Bata Shoez - Financial Analysis

Balance Sheet

As on December, 2001

2001 2000

Capital and reserves Note Rs. ‘000s Rs.’000s

Authorized capital

10,000,000 ordinary shares of Rs. 10 each 100,000 100,000Issued, subscribed and paid up capital 3 75,600 75,600

Reserve and surplusCapital reserve 4 438 438General reserve 5 268,000 248,000Inappropriate profit 1,235 1,0988

287,718 249,581Share holders equity 363,318 325,181

Long term finance 6 - 25,000

Deferred liabilitiesProvision for gratuity 7 62,431 59,505Deferred taxation 8 1,541 4,086

Long term deposits 9 15,015 13,015

Obligations under finance lease 10 3,460 9,615Current liabilities and provisionsShort term running finances 11 381,837 372,716Current portion of long term finance 6 25,000 50,000Current portion of obligation under finance lease 6,155 5,146Creditors, accrued and other liabilities 12 579,704 568,571Provision for taxation 13 23,321 -Proposed dividend 30,240 20,790

Contingent liability and capital Commitments 14 ________ ________

1,492,022 1,453,625The annexed notes from an integral part of these accounts

Institute Of Business Administration 102

Balance sheetAs on December 31,2001

2001 2000

Fixed capital expenditure Notes Rs. ‘000s Rs.’000s

Operating fixed assets 15 230,030 247,617

Long-term investment 16 15,015 13,015

Long term payments 17 21,192 18,732

Current assets

Stores and spares 18 48,739 53,382

Stocks in trade 19 391,680 391,249Trade debts 20 674,128 531,543Loans and advances 21 4,448 2,962Deposits, short term payments and

Other receivables 22 74,821 29,493Cash and bank balances 23 31,968 165,632

1,225,784 1,174,261

________ ________1,492,022 1,453,625


Profit And Loss Account For The Year Ended December 31, 2001

2001 2000

Note Rs. ‘000s Rs.’000s

Net sales 24 2,065,502 2,187,951

Cost of sales 25 1,376,204 1,539,021Gross profit 689,297 648,930

Operating expenses

Administrative 26 171,970 189,296

Selling and distribution 27 335,071 320,286507,041 509,582

Operating profit 182,256 139,348

Other income 28 4,000 2,948

186,256 142,296

Financial and other charges

Financial charges 29 74,010 71,868

Worker’s profit participation fund 5,616 3,522Worker’s welfare fund 2,155 1,801

81,781 77,184

Profit before taxation 104,47 65,112

Provision for taxationCurrent 38,653 14,856Prior years - (364)Deferred (2,545) 4,086

36,098 18,578Profit after taxation 68,377 46,534Unappropriate profit from previous year

AppropriationsProposed final dividend 40% ([email protected]) 30,240 20,790Transfer to general reserve 38,000 26,000

68,240 46,790Unappropriate profit carried forward 1,235 1,098


mailto:[email protected]

Earnings per share of Rs. 10 each 30 9.04 6.16

Tripple-em is private sector organization finance by a Malik Family. The organization

does not disclose its annual reports to anyone. So, I could not get the annual report of

tripple em. As financial analysis is the integral past of the internship report so I with the

prior approval of Miss. Sajida Nisar, analyzed the financial statements of the Bata

Pakistan Ltd.

BRIEF HISTORY OF THE COMPANY

The business that became the Bata Shoe Organization was established on August 24,

1894 in Zlin, Czechoslovakia by Tomas Bata, and included his brother Antonin and sister

Anna. Although this business was new, the Bata name had been part of a tradition of

shoemaking for eight generations, spanning three hundred years.

It was one of the first modern-day shoe 'manufacturers', a team of snitchers and

shoemakers creating footwear not just for the local town, but also for distant retail

merchants. This departure from the centuries-old tradition of the one-man cobbler's

workshop was a brand new concept, creating an entirely new industry.

The Bata enterprise revolutionized the treatment of employees and labor conditions.

Tomas consistently maintained a human focus, creating opportunities for development

and advancement, and added compensation for employees based on achievement.

In late 1895, Antonin was drafted into the army for compulsory military service and left

the family shoe business. Also that year, Anna left the company to marry, leaving a

young Tomas to build the business on his own.


By 1905 Tomas had taken the new enterprise to 2200 pairs of shoes per day, produced by

250 employees - utilizing resourceful imaginations, skilled hands and modern machinery

to keep up with demand. Under this 'manufacturing' system, productivity was greater than

ever before.

Bata ® shoes were excellent quality and available in more styles than had been offered

before. Demand grew rapidly in the early 1900s. Despite material and manpower

shortages, cartels and the outbreak of World War I, sales continued to increase, reaching

two million pairs per year by 1917.

As the enterprise prospered, so did the communities where it operated. Tomas believed

that a focus on people and public service was critical for business success. The enterprise

built housing, schools and a hospital near the shoemaking plant in Zlin. It provided food

and inexpensive rent during very difficult times; when there was no other help to be

found. Bata companies later provided rail services, construction, insurance, publishing

and a tannery in Zlin.

Following World War I, consumer purchasing power was very low. Tomas and his

employees devised a plan to adjust to post-war economic difficulties and reduced their

shoe prices. Bata® stores were flooded with buyers, and industry cynics were forced to

follow their lead.

Already exporting to other European countries, Northern Africa and the USA, the

enterprise began establishing new sales organizations in these markets during the 1920s.

Companies were opened in Poland, Yugoslavia, Holland, Denmark, the United Kingdom

and the USA. By the early 1930s, the Bata enterprise and Czechoslovakia were the

world's leading footwear exporters.

"The Bata System" devised by the Zlin team, and later applied in other Bata Shoe

Organization companies, organized operations into autonomous workshops and

departments ("profit centers"), allowing employees to contribute ideas and stimulate

production, and contributed significant breakthroughs in footwear technology.


BATA BUSINESS

Bata Shoe Organization companies are involved in every facet of the business of shoes.

