PSO’S FINANICIAL ANALYSIS (2005 - 2009)

PSO is following the GAAPs for the preparation of its financial statements:

 Principle of regularity: conformity to enforced rules and laws.

 Principle of consistency: when a business has once fixed a method for the
accounting treatment of an item, it will enter all similar items that follow in
exactly the same way.

 Principle of sincerity: the accounting unit is reflecting in good faith the

reality of the company's financial status.

 Principle of the permanence of methods: This principle aims at allowing

the coherence and comparison of the financial information published by the
company.

 Principle of non-compensation: Management is showing the full details of

the financial information and not seeks to compensate a debt with an asset,
revenue with an expense, etc.

 Principle of prudence: This principle aims at showing the reality "as is" and
it is also being followed. Etc.

Pakistan State Oil Limited:

Horizontal analysis
(taking 2005 as a base year)
Current Assets: 2005 2006 2007 2008 2009
Stores, spares and loose tools 100 95.77 97.95648 88.70626 85.8945
Stock-in-trade 100 136.85 143.6215 302.9644 197.7244
Trade debts 100 174.34 200.2623 499.254 1185.524
Loans and advances 100 127.88 171.619 185.8024 196.0229
Trade deposits and short term prepayments
100 191.97 218.1227 55.28185 75.98949
Other receivables 100 139.22 152.0679 151.3978 123.6414
Short term investments 100 0.00 0 0 0
Taxation
Cash and bank balances 100 98.80 79.20534 157.0625 150.0111
Total Current Assets 100 142.68 153.4657 284.474 340.473
Fixed Assets
Property, plant and equip: 100 92.27 98.77747 91.97517 86.13747
Intangibles 100 107.03 87.25518 72.93757 47.61385
Long term investments 100 141.47 129.0266 116.5366 92.91158
Long term loans, advances and receivables 100 81.90 81.58935 62.07108 52.72102
Long term deposits and prepayments 100 88.17 62.67699 75.21467 79.54794
Deferred tax 100 327.32 321.4983 326.5488 4035.011
Total Fixed Assets 100 104.11 105.6208 97.04335 127.2916
Total Assets 100 134.15 142.8796 243.0036 293.305
Liabilities & Stockholders’ Equity
Current Liabilities
Trade and other payables 100 141.83 160.6467 314.335 426.9986
Provisions 100 103.06 91.28711 96.27287 91.28711
Accrued interest / mark-up 100 188.87 206.4342 340.9173 870.3773
Short term borrowings 100 158.97 188.3941 228.5705 387.6986
Taxation-net 100 143.65 5.162512 54.05938 0
Total Current Liabilities 100 143.62 156.835 286.0934 396.845
Longe Term Liabilities
Long-term deposits 100 110.19 113.7947 123.613 126.593
Retirement & other Benefits 100 117.47 124.2032 118.9214 126.3908
Total Longe Term Liabilities 100 115.01 120.6875 120.5061 126.4591
Stockholders' Equity
SHARE CAPITAL 100 100.00 100 100 100
RESERVES 100 120.65 121.4433 184.7792 121.011
Total Stockholders' Equity 100 118.63 119.347 176.4912 118.957
Total liabilities & Shareholder's equity 100 134.15 142.8796 243.0036 293.305

Pakistan State Oil Limited

 PROFIT AND LOSS ACCOUNTs
(taking 2005 as a base year)
INCOME STATEMENT 2005 2006 2007 2008 2009

Net sales /revenue 100 140.3505 164.5649 233.0682 288.3224

Less: Cost of Goods Sold 100 141.4 169.7783 234.0819 306.7487

Gross Profits 100 125.1769 89.18329 218.4119 21.89756

other operating income 100 73.46221 98.80966 107.895 112.155

Less: Operating Expenses:

Transportation costs 100 116.7671 117.8948 107.8581 163.9719

Distribution and marketing expenses 100 106.6963 118.4004 140.3224 169.5473

Administrative expenses 100 105.9929 111.2437 129.9592 130.4867

Depreciation 100 107.5517 112.824 114.9795 117.2974

Amortisation 100 332.8808 392.3603 446.4844 492.6037

Other operating expenses 100 265.3561 81.45507 361.5423 430.7051

Total Operating Expenses 100 134.789 110.457 170.5316 198.6767

Add: Other income

(58.1078
profit/Loss from operation 100 117.3639 82.83535 233.9353 )

