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Financial Analysis done in 2006 as final project for semester
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Contents
Topic Page#
1. Introduction 01
2. Products 01
3. Liquidity ratios 05
a) Current ratios 05
b) Acid test ratio 06
c) Working capital 07
d) Liability ratio 08
4. Percentage changes in net sales
& net Income 08
a) Percentage change in net sales 08
b) Percentage change in net Income 09
c) Net Income as % of sales 10
5. Coverage ratio 11
a) Interest coverage ratio 11
6. Activity ratios 12
a) Inventory turnover 12
b) Debtors turnover 13
c) Creditors turnover 14
d) Asset turnover 15
e) Operating cycle 16
f) Cash cycle 17
7. Leverage ratios 17
a) Gearing ratio 17
b) Debt-to-Asset ratio 19
8. Profitability ratios 20
a) Gross Profit margin 20
b) Net Profit margin 22
c) Return on capital employed 23
d) Return on asset 24
e) Return on equity 25
f) Operating expense ratio 26
g) Operating Income 27
9. Net worth 28
10. Break up value 28
11. Book value per share 29
12. Z-score test 29
13. Conclusion 34
-“A commodity appears at first sight is obvious, trivial
thing but its analysis brings out that it is very strange thing,
abounding in metaphysical subtleties and theological
niceties.”-
(Karl Marx)
All praises due to Allah,
the most merciful, the most forgiving,
the most generous, the controller of the hearts
and the gazes, the all-knowing of
that which is open and that which is hidden.
We praise HIM with the praise
that is eternal, throughout the night
and the day
Introduction:-
Colgate-Palmolive (Pakistan) Limited (“the company”) was initially incorporated in
Pakistan on December5, 1977 as a public limited company with the name of National
Detergents Limited. The name of the company was changed to Colgate-Palmolive
(Pakistan) Limited on March 28, 1990 when the company entered into participation
agreement with Colgate-Palmolive Company, USA. The company is mainly engaged in
the manufacture and sale of detergents, personal and other related products and is listed
on Karachi and Lahore stock exchanges.
Products:-
Colgate CDC Colgate Maximum Cavity protection contains calcium and
fluoride. Its superior formula penetrates teeth to lock in natural
calcium to give you strong and healthy teeth. It also fights cavities and
provides thorough cleaning for your teeth. Colgate Maximum Cavity protection has a
refreshing taste that will leave your mouth feeling fresh and clean. It is available in 2
exciting flavors– Extra Mint and Great Regular Flavor
Colgate Fresh Energy Gel
Colgate Fresh Energy Gel brings you an amazing cleaning experience
for a refreshing new feeling. It provides fresh breath for long hours and
effectively fights germs and cavities to provide clean, healthy and well
protected teeth. It comes in 2 great tasting flavors- Ice blue and
Sparkling Red
Colgate Total Fresh Stripe Colgate Total Fresh Stripe is the only toothpaste in the world that gives clinically
proven 12-hour germ protection. A unique formula of Triclosan and Gantrez attaches to
the teeth to provide 12 hours of germ protection, even after eating and
drinking.
Colgate Total Fresh Stripe is a multi-benefits toothpaste, which:
• Fights Cavities
• Prevents Gingivitis/Gum disease
• Reduces plaque
• Controls Tartar Build up
• Fights bad breath
• Whitens teeth
Colgate Herbal White White, shiny, healthy teeth, naturally.
Colgate Herbal White's unique formula combines the expert science of Colgate with
nature's best ingredients to safely polish teeth and help restore their natural whiteness and
shine.
It contains:
• Lemon extracts which clean teeth and removes stains
• Saunf which provides long lasting fresh breath
• Fluoride and calcium for strong teeth and healthy gums
• Pearl Powder makes teeth shiny white
Colgate Whitening
Colgate Whitening contains techno-logically advanced micro-
cleaning crystals that polish enamel and remove stains. It is
clinically proven to safely make your teeth whiter and shinier. It also
prevents cavities and tartar build-up. Colgate Whitening gives an exceptional cleaning
that leads to an exceptional smile.
Sparkle Toothpaste New Sparkle's unique formulation contains Clove extract which has
long been a natural way to help relieve toothache and provide protection
from bacteria effectively. Its combination with Fluoride makes teeth and
gums stronger and healthier at an economical price for the whole family.
Palmolive Natural Fresh:
Palmolive Naturals Fresh is a superior skin-germ protection soap that promises
freshness and protection all day. Through its special TCC formulation it fights
bacteria that can be the cause of sickness and body odor. It‟s long lasting,
invigorating fragrance leaves one feeling fresh and confident always. It is
available in two variants namely Ocean Fresh and Citrus Fresh
Azadi Bath Soap
Azadi is a carbolic soap, which has been developed to cater to the needs of
the rural, rustic man of Pakistan. It provides an energizing fragrance and its
antibacterial agents provide active protection from dirt and impurities
Lemon Max Bar
Lemon Max Bar is a high quality is washing bar with leadership in
Pakistan. The consumers have over the years unanimously endorsed high
quality standards and benefits offered by Max Bar. Primary shoppers of Max
Bar are women/housewives who want the best cleaning of their household
dishes. Max Bar with its strong, lemon-like, grease cleansing action and „long-
lasting‟ value, provides the most complete and economical dish wash solution for all of
your dishes. Effective 360 degrees marketing programs (i.e., Heavy media advertising,
unique ground promotion activities, successful consumer promotions e.g., Scotch Brite
Promo and trade push activities) have increased brand awareness and maintained
leadership.
Azadi Dish Bar
Azadi is an affordable and extremely economical dish-wash bar that gives
high quality cleaning while lasting longer than any other dish-wash bar
available in the market. It has lemon power and a fresh fragrance, and cuts
grease and grime from dishes/utensils with extreme ease. Azadi Dish-wash Bar
has shown exponential growth in the 2 years since its launch. This has been
fueled by targeted marketing initiatives in the semi urban and rural market segments. The
brand has taken major volume shares from the small, yet powerful regional brands. Azadi
Dish bar is on track to realize the intended aim of capitalizing on the “low priced” dish
bar potential in the rural landscape of Pakistan. Azadi Dish wash Bar cleans thoroughly
and economically – dishes after dishes.