Throughout the world, Bata companies service customers from the store sales floor to the

factory floor.

Retailing

Bata Shoe Organization companies have built successful retail store concepts to satisfy

changing consumer tastes and needs. Each store features merchandise targeted to

different lifestyles and people. The merchandise ranges from footwear to clothing and

goods complementing shoe offerings. Sensitivity to and satisfaction of customer wants

and needs has allowed the Bata Shoe Organization (BSO) to become a world leader in

footwear.

Manufacturing

Tomas Bata's revolutionary business concept was to industrialize the shoemaking

process of that day. That type of thinking has been the driving force behind the Bata Shoe

Organization success.

The Bata Shoe Organization has been an innovator in the manufacturing of shoes over the

years. Bata personnel have made important advances in DVP (Direct Vulcanization

Process), PVC, athletic footwear production and slush-molded footwear production.


Wholesaling

The Bata Shoe Organization [BSO] enjoys a unique position in the wholesale

marketplace. Global economies of scale enable BSO plants to offer quality products at

local prices, with many operating at ISO standards. Bata Shoe Organization production

facilities are world renowned for their commitment to quality and customers, and have

attracted production contracts from many international footwear brands.

Brands& Product Development

Throughout the world, the Bata ® brand distinguishes well-made and well-priced

footwear. Many core articles for Bata ® branded collections are designed in product

development centers in Italy, the Far East and Canada. Designers and merchandisers in

Bata Shoe Organization companies broaden the collections by developing

complementary styles to reflect tastes, budgets and climates within their own market.

Strict quality controls govern the selection of materials and all production stages.


BATA PAKISTAN LIMITED

Bata Pakistan Ltd. was formed in Pakistan in1952. 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 Bata’s 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 a 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 with in year but in

year 2001 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


AN OVERVIEW ON COMPANY’S

PERFORMANCE DURING 2001

The Bata Company Ltd. with its established brand name and national presence enjoys an

edge over its competitors. Long and successful participation in the industry has given

the Bata name an acceptability and reach, which other brands can only aspire to achieve.

People from all walks of life instantly favorably recognize the “Bata” logo, synonymous

with quality for money shoe. Based on this customer perception, the company hopes to

strengthen its position in the branded footwear segment in Pakistan.

The company’s performance during the year 2001 is quite efficient. During the year

2001 emphasis on cost and quality control measures remains important to the company in

view of both foreign and domestic competitors, who enjoy certain price advantages. The

continuous cost control drive initiated by the management resulted in significant cost

reductions in almost every sphere of operation. Consequently, Bata company able to

achieve good results in the year 2001. Bata Company closed the year with positive

financial outcomes in various areas of its activities.


During the year sales amounted to Rs. 2,065.5 million as compared with Rs. 2,188

million in 2000. The pretax profit of Rs.104.5 million was 60% higher. After making

provision for current and deferred taxation of Rs. 36.1 million, the net profit grew by

47% over the previous year to record level of Rs 68.4 million, benefiting from both good

sales and margin improvements resulting from the focus on cost reductions. By adding

Rs. 1.1 million of un-appropriated profit brought forward from 2000, Rs. 69.5 million

were available for appropriations.

In view of the satisfactory financial condition of company, Bata is pleased to recommend

for 2001 a final dividend of 40%, which is the highest in the history of the company. A

sum of Rs. 38 million is being transferred to General Reserve, as the Board of Directors

considers this necessary to meet the Company’s development plans for its sales outlets

and factories.

Administrative expenses were 9% lower, mainly due to the capital loss booked in last

year on the sale of company’s wholly owned subsidiary international Tanners &

industries (PVT) Limited that has been a constant financial drain on the company.

Selling and distribution expenses went up by 5% and financial charges increased by 3%

due to higher short term borrowing to meet the cash flow requirements of the Company.


Bata Company achieved a return on equity of 18.8% and the earnings per share of Rs.

9.04 increased by 47% over 2000. The equity of the company at Rs. 363.3 million

constitutes a solid capital base. The Company’s shares of Rs. 10 each were quoted at Rs.

23 on the 31st December 2001. Bata Company continues to be listed on Karachi and

Lahore Stock Exchanges with whom we have maintained close contact.

In 2001, Bata Company contributed Rs.323.3 million to the National Revenue in the form

of corporate tax, customer’s duties and other taxes. The total production of footwear

during the year from the factory at Batapur was 13,891 million pairs, as against 12,560

million in 2000. The branch factory at Maraka produced 1,857 million pairs in 2000.

The company creates regular work for 42 independent contractors under the Business

Associates Programme. We provide technical and design assistance to the Business

Associates, as well as materials and components, where necessary. The total production

achieved through these independent manufacturers was 1,194 pairs, a decrease of 40%

from the previous year.


FINANCIAL ANALYSIS

BATA PAKISTAN LIMITED

A number of different approaches might be used in analyzing a firm’s financial

performance in a particular period. To analyze the performance of BATA PAKISTAN

LIMITED. I adopted following three method of

Ratio Analysis

Common Size and Index Analysis

Trend Analysis

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 fro inter firm comparison. Ratios

highlights the factors associated with successful and unsuccessful firm. They also reveal

strong firms and weak firms, over- valued and under valued 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 firm’s 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


Bata’s Current Ratio

1,225,784,000

2001 = --------------------- = 1.17:1

1,046,257,000

1,174,261,000

2000 = -------------------- = 1.15:1

1,017,223,000

1,038,542,000

1999 = --------------------- = 1.23:1

843,973,000

Industry ratio =1.20:1

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 2000, it was 1.15. Where as the

industry ratio is 1.20:1 that is slightly high than Bata’s 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

Where as quick assets = Current Assets – Store & spare parts – Stock in trade

Acid test ratio for Bata

785,365,000

2001 = --------------------- = 0.75:1

1,046,257,000

729,630,000

2000 = -------------------- = 0.71:1

1,017,223,000

434,474,000

1999 = --------------------- = 0.51:1

843,973,000

Industry ratio = 0.71:1

Bata is also maintaining a good acid test ratio as compared to industry ratio i.e.

