CORPORATE FINANCE

CORPORATE FINANCE

PRESENTED TO

CH. ABDUL KHALIQ BBA (FINANCE)

SUPERIOR UNIVERSITY, LAHORE MADIHA RASHEED FARYAL BATOOL 8206 8204

CORPORATE FINANCE

PRESENTED TO KHALIQ BBA (FINANCE)

CH. ABDUL

SUPERIOR UNIVERSITY, LAHORE

MADIHA RASHEED FARYAL BATOOL

8206 8204

CORPORATE FINANCE

BATA PAKISTAN LIMITED Bata Pakistan Ltd. was formed in Pakistan in 1942. It was a newly growing concern all over the world but in Pakistan it established its feet with in very short time. It was very tuff decision for the Bata International to start its business in a country that was newly established. But Batas decision was quite right because there was not so tuff competition in Pakistan at that time which helps them to make their foots more strong. Now Bata Pakistan is not only providing the quality shoe with in Pakistan but is also exporting its major portion of production all over the world. With in the country Bata is facing the competition with Service Industries ltd and other private companies. According to survey almost 89% of the market is covered by the other organizations and 6% by Service and 5% by the Bata Pakistan Ltd .Bata Pakistan Ltd. is producing almost 13000 million pairs of shoes within year but in year 2008 produces 13891 million pairs of shoes which shows the soundness of the organization and it strong footing in the Pakistan. Bata is still improving its business. MISSION STATEMENT OF BATA To be successful as the most dynamic, flexible and market responsive organization, with footwear as its core business BATA will provide its products and services to all the age groups in the community. Will also provide the finest quality through customer involvement

VISION STATEMENT OF BATA To grow as a dynamic, innovative and market driven domestic manufacturer and distributor, with footwear as our core business, while maintaining a commitment to the country, culture and environment in which we operate

Bata Today

CORPORATE FINANCE

Bata is one of the world leading footwear retailer and manufacturer with operations across 5 continents managed by 4 regional meaningful business units (MBUs). The MBU approach provides quality resources and support in key areas to the companies operating in similar markets such as product development, sourcing or marketing support. Each MBU is entrepreneurial in nature, and can quickly adapt to changes in the market place and seize potential growth opportunities. Bata's strength lies in its worldwide presence. While local companies are self- governing, each one benefits from its link to the international organization for back- office systems, product innovations and sourcing. Although Bata operates in a wide variety of markets, climates and buying power Bata companies share the same leadership points. Two important ones are product concept development and constant improvement of business processes in order to offer customers great value and the best possible service.

Bata today
Serves 1 million customers per day Employs more than 40,000 people Operates 5000 retail stores Manages a retail presence in over 50 countries

Runs 40 production facilities across 26 countries

ORGANISATION STRUCTURE Proprietor / Owner Manager Supervisor Employees

FINANCIAL ANALYSIS

CORPORATE FINANCE

A number of different approaches might be used in analyzing a firms financial performance in a particular period. To analyze the performance of BATA PAKISTAN LIMITED. I adopted following three method of RATIO ANALYSIS An index that relates two accounting numbers and is obtained by dividing one number by other Ratio Analysis is an important and age-old technique of financial analysis. It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of business. It provides data for inter firm comparison. Ratios highlight the factors associated with successful and unsuccessful firm. They also reveal strong firms and weak firms, over- valued and undervalued firms. It helps in Planning and forecasting. Ratios can assist management, in its basic functions of forecasting, planning, co-ordination, control and communication. Ratio analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in decision about their efficiency of otherwise in the past and likely performance in future. Ratios also helps in Investment decisions in the of investors and lending decisions in the case of bankers etc. Types of Ratios Following the main types of ratios that we are going to calculate in this assignment,

Liquidity Ratios Leverage Ratios Coverage Ratio Activity Ratios Profitability Ratios