Max Scourers
Max Scourer is a superior all round cleaning product. It‟s extra Lemon Power
and strong Lemon fragrance make it a rugged cleaning agent for greater grease
cutting and stain removal. It brings a shine to those filthy kitchen and bathroom
tiles, greasy pots and pans and dirty floors.
An all-time successful consumer promotion (Free Scotch Brite on 1000gm)
creates and highlights a differentiation through extreme cost saving, thereby providing an
extra ordinary value offer for the consumer. It gives a saving of Rs. 18 on a retail of Rs.
32 i.e., a saving of almost 36%.
Max Liquids
Max Liquid has a superior cleaning formula that is designed to entirely remove even
the toughest grease from dishes, pots, pans and glasses. Max leaves utensils sparkling
clean and free from residue. It is for all housewives looking for uncompromisingly
clean dishes but who find that dishwashing is a chore that requires a lot of work. Max
dish wash easily strips off all the grease, leaving the dishes sparkling clean. It cleans
precious crockery and cutlery without any scratches. Max Liquid is also gentle on hands
and prevents your skin from damage.
Max Liquid is the only Pakistani liquid which offers more value (i.e., high quality) at
an affordable price and is superior to both local and foreign competition.
Max Antibacterial
Max Antibacterial/germ fighting dishwashing liquid not only strips off grease but
also removes invisible bacteria that could be potentially harmful. It has a superior
cleaning formula plus PCMX, a known antibacterial ingredient designed to entirely
remove even the toughest grease and harmful germs from dishes, pots, pans and glasses.
Antibacterial Max is for all those who are looking for uncompromisingly clean dishes
and are more concerned than the average person about hygiene and health.
Brite Total
Launched in the year 1981, Brite Total is one of the leading branded
detergents in the Pakistani market. Over the years, Brite has evolved together
with the needs of the Pakistani housewife in order to better cater to her wants
and lifestyle.
This premium quality detergent is now even better than before with the inclusion of
globally recommended ingredients of Stain Lifters and Oil Eaters. The combined action
of these ingredients lifts the toughest of stains of oil and grease in just 1 wash. Besides
delivering unmatched performance on tough stains, Brite‟s new formulation makes the
colors even more vibrant while continuing to protect the fabric of the clothes.
It even has the seal of approval from some of the top fabric manufacturers of the
country including Al Karam Textiles, Bonanza Garments, United Colors of Benetton and
Mohd Farooq Textiles Mills Limited.
Bonus
Bonus is the largest selling detergent in Pakistan, contributing towards the
industry leadership of Colgate-Palmolive in the category. It is an affordable value
detergent, which offers superior cleaning performance and stain and dirt removal
as compared to traditional laundry aids. It is replacing the use of laundry soaps and
loose detergents and helps in shaping up the penetration in downscale rural
markets.
Express Power
Express is the only brand in the popular price segment of laundry detergents. It
has a loyal consumer base and from the year 1993, Express has effectively
contributed towards the leadership of Colgate-Palmolive Co. in the overall detergent
market. The quality and price fit perfectly into the consumer needs and affordability
criteria
Analysis Liquidity Ratios “Ability of an organization to meet its short term obligation. A firm that cannot
meet its current financial obligations must resolve this problem before long term
strategic planning can be effective”.
1. Current ratio = Current assets__
Current Liabilities
(2001) = 529,912,000
361,425,000
= 1.466
(2002) = 641,391,000
362,723,000
= 1.768
(2003) = 674,985,000
441,596,000
= 1.529
(2004) = 808,825,000
463,218,000
= 1.746
(2005) = 877,981,000
436,201,000
= 2.013
1.466
1.7681.529
1.7462.013
0
0.5
1
1.5
2
2.5
2001 2002 2003 2004 2005
Current Ratio
Current ratio is the measure of the ability of an organization to meet its current
obligations. A common rule of thumb is that it should at least be equal to 2:1. As we can
see from the figures, there is a remarkable increase in inventories in 03, 04 & 05, which
shows that our current ratio will increase.
From the past records, trade in payables has decreased thus our current liabilities will
decrease with the going years.
In 01, company has huge liabilities. The main reason behind it is that maturity of loans
falls due in 01. thus we have to make payment, which results in increase in liabilities.
Company has also made short term investments in 03, whereas no such investment of
this sort has been done in 02. That is why our current ratio has decreased in 03 as
compared to 02.
Increase in cash & bank balance is one of the reasons for the improved current ratio in 03,
as compared to 02.In 05 the company has the best current ratio over the year because of
its huge investments in inventory increases from 443,660,000 to 547,765,000 and also a
remarkable increase in prepayments.
2. Acid -test ratio = Current assets – Inventories –
Prepayments
(Quick ratio) Current Liabilities
(2001) = 529,912,000 – 302,039,000 – 3,026,000
361,425,000
= 224,847,000
361,425,000
= 0.622
(2002) = 641,391,000 – 311,892,000 – 4,492,000
362,723,000
= 325,007,000
362,723,000
= 0.896
(2003) = 674,985,000 – 344,983,000 – 3,150,000
441,596,000
= 326,852,000
441,596,000
= 0.740
(2004) = 808,825,000 – 443,660,000 – 2,514,000
463,218,000
= 362,651,000
463,218,000
= 0.783
(2005) = 877,981,000 – 547,765,000 – 4,494,000
436,201,000
= 325,722,000
436,201,000
= 0.747
Acid test ratio is the measure of the ability of the organization to meet current debts
with most liquid (quick) current assets. It should be at least equal to 1:1. This ratio is best
in 02. Following are the reasons:-
Firstly this ratio depends on the size of the creditors. In 02 size of the creditors is
18,572,000 (current portion of the long term liabilities) which is remarkably less as
compared to 03 in which the figure lowers down to 69,302,000.
Another major factor is retained earnings. In 02, retained earnings are 84Mn, which
increased up to 118Mn in 03.Stock in trade is another factor. Greater the stock in
inventory, lesser will be the liquidity & vice versa.
