Pakistan State oil

Introduction of the Organization

Pakistan State Oil (PSO), the largest oil marketing company in Pakistan (with a market share of

80%), was formed in 1976 through the merger of Pakistan National Oil, Premiere Oil, and Esso.

PSO operates 3,600 retail outlets, including more than 1,600 New Vision Retail Outlets that

offer, besides the usual gas-station services, an Internet kiosk, car wash, and other amenities. The

company additionally sells a full range of petroleum and related products, including fuel oil,

industrial oils, and petrochemicals. The Government of Pakistan controls a majority stake in the

publicly traded PSO.

History of Pakistan State Oil

PSO came into being in the mid-1970s when the Government of Pakistan amalgamated three

“Oil Marketing Companies”: Esso Eastern, Pakistan National Oil (PNO) and Dawood Petroleum

as part of its “Nationalization Plan”. From 1999 to 2004, PSO had undergone radical changes,

both internal and external and has emerged with a new look and as a market leader with a long-

term vision. The company is the only public sector entity in Pakistan that has been competing

effectively with three foreign multinationals, Shell, Caltex and Total.

PSO is currently enjoying over 73% share of Black Oil market and 59% share of White Oil

market. It is engaged in import, storage, distribution and marketing of various POL products

including, mogas, high speed diesel (HSD), fuel oil, jet fuel, kerosene, liquefied petroleum gas

(LPG), compressed natural gas (CNG) and petrochemicals.

PSO also enjoys around 35% market participation in lubricants and is blending/marketing

Castrol brands, in addition to a wide array of its own. It is considered as one of the most

successful mergers in the history of Pakistan. The company has retail coverage of over 3,800

outlets, representing 80% participation in total industry network. The company has been the

winner of Karachi Stock Exchange Top Companies Award for many years and is a member of

World Economic Forum. PSO serves a wide range of customers throughout Pakistan including

retail, industrial, aviation, and marine and government/defense sectors. PSO has been meeting

the country’s fuel needs by merging sound business sense with national obligation.

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Vision Statement

To excel in delivering value to customer as an innovative and dynamic energy company that get

to the future first.

Mission Statement

We are committed to leaderships in energy market through competitive advantages in providing

the highest quality petroleum products and services to our customers based on.

Professionally trained high quality motivated work force working as a team in an

environment which recognizes and rewards performance innovation and creativity and

provide for personal growth and development.

Lowest cost operation and assured access to long term and cost effective supply sources.

Sustain growth in earning in real terms.

High ethical and safety environment and socially responsible business practices.

Petroleum Industry Overview

During FY10, oil prices remained relatively stable maintaining an average of $ 73.44/ bbl as

compared to a sharp fluctuation in international prices in FY09 which helped maintain the POL

prices in the country. In the period under review, POL consumption in the country was recorded

to be 20.8 million tons, as compared to 19.2 million tons last year. The primary reason for this

8% growth has been the increased consumption of Mogas and Fuel Oil.

Consumption of Black Oil grew to 9.3 million tons - an increase of 14% over the preceding

year. Black Oil demand picked up owing to supply constraints for natural gas. Reduced hydro-

electric potential also contributed to rise in Fuel Oil consumption. This trend in Fuel Oil

consumption is expected to continue in subsequent years.

White Oil reported a slight increase from 10. Million tones to 10.2 million tones.

During FY10 consumption of HSD decreased by 3%. During the period under review, demand

for motor gasoline increased by over 27% over the preceding year mainly due to 50% increase in

cars sales and 44% increase in motor cycles’ sales, gas shortage in winters, one day holiday of

CNG per week and extraordinary increase in use of generators due to frequent power outages.

Demand of Jet A-1 (local) registered an increase of around 9% due to increase in domestic

carriers and technical landings. During FY10, local refineries produced 7.9 million tons while the

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deficit requirement of around 11.3 million tons was imported. The major chunk of demand was

in FO and HSD for which 6.7 million and 3.75 million tons were imported respectively by PSO.