Less: Interest Expense 100 238.5097 312.413 369.005 1681.163

(127.988
100 112.4965 73.61136 228.5085 )

Share of profit of associates

(123.091
Net Profits Before Taxes 100 123.757 77.19137 231.6985 )

Less: Taxes 100 110.0722 68.7577 207.0384 129.1465

(119.326
Net Profit/Loss After Taxes 100 132.2659 82.43522 247.0315 )
Pakistan State Oil Limited
 Vertical ANALYSIS
Current Assets: 2005 2006 2007 2008 2009
Stores, spares and loose tools 0.249597 0.178185 0.171121 0.091113 0.073095
Stock-in-trade 39.35029 40.14426 39.55461 49.05991 26.52703
Trade debts 12.9829 16.87298 18.19702 26.67353 52.47619
Loans and advances 0.407679 0.388626 0.48968 0.311714 0.272462
Trade deposits and short term
prepayments 1.3882363 1.9866899 2.1193068 0.3158154 0.3596644
Other receivables 19.802 20.55065 21.07541 12.33718 8.34744
Short term investments 0.019272 0 0 0 0
Taxation 0 0 0 0 0.462534
Cash and bank balances 3.674276 2.706191 2.036835 2.374825 1.879212
Total Current Assets 77.87424 82.82758 83.64399 91.16409 90.39763
Fixed Assets
Property, plant and equip: 15.50719 10.66636 10.72064 5.869363 4.554133
Intangibles 0.27653 0.220639 0.168874 0.083001 0.044891
Long term investments 4.431091 4.672993 4.00147 2.125007 1.403657
Long term loans, advances and
receivables 1.4714303 0.8984099 0.8402389 0.3758516 0.2644868
Long term deposits and prepayments 0.201046 0.13214 0.088193 0.062228 0.054526
Deferred tax 0.238473 0.581879 0.536595 0.32046 3.28068
Total Fixed Assets 22.12576 17.17242 16.35601 8.835911 9.602373
Total Assets 100 100 100 100 100
Liabilities & Stockholder’s Equity
Current Liabilities
Trade and other payables 49.30458 52.12966 55.43559 63.77748 71.77847
Provisions 1.441899 1.107727 0.921243 0.57125 0.448771
Accrued interest / mark-up 0.122207 0.172059 0.176566 0.171448 0.362648
Short term borrowings 9.198623 10.90078 12.12886 8.652275 12.15899
Taxation-net 2.569915 2.752003 0.092856 0.571712 0
Total Current Liabilities 62.63722 67.06223 68.75512 73.74416 84.74888
Long Term Liabilities
Long-term deposits 1.290761 1.060296 1.028011 0.656595 0.557104
Retirement & other Benefits 2.530571 2.215941 2.199789 1.238414 1.090472
Total Long Term Liabilities 3.821332 3.276237 3.2278 1.895009 1.647576
Stockholders' Equity
SHARE CAPITAL 3.279028 2.444387 2.294958 1.349374 1.117958
RESERVES 30.26242 27.21715 25.72213 23.01145 12.48559
Total Stockholders' Equity 33.5414 29.6615 28.0171 24.3608 13.6035
Total liabilities & Shareholder's
equity 100 100 100 100 100

Pakistan State Oil Limited

Vertical Analysis
 PROFIT AND LOSS ACCOUNT

INCOME STATEMENT 2005 2006 2007 2008 2009

Net sales /revenue 100 100 100 100 100

Less: Cost of Goods Sold 93.53125 94.2306 96.49436 93.93803 99.50871

Gross Profits 6.468751 5.769396 3.505636 6.061968 0.49129

other operating income 0.60909 0.31881 0.365716 0.281968 0.236931

Less: Operating Expenses:

Transportation costs 0.147418 0.122647 0.105611 0.068221 0.083838

Distribution and marketing expenses 1.099367 0.835753 0.790968 0.661891 0.64648

Administrative expenses 0.415376 0.313693 0.280789 0.231615 0.187988

Depreciation 0.458033 0.350994 0.314023 0.225961 0.18634

Amortization 0.005026 0.011921 0.011984 0.009629 0.008587

Other operating expenses 0.436419 0.825123 0.216016 0.676987 0.651937

Total Operating Expenses 2.561639 2.460131 1.71939 1.874303 1.76517

Add: Other income 0 0.148463 0.121313 0.06337 0.126765

profit/Loss from operation 4.516201 3.776538 2.273275 4.533003 (0.91018)

