.1
5.05
2017 2018 2019

The average collection period is calculated by dividing the average balance of accounts


receivable by total net credit sales for the period and multiplying the quotient by the number of
days in the period. Average collection periods are most important for companies that rely heavily
on receivables for their cash flows. Average collection period for packages limited from year
2017 to 2019 is 69 days, 24 days and 67 days.

 Average payment Period

Inventory turnover in days

70

60

50

40

30

20

10

0
2017 2018 2019

Average payment period is the average amount of time it takes a company to pay off credit
accounts payable. Many times, when a business makes a purchase at wholesale or for basic
materials, credit arrangements are used for payment. These are simple payment arrangements
that give the buyer a certain number of days to pay for the purchase. Average payment period for
packages limited from 2017 to 2019 is 29 days, 45 days and 43 days.

 Total Asset Turnover


Average collection period in days

70
69.5
69
68.5
68
67.5
67
66.5
66
65.5
2017 2018 2019

The asset turnover ratio measures the value of a company's sales or revenues relative to the value
of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a
company is using its assets to generate revenue. Total asset turnover for packages limited from
2017 to 2019 is 0.27, 0.27 and 0.30, slightly increased in 2019.

3. Debt Ratios:

 Debt Ratio

Debt ratio

40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2017 2018 2019

The debt ratio is a financial ratio that measures the extent of a company’s leverage. The debt
ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It
can be interpreted as the proportion of a company’s assets that are financed by debt. Debt ratio
for packages limited from 2017 to 2019 is 35.6%, 27.2% and 23.3% which decreases over the
time.

 Debt to equity ratio

Debt to equity ratio

96%
96%
95%
95%
94%
94%
93%
93%
92%
92%
2017 2018 2019

The debt-to-equity (D/E) ratio is calculated by dividing a company’s’ total liabilities by its


shareholder equity. These numbers are available on the balance sheet of a company’s’ financial
statements. Debt to equity ratio for packages limited from 2017 to 2019 is 93%, 95% and 96%, it
increased over the time.

 Interest coverage ratio


Interest coverage ratio

18
16
14
12
10
8
6
4
2
0
2017 2018 2019

The interest coverage ratio is used to determine how easily a company can pay
their interest expenses on outstanding debt. The ratio is calculated by dividing a company's
earnings before interest and taxes (EBIT) by the company's interest expenses for the same
period. Interest coverage ratio for packages limited from 2017 to 2019 is 6.43, 17.96 and 7.87.

1. PROFITABILITY RATIOS:

 Gross profit margin

Gross profit margin

25%

20%

15%

10%

5%

0%
2017 2018 2019

Gross profit margin is a metric analysts use to assess a company's financial health by calculating
the amount of money left over from product sales after subtracting the cost of goods sold
(COGS). Sometimes referred to as the gross margin ratio, gross profit margin is frequently
expressed as a percentage of sales. Packages limited gross profit margin from 2017 to 2019 is
21%, 20% and 16%.

 Operating profit margin

Operating profit margin

45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2017 2018 2019

Operating Profit Margin is a profitability or performance ratio that reflects the percentage of
profit a company produces from its operations, prior to subtracting taxes and interest charges. It
is calculated by dividing the operating profit by total revenue and expressing as a percentage. The
margin is also known as EBIT (Earnings before Interest and Tax)  Margin. Operating profit margin
for packages limited from 2017 to 2019 is 41.34%, 39.99% and 16.64%.
 Net profit margin

Net profit margin

16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2017 2018 2019

Net profit margin is the percentage of revenue remaining after all operating expenses, interest,
taxes and preferred stock dividends (but not common stock dividends) have been deducted from
a company's total revenue. Net profit margin of packages limited from 2017 to 2019 is 14.41%,
12.72% and 8.55%.

 Return on Asset

Return on total assets (ROA)

4.1

3.9

3.8

3.7

3.6

3.5

3.4
2017 2018 2019
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
ROA gives a manager, investor, or analyst an idea as to how efficient a company's management
is at using its assets to generate earnings. Return on assets is displayed as a percentage. Return
on asset for packages limited from 2017 to 2019 is 3.92 4.07 and 3.7.

 Return on Equity

Return on total equity (ROE)

12

10

0
2017 2018 2019

Return on equity (ROE) is a measure of financial performance calculated by dividing net income


by shareholders' equity. Because shareholders' equity is equal to a company's assets minus its
debt, ROE is considered the return on net assets. Packages limited return on asset from 2017 to
2019 is 10.60, 9.47 and 4.85.
Overall Analysis of Ratios
The liquidity ratios highlight the company ability to pay off its short term debt obligations.
Considering both, the current and quick ratio of packages limited, it is obvious that the firm is in
good shape when it comes to paying off its short term debt and it will not face any liquidity issue
in the coming future. The current ratio for the year 2017 is 1.52, it slightly increases in 2018 by
1.71 and then in 2019 the ratio was 1.67. Despite the slight decrease in current ratio of packages
limited, the firm is still stand strong with regards to it liquidity. Similarly, the quick ratio of the
packages limited in the year 2017 and 2018 was above 1, however in 2019 the it decreases from
1.20 to 0.67. it indicates that if the firm is not able to sell its inventory it might not be able to
meet its short term debt obligations.