Stock in inventory in 02 is less as compared to 03, which indicates that company has
faced more liquidity problem. Prepayments in 02 it is 7045,000 which is in contrast to
01 & 03 less. This reveals that Acid test ratio will be good in 02 as compared to 01 &
03.In 05 the acid test ratio comes down from 0.783 to 0.747 because the volume of
inventory and prepayments is high.
Working Capital = Current assets – Current liabilities
(2001) = 529,912,000 - 361,425,000
= 168,487,000
(2002) = 641,391,000 - 362,723,000
= 278,668,000
(2003) = 674,985,000 - 441,596,000
= 233,389,000
(2004) = 808,825,000 - 463,218,000
= 345,607,000
(2005) = 877,981,000 - 436,201,000
= 441,780,000
Working capital compares current assets to current liabilities, and serves as the liquid
reserve available to satisfy contingencies and uncertainties. The ratio indicates the short-
term solvency of a business and in determining if a firm can pay its current liabilities
when due, from the above calculation we observed that the working capital of the
company is increasing year by year, only in the year 2003 the figure comes down to
233,389,000 because long term loans arose from 12,500 to 62,500. Although the cash at
bank in 2005 decrease from 249,203 to 216537, but the working capital 2005 is at the
higher side as compare to the previous years. This is only because there is an increase in
the stock in trade and also on the liability side a decrease in the trade and other
payables and decrease in the liabilities against the assets subject to lease finance.
Liability Ratio = Current liability
Shareholder’s fund
(2001) = 361,425,000
334,704,000
= 1.080
(2002) = 362,723,000
394,615,000
= 0.919
(2003) = 441,596,000
484,025,000
= 0.912
(2004) = 463,218,000
770,942,000
= 0.601
(2005) = 436,201,000
951,613,000
= 0.458
Liability ratio is continuously decreasing from 2001 to 2005. This ratio is highest in
2001 which is 1.080 but minimum in 2005 i.e. 0.458 due to following reasons:
This ratio is on decreasing trend because our shareholder’s fund has been increasing
till 2005, the current liabilities of the company are also increase year by year but this
increase is not of same proportion as increase in shareholder‟s fund. This shareholders
fund has increased because our revenue reserves have increased. This increase results in
greater sales which ultimately increase our profits. Our current liabilities have increased
from 2001 to 2004 because our long term debts, creditors accrued and other liabilities
have increased but it suddenly decrease in 2005 because the company pays off its long
term loan and the amount reduces to 53,847,000 from 114,834,000.
Percentage changes in net sale and net income
1. % changes in net sale =___________ Rs amount of change_________
X100
Financial statement amount in the earlier year
(2001) = _431,250,000_
1,519,711,000
= 28.38 %
(2002) = 294,922,000_
1,950,961,000
= 15.12 %
(2003) = _488,602,000_
2,245,883,000
= 21.76 %
(2004) = _613,830,000_
2,734,485,000
= 22.45 %
(2005) = 571,908,000_
3,348,315,000
= 17.08 %
28.38%
15.12%
21.76% 22.45%
17.08%
0.00%
10.00%
20.00%
30.00%
2001 2002 2003 2004 2005
% Change in Net Sales
2. % changes in net income =___________ Rs amount of change_________
X 100
Financial statement amount in the earlier year
(2001) = 53, 489,000
105,783,000
= 50.56 %
(2002) = 51,202,000_
159,272,000
= 32.15 %
(2003) = 81,821,000_
210,474,000
= 38.87 %
(2004) = 158,347,000
292,295,000
= 54.17 %
(2005) = 30,975,000_
450,642,000
= 6.87%
50.56%
32.15%
38.87%
54.17%
6.87%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
2001 2002 2003 2004 2005
% Change in Net Income
3. Net income as a % of Sales = Net income X 100
Net sales
(2001) = 159,272,000_
1,950,961,000
= 8.16 %
(2002) = 210,474,000_
2,245,883,000
= 9.37 %
(2003) = 292,295,000_
2,734,485,000
= 10.69 %
(2004) = 450,642,000_
3,348,315,000
= 13.46 %
(2005) = 481,617,000_
3,920,223,000
= 12.29 %
8.16%
9.37%
10.69%
13.46%12.29%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
2001 2002 2003 2004 2005
Net Income as % of Sales
Coverage Ratio “Ratios that relate the financial charges of a firm to its ability to serve, or
cover them”
1. Interest Coverage Ratio = EBIT___
Interest Expenses
(2001) = 159,272,000
17,979,000
= 8.85
(2002) = 210,474,000
23,189,000
= 9.08
(2003) = 292,295,000
22,016,000
= 13.28
(2004) = 450,642,000
14,082,000
= 32
(2005) = 481,617,000
14,526,000
= 33.16
The interest cover ratio tells us the safety margin that the business has in terms of
being able to meet its interest obligations. That is, a high interest cover ratio means that
the business is easily able to meet its interest obligations from profits. Similarly a low
value for the interest cover ratio means that the business is potentially in danger of not
being able to meet its interest obligations.
Our ratio analysis of Colgate Palmolive shows that the company's safety margin is
increasing year after year, and has a very good interest coverage ratio in 04 & 05. It is
also noteworthy that the company has not availed any credit facility in 01 & 02 so it has
no interest obligations in these years and the low values in these years does not means
that the company is inefficient in terms of meeting its interest obligations.
Activity Ratios “Ratios that measure how effectively the firm is using its assets”
1. Inventory Turnover = Cost of Goods Sold
Inventory
(2001) = 1,407,544,000
309,889,000
= 4.54
(IT) in Days = 365
4.54
= 80days
(2002) = 1,667,029,000
311,892,000
= 5.34
(IT) in Days = 365
5.34
= 68days
(2003) = 1977,197,000
344,983,000
= 5.73
(IT) in Days = 365
5.73
= 64days
(2004) = 2,386,323,000
443,660,000
= 5.38
(IT) in Days = 365
5.38
= 68days
(2005) = 2,861,841,000
547,765,000
= 5.22
(IT) in Days = 365
5.22
= 70days
Inventory measures how many times the inventory has been turned over (sold) during
the year; provides insight into liquidity of inventory and tendency to overstock. In
principle, the lower the investment in stocks the better. Apart from buffer stocks that
businesses sometimes need in case of shortages of supply and strategic stocks in case of
war, sudden changes in demand and so on, modern stock control theory tells us to
minimize our investment in stocks.