LIQUIDITY RATIOS Liquidity ratios are used to measure a firms ability & solvency of the firm to meet short-term obligations. They compare short-term obligations to short-term resources available to meet these obligations. It consists of two ratios current & acid test ratio. Let us calculate these for Bata; Current Ratio Current ratio is the relationship between current assets and current liabilities. This Ratio is also known as working Capital ratio. It is calculated as Current ratio = Current Assets/ Current Liabilities Batas Current Ratio results Calculations Results 2008 1,225,784,000 / 1,046,257,000 1.17:1 2007 1,174,261,000 / 1,017,223,000 1.15:1 2006 1,038,542,000 / 843,973,000 1.23:1

Interpretation

CORPORATE FINANCE

Current ratio for Bata Company shows that the Bata has Rs. 1.17 to meet its obligations of Rs. 1. If we review the last year we will find that current ration of the Bata is continuously increasing which is a good sign. In 2007, it was 1.15. Whereas the industry ratio is 1.20:1 that is slightly high than Batas but still Bata is maintaining a good solvency and liquidity ratio. Quick or Acid Test Ratio Quick or Acid Test Ratio is the ratio of liquid assets to current Liabilities. True liquidity refers to the ability of a firm to pay its short-term obligations as when they become due. Quick Ratio is equal to Quick or Acid test ratio = Quick Assets/ Current liabilities Whereas quick assets = Current Assets Store & spare parts Stock in trade Acid test ratio for Bata Results Calculations Results Interpretation Bata is also maintaining a good acid test ratio as compared to industry ratio i.e. 0.71:1. In year 2008 Batas acid test ratio is 0.75:1 which is continuously increase from year 2007, in 2006 it was .051 than in 2007 it increases to .71:1 and now .75:1 which shows the managements efficiency during the operating year. LEVERAGE RATIOS Ratios that shows the extent to which the firm is financed by the debts Debt to Equity Ratio Debt to equity ratio indicates the relationship between the external equities or outsider finds and the internal equities or shareholder fund. It is calculated to assess the extent to which the firm is using borrowed money. Debt to equity is simply calculated as Debt to equity ratio = Total Debts / Shareholders equity Ratio for Bata Years Calculations Results 2008 1,125,244,000 / 363,318,000 3.09:1 or 76:24 2007 1,118,829,000 / 325,181,000 3.44:1 or 78:22 2006 1,038,542,000 / 843,973,000 1.23:1 or 55:45 2008 785,365,000 / 1,046,257,000 0.75:1 2007 729,630,000 / 1,017,223,000 0.71:1 2006 434,474,000 / 843,973,000 0.51:1

Interpretation According to prudential Regulation this ratio should be 1.5:1 or 60:40, which means the company,

CORPORATE FINANCE

should have the debts of Rs. 1.5 as against owner equity of Rs. 1. Equity ratio for the Bata in year 2008 is 3.09:1. This ratio in year 2007 was 3.44:1 and in 2006 it was 3.60: 1.Which means company in mostly relaying on external sources. But as we review the ratios of last three years we observe that this ratio is continuously decreasing. Debts to Total Assets Ratio The Debts to total assets Ratio tells us how much portion of assets is a debt. This ratio servers a similar purpose to debts to equity ratio. It highlights relative importance of debt financing to the firm by showing the percentage of the firms that is supported by debts financing. This ratio is calculated as Debts to Total Assets ratio = Total Debts / Total Assets Ratio for Bata Years Calculations Results Interpretation According to this ratio around 75% of total assets are supported by the debts finance or debts. Whereas the industry ratio is 73% Bata is going right according to the industry ratio; there is not so high difference in ratios. But this ratio is also slightly decreasing as we review the ratio of previous two year i.e. in year 2007 77% and in 2006 78 % of the total assets are financed by the debts. We can say that people and other financial institutions are very sure about the solvency of the firm and not hesitating to finance or make investment in Bata Pakistan Ltd. COVERAGE RATIO The Ratio that relate the financial charges of a firm to its ability to service, or cover them Interest Coverage Ratio Interest Coverage ratio is designed to relate the financial charges of a firm to its ability of pay/cover them from its earning. Interest Coverage ratio is calculated as Interest Coverage Ratio = Earnings before Interest & Tax / Financial charges Ratio for Bata Yearz Calculations Results Interpretation Coverage ratio shows that the firm has significant profit to pay its financial charges This ratio shows that Bata has Rs. 2.52 to pay off its financial charges of Rs. 1. This ratio was 1.98 2008 186,256,000 / 74,010,000 2.52:1 2007 142,296,000 / 71,861,000 1.98:1 2006 123815000 / 73,051,000 1.69:1 2008 1,125,244,000 / 1,046,257,000 0.75:1 or 75% 2007 1,118,829,000 / 1,453,625,000 0.769:1 or 77% 2006 1,078,368,000 / 1,377,805,000 078:1 or 78%