0.71:1. In year 2001 Bata’s acid test ratio is 0.75:1 which is continuously increase from

year 1999, in 99 it was .051 than in 2000 it increase to .71:1 and now .75:1 which shows

the management’s 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 extend to

which the firm is using borrowed money. Debt to equity is simply calculated as

Debt to equity ratio = Total Debts / Shareholders equityRatio for Bata

1,125,244,000 2001 = --------------------- = 3.09:1 or 76:24 363,318,000

1,118,829,0002000 = -------------------- = 3.44:1 or 78:22 325,181,000

1,038,542,0001999 = --------------------- = 1.23:1 or 55:45 843,973,000

Industry Ratio = 2.974:1

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

company should have the debts of Rs. 1.5 as against owner equity of Rs. 1. Equity ratio

for the Bata in year 2001 is 3.09:1. This ratio in year 2000 was 3.44:1 and in 1999 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 firm’s that is supported by

debts financing. This ratio is calculated as


Debts to Total Assets ratio = Total Debts / Total Assets

Ratio for Bata

1,125,244,000

2001 = --------------------- = 0.75:1 or 75%

1,046,257,000

1,118,829,000

2000 = -------------------- = 0.769:1 or 77%

1,453,625,000

1,078,368,000

1999 = --------------------- = 078:1 or 78%

1,377,805,000

Industry Ratio = 073 or 73%

According to this ratio around 75% of total assets are supported by the debts finance or

debts. Where as 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 2000 77% and in 1999 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 form its earning. Interest Coverage ratio is calculated as

Interest Coverage Ratio = Earning before Interest & Tax / Financial charges

Ratio for Bata

186,256,000 2001 = --------------------- = 2.52:1 74,010,000

142,296,0002000 = -------------------- = 1.98:1 71,861,000

123,815,0001999 = --------------------- = 1.69:1 73,051,000


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 times in 2000 and 1.69 times in 1999. This ratio is also increasing continuously,

in 2001 this ratio increased by 33% which is a high percentage. It is very important from

the lender’s 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

2,065,502,000 2001 = --------------------- = 3.06:1 674,128,000

2,187,951,0002000 = -------------------- = 411:1 71,861,000

2,007,224,0001999 = --------------------- = 6.08:1 330,089,000


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 2000 this ratio was

4.11 times and in 1999 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 2001. 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

365

2001 = --------------------- = 119 days

3.06

365

2000 = -------------------- = 89 days

4.11

365

1999 = --------------------- = 60 days

6.08

Industry Ratio = 106 days

Bata’s average collection period is not much impressive in year2001 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

2001 Average collection period is 119, in 2000 it was 89 days and in 1999 it was 60 days.

In the year 2001 the industry ratio is also less then the Bata’s. Management has to think

seriously to reduce average collection period to improve its efficiency.


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

867,677,000

2001 = --------------------- = 2.265:1

383,414,000

846,412,000

2000 = -------------------- = 2.362:1

358,214,000


Bata Pakistan Ltd. is quite efficient in its payable turnover ratio. In year 2001 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.

‘


Average Payment Period

It is also a managerial ratio, which signifies the credit period, which is enjoyed by the

organization in paying credit. Higher the number of days betters the ratio and efficiency.

More the days allowed to pay off its debts more the working capital for the organization.

It is calculated as

Average Payment period = No. of days in a year / Payable turnover

Ratio for Bata

365

2001 = --------------------- = 161 days

2.265

365

2000 = -------------------- = 155 days

2.362


Average payment period for Bata Pakistan Ltd. was 155 days in 2000, which increased to

161 days in 2001, is a good sign for a company to have more and more money at his

disposal. Number of days to payoff its debts are also greater than the average Industry

ratio, which is 111 days. Bata need to continue this increase to be more efficient and

effective.


Inventory turnover Ratio

Inventory Turnover ratio, also known as Stock Turnover, is the relationship between Cost

of Goods Sold during the period and average inventories. It measures the velocity of

conversion of stock into sales. Usually higher inventory turnover, stock velocity,

indicates efficient management because more frequently stocks are sold lesser the amount

of money required to finance the inventory. It is calculated as

Inventory Turnover = Cost of Goods Sold / Average Inventory

Ratio for Bata

1,376,205,000

2001 = --------------------- = 3.52 times

391,465,000

1,539,021,000

2000 = -------------------- = 3.31 times

465,271,000

Industry Ratio = 3.37 times

Every organization has to maintain a certain level of inventories to be able to meet the

requirement of the business. Bata is also maintaining a good inventory turnover, which

is 3.52 time in a year 2001 and 3.31 times in 2000. This ratio is also increasing which

shows that management is improving it management strategies about the inventories and

stock. For the Inventory turnover ratio Industry ratio is 3.37 times. Bata’s ratio is

slightly higher than the industry ratio.


Inventory turn over in days

This ratio is also a managerial ratio, which measures the number of days the inventory is

held before it is turned into accounts receivables through cash. Usually lesser the

number of days inventory held before it is turned into accounts receivable though sale is

better for the company. Inventory turnover is calculated as

Inventory turnover in days = No. of days in a year / Inventory turnover ratio

Ratio calculation for Bata

Ratio for Bata

365

2001 = --------------------- = 104 days

3.52

365

2000 = -------------------- = 110 days

3.31


For Bata whose Inventory turnover ratio is 3.52 times in year 2001 the inventory turnover

in days is 104 days which is almost 4 days slower as compare to industry ratio i.e. 100

days in turning its inventory into Accounts receivables through sales. Bata has to reduce

these days and management has to think about that to improve this ratio in Companies

favour.


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

689,297,0002001 = --------------------- = .33 or 33% 2,065,502,000

648,930,0002000 = -------------------- = .296 or 29.6% 2,187,951,000

581,463,0001999 = --------------------- = .289 or 28.9% 2,007,224,000

Industry Ratio = 24.07%

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 2000 and 28.9 % in 1999.


