Financial Analysis of Cherat Cement Company Limited

Financial Analysis of Cherat Cement Company

Name of Group Members: Roll No.:

1. Farhan Ahmad 10-12001

2. Safwan Arif 10-12016

Course code: BUSN321

Section: B

Date of Submission: December 4, 2008

Financial Analysis of Cherat Cement Company Limited

Companies Introduction:

Profile of the company:

The company was incorporated in Pakistan as a public limited company by shares in the

year 1981. The company started commercial production in May 1985 and is listed on

Karachi, Lahore and Islamabad stock exchanges.

The Nature of Business:

The company operates in the secondary sector that is the production sector of the

economy. Its main business activity is manufacturing, selling and marketing of cement

and clinker. The graphical view presents this more clearly how much is produce:

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Clinker/Cement Production Over the Years

clinker

cement

Vision:

“Growth through the best value creation for the benefit of all stakeholders”

Mission Statement:

1. Invest in projects that will optimize the risk-return profile of the company.

2. Achieve excellence in business.

3. Maintain competitiveness by leveraging technology.

4. Continuously develop our human resource.

5. To be regarded by investors as amongst the best blue-chip stocks in the country.

Core Values:

Always deliver the best quality product to our customers.

1. Maintain the highest level of integrity, honesty and ethics.

2. Use technology to continuously improve our processes.

3. Develop the capability of our workforce on an ongoing basis.

4. Safeguard the interest of all our stakeholders.

Key Ratios for the two annual periods (2007-06, 2006-05):

2007 2006Profitability

1. Gross profit margin % 14.41 38.842. Net Profit margin% 7.03 22.093. Net Profit Equity % 8.23 25.454. Return on assets % 5.21 14.895. Operating profit margin % 12.31 32.826. Return on investment% 9.12 22.127. Raw & packing material % of net sales 12.48 8.508. Labor % of net sales 7.77 7.309. Manufacturing expenses % of net sales 71.88 54.4510. Purchases % of net Sales 12.64 9.2

Asset Management1. Total Asset turnover 0.74 0.672. Fixed Asset turnover 1.14 1.043. Inventory turnover/ times 17.08 12.744. Inventory days 21.37 28.65

Liquidity 1. Current ratio 2.29 2.452. Acid test ratio 2.07 2.17

Debt 1. Payable days 3.76 12.862. Total debt/ total assets 0.37 0.413. Equity multiplier 1.58 1.714. Time interest earned 4.27 9.945. Return on Equity 8.47 27.89

Market value1. Book value per share 23.40 25.422. Earning per share 1.93 5.63

Common size statements: - Key: (figures in Rs 000)Turnover net 2007 = 2,619,960Turnover net 2006 = 2,434,513 Total Assets 2007 = 3,533,350 Total Assets 2006 = 3,611,889Total Equities & Liabilities 2007 = 3,533,350Total Equities & Liabilities 2006 = 3,611,889

Cherat Cement Company Ltd:

Income statement% to Sales 2007 % to Sales 2006

Turnover- net 100% 100%Cost of sales 86% 61%Gross profit 14% 39%Distribution cost 2% 2%Administrative expenses 3% 3%Other operating expenses 1% 2%Other operating income 4% 1%Operating profit 12% 33%Finance cost 3% 3%Profit before taxation 9% 30%TaxationCurrent-for the year 3% 2%- prior years 0.12% 0.48%Deferred-for the year 0.43% 6%Profit after taxation 7% 22%

Cherat Cement Company Ltd Balance Sheet

% to Assets 2007 % to Assets 2006AssetsNon Current AssetsTangible fixed Assets, P,P & E 62% 63%Long Term Investments 1.8% 0.6%Long term loans and advances 0.17% 0.2%Long term security deposits 0.4% 0.05%Derivative financial assets 0.7% 1.1%Total non current assets 65.89% 64.90%Current AssetsStores, spare parts & loose tools 17.5% 11.2%Stock in trade 3.3% 4.0%Loan and advances 0.3% 4.4%Trade deposits & S-T prepayments 0.1% 0.08%Other receivables 0.06% 0.05%S-T investments 11.6% 42.1%

Taxation – Net - 0.52%Cash & Bank Balances 0.021% 10.6%Total Current Assets 35.11% 35.10%Total Assets 100% 100%

% to TE & Debt 2007 % to TE & Debt 2008Equity and liabilitiesShare capital & reserveIssued, subscribed & paid up Capital 27% 23%Reserves 36% 35%Non – Current LiabilitiesL-T Financings 12.4% 18%L-T Deposits 0.41% 0.38%Differed Taxation 8.6% 8.8%Current LiabilitiesS-T Running Finance 2.7% 1.7%Trade & other Payables 6% 7.7%Current Maturity of L-T liabilities 6% 4.5%Taxation – Net 0.32% -Un claimed Dividends 0.33% 0.31%Total current liabilities 15.34% 14.30%Total equity & liabilities 100% 100%

Summarize Operating Performance of the company:

2006/07 (Rs. In million)

2005/06(Rs. In million)

Variance

Net Sales 2,619.96 2,434.51 8%Cost of Sales 2,242.30 1,488.88 51%

Gross Profit 337.66 945.63 (60%)Expenses & Taxes 193.50 407.85 (53%)

Net Profit 184.16 537.78 (66%)

Ratio analysis:-

Profitability: -

These are use to access how successful the management of the business has been at

earning profits for the business from sales and from the assets employed.