CORPORATE FINANCE

times in 2007 and 1.69 times in 2006. This ratio is also increasing continuously, in 2008 this ratio increased by 33% which is a high percentage. It is very important from the lenders point of view. It indicates number of times interest is covered by profit. It is an index of the financial strength of an enterprise and high ratio assure the lender a regular and periodical interest income. ACTIVITY RATIOS Activity ratios are also known as efficiency or turnover ratios, measure how effectively the firm is using its assets. Some of the aspects of activity analysis are closely related to liquidity analysis. In this session we will primarily focus on how effectively the firm is managing tow specific groups receivables and inventories and its total assets in general. Receivable Turnover Ratio Debtor turnover ratio indicates the velocity of debts collection of a firm. In simple words it indicates the number of times average debts are turned over during a year. Higher the value of debts turnover, more efficient is the management of debts or more liquid the debtors are and vice versa. Receivable turnover ratio is calculated as Receivable/debtors turnover ratio = Annual credit sale / Trade debtors Ratio for BATA Years Calculations Results Interpretation Above calculations for Bata shows, around 3.06 time debtors are turned over during the year. This ratio for Bata is declining, as we review previous years, in 2007 this ratio was 4.11 times and in 2006 it was 6.08 times which is not a good sign for a organization like Bata. The industry ratio is 3.51, which is above the turnover ratio for 2008. So management has to think about the recovery of its debts and make it frequent. Average Collection Period Debtor turnover ratio when calculated in term of days is known as receivable turnover in days. It represents the average number of days for which a firm has to wait before its debtors are converted in cash. It is calculated as A.C.P = No. of days in year / Receivable turnover ratio Ratio for Bata years Calculations Results Interpretation Batas average collection period is not much impressive in year2008 because it is showing continuous increase in days to wait before its debtors converted into cash and it is not a good sign because less the average collection period better for the company. In 2008 Average collection 2008 03/06/65 119 days 2007 04/11/65 89 days 2006 06/08/65 60 days 2008 2,065,502,000 / 674,128,000 3.06:1 2007 2,187,951,000 / 71,861,000 411:01:00 2006 2,007,224,000 / 330,089,000 6.08:1

CORPORATE FINANCE

period is 119, in 2007 it was 89 days and in 2006 it was 60 days. In the year 2008 the industry ratio is also less than the Batas. Management has to think seriously to reduce average collection period to improve its efficiency. Accounts Payable/Creditor Turnover Ratio This ratio is against to Debtors turnover ratio. It compares the creditors with the total credit purchase. It signifies the credit period enjoyed by the firm in paying off debts. In payable turnover ratio less the results better for the company. It is calculated as Payable Turnover ratio = Annual Credit Purchase / Creditors Ratio for Bata Years Calculations Results Interpretation Bata Pakistan Ltd. is quite efficient in its payable turnover ratio. In year 2008 the ratio is 2.265 times which means almost in year 2.265 time creditors are paid off. Industry ratio is 4.136 times. It means Bata Company is enjoying a healthy credit period. PROFITABILITY RATIOS Profitability ratios are of tow types --- those showing profitability in relation to sale and those showing profitability in relation to investment. To gather these ratios indicate the overall effectiveness of operation Gross Profit Margin Gross profit ratio, which is also called Profitability in relation to sales, is the ratio of gross profit to new sales expressed as a percentage. This ratio tells us the profit of the firm relative to sales after we deduct the producing the goods. It is an measure of the efficiency of the firm operation. Higher the gross profit ratio better it is. It is calculated as Gross Profit Margin = Gross Profit / Net Sales Ratio for Bata Yearz Calcualations Results Interpretation According to above calculation Gross Profit Margin for Bata is 33.3 % , which is increasing as we review the previous two years, 29.6 % in 2007 and 28.9 % in 2006. Industry ratio for 2008 is 24.07%. Batas G.P ratio is very good as compared to industry ratio and sill improving,. Net Profit Margin 2008 689,297,000 / 2,065,502,000 33 or 33% 2007 648,930,000 / 2,187,951,000 .296 or 29.6% 2008 581,463,000 / 2,007,224,000 289 or 28.9% 2008 867,677,000 / 383,414,000 2.265:1 2007 846412000 / 358,214,000 2.362:1