Our analysis of inventory turnover tells that the COGS and inventory both are
increasing. The turnover in days shows that in 01 the turnover took maximum time as
compared to the following years. The reason could be the ineffective selling and
marketing strategies. In the five years the COGS are increasing but the rate of increase
in inventory is greater than the increase in COGS. The difference is not too big and we
can say that the company is working favorably in terms of its inventory control but it
should adopt suitable strategies to avoid the tendency to overstock.
2. Debtors Turnover = Net Credit Sales
Receivables
(2001) = 2,461,242,000
964,000
= 2553.16
(DT) in Days = 365
2553.16
= 0.14days
(2002) = 2,802,878,000
1,634,000
= 1715.35
(DT) in Days = 365
1715.35
= 0.24days
(2003) = 3,461,557,000
1,306,000
= 2650.50
(DT) in Days = 365
2650.50
= 0.13days
(2004) = 4,195,162,000
2,164,000
= 1938.61
(DT) in Days = 365
1938.61
= 0.19days
(2005) = 4,883,261,000
3,243,000
= 1505.79
(DT) in Days = 365
1505.79
= 0.24days
Debtor turnover measures how many times the receivables have been turned over (into
cash) during the year; provides insight into quality of the receivables. And the debtor's
turnover in days gives the average number of days receivables are outstanding before
being collected.
The overall analysis shows that the company is very favorably receiving its debts; this
is may be due to the restrictive credit policy of the company. The outstanding period of
the receivables is not more than a day rather they are collected within a day. The gross
sales are increasing year by year and the receivables also shows an upward growth except
in 03 where it fell as compared to 02, but continue increasing in 04 & 05. Also the
problem is that we have used net sales figure in calculating this ratio as there was no
distinction between credit & cash sales. So we cannot analyze the reasons correctly as the
net sales figure doesn‟t show the true picture.
3. Creditors Turnover = Cost of Goods Sold
Payables
(2001) = 1,407,544,000
139,848,000
= 10.06
(CT) in Days = 365
10.06
= 36days
(2002) = 1,667,029,000
167,086,000
= 9.98
(CT) in Days = 365
9.98
= 37days
(2003) = 1,977,197,000
222,224,000
= 8.89
(CT) in Days = 365
8.89
= 41days
(2004) = 2,386,323,000
302,590,000
= 7.88
(CT) in Days = 365
7.88
= 46days
(2005) = 2,861,841,000
257,520,000
= 11.11
(CT) in Days = 365
11.11
= 33days
Creditors are the businesses or people who provide goods and services in credit terms.
That is, they allow us time to pay rather than paying in cash.
The analysis shows that in 01 & 05 the ratio is favorable and the company is paying its
liabilities in lesser days as compared to 02, 03 & 04 where the numbers of days are large
and increasing. The main reason behind this could be that the cost of sales is increasing,
due to rising prices of raw material. The company mostly imports the raw material to
make the quality of products good. This increases the cost, and as the credit facility
availed to cover this cost is not sufficiently increasing, the turnover ratio is not so good in
these years.
4. Asset Turnover = Net Sales___
Total Assets
(2001) = 1,950,961,000
753,958,000
= 2.58
(2002) = 2,245,883,000
893,820,000
= 2.51
(2003) = 2,734,485,000
1,061,882,000
= 2.57
(2004) = 3,348,315,000
1,409,024,000
= 2.37
(2005) = 3,920,223,000
1,537,724,000
= 2.54
The asset turnover ratio simply compares the turnover with the assets that the
business has used to generate that turnover. In its simplest terms, we are just saying that
for every Re.1 of assets, the turnover is Rs x. This ratio measures relative efficiency of
total assets to generate sales.
The analysis of this ratio shows that for every Re. 1 of assets the company's turnover is
approx. Rs. 2.5 which means that the assets are efficient in generating sales. Net sales are
increasing year by year which means that the demand for the company's products is
increasing and the increase in total assets year by year shows the ability of the company
to meet the demand. This shows that the company is having sufficient income from its
sales to meet the increasing demand of assets to generate those sales. The variation in
asset turnover ratio is not very high in the five years and shows the consistency of the
company.
Operating Cycle = (IT) in Days+ (DT) in Days
(2001) = 80 + 0.14
= 80.14days
(2002) = 68 + 0.21
= 68.21 days
(2003) = 64 + 0.13
= 64.13 days
(2004) = 68 + 0.19
= 68.19 days
(2005) = 70 + 0.24
= 70.24 days
This shows the number of days the inventory is converted into cash. Our analysis of the
operating cycle of Colgate Palmolive shows that only in 01 the inventory took longer
time to be converted into cash. This time period is declining in 02 & 03 and rising a bit in
04 and 05. As we know that the debtor's turnover in days is extremely good so the
problem lies in inventory turnover. The company is needed to reduce the inventory by
adopting suitable selling strategies.
Cash Cycle = Operating Cycle- (CT) in Days
(2001) = 80.18 - 10.06
= 70.12days or 70days
(2002) = 68.26 - 9.98
= 58.28 days or 58days
(2003) = 64.17 -8.89
= 55.28 days or 55days
(2004) = 68.24 -7.88
= 60.36 days or60days
(2005) = 70.30 -11.11
= 59.19 days or 59days
This shows the length of time from the actual outlay of cash for purchases until the
collection of receivables resulting from the sale of goods or services. We can observe
from the ratios that the cash cycle of Colgate Palmolive is reducing. In 2001 it is 70 days,
reduces to 55 days in 2003, increases in 2004 to 60 days and again decreases in 2005 to
59 days. It shows the effectiveness of management how they reduce the length of time
between the purchase of inventory and the collection of account receivable created from
the sale of their product. The main reason of this cash cycle is that the debtor’s turnover
of this company is very low because their credit sales are less.