Industry ratio for 2001 is 24.07%. Bata’s G.P ratio is very good as compared to industry

ratio and sill improving, as it is 37 % according to half yearly report 2002.

Net Profit Margin

The net profit margin is a measure of the firm’s 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

68,377,000

2001 = --------------------- x 100 = 0.031 or 3.31%

2,065,502,000

46,534,000

2000 = -------------------- x 100 = 0.021 or 2.10%

2,187,951,000

33,954,000

1999 = --------------------- x 100 = 0.0169 or 1.69%

2,007,224,000


Bat is also maintaining a good Net Profit margin ratio, which is 3.31% of sales. Where as

the industry ratio is 3.11%, less then the Bata’s. Company is not showing loss any of the

last five years which shows companies strong financial position.


Return On Investment

Return on investment is one of he most important ratio considered by he proprietors and

investors. It compares the net profit after tax with Total Assets. Investor is much

concerned about this ratio. Higher the ratio of ROI more secures the place considered for

making investment. It is calculated as

Return On Investment = Net profit after tax / Total Assets x 100

Ratio for Bata

68,377,000

2001 = --------------------- x 100 = 4.58%

1,492,022,000

46,534,000

2000 = -------------------- x 100 = 3.20%

1,453,625,000

34,474,000

1999 = --------------------- x 100 = 2.57%

1,377,805,000


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.


Return On Equity

Return on equity is another measure of overall firm’s performance. It compares

net profit after tax to the equity that share holders have invested in firm. This ratio tells

the earning power on shareholder’s book value. High the return on equity often reflects

the firm’s acceptance of strong investment opportunities and effective expense

management. It is calculated as

Return On Equity = Net profit After Tax / Shareholders Equity x100

Ratio for Bata

68,377,000

2001 = --------------------- x 100 = 18.82%

363,318,000

46,534,000

2000 = -------------------- x 100 = 14.31%

325,181,000

33,954,000

1999 = --------------------- x 100 = 11.33%

299,437,000


Bata Company is continuously improving its Return on equity as it was 11.33 in

1999,14.31% in 2000 and in year 2001 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 utilize its total

assets to generate sale. It is calculated as

Total Asset Turnover = Net Sales / Total Assets x 100

Ratio for Bata

2,065,502,000 2001 = --------------------- = 1.38:1 1,492,022,000

2,187,951,0002000 = -------------------- = 1.50:1 1,453,625,000

2,007,224,0001999 = --------------------- = 1.46:1

1,377,805,000

Industry Ratio = 1.38 : 1

Bata is also showing efficiency in Total assets turn over because in 2001 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 Bata’s ratio. This year

ratio is decreased as compare it to its last year ratio i.e. 1.50:1 in 2000 and 1.46:1 in 1999.

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.


Return On Equity

Return on equity (ROE) compares net profit after tax to the equity that shareholders have

invested in the firm. This ratio tells us the earning power on shareholder’s book value

investment and is frequently used in comparing two or more firms in an industry. A high

return on equity often reflects the firm acceptance of strong investment opportunities and

effective expense management. However if firm has chosen to employ a level of debt

that is high by industry medium, high ROE might simply be result of assuming excessive

financial risk

To illustrate more we use Due Pont Analysis

ROE = Net Profit Margin x Total Asset turnover x Equity Multiplier

Net Profit Margin = 3.10 %

Total Asset Turnover = 1.384

Equity Multiplier = 4.11\

Calculation for Bata

ROE = 3.10% x 1.384 x 4.11 = 18.83 %

Net profit margin measures profitability with respect to sales generated, Total Asset

turnover ratio measures efficiency in using assets to generate sales, and equity multiplier

measures the financial leverage of firm


OPERATING CYCLE

"Operating Cycle indicates the length of time from the commitment of cash for purchase

until the collection of receivable resulting from the sale of goods or services”. It does not

mean the actual outflow of cash but the time at which purchase and promise for the

payment is made. Lesser the number of days to complete the operational cycle better for

the company. It is calculated as

Operating Cycle = Inventory turnover in days + Receivable turnover in days


2001 = 104 days + 119 days = 223 days

2000 = 110 days + 89 days = 199 days

Operating Cycle for Bata Pakistan limited is very high it means from the day of purchase

Bata is receiving back the money from the accounts receivables after 223 days which is

very high amount of days because it takes more than half year to complete its operating

cycle. Management have to investigate the reasons behind this large number of days


Cash Cycle ( Cash Flow Cycle)

“Cash Cycle shows the length of time from the actual outlay of cash for purchase until

the collection of receivable resulting from the sales of goods and services”. It indicates

the period that starts firm the actual outflow of cash to actual inflow of cash. It is

calculated as

Cash Cycle = Operating cycle – Payable Turn over


2001 = 223 days + 155 days = 68 days

2000 = 199 days + 161 days = 38 days


Cash Cycle calculation is indicating that after the actual out flow of cash almost after 68

days company receives back the money from receivables created by sales in 2001. In

2000 this period was more efficient i.e. 38 days it means company was receiving back

money or inflow of cash after 38 days. It is very positive no of days as compared to

operating cycle


DU PONT ANALYSIS

Return On Equity

Return on equity (ROE) compares net profit after tax to the equity that shareholders have

invested in the firm. This ratio tells us the earning power on shareholder’s book value

investment and is frequently used in comparing two or more firms in an industry. A high

return on equity often reflects the firm acceptance of strong investment opportunities and

effective expense management. However if firm has chosen to employ a level of debt

that is high by industry medium, high ROE might simply be result of assuming excessive

financial risk. To illustrate more we use Due Pont Analysis

ROE = Net Profit Margin x Total Asset turnover x Equity Multiplier

Net Profit Margin = 3.10 %

Total Asset Turnover = 1.384

Equity Multiplier = 4.11


ROE = 3.10% x 1.384 x 4.11 = 18.83 %

Du Pont Analysis helps to Return On Equity to explain why company is going behind the

industry average but in the case of Bata almost all the ratios are above the industry

medium and having the upward trend. It is because of the efficient use of Assets to create

sale and good ratio of N.P. Net profit margin measures profitability with respect to sales

generated, Total Asset turnover ratio measures efficiency in using assets to generate

sales, and equity multiplier measures the financial leverage of firm.