The activity ratios of the packages limited tell us how efficiently a company is using its assets in
order to generate revenue. The inventory turnover of the packages limited is very high in 2017
and 2018 that is 7.47 and 7.35 respectively, it either indicates that the firm is efficiently selling
their products or the inventory is insufficient for a given period of time. the inventory turnover in
2019 is 5.57, indicating a decrease in ratio as compared to previous years, this ratio again
indicated either poor sales or increase in inventory stock as compared to previous years. Looking
at the balance sheet of the packages limited, there is an increase in the stock in 2019 as compared
to previous years. This increase in stock resulted into decrease in inventory turnover. The same
trends were identified in inventory turnover in days, for the year 2017 and 2018 the inventory
turnover in days is 48.8 days and 49.6 days respectively, while in 2019 the days increased to 65.5
days (due to increase in inventory stock). Another activity ratio is average receivables
turnover, it tells how efficiently the company credit facilities are and how quickly they collect
funds from their creditors. The average collection turnover of the packages limited in 2017, 2018
and 2019 is 5.28, 5.20, and 5.57 respectively, this indicates the average collection period is high,
showing efficiency in collecting payments from the customers, moreover, it also indicates the
company’s terms for granting credit facilities is very strong. The same trend is identified in
average collection period.

The financing ratios tells the financial position of the company. The debt ratio of the packages
limited indicates how much debt is being financed by the firm in order to invest in the assets.
The debt ratio of the firm decrease over time indicating the firm is acquiring less debt finance
over time. The debt to equity ratio of the packages limited in 2017 was 93%, this indicated that
the company use more equity than debt to finance its assets. Similarly, in 2018 the debt to equity
ratio was 95% which is less than 100%, indicating that the company equity is more than its debt.
In 2019 that ratio slightly increases to 96%, despite the increase the proportion of equity
financing is still greater than the debt financing which is favorable for the company. The interest
coverage ratio is also an important ratio that is mostly used by investors to determine whether
the firm is financially able to pay its interest expense. The interest coverage ratio of the Packages
limited in 2017 was 6.43, indicating that the firm is able to pay back interest obligations almost 6
times over. In 2018 this ratio greatly increased to 17.96 indicating either low interest expense or
high ability of the firm to pay its interest expense. in 2019 the ratio decreases from 17.96 to 7.86,
this huge decrease in the ratio can be linked to the balance sheets liabilities. In 2019 there was an
increase in liabilities of the firm which resulted in the lower interest coverage ratio when
compared to the ratio of 2018.

The profitability ratios of any firm indicates the ability of the company to generate profits against
factors such as revenue, operating cost, shareholder’s equity and assets of the balance sheet. The
packages limited gross profit margin in 2017 and 2018 was 21% and 20%. This indicates that
the firm needs to cut down the cost of goods sold and needs to be more efficient in managing the
cost of sales, so that more funds are available to cover the operating, tax and interest expenses of
the company. In 2019 the gross profit margin further declined to 16%. With regards to the
operating profit margin, in 2017 and 2018 the packages limited percentage was 41.34% and
39.99%. This highlights that firm operating expenses is under control or the firm is efficiently
handling their operating expenses, however, in 2019 the percentage declined to 16.64%,
indicating a huge increase in the operating expenses of the company. Net profit margin of the
firm indicated how much net income is generated with regards to the total revenue after cutting
down the total expenses. In 2017 the net profit margin of the packages limited is 14.41%, these
percentages declined in 2018 by 12.72%, indicating the less profit generating with respect to the
revenue. This may be due to increase in operating expenses, interest expenses or tax expenses. In
2019 the percentage further declined to 8.55%. This declined in net profit margin can also be
lined to the decline in the gross profit margin and operating profit margin in 2019 with respect to
previous year. It indicated that the firm expenses are increasing each year which is eventually
effecting the total net profit. ROA is another ratio to measure the profitability of the firm against
the assets used by the company to generate revenue. This measures indicate how efficiently a
firm is using its assets. Overall ROA of the packages is considered to be healthy or good as it is
greater than 1. In 2017 the ROA was 3.92, his ratio increased in 2018 by 4.07, however, in 2019
the ratio again declined to 3.67. Despite that the ratio in 2019 was lowest as compared to 2017
and 2018 but overall the company is efficiently using its assets to generate revenue. ROE is a
measures usually used by the shareholders in order to determine how efficiently a firm is using
shareholders’ investment in order to generate profits. Overall ROE of the packages limited is in
good shape, however, as compared to 2017 and 2018, in 2019 the ROE greatly declined to 4.85
from 9.47.

Hence, the liquidity ratio of the Packages limited is in good shape as well as the financing ratios
and activity ratios. However, the profitability ratios indicate decline in the net income or profits
of the company.

Conclusion:

In conclusion, Packages is a very significant company. Though its performance has deteriorated
in the past significantly and it has witnessed a loss, but they managed to come out of those crises
and Packages still remains a viable investment. Its problems lie in the decreasing the
profitability ratios indicate decline in the net income or profits of the company.It should focus
on improving these to sustain profits. As for the net profits, we can expect financing costs not to
increase drastically again as the company has entered into a cross currency and interest rate swap
on its loan from the International Finance Corporation (IFC). The company aims to retain its
market leadership through its enhanced productivity and cost efficiency

Recommendations:

 Packages limited needs to reduce their inventory turnover days.

 Through stock control they should streamline the business and improve their cashflow
because lessor the inventory lessor cash will be kept tied.
 Packages Limited should shift to just in time management system in order to improve their
profitability and inventory turnover.

 They need to cut down their inprofiable services and goods and in order to do that they need
to use BCG Matrix to determine which profitable and which are not.

 They should expand to new market and new customers to increase profitablity.

 They need to revise their pricing strategyand use Price Elasticity and demand to determine
whether to reduce the prices or to slightly increase them.

 They should reduce their business overall direct cost. In order to do that they need to bargain
with their suppliers and negotiate the prices because low cost raw material will reduce their
direct cost and they should alsoo cutt of the unnecessary purchases.