Less: Interest Expense 0.174444 0.296447 0.331167 0.276188 1.017154

4.341758 3.480091 1.942108 4.256816 (1.92734)

Share of profit of associates 0 0.003483 0.000945 0.000594 0.000737

Net Profits Before Taxes 4.341758 3.828436 2.03656 4.31624 (1.85359)

Less: Taxes 1.664594 1.305485 0.695493 1.478687 0.745612

Net Profit/Loss After Taxes 2.677164 2.522951 1.341068 2.837554 (1.10798)

Pakistan State Oil Limited

 Overview of Ratio Analysis

Ratios 2005 2006 2007 2008 2009

Liquidity Ratio

Current Ratio 1.243258 1.235085 1.216549 1.236221 1.066653

Quick Ratio 0.615033 0.636473 0.641252 0.570949 0.753645

Day's sales in receivable ratio 35.35424 34.47292 30.85489 45.95682 24.24507

Day's sales in inventory ratio 37.79939 36.58358 31.97585 48.92248 24.36477

Operating cycle 73.15363 71.0565 62.83074 94.8793 48.60984

Leverage Ratio

Time Interest Earned 25.88918 12.73934 6.864436 16.41277 (0.89483)

Debt Ratio 0.664586 0.703385 0.719829 0.756392 0.863965

Debt-to-Equity 1.981386 2.37137 2.569251 3.104951 6.351024

Profitability Ratio

Net profit Margin 0.026772 0.02523 0.013411 0.028376 (0.01108)

Total Asset Turnover 4.062555 4.250482 4.67914 3.896455 3.993541

Return on Assets 0.108761 0.107238 0.06275 0.110564 (0.04425)

Operating Incom Margin 0.045162 0.037765 0.022733 0.04533 (0.0091)

Return on Total Equity 0.324259 0.361537 0.223972 0.45386 (0.32526)

Gross Profit Margin 0.064688 0.057694 0.035056 0.06062 0.004913

INTERPRETATIONS OF RATIO’S

CURRENT RATIO:
CURRENT RATIO= Current Assets
Current Liabilities

Current Ratio shows the degree to which a firm can cover its current liabilities with
its current assets. In our case, Current ratio is more than one in 2005,2006,2007,2008 &2009
which is good sign for the company but we observe a decline in current ratio from the year 2008
owing to the large increase in the amount of current liabilities form the year 2005 to 2009. This
is a bad sign. Although there is an increase in the current assets but less than the current
liabilities. More specifically, short term borrowing has increased to 442% greater as compared to
the previous years, but in spite of that the current ratio has decreased from year 2005 to 2009.
Still, the company has the potential to pay its current liabilities with its current assets because its
current ratio is still greater than one.

QUICK RATIO:

QUICK RATIO = current assets-Inventory

Current Liabilities
The inventory cost has been continuously decreasing from year 2005 to 2009 and hence Quick
ratio of Pakistan State Oil company has been continuously increasing except for the year 2008
where the inventory cost increased up to the 49% causing a decline in the Quick Ratio. In the
year 2009 the quick ratio is maximum- 0.75 - because in this year the inventory cost came down
up to 26%. We can conclude that the firm has a favorable Quick ratio and it can easily pay its
current liabilities.

DAY'S SALES IN RECEIVABLE RATIO:

DAY'S SALES IN RECEIVABLE RATIO = Gross Receivable

Net Sale / 365

This is the general relationship between the gross receivables and the net sales of the year. This
ratio explains how efficiently the company is managing its receivables and it shows the
relationship between the gross receivables and the net sales of the year. It is ideal when this
ratio is low. In our case we see a fluctuation in this ratio. From 2005 to 2009 the average days
sales account receivable decreases which is a good sign but when we look at the figure of 2008
this ratio increases from 30days to 45 days but again decrease to 24 days in 2009. Hence we
can say that the firm is working efficiently and monitoring its credit sale properly due to which
this ratio is constantly decreasing. Therefore, there is less chance of bad debt.