Return On Investment

In Du Pont Analysis We calculate Return On Investment as

ROI = Net Profit Margin x Total Asset Turnover

Calculation For Bata

2001 = 3.10% x 1.384 = 4.55%

Net profit margin measures profitability with respect to sales generated, Total Asset

turnover ratio measures efficiency in using assets to generate sales. It is again a practical

approach to see the field where the company in going unfavorable. But in case of Bata

Pakistan Limited ROI is showing positive trend and both the component of this approach

is also showing positive trend due to the effective management policies and efficient use

of assets.


Common Size & Index Analysis

Balance Sheet At A Glance

Items 1999Rs. In thousand

2000Rs. In thousand

2001Rs. In thousand

Liabilities and Owner’s equity

Paid up Capital Capital Reserves General Reserves Inappropriate ProfitTotal Shareholder’s EquityLong term FinanceDeferred Liabilities

Provision for gratuity Deferred taxationTotal Deferred LiabilitiesLong term Deposits Obligation under finance leaseCurrent liabilities Short term running finance Current portion of long term finance Obligation under finance lease Creditors accrued and others Proposed dividend

Total Current Liabilities

75,600483

2,22,0001,354

299,4371,50,000

57132-

57,13212,50314,760

2,91,927-

18,4485,18,438

15,120

8,43,973

75,600483

2,48,0001,098

3,25,18125,000

59,5054,086

63,59113,0159,615

3,72,71650,0005,146

5,86,57120,790

10,17,223

75,600483

2,86,0001,235

3,63,318-

62,4311,541

63,97215,0153,460

3,81,83725,0006,155

5,79,70430,240

10,46,257

Total liabilities and owner equity 1,377,805 1,453,625 1,492,022Assets

Fixed Operating AssetsLong term Investment Long term DepositsCurrent Asset

Store & Spare parts Stock in TradeTrade DebtorsLoan and advancesDeposit & short term paymentsCast at Bank

Total Current Assets

2,67,96558,57012,728

64,7755,39,2933,30,0891,440

41,17561,770

10,38,542

2,47,61713,01518,732

53,3823,91,2495,31,5432,96229,4931,65,632

11,74,261

2,30,03015,01521,193

48,7393,91,6806,74,1284,44874,82131,968

12,25,784Total Assets 1,377,805 1,453,625 1,492,022


Profit & Loss Account At A Glance

Items 1999Rs. In, 000

2000Rs. In, 000

2001Rs. In, 000

Net SaleLess: Cost of goods soldGross ProfitLess Operating Expenses Selling expenses Administrative expenses Total operating expensesOperating ProfitAdd: Other IncomeEarning Before Interest & TaxLess: Financial & other charges Financial charges Worker’s profit participation Worker’s welfare fundTotal Financial & other chargesProfit Before TaxationLess: Provision for Taxation Profit After TaxationAdd: Inappropriate profit from last yearLess: Appropriations for the year Proposed Final Dividend Transferred to General Reserves

2,007,2241,425,761581,463

167,483290,941458,454123,039776123,815

73,0512,53896476,55347,26213,30833,9541,520

19,00015,120

2,187,9511,539,021648,930

189,296320,286509,582139,3482,948142,296

71,8613,5221,80177,18465,11218,57846,5371,354

20,79026,000

2,065,5021,376,205689,297

171,970335,041507,041182,2564,000186,475

74,0105,6162,15581,781104,47536,09868,3771,098

30,24038,000

Inappropriate Profit C/F 1,354 1,098 1,235

COMMON SIZE ANALYSIS“An analysis of percentage financial statements where all balance sheet items are

divided by total assets and all income statement items are divided by net sales or

revenue”. It is also known as Vertical Analysis. It shows the more sensitive and

important elements in financial statement.


Vertical Analysis Balance Sheet

Items 1999% age

2000% age

2001% age


Paid up Capital Capital Reserves General Reserves Inappropriate ProfitTotal Shareholder’s EquityLong term FinanceTotal Deferred LiabilitiesLong term Deposits Obligation under finance leaseCurrent liabilities Short term running finance Current portion of long term finance Obligation under finance lease Creditors accrued and others Provision for Taxation Proposed dividendTotal Current Liabilities

5.486.035

16.112.098

21.73010.884.146.905

1.071

21.188-

1.34237.62

-1.90761.25

5.200.033

17.061.076

22.3701.7194.375.895.661

25.6403.439.354

40.352-

1.43069.978

5.067.032

19.168.083

24.350-

4.2871.006.232

25.5921.675.413

38.8541.563

2.026770.125

Total liabilities and owner equity 100 100 100

Assets

Fixed Operating AssetsLong term Investment Long term DepositsCurrent AssetStore & Spare parts Stock in TradeTrade DebtorsLoan and advancesDeposit & short term paymentsCast at BankTotal Current Assets

19.4464.251.924

4.70139.14123.96.105

2.9884.483

75.379

17.034.895

1.289

3.67226.91536.566

.2042.029

11.39480.782

15.4171.0061.420

3.26726.25245.182

.2985.0152.143

82.157


Total Assets 100 100 100

Vertical Analysis Profit And Loss Account

Items 1999% age

2000% age

2001% age

Net SaleLess: Cost of goods soldGross ProfitLess Operating Expenses Selling expenses Administrative expenses Total operating expensesOperating ProfitAdd: Other IncomeEarning Before Interest & TaxLess: Financial & other charges Financial charges Worker’s profit participation Worker’s welfare fundTotal Financial & other chargesProfit Before TaxationLess: Provision for TaxationProfit After TaxationAdd: Inappropriate profit from last yearLess: Appropriations for the year Proposed Final Dividend Transferred to General ReservesTotal Appropriations for the year

100(71.031)28.969

8.34414.494(22.838)6.129.0396.168

3.639.126.048(3.813)2.355(.663)1.692.076

.947

.753(1.700)

100(70.340)29.660

7.65514.639(23.290)6.369.1356.504

3.284.161.082(3.527)2.976(.849)2.127.062

1.188.950(2.138)

100(66.630)33.370

8.32616.222(24.548)8.824.1949.017

3.583.272.104(3.959)5.058(1.747)3.310.053

1.4641.839(3.303)

Inappropriate Profit C/F .068 .051 .060


COMMENTS

Percentage of capital reduced at very low rate because of increase in the amount of long

term as well as short-term debts and unappropriated profit.