Leverage Ratios “Ratios that show the extend to which the firm is financed by debt”
1. Gearing Ratio = Long Term Debt__
Long Term Debt+ shareholders Equity
(2001) = 46,875,000
46,875,000+334,704,000
= 46,875,000
381,579,000
= 0.12
= 12%
(2002) = 121,622,000
121,622,000+394,615,000
= 121,622,000
516,237,000
= 0.23
= 23%
(2003) = 113,559,000
113,559,000+484,025,000
= 113,559,000
597,584,000
= 0.19
= 19%
(2004) = 114,834,000
114,834,000+770,942,000
= 114,834,000
885,776,000
= 0.1296
= 12.96%
(2005) = 53,847,000 ______
53,847,000+951,613,000
= 53,847,000
1,005,460,000
= 0.053
= 5.3%
= 5.3%
Gearing ratio basically measures the financial stability of the company. It is concerned
with the relationship between the long term liabilities that a business has and its capital
employed .
Gearing ratio is maximum in 2005 which is due to following FACTORS:-
SHAREHOLDERS EQITY is major factor in 2005 fund is remarkably on its peak i-e
Rs 951,613,000.where as in 2001, fund was only Rs 334,704,000 which is the main
reason for its lowest gearing in that year.
LONG TERM DEBT is another important factor. In 2005 long term debt reduces from
114,834,000 to 53,847,000 which means that company is majorly financed by its own
resources and not only depend on the loans from the outsiders.
This ratio also depends on the CASH FLOW of the company. Company is able to
serve its financial obligations, which makes this company a reliable one. Also this
company is not hugely financed by creditors, thus less risk will be bear by the
shareholders in case of liquidation and also this ratio will help company to take more
loans from the outsiders.
Indirect factors which affects the gearing ratio is volume of sale, in 2005 sales are
remarkably on its peak i-e Rs3,920,223,000.where as in 2001 , sales are only
Rs1,950,961,000 which is one of the main reasons for its lowest gearing in that year.
Profitability is another important factor. In 2005 firm‟s profitability is Rs302, 974,000
which is very high as compared to 2004‟s profit i-e Rs286, 917,000 which shows that
2004 has a lowest gearing ratio because higher the profitability, higher will be the gearing
ratio.
2. Debt-to-Asset Ratio = Total Debt
Total Assets
(2001) = 408,300,000
753,958,000
= 0.54
12%
23%
19%
12.96%
5.30%
0%
5%
10%
15%
20%
25%
2001 2002 2003 2004 2005
Gearing Ratio
= 54%
(2002) = 484,345,000
893,820,000
= 0.542
= 54.2%
(2003) = 555,155,000
1,061,882,000
= 0.5228
= 52.28%
(2004) = 752,916,000
1,409,024,000
= 0.5344
= 53.44%
(2005) = 639,958,000
1,537,724,000
= 0.4162
= 41.62%
Debt to asset ratio shows the extent to which the firm is using borrowed money. It
highlights the relative importance of debt financing to the firm by showing the percentage
of the firm‟s assets that is supported by debt financing.
In 2005 this ratio is best because 41.62% shows that 41.62% of firm‟s assets are
financed with debt of various types and the remaining 58.38% of the financing comes
from shareholders equity. This points out that greater the percentage of financing
provided by shareholders equity. The larger the cushion of protection afforded the firm‟s
creditors. In short, the higher the debt to total asset ratio the greater the financial risk; the
lower this ratio the lower the financial risk.
All these figures reveal that Palmolive Colgate is a reliable company. As it is less
reliable in the external debt therefore in case of liquidation creditors will be ensured that
they will get their money back.
54% 54.20%52.28% 53.44%
41.62%
0%
10%
20%
30%
40%
50%
60%
2001 2002 2003 2004 2005
Debt-T0-Asset Ratio
Profitability Ratio “Ratios that relate profits to sales and investment”
1. Gross profit margin = Gross profit
Net sales
(2001) = 543,417,000
1,950,961,000
= 27.85%
(2002) = 578,854,000
2,245,883,000
= 25.77%
(2003) = 757,288,000
2,734,485,000
= 27.69%
(2004) = 961,992,000
3,348,315,000
= 29%
(2005) = 1,058,382,000
3,920,223,000
= 27%
27.85%
25.77%
27.66%
29%
27%
24.00%
24.50%
25.00%
25.50%
26.00%
26.50%
27.00%
27.50%
28.00%
28.50%
29.00%
2001 2002 2003 2004 2005
Gross Profit Margin
Gross margin ratio tells us the profit a business makes on its cost of goods sold. It also
tells us how much G.P per Rs1 of turnover our business is earning. G.P ratio is maximum
in 2005 due to following FACTORS:
SALES VOLUME:
In contrast to 2002, volume of sales in 2004 is 3,348,315,000 has increased which results
in increase in G.P ratio in 04.
C.O.G.S:
COGS has decreased 2004 from Rs2,386,323,000 to Rs2,861,841,000 in 2005 which
results in increase in G.P ratio in 2004.
TURNOVER:
Less inventory turnover ties up your capital and lessens our capital. In 2002 our G.P ratio
is minimum because in 2002 our turnover is just Rs2, 245,883,000 which is very low as
compared to other years.
EFFICIENT OPERATIONS:
Past data have shown that company‟s G.P remains consistent over the past 4 years which
shows that firm is efficient in its operations.
EFFICIENT IN PRODUCING & SELLING PRODUCTS:
In 2004 its G.P is highest which reveals that it is relatively more effective at producing &
selling products above cost. Company‟s products has also priced efficiently in 2004
2. Net profit Margin = Earning before Tax
Net sales
(2001) = 141,293,000
1,950,961,000
= 7.24%
(2002) = 187,285,000
2,245,883,000
= 8.34%
(2003) = 270,279,000
2,734,485,000
= 9.88%
(2004) = 436,560,000
3,348,315,000
= 13.04%
(2005) = 467,091,000
3,920,223,000
= 11.91%
7.24%8.34%
9.88%
13.04%11.91%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
2001 2002 2003 2004 2005
Net Profit Margin
Net profit margin measures profitability that sales generated. It‟s the gross profit after
deducting our expenses, it also tells us the amount of net profit per 1Rs of turnover a
business has earned. It is the profit that is left, of which they will pay interest, taxes,
dividends & so on.Net profit of the firm is maximum in 2004,due to following
FACTORS:-
CHANGES IN SAES VOLUME:
Increase in sales volume results in increase in net profit. that is why in 2004 sales are
Rs3,348,315,000 which is extremely high as compared to 2001‟s sales which were
Rs1,950,961,000 only. That is why Company has earned minimum profit of 7.24%.