A significant reduction in the refining capacity of different refineries was witnessed mainly due

to the mounting circular debt and lower refining margins.

Pakistan State Oil Performance year 2010

During FY10, PSO sold 14.2 million tons of POL products as compared to 13.2 million tons

during the preceding year, the details of their products are as follows:

Black Oil

In Black Oil, PSO enhanced its market share appreciably from 85.8% in FY09 to 88.3%. PSO

registered a ever highest sales volumes of 8.2 million MTs for Furnace Oil (FO). The surge was

mainly due to increase in demand in power generation sector. PSO despite the mounting circular

debt responsibly met the demands of the power sector of the country. In the period under review,

the company remained committed to keep the homeland lit up.

White Oil

In White Oil, PSO reduced its market share from 59.4% in FY09 to 55.4% in FY10. Decrease in

PSO’s market participation in White Oil by 4% was mainly due to the overall economic

downturn and circular debt.

Mogas

PSO lost 2.1% share in Mogas as compared to previous year bringing its market share in this

product to around 45.9%. PSO’s Mogas volumes increased by 22% whereas the industry

volumes grew by 27%. This increase in volumes was reported due to increase usage of

generators and more vehicles on the road. PSO registered a ever highest sales volume of 0.89

million MTs for Mogas as compared to previous Year’s 0.73 million MTS.

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HSD

HSD sales by PSO during the year also witnessed a downward trend along with the industry’s

depreciating trend. The industry showed a negative growth of 3% whereas PSO showed a

negative volume growth of 10%. The reason behind this negative growth was the slow down of

economic activity. As a result, the company’s market participation decreased to around 56.8%

from 61.1% during the preceding year. Comparison with FY09 figures shows that during FY10,

the company achieved a sales volume of 4.2 million MTs against previous year’s figures of 4.7

million MTS.

Financial Performance of Pakistan State Oil

During my analysis of the PSO i observed for the year ended June 30, 2010, the Company

achieved an impressive performance with turnover Touching the Rs. 877 billion marks compared

to Rs. 719 billion in FY09, an increase of 22% mainly due to heavy reliance of the power sector

on PSO for the supply of Furnace Oil. During FY10, profit before tax was recorded at Rs. 17.96

billion versus a loss of Rs. 11.35 billion last year and profit after tax at Rs. 9.05 billion against a

loss Rs. 6.69 billion registered in previous financial year. The earning per share was Rs. 52.76

versus loss per share of Rs. 39.05 last year.

Dividends and Other Appropriations

Based on these results, the board announced a dividend of Rs. 5 per share. Combined with the

Earlier interim dividends aggregating Rs. 3 per share, the total dividend for the year stood at

Rs. 8 per share translating into a total payout of Rs. 1.37 billion to the shareholders.

Circular Debt

Despite being profitable, the Company continued to face liquidity problems due to ever-

increasing Receivables throughout FY2010. As of June 30, 2010, various major power

generation companies including WAPDA, KAPCO, HUBCO and KESC and the PIA (Pakistan

International Airlines) owe our Company an aggregate amount of Rs. 111 billion. On account of

PDC Gop owes Rs. 11.86 billion. This has created such an acute financial crunch that we have to

struggle to meet our import payments. Consequently, the Company owed Rs. 81 billion to local

refineries and hence had to rely on short-term borrowings for its needs.

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Financial Charges

The heavy bank barrowings resulted in high financial costs borne by the Company in terms of

interest payments, which dented your Company is profit margins. The Company ended up

incurring Rs 9.88 billion as financial charges during FY10 as compared

To Rs. 6.2 billion as financial charges in FY09.

Pak Rupee Devaluation

In addition to heavy financial charges borne by your Company, Pakistan Rupee devaluation of

4.9% against the US$ also adversely affected the profitability of the Company as more than 90%

of oil product imports in the country are carried out by PSO.