.

Amount of capital reserve is same but percentage shows decreasing trend due to increase

in net figure of the balance sheet.

General reserves percentage increase it means this year net profit is higher than last year

profit and company consistently improve its position in these three years.

Unappropriated profit percentage increases every year due to increase in net profit.

Shareholder’s equity shows increasing trend because increase in percentage of reserves.

Percentage of total deferred liability during the year 2000 increase because of high

provision and less total value of liability side and in 2001 provision add less and value of

total liability also increase this year.

Long-term deposits decrease in 2000 because company reduced the number of employees

in 2000 and increase in 2001 due to the appointment of new staff.

Percentage obligations under finance lease reduced every year this shows company’s

financial position become stronger and stronger.

Percentage of current liabilities increase every year, which shows that company relying

more on short term financing than long term financing against hypothecation of


company. Operating fixed assets/percentage reduced every year because of depreciation

and disposal of assets every year.

Current assets show that company maintain control over stocks and spares, company’s

credit sales increase every year. Loans and advances to employee’s increase but loans to

suppliers reduced, this shows that company follows the policy of backward integration.

In 2000 the percentage of cash at bank was very high which shows the wastage of

resources but in 2001 company use cash in loans and advances to employees.

In 2000 sales of company increase and cost of goods sold also increase but less than the

rate of sales due to this gross profit percentage increase. In 2001 sales reduced (due to

decrease in export) but cost of goods sold reduced at high rate than sales due to this gross

profit percentage increase in 2001. This shows company management has good control

on production process.

In 2001 company reduce the expenses of administration and spent on selling but the

percentage of overall operating expenses increase due to the reduction in sales and

company still has high percentage of operating profit.

Percentage of other incomes increase due to the sale of scrapped fixed asset every year.

Percentage of financial charges & other increase due to interest receive on short & long-

term loans and receiving interest on employee’s securities and personal accounts due to

these reserves percentage of profit before taxation & after taxation also increase. So

company declares more dividend and automatically reserving per share increases in year

of 2001

. INDEX ANALYSIS

‘An analysis of percentage financial statements where all balance sheet or income

statement figures for a base year equal 100 and subsequent financial statement items are


expressed as percentages of their values in base year”. It is also know as Horizontal

Analysis.

Horizontal Analysis (Chain Base methodBALANCE SHEET

Items 2000 % Inc (Dec)

2001 % Inc (Dec)


Paid up Capital Capital Reserves General Reserves Inappropriate ProfitTotal Shareholder’s EquityLong term FinanceDeferred Liabilities Provision for gratuity Deferred taxationTotal Deferred LiabilitiesLong term Deposits Obligation under finance leaseCurrent liabilities Short term running finance Current portion of long term finance Obligation under finance lease Creditors accrued and others Proposed dividendTotal Current Liabilities

0011.17(18.91)8.59(83.84)

4.15-11.314.10(34.86)

27.67

(72.17)13.1437.520.53

0015.3212.4711.73-

4.92(62.29).59915.3764.01

2.48(50)19.61(1.17)45.452.85

Total liabilities and owner equityAssets

Fixed Operating AssetsLong term Investment Long term DepositsCurrent AssetStore & Spare parts Stock in TradeTrade DebtorsLoan and advancesDeposit & short term paymentsCast at BankTotal Current Assets

8.22(78.78)47.77

(17.59)(27.45)61.03102.6928.73168.1413.07

(7.11)15.3713.14

(8.70).1126.8250.19153.69(80.70)4.39

Total Assets


COMMENTS

General Reserves

General reserves are showing a rising trend since 1999. In year 2000 General Reserves

were increased by 12% and in year 2001 it again increased by 15 %. It means

management is allocating a healthy portion of to General Reserves due to the higher

profit, which increases the share holder equity.

Share Holder’s Equity

Shareholder equity is continuously increasing due to the increased allocation of general

reserves where inappropriate profit is decreasing and share capital is unchanged in 2000.

Owner’s equity was increased by 9 % and again increased by 15 % in 2001.

Current Liabilities

Current liabilities are also showing a rise of 20 % in 2000 and 3 % in 2001. This

increase is basically due to the increase in short term running finance and proposed

dividend, which increased by 38 % in 2000 and again increased 45 % in 2001.

Long Term Debts

Company’s long-term debts are decreasing very sharply in year 2000 it decreased by 52

% and again decreased by 26 % in 2001. Share of long-term debts was 17 % of total


liabilities in 2000, which decrease to 8 %, and at the end of 2001 it was 6%, which is very

minor amount.

Fixed Assets

Fixed Assets are showing fluctuation as in year 2000 increased by 8 % but 2001 it

decreases by also 8 %. This decrease in ratio is due to the sale of scrap assets.

Long Term Investment

According to Horizontal analysis long term Investment are showing a huge decrease by

77.78 %, which is a big one and then increased by 15 % and still increasing.

Stock In Trade

Inventories maintained by the Bata ltd. are fluctuating. In 2000 stock in trade deceased

by 27 % and in 2001 it increased only by 0.11 %. Decrease in the inventory may be due

to the increase in sale by 9 %.

Current Assets

Current Asset in Horizontal Analysis of Bata Pakistan ltd are continuously increasing.