Gross profit Margin of the company: -

Despite 56% increase in sales volume, sales revenue could only rise by 8% because the

per ton price of cement had decreased from Rs 4085 in 2006 to Rs 2823 in 2007 causing

an increase in sales volume but the sales revenue could not cope up with the sales volume

in the same proportion.

On the other hand the cost of goods sold has increased as it could be seen in the common

size statement. This is because the Manufacturing overheads (mainly fuel & power) have

increased as could be seen in the ratios table. Besides that labor, cost of inputs and

packing has increased mainly because of inflation.

This all have reflected the gross profit margin which is decreased from 38.84 in 2006 to

14.41 in 2007.

Net Profit Margin & Operating Profit Margin:-

Although some of the expenses incurred have decreased such as other operating expenses

and deferred taxation and an increasing in operating income but still the net profit margin

& operating profit margin was quite low as compared to last year because a low gross

profit.

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2002 2003 2004 2005 2006 2007

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Comparison of Sales with Netprofit

Net Profit

Sales

Net Profit to Equity:-

This ratio has decreased because an increase in share capital and reserves. Further more

another cause of decline in this ratio is the decrease in the profit. So both the reasons

contributing subsequently, causing a low net profit to equity ratio.

Return on Investments & Return on Assets:

Although the debt had decreased but the equity had increased and on top of all the

operating profit have decreased giving out a low return on investment ratio. If we see the

other side that is the return on asset, the assets has increase but the main problem for the

ratio to be low as compared to previous year is that the operating profit is low.

Asset Management:-

These ratios allow a business to measure how effectively it uses some of its resources.

Asset Turnover Ratio:-

The asset turnover ratio is higher showing that assets are more productive that is assets

are being used more effectively. This ratio shows that sales generated from every Rs 1 of

net asset.

Stock Turnover in Days and Times:-

This ratio shows that the profit on the sale of stock is earned more quickly as compared to

previous years. This also shows that there are low stock levels, effective control over

purchasing and low obsolete inventory left in the stock as compared to previous year.

Stock turnover in times means that the stock is being sold 17 times a year in 2007 as

compared to previous year which was 12.74 times. It is also expressed in days in the table

above so that to find it out more clearly the number of days it takes to sell stocks.

Receivable days:

The trade receivables of the company are very low as mostly it deals with cash sales.

Liquidity:

It shows effective cash management as well as profitability. It is essential for the business

survival. Liquidity ratios are concerned with the business ability to convert its assets into

cash.

Current Ratio:-

The current ratio have decline because of the increase in current liabilities. This has

mainly increased because the current maturity of long term debt this year in greater than

the previous year.

Acid Test Ratio:-

The Acid test ratio clearly shows that the effect of stock is minimal. As could be seen

while taking the difference of both year current ratio matching with the difference of both

year acid test ratio. The difference is (2.45-2.29) – (2.17-2.07) = -0.06. In fact this shows

that the stock is decreasing as a negative balance is occurring. So the main problem with

liquidity ratios going down is because of the current maturity of long term debt and S-T

financing.

Debt:-

These ratios show the position about the company’s debt and equity.

Payable Days:

The payment to suppliers is done more promptly as compared to the previous year

causing negative impact on the liquidity of the company. But while seeing its cash flow

statement it seems to be all right as prompt payments helps getting discounts.

Total Debt to Total Assets:-

This shows that you many assets are being financed by debt and it seem to be good that

just 35% of assets are being financed by debt. But the main problem lies is that equity is

tax deductible but on debt no interest is charge. So equity is an expensive way to finance

the assets.

Equity Multiplier:-

It has decreased because the share capital has increased. But it still shows that much of

the assets are financed by equity.

Return on Equity:-

This ratio is the combination of profitability, asset use and debt ratio. It has reduce

showing that much of the firms assets are finance from equity and the profit to the

shareholder’s as a percentage of the shareholder’s equity has decreased.

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Return on Equity

Equity

Profit

Equity with long term liability:-

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Equity and Long term Liabilities

Equity

Long Term Liabilities

The following risks are important for the company’s analysis:

1. Concentration of credit risk:

Credit risk represents the accounting loss that would be recognized the accounting

loss that would be recognized at the reporting date if counter parties failed to perform

as contracted. The company does not have exposure to credit risk, as the company

receives money in advance against sales.

2. Liquidity Risk:

The company applies prudent risk management policies by maintaining sufficient

cash and bank balances and by keeping committed credit lines. At the balance sheet

date the company has unavailed credit facility of Rs. 713.83 million.

3. Foreign Exchange risk management:

Foreign currency risk arises mainly where investments, receivables, loans and

payables are denominated in foreign currencies. As at the balance sheet date, the

carrying value of the assets exposed to exchange risk is Rs. 4.953 million. The

company occasionally enters into foreign exchange forward contracts to minimize

foreign currency risks.

Foreign Vs Local Market Consumption:

2006/07(in tons)

2005/06(in tons)

Variance

Local sales 653,023 401,080 63%Export sales 274,601 194,906 41%Total 927,624 595,986 56%

Graphical Financial Comparison of Cherat Cement Company and Fauji Cement Company:

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NetProfit/Sales

Fauji Cement Company

Cherat Cement Company

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Net Sales



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Profit After Tax



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Equity



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Long Term Liabilities



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Fixed Assets



References:

1. Financial Statements of Cherat Cement Company 2002, 2003, 2004, 2005, 2006 and 2007.

2. Financial Statements of Fauji Cement Company 2002, 2003, 2004, 2005, 2006 and 2007.

Documents

Financial Analysis of Cherat Cement Company Limited