Associated companies of Pakistan State Oil

Asia Petroleum Limited (APL)

APL was incorporated in Pakistan as an unlisted public limited company on July 17, 1994. The

Company has been principally established to transport Residual Fuel Oil (RFO) to the Hub

Power Company Limited (HUBCO) at Hub, Baluchistan. For this purpose, the Company laid

an underground oil pipeline starting from Pakistan State Oil Company Limited (PSO)

Zulfiqarabad ,Terminal at Pipri to HUBCO at Hub. PSO holds a 49% equity stake in APL.

Pak Grease Manufacturing Company (Private) Limited (PGMCL)

PGMCL was incorporated in Pakistan on March 10, 1965 as a private company. The principal

activity of the Company is to manufacture and sell petroleum grease products. PSO holds a 22%

equity stake in PGMCL.

Auditor’s Opinion

In the past five years the company changes two auditors. The reason which i observed during my

analysis of the PSO is that the auditor completes their audit tenor. In year 2006, 2007, 2008 the

company auditors are same I three years A.F. Fergusson & co, Ford Rhodes Sadat Hyder & co

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audited the financial statements I these three years, after year 2008 the next year 2009 the Ford

Rhodes Sadat Hyder & co are replace with KPMG Tasser Hadi & co. In, year 2010 the Company

changes its another auditors A.F. Fergusson & co replace with M. Yusuf Adil Saleem &

Chartered Accountant Mushtaq Ali Hirani. All auditors show unqualified option. They further

described that all company accounts and financial statements are prepared according with the

general accepted accounting principles, ad the accounts shows true and fairs financial positions.

Pakistan State Oil Limited

Horizontal Analysis

(Balance Sheet)

Current Assets: 2005 2006 2007 2008 2009 2 010

Stores, spares and loose tools 100 95.77 97.95648 88.70626 85.8945 86.1425

Stock-in-trade 100 136.85 143.6215 302.9644 197.7244 305.1415

Trade debts 100 174.34 200.2623 499.254 1185.524 707.1537

Loans and advances 100 127.88 171.619 185.8024 196.0229 197.5242

Trade deposits and short term

prepayments 100 191.97 218.1227 55.28185 75.98949 73.1725

Other receivables 100 139.22 152.0679 151.3978 123.6414 171.1425

Short term investments 100 0.00 0 0 0 0

Cash and bank balances 100 98.80 79.20534 157.0625 150.0111 163.1452

Total Current Assets 100 142.68 153.4657 284.474 340.473 345.1725

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Fixed Assets

Property, plant and equip: 100 92.27 98.77747 91.97517 86.13747 89.1423

Intangibles 100 107.03 87.25518 72.93757 47.61385 71.2543

Long term investments 100 141.47 129.0266 116.5366 92.91158 103.2457

Long term loans, advances and receivables 100 81.90 81.58935 62.07108 52.72102 64.1542

Long term deposits and prepayments 100 88.17 62.67699 75.21467 79.54794 78.2542

Deferred tax 100 327.32 321.4983 326.5488 4035.011 508.0215

Total Fixed Assets 100 104.11 105.6208 97.04335 127.2916 109.1243

Total Assets 100 134.15 142.8796 243.0036 293.305 257.1245

Liabilities & Stockholders’ Equity

Current Liabilities

Trade and other payables 100 141.83 160.6467 314.335 426.9986 457.1247

Provisions 100 103.06 91.28711 96.27287 91.28711 99.1246

Accrued interest / mark-up 100 188.87 206.4342 340.9173 870.3773 647.1245

Short term borrowings 100 158.97 188.3941 228.5705 387.6986 395.1243

Taxation-net 100 143.65 5.162512 54.05938 0 0

Total Current Liabilities 100 143.62 156.835 286.0934 396.845 314.1422

Long Term Liabilities

Long-term deposits 100 110.19 113.7947 123.613 126.593 127.2147

Retirement & other Benefits 100 117.47 124.2032 118.9214 126.3908 123.1425

Total Long Term Liabilities 100 115.01 120.6875 120.5061 126.4591 127.1243

Stockholders' Equity

SHARE CAPITAL 100 100.00 100 100 100 100

RESERVES 100 120.65 121.4433 184.7792 121.011 165.1217

Total Stockholders' Equity 100 118.63 119.347 176.4912 118.957 145.1122

Total liabilities & Shareholder's

equity 100 134.15 142.8796 243.0036 293.305 308.1257

Interpretation of Horizontal Analysis of Balance Sheet:

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In horizontal analysis we take any one year as base year and compare all items balance sheet or

income statement with it. During my analysis the year which I take as a base is 2005 and

compares all balance sheet items with it. The current assets of the Pakistan state oil shows a

increasing trend, and the fixed assets shows are also shown a increasing trend in the horizontal

analysis of balance sheet. On the other side of the balance sheet the current liabilities of the

company increased every year when we take 2005 as base this shows the company borrows more

loans to fulfill its deficit. The stockholders equity section of balance sheet also shows increasing

trend with respect to year 2005 as a base.

Pakistan State Oil Limited

Horizontal

Analysis

PROFIT AND LOSS ACCOUNT

INCOME STATEMENT 2005 2006 2007 2008 2009 2010

Net sales /revenue 100 140.3505 164.5649 233.0682 288.3224 334.1524

Less: Cost of Goods Sold 100 141.4 169.7783 234.0819 306.7487 335.8527

Gross Profits 100 125.1769 89.18329 218.4119 21.89756 221.2425

other operating income 100 73.46221 98.80966 107.895 112.155 113.7412

Less: Operating Expenses:

Transportation costs 100 116.7671 117.8948 107.8581 163.9719 111.2514

Distribution and marketing

expenses 100 106.6963 118.4004 140.3224 169.5473 147.5124

Administrative expenses 100 105.9929 111.2437 129.9592 130.4867 129.9224

Depreciation 100 107.5517 112.824 114.9795 117.2974 115.2518

Amortization 100 332.8808 392.3603 446.4844 492.6037 472.1542

Other operating expenses 100 265.3561 81.45507 361.5423 430.7051 392.1241

Total Operating Expenses 100 134.789 110.457 170.5316 198.6767 185.1297

Add: Other income

profit/Loss from operation 100 117.3639 82.83535 233.9353 (58.1078) 277.1524

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Less: Interest Expense 100 23.8517 312.413 369.005 1681.163 374.225

100 112.4965 73.61136 228.5085 (127.988) 275.1234

Share of profit of associates

Net Profits Before Taxes 100 123.757 77.19137 231.6985 (123.091) 241.1432

Less: Taxes 100 110.0722 68.7577 207.0384 129.1465 215.1427

Net Profit/Loss After Taxes 100 132.2659 82.43522 247.0315 (119.326) 265.1425

Interpretation of Horizontal Analysis of Income Statement:

In income statement we take 2005 as a base and compare all other income statement items with

that base year. The net income of the company increased every year which is a favorable sign for

the Pakistan state oil, on the other side of the coin cost of goods sold also increases which are not

a good signal for the company. The reason which I observed is the increase in the petroleum

prices in the international market that’s leads to high cost of goods sold. The net profit of the

Pakistan state oil shows a mixed trend, but in year 2009 they is in negative which are not a good

sign for the profitability, and long term growth of company. In year 2010 the net profit shows its

highest value than all previous five years. This is very good signal for Pakistan state oil growth

and development.