In the 2000 the amount of the total current assets increased by 13 % as compared to year

1999 and by 4 % in 2001. Management is increasing the current assets to be more liquid

and increase its current ratio to 2:1 but if it block its more capital in current assets it will

be proved adverse because it may loose a healthy profit obtained if this amount is

invested in some long term investment


Horizontal Analysis Profit And Loss Account

Items 2000% Inc (-dec)

2001% Inc (-dec)

Net SaleLess: Cost of goods soldGross ProfitLess Operating Expenses Selling expenses Administrative expenses Total operating expensesOperating ProfitAdd: Other IncomeEarning Before Interest & TaxLess: Financial & other charges Financial charges Worker’s profit participation Worker’s welfare fundTotal Financial & other chargesProfit Before TaxationLess: Provision for TaxationProfit After TaxationAdd: Inappropriate profit from last yearLess: Appropriations for the year Proposed Final Dividend Transferred to General Reserves

9.047.9411.60

13.0210.8611.1513.25279.9014.93

-1.6038.7786.83.8237.7739.6037.05-10.92

36.8437.50

-5.60-10.586.22

-9.1534.61-0.5030.7935.6930.89

2.9059.4619.665.9660.4594.3146.49-18.91

16.3182.78

Inappropriate Profit C/F -18.91 12.48


COMMENTS

Sales

Horizontal Analysis of sales is showing a great fluctuation. In year 2000 it increased by

9% and then decreased by 6%. This decrease in sales in 2001 may be due to the events of

September 11 events but it is not a good sign and management has to think and

investigate about it to get the actual reasoning behind it.

Cost Of Goods Sold

Horizontal Analysis of Cost of Goods Sold also indicating the increase in cost of sales by

8 % as the sale increased by 9% in 2000 and decreased by 10.5% against the decrease of

sales by 6%. So it is showing fluctuating trend exactly following the sales.

Gross Profit

Gross Profit is showing a positive trend as in year 2000 it was increased by 12 % and

again increased by 6 %, which is a positive sign. Increase in gross profit percentage is

due to the reduction in cost during 2001.


Operating Expenses

Operating expenses in Horizontal Analysis is also showing the same trend of increase and

decrease along with sale. Operating expenses increased by 11 % as against the increased

sale of 9 % and showing a decline of a nominal .50% as against decreased sale of 6%.

Financial Charges

Financial charges are showing a decline of almost 2 % despite of increase in sales in 2000

and increased by 3 % in 2001 as compared to 2000. This increase may be due to

increase in differed liabilities, which are increased by 4 %.

Operating Profit

As we analyze the operating profit in Horizontal Analysis we observed that profit is

increasing consistently. In 2000 operating profit was increased by 13 % and then again

increased by 31 % in 2001, which is a positive sign. Increase in operating profit may be

due to the slight reduction in operating expenses.

Profit Before Tax

Horizontal Analysis is showing 40 % increase in 2000 and 60 % increase in 2001, despite

of less sales and high financial charges %age as compared to 2000, which is good sign

for the company.

Tax Payment


In year 2000-tax payment are increased by 38 % as to 1999 and in 2001 tax payments are

increased by almost 94 % which is a high ratio as compared to year 2000. This increases

60% increase in the profit before tax.

Dividends

The Amount of proposed dividend is increasing continuously. In year 2000 the amount

of dividend is increased by 37 % as compared to 1999 and again it is 47 % more then the

dividend of year 2001. It is a very good sign for shareholder point of view and helps to

increase the share value in market.

Earning per Share

Earning per share in also showing an increase of 25 % in 2000 and almost 47% in 2001

as compared to 2000. Which is good sign for any company and shareholders will be

pleased with the performance of the management’s efficiency and effective policies.


TREND ANALYSIS

Items 1999 2000 2001 Industry Ratio 2001


Liquidity Ratios Current Ratio Acid Test Ratio

Leverage Ratios Debt to Equity Ratio Total Debts to Total Asset Coverage Ratio Interest Coverage Ratio

Activity Ratios Receivable Turnover Average Collection Period Payable Turnover Average Payment Period Inventory Turnover Inventory turnover in days

Profitability Ratios Gross Profit Margin Net Profit Margin Return On Investment Return On Equity

Total Debts Turnover

1.23:10.51:1

3.60:10.78:1

1.69:1

6.08 times60 days

2.27 times149 days

3.09 times117 days

28.97 %1.69%2.57%11.33%

1.46:1

1.15:10.71:1

3.44:10.78:1

1.98:1

4.11 times89 days

2.36 times155 days

3.31 times110 days

29.60 %2.10%3.20%14.31%

1.50:1

1.17:10.75:1

3.09:1.75:1

2.52:1

3.06 times119 days

2.265 times161 days

3.52 times104 days

33.33%3.31%4.58%18.82%

1.38:1

1.20:10.71:1

2.79:1.73:1

2.40:1

3.51times106 days

4.14 times111 days

3.37 times100 days

24.07%3.11%4.30%16.42%

1.38:1

TREND ANALYSIS INTERPRETATION

As it can be seen, the current ratio have fallen off and become less then industry norms in

2001. Where as Acid test ratio is rising continuously and higher than the industry ratio.

So the firm trend in Absolute liquidity is increasing. The average collection period has

growing up since 1999 and exceeds the current industry median level, where as average

payment period is tends to increase frequently which is a good sign and company is

enjoying a good credit time. This ratio also exceeds industry average. These trends here


tell us that there has been a relative building up in receivable and inventories. Despite

above average level of current and acid test ratios, the apparent deterioration in accounts

receivable and inventories is a matter of concern and needs to be investigated.

Stability of the firm’s leverage also helping to stable the efficiency and performance. In

Bata Share of debts assets is decreasing which is not a good sing as management point of

view, because it is considered better to use the outsider find and safe owner equity from

losses. So it should be investigated to get the reason behind it.