DAY'S SALES IN INVENTORY RATIO:

DAY'S SALES IN INVENTORY RATIO = Ending Inventory

Cost of Goods Sold / 365

This ratio shows a relationship between the inventory and the cost of goods sold and that how
often the company places an order for the inventory. Inventory is taken from the balance sheet
of the firm while the cost of goods sold is obtained from the income statement of the
organization. When we compare it with the previous years we see that in 2009 the company is
placing fewer orders than the previous years. It means there is a decreasing trend from 2005 to
2009 except for the year 2008 because in that year the inventory had increased more than
double but in 2009 this ratio had again decreased dramatically which is a good sign.
OPERATING CYCLE:

OPERATING CYCLE= Account Receivable in Days + Inventory Turnover in days

This ratio indicates how many days are required to sell the inventory and receive cash from
customers. This ratio is favorable if it is low. When we compare operating cycle with the
previous years we find that there is a decreasing trend in the operating cycle from 2005 to 2009
except for year 2008 in which operating cycle ratio had increased from 73% to 98% as in this
year the Days in inventory turnover ratio and days sales account receivable had increased
dramatically and there was also an increase in the operating cycle ratio. We see a declining
trend in this ratio in 2009.
TIME INTEREST EARNED:

Recurring Earnings, Excluding Interest Expense, Tax

Expense, Equity Earnings, and Minority Earning
TIME INTEREST EARNED= Interest Expense, Including Capitalized Interest

This ratio shows how many times a firm is able to pay the amount of interest of loan which it
borrowed for the annual earning. An increasing trend in this ratio is favorable for the business
and attracts the investors. When we look at the time interest earned ratio of pso from
2005 to 2009, there is a decreasing trend as the cost of goods sold increased due to increase in
prices of petroleum in the international market. Moreover, the EBIT decreased in the year
2009, the ratio turned negative which is not a good sign for the company from investor point of
view.

DEBT RATIO:
DEBT RATIO = Total Liabilities / Total Assets

This ratio indicates the firm long term debt paying ability and it also indicates how many assets
are financed by creditors and furthermore how much creditors are protected in case of solvency.
The creditors are not well protected and the company is not in a position to apply for new long
term debt due to poor long term debt paying ability. The lower this ratio, the better for the firm.
If we look at the trends of this ratio from 2005 to 2009 there is an increasing trend, indicating
that the company has acquired more debt and more assets are financed through debt.

DEBT-TO-EQUITY:

DEBT-TO-EQUITY = Debt / Equity

 This ratio determines the long term debt paying ability of firm by comparing total debt with
share holder’s equity. It also shows how well creditors are protected in case of solvency. As far
as long term debt paying ability is concerned, the lower this ratio the better is the company’s debt
position. When we look at the Debt to Equity ratio of PSO there is an increasing trend from
2005 to 2009 which implies that the long term debt paying ability of PSO is decreasing from
2005 to 2009 and creditors are not really protected in case of solvency.

NET PROFIT MARGIN:

NET PROFIT MARGIN = Net Income

 Net Sales

This ratio shows a general relationship between net profit and sales of the year. The higher this
ratio, the more the profit and the better for the firm. This ratio is mainly concerned with the
income statement of a business. When we compare observe this ratio from 2005 to 2009, we see
that the net profit margin has declined, which is a good sign. Due to high cost of goods sold and
increased prices of crude oil in the international market for the past few years, it has become very
difficult to control the increase in cost of goods sold.

Total Asset Turnover:

Total Asset Turnover = Net Sales

Average Total Assets
This ratio shows the relationship between the net sales and the average total assets and that
how much the company is generating sales by utilizing the assets of a firm. Net sale is a part of
the income statement of the company while the average total assets are related to the balance
sheet of the firm. When we compare this ratio from 2005 to 2009 we observe that this ratio is
increasing from 2005 to 2007, decreasing in 2008 and again increasing in 2009 which is
favorable for PSO owing to efficient use of assets. Hence when sales increase then this ratio
alsoincreases.

RETURN ON ASSETS:

Return on Assets = Net Income

Total Assets
 This ratio gives a general relationship between net income and the average total assets of the
company. Net income is obtained from the income statement of the firm while the average
total assets are a part of the balance sheet of the firm. This ratio decreases from 2005 to 2009
except for 2008 which is harmful for the company. When we compare this ratio with the
previous year ratio we find that the company is going to decline because this ratio is very low. It
has been observed that the operating expenses are increasing due to which the net income is
decreasing.