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Pakistan State Oil Limited

Vertical analysis

Balance Sheet

Current Assets: 2006 2007 2008 2009 20 10

Stores, spares and loose tools 0.178185 0.171121 0.091113 0.073095 0.062530

Stock-in-trade 40.14426 39.55461 49.05991 26.52703 28.972414

Trade debts 16.87298 18.19702 26.67353 52.47619 58.10142

Loans and advances 0.388626 0.48968 0.311714 0.272462 0.204471

Trade deposits and short term

prepayments 1.9866899 2.1193068 0.3158154 0.3596644 0.181225

Other receivables 20.55065 21.07541 12.33718 8.34744 7.201223

Short term investments 0 0 0 0 0

Taxation 0 0 0 0.462534 0.02021

Cash and bank balances 2.706191 2.036835 2.374825 1.879212 0.88151

Total Current Assets 82.82758 83.64399 91.16409 90.39763 95.6101

Fixed Assets

Property, plant and equip: 10.66636 10.72064 5.869363 4.554133 3.17224

Long term investments 4.672993 4.00147 2.125007 1.403657 1.000000

Long term loans, advances and

receivables 0.8984099 0.8402389 0.3758516 0.2644868 0.160223

Long term deposits and prepayments 0.13214 0.088193 0.062228 0.054526 0.064142

Deferred tax 0.581879 0.536595 0.32046 3.28068 0.00000

Total Fixed Assets 17.17242 16.35601 8.835911 9.602373 4.39122

Total Assets 100 100 100 100 100

Liabilities & Stockholder’s Equity

Current Liabilities

Trade and other payables 52.12966 55.43559 63.77748 71.77847 77.1512

Provisions 1.107727 0.921243 0.57125 0.448771 0.34211

Accrued interest / mark-up 0.172059 0.176566 0.171448 0.362648 0.16111

Short term borrowings 10.90078 12.12886 8.652275 12.15899 6.444455

taxation-net 2.752003 0.092856 0.571712 0.00 0.000000

Total Current Liabilities 67.06223 68.75512 73.74416 84.74888 84.0978

Long Term Liabilities

Long-term deposits 1.060296 1.028011 0.656595 0.557104 0.4714

Retirement & other Benefits 2.215941 2.199789 1.238414 1.090472 0.93233

Total Long Term Liabilities 3.276237 3.2278 1.895009 1.647576 1.40121

Stockholders' Equity

SHARE CAPITAL 2.444387 2.294958 1.349374 1.117958 0.8512

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Interpretation of Vertical Analysis of Balance Sheet:

In the vertical analysis of balance sheet of Pakistan state oil we take total assets as a base and

compare all other assets current or fixed with those total assets every year. The current assets of

the Pakistan state oil shows a increasing trend but the fixed assets shows a negative trend. In the

other side of the balance sheet we taker total liabilities and shareholders equity as a base and

compare all liabilities current or non-current with the total liabilities every year. The current

liabilities of the Pakistan state oil shows increasing trend this means that the company borrow

more and more loans. The stockholders equity section of the balance sheet shows mixed trend,

when we compare stockholders equity with total stockholders equity.

Pakistan State Oil Limited

Vertical Analysis

Income Statement

INCOME STATEMENT 2006 2007 2008 20092010

Net sales /revenue 100 100 100 100100

Less: Cost of Goods Sold 79.73 82.09 79.77 84.7681.35

Gross Profits 4.88 2.98 5.15 0.423.33

other operating income 0.40 1.93 0.29 0.31 0.86

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Less: Operating Expenses:

Transportation costs 0.10 0.09 0.06 0.070.07

Distribution and marketing expenses 0.97 0.91 0.76 0.710.59

Depreciation 0.31 0.28 0.20 0.170.13

Other operating expenses 0.70 0.18 0.57 0.560.28

Total Operating Expenses 2.08 1.46 1.59 1.501.07

profit/Loss from operation 3.20 1.93 3.85 -0.783.12

Less: Interest Expense 0.25 0.28 0.23 0.871.13

Share of profit of associates 0.29 0.08 0.05 0.060.06

Net Profits Before Taxes 3.24 1.73 3.67 -1.582.05

Less: Taxes 1.10 0.59 1.26 0.65- 1.02

Net Profit/Loss After Taxes 2.13 1.14 2.41 -0.931.03

Interpretation of Vertical Analysis of Income Statement:

In the vertical analysis of income statement of Pakistan state oil we take net sale as a base and

compare all other income statement items with the net sale. The gross profit of the Pakistan state

oil shows a mixed trend, but in year 2009 gross profit shows a less value then all other previous

five years. The reason which i observed is the cost of goods sold raises because of the increase in

the petroleum prices in the international market that’s why gross profit shows less value. The net

profit of the company shows a negative trend this shows how profitable are Pakistan state oil.