The Gross profit and Net profit margin have generally shown improvement over the

recent past. The current level is stronger then the industry ratio and management will be

comfortable to get these result. Return on Investment has been relatively stable over the

time and above the industry medium and it is the case with the Return on Equity, it is also

quite impressive.

When we analysis the overall performance pf the Bata Pakistan Limited, we observed

that almost all the ratios are positive and in the favour of the company. Management

should continue to increase the ratios in their favour and plan to make favorable those

who are still against the company’s interest.

COMPARISON WITH SERVICE INDUSTRIES LTD

BREIF HISTORY OF SERVICE

Service Industries Limited is the major competitor of Bata Pakistan Ltd. in footwear

industry in Pakistan. Service is basically a Domestic Industry have good repute in


international market of footwear due to fashion and durable products. Service industries

were formed in 1941. Ch. Mohammad Hussein was the founder. Service is a strong

footwear company with its capital of Rs. 1 billion and annual sale of more than Rs. 2.32

billion.

FINANCIAL COMPARISON

Liquidity Ratios: -

As we compare the liquidity position of servis we find that current ratio of servis industry

is quite efficient because it is above the industry average as well as sales current Ratio.

But in case of acid test ratio the situation is quite different. In acid test ratio Bata is

comparatively better i.e. 0.75 and o.62 for servis. The reason behind this difference is that

service maintains and blocks his large amount of money in inventories, store and spare

parts.

Leverage Ratio : -

Bata is relying more on external debts as compare to servis. Servis debts to equity ratio is

2.49 and Bata’s 3.07 in the year 2001. In case of debts to total assets ratio we observed

that Bata is using 75% of outer debts and remain 25% is shareholders equity and servis is

using only 20 % of external reserves. E can say that Bata has less risk of equity loss as

compare to servis. But the difference is around 4%, which is considered not so high in

both companies.

INTERST COVERAGE: -


When we compare Interest coverage ratio of servis and Bata there is a great difference.

Bata has the high coverage ratio of Rs. 2.52 to cover 1 rupee of interest where as servis

has 2.33 and industry ratio of 2.4. This difference is due to the high percentage increase

of profits and reducing the costs.

ACTIVITY RATIO COMPARISON: -

Receivable turnover and a collection period

As we know high the receivable turn over better for the company in this ratio comparison

Servis is the quite efficient as compare to Bata because it receivables turnover ratio is

3.97 as compare to Bata which is 3.06 times

And when we observe a collection period due to good receivable turnover ratio Servis is

collecting its debts quite earlier as compared to Bata. Servis is collecting its debts almost

after 95 days where as Bata is collecting its debts after 119 days.

Payable turnover and Average Payment Period

Payable turn over ratio for servis is only 5.9 which is very high as compare to Bata’s

2.36. it means that servis is paying 5.9 or 6 % time its debts which is unfavorable for any

company as we know less the ACP better will be the company’s operating cycle. So Bata

is showing a good impression here.

And when we are concerned about any payment period Bata is paying off its debts after

155 days and servis is only 61 days. For servis it is very low paying off its debts and it

may reduce the working capital availability. So servis has to consider this ratio and

investigate the actual reason behind it.

In Profitable ratios servis is going under the industry average. So servis has to think about

it and investigation should be conducted to the revise the policies to get better results.

Inventory Turnover


It is under stood that higher the inventory turnover better the company’s performance and

Bata is again going ahead with 3.51 times as to servis 3.23 and Industry average of 3.37.

It means inventories of Bata are converted into sales or account receivable than sales

almost 3.51 times. There is no rule of thumb of about the industry ratio. Inventory

turnover in days for servis is 125 days and for Bata is 104 days. So Servis is converting

its stock into sales almost after 125 days quite late as compare to Bata.

PROFITABILITY SITUATION: -

Both Servis and Bata are improving their profitability ratios, and going positive and

upward but Bata’s all the profitability ratios are higher as compare to servis. In year 2001

G.P margin for Bata is 33% and for servis is only 15%, Almost 50% less as compare to

Bata. It is the case with N.P margin, N.P of Bata is 3.3% and for servis is 3 % .In return

on equity position is almost same i.e. above 4 %. Servis is again below in respect of

industry average. Return on Equity of Bata is very impressive with 19 % as compared to

servis 14 %.

RECOMMENDATIONS


Financial Position of the Bata Pakistan limited is very impressive only in few of the

department Bata is quite week. There is some of recommendations which help the

management to overcome these deficiencies

Bata Debt to Equity ratio is 3.51, which means almost 75 % are debts. Due to

high debts ratio financial charges are increasing and consuming major portion of

profit. Management has to reduce its debts to reduce the financial charges

Due to High debts ratio company will also find difficulties if they apply for the

loan. Because none of the financial institution will like to invest money due to

low equity ration

Company’s current ratio is 1.17:1 but the favorable and most acceptable is 2:1.

So company should try to decrease its liabilities mainly the accrued expenses

payable or to increase its current assets to be more positive.

Company’s Average collection period is increasing, which is adverse situation not

favorable, and reducing Bata’s current ratio. To manage it, management should

have to offer incentive to debts in payment of debts to get early payment. It will

help us to increase our current ratio and reduces the high number of days to

complete operating cycle.

Company is earning a healthy operating profit of 9% of its sales where as out of

this operating profit almost 6% is absorbed by the operating and other expenses.

Management has to reduce these expenses mainly selling and administration

expenses to get more Net profit.

Company is maintaining a healthy Return on equity and showing a upward trend

which is a good sign. Management has to maintain this improvement and try to

increase this ratio by revising the policy in positive sense.


Company’s Total Asset Turnover ratio is declining. Management should have to

increase this ratio by efficient use of Assets and to increase the sale by impressive

marketing and sale strategy.

As we observed company is borrowing short term running finance to meet its

accrued liabilities which is not a positive action of a good management because it

increase our current liabilities and adversely effects the Current ratio. So

management should try to collect its debts early by offering incentives and use

this money in paying debts. It will help to reduce liabilities and decrease the our

financial charges


Documents

Bata Shoez - Financial Analysis