COST OF GOODS SOLD (COGS):
Lesser the COGS, higher will be the net profit. Comparing 2004&2005,COGS incurred
by the company in 2004 is Rs2,386,323,000, whereas in 2005 it becomes
Rs2,861,841,000 thus decreased our profit in 2005.
OPERATING EXPENSES:
By controlling our operating expenses we can increase our net profit. company has
efficiently controlled its operating expenses in 2004 as compared to other years. That is
why earned highest profit in 2004.
INCOME TAXES:
It is another factor that contributes to net profit. While comparing 2004 & 2005, an
income tax has increased from Rs149, 643,000 toRs164, 117,000 thus lowers the net
profit.
3. Return on Capital Employed= EBIT
(ROCE) Working capital + fixed assets
(2001) = 159,272,000 .
168,487,000 + 224,046,000
= 40.58%
(2002) = 210,474,000 .
278,668,000 + 252,429,000
= 39.63%
(2003) = 292,295,000 .
233,389,000 + 386,897,000
= 47.12%
(2004) = 450,642,000 .
345,607,000 + 600,199,000
= 47.65%
(2005) = 481,617,000 .
441,780,000 + 659,743,000
= 43.72%
40.58% 39.63%
47.12% 47.65%43.72%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
2001 2002 2003 2004 2005
ROCE
ROCE tells us how much profit we make from the investments, the shareholders have
made in their company. Shareholders first see the R.O.C.E of the firm, before investing in
the stocks of that company. Figures shows that ROCE is max in 2004 &some what in
2003 also. Following are its REASONS:-
In 2004 SALES VOLUME has increased drastically as compared to 2002 which
results in increase in R.O.C.E because greater the sales greater will be the margins on
R.O.C.E.
Past records of 03 &04 have also indicated that company is efficient in ANALIZING
THE DEMAND FOR ITS PRODUCTS as compared to in 01 & 02.
Thirdly company becomes efficient in CONTROLLING ITS EXPENSES, such as
selling & administration expenses, which results in increase in R.O.C.E.
Fourthly SALE PRICE has also increased in 04 & 03 as compared to 02, which has
also in increased our R.O.C.E in 04 & 03.
4. Return on Asset = EBIT
(ROA) Total Assets
(2001) = 159,272,000
753,958,000
= 21.12%
(2002) = 210,474,000
893,820,000
= 23.55%
(2003) = 292,295,000
1,061,882,000
= 27.53%
(2004) = 450,642,000
1,409,024,000
= 31.98%
(2005) = 481,617,000
1,537,724,000
= 31.32%
21.12%23.55%
27.53%
31.98% 31.32%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
2001 2002 2003 2004 2005
Return on Asset
Return on assets (ROA) weighs how efficiently a company can squeeze profit from its
assets, regardless of size. A high ROA is a telltale sign of solid financial and operational
performance.
The return on asset ratio is being improved from 2001 to 2004. In 2004 the company
achieved records in each of its key business performance measure, sales growth of 21
percent, operating profit growth of 54.2 percent an increase of 64 percent in its profit
after paying tax and remarkable decrease in financial costs. In 2005 return reduces a bit,
because of company‟s investment in fixed assets and stock in trade. The Company can
improve this ratio either by boosting company‟s profit margin or, by using its assets to
increase sales more efficiently. Overall the ratio is favorable, and we can say that the
company‟s good management is striving continuously to increase the ROA - to extract
greater profit from every rupee of assets at its disposal.
5. Return on Equity = EBIT___
(ROE) shareholder’s equity
(2001) = 159,272,000
334,704,000
= 47.59%
(2002) = 210,474,000
394,615,000
= 53.33%
(2003) = 292,295,000
484,025,000
= 60.39%
(2004) = 450,642,000
770,942,000
= 58.45%
(2005) = 481,617,000
951,613,000
= 50.61%
47.59%53.33%
60.39% 58.45%
50.61%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
2001 2002 2003 2004 2005
Return on Equity
ROE measure‟s the earning power on shareholders book value of investment. It also
measure the overall firm‟s performance. A higher R.O.E often reflects the firm‟s
acceptance of strong investment opportunities & effective expense management. It is
maximum in 2003 due to following FACTORS:
NET PROFIT:
Greater the net profit higher will be the R.O.E.Net profit of the firm has tremendously
increased from Rs95, 336,000 in 2001 to Rs175, 022,000 in 2003, which clearly indicates
the reason for the drastic change from 2001 to 2003.
TAX DEDUCTION:
From the past records we can see that in 2003, company‟s taxes were very low as
compared to Rs149, 643,000 Rs7164, 117,000 of 2004 & 2005‟s taxes.
If the firm has chosen to employ a level of debt that is high by the industry standards, a
high R.O.E might simply be the result of assuming excessive financial risk
6. Operating Expense Ratio = Operating Expense
Net sales
(2001) = 388,429,000
1,950,961,000
= 19.91%
(2002) = 375,602,000
2,245,883,000
= 16.72%
(2003) = 476,990,000
2,734,485,000
= 17.44%
(2004) = 522,310,000
3,348,315,000
= 15.60%
(2005) = 584,950,000
3,920,223,000
= 14.92%
19.91%
16.72% 17.44%15.60% 14.92%
0.00%
5.00%
10.00%
15.00%
20.00%
2001 2002 2003 2004 2005
Operating Expense Ratio
Operating expense ratio is the ratio between the operating expenses and the expensive
gross sales. Operating expenses are costs associated with the operation and maintenance
of income producing properties, and includes wages, insurance, repairs and maintenance,
supplies, advertising etc. The operating expense ratio is the company s decreases year by
year. In 2002 the operating expenses reduces at a considerable percentage from app 19 to
app.14. Because company cut down its legal and professional charges from 1,114,000
to 374,000 only and also reduction in the charges of advertising and sales promotion
from 216,119,000 to 186,389,000. But after 2002 this ratio is increase in 2003 because of
spending on advertising, promotion and other marketing incentives towards brand
building and brand support. In addition the increase is also due to the introduction of
employees' gratuity plan. After 2003 this ratio is decreases in 2004 and 2005 because
increase in sales is more as compare to the increase in operating expenses.