This is not a good sign for Pakistan state oil future growth and development.

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Ratios of Pakistan

State Oil

Ratios 2006 2007 2008 20092010

Liquidity Ratio

Current Ratio 1.24 1.22 1.24 1.071.14

Quick Ratio 0.64 0.64 0.57 0.750.79

Average collection period 34.47 30.85 45.96 24.2529.29

Average age of Inventory 36.58 31.98 48.92 24.3629.97

Operating cycle 71.06 62.83 94.88 48.61 32.64

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Cash ratio 1.23 1.22 1.24 1.201.22

A/R turnover 38.1 32.5 24.6 12.578.9

Inventory turnover 11.5 11.7 10.1 11.8314.37

Working capital 10978097 11127546 22142472 866640123297632

Sales to working capital 27.17 31.43 22.37 70.6931.89

A/P Turnover 12.5 10.81 9.60 6.326.1

Leverage Ratio

Time Interest Earned 12.74 6.86 16.41 (0.89)2.80

Debt Ratio 0.70 0.72 0.76 0.860.85

Debt-to-Equity 2.37 2.57 3.10 6.355.87

Debt to tangible net worth 2.54 2.58 3.12 6.375.90

Profitability Ratios

Net profit Margin 0.03 0.01 0.03 (0.01)0.01

Total Asset Turnover 4.25 4.68 3.89 3.994.93

Return on Assets 0.10 0.06 0.11 (0.04)0.05

Operating Income Margin 0.038 0.022 0.045 (0.009)0.031

Return on Total Equity 0.361 0.224 0.454 (0.325)0.308

Gross Profit Margin 0.058 0.035 0.060 0.0040.033

Sales to fixed assets 44.3 52.0 74.3 98.38130.3

Return on common equity 54.1 35.4 68.1 15.4731.10

Market Value ratios

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EPS 43.90 27.30 81.90 (39.05)52.76

Dividend payout 77.5 76.8 28.7 ------15.16

Dividend yield 0.11 0.054 0.056 0.0230.0307

Dividend per share 34 21 23.5 58

Book value per share 121 121.7 180 121.34171

Percentage of earnings

retained 0.51 0.46 0.69 0.560.43

Price/earning ratio 4.9 (5.47)

INTERPRETATIONS OF RATIO’S

Liquidity Ratios

CURRENT RATIO = Current Assets

Current Liabilities

year 2006 2007 2008 2009 2010

Current ratio 1.24 1.22 1.24 1.07 1.24

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Current Ratio shows a firm’s ability to cover its current liabilities with its current assets. They is

mixed trend in current ratio. In year 2009 they is more decrease in current ratio, the reason which

i observed during my analysis of the financial statement is because of the increase in the current

liabilities, the item which increase current liabilities in year 2009 is the shot term borrowing of

the firm. In year 2010 they is increase in the current ratio because of the increase in inventory,

and account receivables. The shot term borrowing of the company is lower than the year 2009. In

spite of the mixed trend that the current ratio follows the company has in position to its current

liabilities from its current assets.

QUICK RATIO = current assets-Inventory

Current Liabilities

Year 2006 2007 2008 2009 2010

Quick ratio 0.64 0.64 0.57 0.750.79

Quick ratio of the Pakistan state oil follows a mixed trend. The quick ratio of the Pakistan State

Oil in the year 2008 is decreasing because the inventory cost was increased up to the 49% result

of that Quick Ratio was decreased. In the year 2010 the quick ratio is on top which is 0.79

because in this year the value of the inventory is increased, but on the other side the value of the

trade payables are also increased, and they is decreased in the shot term borrowing of the firm.