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The net profit margin is a measure of the firms profitability of sales after taking account of all expenses and income tax. This ratio also indicates performance during the financial year. Simply high the ratio better the firm performance and efficiency. It is calculated as Net Profit Margin = Profit after tax / Sales Ratio for Bata Years Calculations Results Interpretation Bat is also maintaining a good Net Profit margin ratio, which is 3.31% of sales. Whereas the industry ratio is 3.11%, less than the Batas company is not showing loss any of the last five years which shows companys strong financial position. Return On assets Return on investment is one of the most important ratios considered by the proprietors and investors. It compares the net profit after tax with Total Assets. Investor is much concerned about this ratio. Higher the ratio of ROA more secures the place considered for making investment. It is calculated as Return On assets = Net profit after tax / Total Assets x 100 Ratio for Bata Tears Calculations Results Interpretation In this special ratio Bata is quite consistent to rise at it was 2.57% in 1999 which increases to 3.20% in 2000 and now it reaches to 4.58% which is a huge increase and welcome one for Bata Pakistan Ltd. Management should have to maintain its policies and strategies, they have adopted during the year. 2008 68,377,000 / 1,492,022,000 *100 4.58% 2007 46,534,000 / 1,453,625,000 *100 3.20% 2006 34,474,000 / 1,377,805,000 *100 2.57% 2008 68,377,000 / 2,065,502,000 * 100 0.031 or 3.31% 2007 46,534,000 / 2,187,951,000 * 100 0.021 or 2.10% 2006 33,954,000 / 2,007,224,000 * 100 0.0169 or 1.69%

Return on Equity Return on equity is another measure of overall firms performance. It compares net profit after tax to the equity that share holders have invested in firm. This ratio tells the earning power on shareholders book value. High the return on equity often reflects the firms acceptance of strong investment opportunities and effective expense management. It is calculated as Return On Equity = Net profit After Tax / Shareholders Equity x100

CORPORATE FINANCE

Ratio for Bata Years Calculations Results Interpretation Bata Company is continuously improving its Return on equity as it was 11.33 in 2006 ,14.31% in 2007 and in year 2008 it increases to 18.82%, which is a positive sign for a organization. It shows a strong position of firm. It will be helpful for the company to create in investment within the company from outsiders. Total Asset Turn over Total Asset turn over shown the sale revenue per dollar of assets invested. This total asset turnover ratio tells us the relative efficiency with which firm utilizes its total assets to generate sale. It is calculated as Total Asset Turnover = Net Sales / Total Assets x 100 Ratio for Bata Years Calculations Results Interpretation Bata is also showing efficiency in Total assets turn over because in 2008 Total Asset Turnover ratio is 1.38:1, which Means Company is generating sale of Rs. 1.38 out of every Rs.1 invested in assets. Industry ratio is exactly equal to the Batas ratio. This year ratio is decreased as compare it to its last year ratio i.e. 1.50:1 in 2007 and 1.46:1 in 2006. It is not a good sign and management has to investigate the reasons for the decrease in this ratio to avoid its effect on coming year. 2008 2,065,502,000 / 1,492,022,000 1.38:1 2007 2,187,951,000 / 1,453,625,000 1.50:1 2006 2,007,224,000 / 1,377,805,000 1.46:1 2008 68,377,000 / 363,318,000 *100 18.82% 2007 46,534,000 / 325,181,000 *100 14.31% 2006 33,954,000 / 299,437,000 *100 11.33%