7. Operating Income = Gross Profit – Operating
Expense
(2001) = 543,417,000 - 388,429,000
= 154,988,000
(2002) = 578,854,000 - 375,602,000
= 203,252,000
(2003) = 757,288,000 – 476,990,000
= 280,298,000
(2004) = 961,992,000 – 522,310,000
= 439,682,000
(2005) = 1,058,382,000 – 584,950,000
= 473,432,000
Operating Income maximum in 2005 due to following FACTORS:-
SALES VOLUME:
Comparing 2004 &2005,in 2004 sales are Rs334,831,000 which increased up to
Rs3,920,223,000 in 2005,due to which operating income in 2005 is better than 2004.
PROFITABILITY:
Higher the profitability, greater will be the operating income & vice versa. That is why
in 2001 company has earned lowest profitability of only Rs95, 336,000 which was
tremendously low as compared to 2002‟s profitability which was Rs121, 062,000.thus
operating income has increased drastically from 2002 to onwards.
SALE PRICE:
Company has efficiently priced its products in their respective markets especially in
2005, which ultimately increased the operating income in2005.
Net Worth =Net assets employed – long term
liabilities
(2001) = 435,339,000 – 57,829,000
= 377,510,000
(2002) = 595,248,000 – 136,482,000
= 458,766,000
(2003) = 705,898,000 – 136,261,000
= 569,637,000
(2004) = 945,806,000 – 174,864,000
= 770,942,000
(2005) = 1,101,523,000 -149,910,000
= 951,613,000
Break up value = Net worth
No of shares
(2001) = 377,510,000
12,230,263
= 30.87
(2002) = 458,766,000
12,230,263
= 37.51
(2003) = 569,637,000
12,230,263
= 46.58
(2004) = 770,942,000
12,230,263
= 63.04
(2005) = 951,613,000
12,230,263
= 77.81
Book Value per Share = Shareholder’s Equity
Shares of Common Stock
(2001) = 334,704,000
12,230,263
= 27.37%
(2002) = 394,615,000
12,230,263
= 32.27%
(2003) = 484,025,000
12,230,263
= 39.58%
(2004) = 770,942,000
12,230,263
= 63.4%
(2005) = 951,613,000
12,230,263
= 77.81%
Z- Score Test
(2005)
X1 = Working Capital
Total Assets
= 441,780,000_
1,537,724,000
= 0.287
X2 = Retained Earnings
Total Assets
= 815,854,000
1,537,724,000
= 0.531
X3 = ___Ebit___
Total Assets
= 481,617,000_
1,537,724,000
= 0.313
X4 = Market Value of Equity
Book value of debt
= 194.25 x 12,230,263
211,477,000
= 2,375,728,588
118,770,000
= 20.00
= 77.81
= 0.401
X5 = ___Sales___
Total Assets
= 3,920,223,000
1,537,724,000
= 2.55
Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5
= 1.2(0.287) + 1.4(0.531) + 3.3(0.313) + 0.6(20.00) + 1.0(2.55)
= 0.3444 + 0.7434 + 1.0329 + 12.00 + 2.55
= 16.67
(2004)
X1 = Working Capital
Total Assets
= _345,607,000_
1,409,024,000
= 0.245
X2 = Retained Earnings
Total Assets
= 635,183,000
1,409,024,000
= 0.451
X3 = ___Ebit___
Total Assets
= _450,642,000_
1,409,024,000
= 0.32
X4 = Market Value of Equity
Book value of debt
= 194.25 x 12,230,263
188,893,000
= 2,375,728,588
188,893,000
= 12.577
X5 = ___Sales___
Total Assets
= 3,348.315,000
1,409,024,000
= 2.376
Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5
= 1.2(0.245) + 1.4(0.451) + 3.3(0.32) + 0.6(12.577) + 1.0(2.376)
= 0.294 + 0.6314 + 1.056 + 7.546 + 2.376
= 11.90
X1, Working Capital/Total Assets (WC/TA).
The working capital/total assets ratio, frequently found in studies of corporate
problems, is a measure of the net liquid assets of the firm relative to the total
capitalization. Ordinarily, a firm experiencing consistent operating losses will have
shrinking current assets in relation to total assets. Of the three liquidity ratios evaluated,
this one proved to be the most valuable. Two other liquidity ratios tested were the current
ratio and the quick ratio. There were found to be less helpful and subject to perverse
trends for some failing firms.
A firm is considered to be good whose this ratio is 0.1 to 0.2. But Colgate has the ratio
of 0.287 which is very good. This shows that firm is quite liquid and able to pay its
liabilities on time.
X2, Retained Earnings/Total Assets (RE/TA).
Retained earnings are the account which reports the total amount of reinvested earnings
and/or losses of a firm over its entire life. This is a measure of cumulative profitability
over time as a “new” ratio. The age of a firm is implicitly considered in this ratio. For
example, a relatively young firm will probably show a low RE/TA ratio because it has
not had time to build up its cumulative profits. Therefore, it may be argued that the young
firm is somewhat discriminated against in this analysis, and its chance of being classified
as bankrupt is relatively higher than that of another older firm, ceteris paribus. But, this is
precisely the situation in the real world.
Colgate Palmolive is an older firm that‟s why its RE/TA is quite impressive. In
addition, the RE/TA ratio measures the leverage of a firm. Those firms with high RE,
relative to TA, have financed their assets through retention of profits and have not
utilized as much debt. And it is also seen in our ratio analysis that firm is majorly rely on
their own resources and its outsider financing is quite small when we take the whole firm
volume of business
X3, Earnings Before Interest and Taxes/Total Assets (EBIT/TA).
This ratio is a measure of the true productivity of the firm‟s assets, independent of any
tax or leverage factors. Since a firm‟s ultimate existence is based on the earning power of
its assets, this ratio appears to be particularly appropriate for studies dealing with
corporate failure. Furthermore, insolvency in a bankrupt sense occurs when the total
liabilities exceed a fair valuation of the firm‟s assets with value determined by the
earning power of the assets. As we will show, this ratio continually outperforms other
profitability measures, including cash flow.
Colgate Palmolive this ratio is also outstanding. This ratio is going to be better year after
year and the earning power of the assets are increasing, which shows that the firm is
utilizing its assts very well but at the same time it also tells that the firm has the potential
to enhance the earning power of its assets .
X4, Market Value of Equity/Book Value of Total Liabilities (MVE/TL).
Equity is measured by the combined market value of all shares of stock, preferred and
common, while liabilities include both current and long term. The measure shows how
much the firm‟s assets can decline in value (measured by market value of equity plus
debt) before the liabilities exceed the assets and the firm becomes insolvent. This ratio
adds a market value dimension which most other failure studies did not consider. It also
appears to be a more effective predictor of bankruptcy than a similar, more commonly
used ratio; net worth/total debt (book values).
The equity market value serves as a proxy for the Colgate market value is very high
and company share was traded about 200% above its market value which shows
investor‟s faith in company ability to pay its liabilities. The company has huge assets and
strong profitability which is the reason of its high market price. The company long term
loans are also decreasing almost 50% which further increase the firm strength. This is the
reason for a very excellent ratio
X5, Sales/Total Assets (S/TA).
The capital-turnover ratio is a standard financial ratio illustrating the sales generating
ability of the firm‟s assets. It is one measure of management‟s capacity in dealing with
competitive conditions. This final ratio is quite important because it is the least
significant ratio on an individual basis. However, because of its unique relationship to
other variables in the model, the sales/total assets ratio ranks second in its contribution to
the overall discriminating ability of the model
Colgate S/TA outperform as this ratio is about 2.55 in 2005 and 2.376. This reason
behind this that company sales volume is very high and company‟s assets ability to
generate sales is very exceptional and tremendous.
The company z-score shows a very positive sign of firm‟s strength, liquidity and
solvency. A z-score of above 3 shows that it is most creditable and solvent. Colgate
Palmolive z-score is 16.67 in 2005 and 11.90 in 2004 which is outstanding. This shows
that firm is very creditable and solvent and has not facing any problems in paying its
liabilities. Further there are no chances of its liquidation and insolvent not only in the
near future but also in the long run. Company profitability is very stro9ng and a huge
equity base which is one of the reasons of the firm strength.
Conclusion
“Team work is the ability to work together towards a common vision. The ability to direct
individual accomplishments towards organizational objectives. It is the fuel that allows
common people to attain uncommon results”
Colgate-Palmolive Pakistan Limited is a consumer goods company, whose strong brand
portfolio has allowed it to grow rapidly over the last few years. With Pakistan‟s strong
economic situation and the company‟s soon to be completed capacity expansion, we
expect revenues to grow. However, net margins are expected to decline by 150bps over
the next 5 years as a result of (I) the depreciating rupee, (II) increasing international raw
material costs, (II) a likely increase in operating expenses on the back of aggressive
marketing activities in the near future, and (IV) a price ceiling due to the high levels of
competition in the sector. These factors are expected to result in the company reporting a
17% 5-year return in profits.
Today, competition is not only rife but growing more intense every year. In the light
of increasing competition at the point of sale, category management initiatives have
become key in building brand recall and increasing in-store presence. To serve the
expanding needs of trade and channels, Customer Marketing through its various
initiatives and activities contribute towards improved trade relations, customer
profitability and satisfaction. Colgate-Palmolive firstly will consider the consumers‟
perception of prices and values as it sets a price for the target market. Urbanization is
likely to be strong drivers of the Pakistani economy, thus generating a 5 year return of
12% in the consumer and allied sector revenues. Sustained growth, relatively low risk
and regular dividends make the consumer and allied companies a good defensive
investment.
Colgate-Palmolive (Pakistan) Limited recorded continued growth for the years,
benefiting from on going operating efficiencies and sustained strategic focus. Colgate-
Palmolive has shown a very strong sales trend over the past few years. Given the growth
in the Pakistani economy, the company‟s strong product portfolio and the relationship
that exists between the Colgate-Palmolive‟s stock prices is likely to react to news
regarding the new product launches, aggressive government action to counter smuggling
and counterfeiting and a revocation/change in the applied CED rate. Strong economic
growth figures are also likely to boost interest in the stock.
The relationship that exists between the company‟s sales and GDP, we expect revenues
to continue growing strongly and predict a return of 23% in the company‟s revenues over
the next 5 years. While growth is likely to be broad based, we expect the main driver to
be detergents, on the back of the company‟s completed capacity expansion and its
successful strategy of concentrating on the lower end of the packed detergent segment..
The company entered 2004-05 with increased detergent capacity, which laid the
foundation for stronger volume growth. However, maintaining margins next year will be
demanding as the material costs are on the rise and the product prices can not be raised
unilaterally due to strong competitive pressures.
Colgate proved to be one of the market leaders in consumer and allied products as it
increases its efficiency in terms of turnover and profits. Although company heavily
invested in inventories but at the same time its efficient management of its cash and
current assets increase in sales and profits. Company is majorly operating on its own
resources and it will not find any difficulty in acquiring advance and credit facilities in
case of facing any liquidity crunch and want to increase its capacity and sales. .Company
is going concern in next 10 to 15 years as its creditability, liquidity and solvency is
without any question.
Colgate-Palmolive imports nearly all the raw materials used to produce oral care
products and just over half the raw materials used in producing the rest of the company‟s
products. It is thus estimated that about 60% of the company‟s total raw materials are
imported. With the rupee expected to depreciate by about 2-3% per annum over the next
few years and with international raw material prices also rising, we expect the company
to report a 177bps fall in gross margins to 28% over the next 5 years.
Colgate-Palmolive‟s future strategy is to continue in its ongoing quest to understand the
continuously evolving needs and expectations of consumers and exceed these
expectations by offering products that provide unique functional benefits, quality and
value. The strategy is designed to strengthen the company‟s market leadership positions
and deliver further earning growth and incremental value to all its stakeholders.