Average collection period = Average Gross Receivable

Net Sale / 365

year 2006 2007 2008 2009 2010

Average collection period 34.47 30.85 45.96 24.25 29.29

The average collection period of the Pakistan state oil is following the mixed trend. Average

collection period states that how efficiently the company is managing its receivables. The lower

the ratio the better for the firm. When we compare average collection period from the last five

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years in 2008 this ratio were increases from 30 days to 45 days which are not a good sign for the

firm, but again decrease to 24 days in 2009 and then increase to 29 days in 2010. It means that

firm is working efficiently monitoring its credit sale properly due to which this ratio is constantly

decreases and there is less chance of bad debt.

Average age of inventory = Average Inventory

Cost of Goods Sold / 365

Year 2006 2007 2008 2009 2010

Average age of inventory 36.58 31.98 48.92 24.36 29.97

Average age of the inventory shows a relationship between the inventory and the cost of goods

sold. The value of the Inventory is taken from the balance sheet of the firm while the cost of

goods sold is obtained from the income statement of the organization. This ratio states us that

how often the company places an order for the inventory. When we compare it with the previous

years we have found that this year company is placing more orders than the previous years. It

means there is mixed trends is shown from 2006 to 2010. This ratio was decreased for the 2008

because in this year the value inventor was increased more than double but in the recent year

2009 this ratio is again decreased dramatically and then increase in the year 2010.

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

Year 2006 2007 2008 2009 2010

Operating cycle 71.06 62.83 94.88 48.61 32.64

Operating cycle of the Pakistan state oil shows a mixed trend. It shows how many are required

to receive cash from customers and to convert inventory into cash. If this ratio is low it is good

signal for the firm. When we compare operating cycle with the previous years we found that

there is decreasing trend was shown in the operating cycle from 2006 to 2010 except for year

2008 in which operating cycle ratio was increased from 73% to 98% because in this year the

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Days in inventory turnover ratio and days sales account receivable was increased dramatically

and ultimately increase in the operating cycle ratio. Again this ratio was decreased in the year

2010 which is positive sign for the Pakistan state oil.

Cash Ratio = Cash equivalents + marketable Securities

Current liabilities

Year 2006 2007 2008 2009 2010

Cash ratio 1.23 1.22 1.24 1.20 1.22

Cash ratio of the Pakistan state oil shows the mixed trend. In the year 2007 and year 2010 cash

ratio is constant, and in year 2009 they is more decrease in cash ratio. The reason which i

observed during my analysis of the balance sheet in year 2009 current liabilities of the firm is

increased, the shot term borrowings is increased which leads to low cash ratio. Overall Pakistan

state oil in position to pay its obligations from its cash.

Account Receivables Turnover = Net sales

Average Gross Receivables

Year 2006 2007 2008 2009 2010

A/R Turnover 38.1 32.5 24.6 12.57 8.9

Account receivables turnover gives the number of times account receivables is collected during

the year. The account receivables turnover shows a decreased trend. In the year 2010 the account

receivables turnover is lower then all previous five years. This shows very negative signal for the

firm, and the chances of the bad debts is increased.

Inventory turnover = Cost of goods Sold

Average Inventory

Year 2006 2007 2008 2009 2010

Inventory turnover 11.5 11.7 11.75 11.83 14.37

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The inventory turnover ratio of the Pakistan state oil shows a increasing trend .Inventory

turnover means that the number of times the inventory is purchased during the year. In year 2010

the ratio of the inventory turnover is the highest which means that inventory is purchased more

than all previous five years. The value of the stock is the highest in all other previous five years.

Net Working Capital = Current Assets – current liabilities

Year 2006 2007 2008 2009 2010

Net working capital 10978097 11127546 22142472 8666401 23297632

Working capital of the Pakistan state oil is shows a increasing trend, except for the year 2009 inn

which working capital is lower then all previous five years. The only reason which I observed

that in year 2009 the current liabilities is more then all previous five years. So that the firm

working capital is decreased in that year, but in year 2010 the working capital of Pakistan state

oil is increased, which is a very positive sign for the Pakistan state oil.

Sales to working Capital = Sales

Average working Capital

Year 2006 2007 2008 2009 2010

Sales to working capital 27.17 31.43 22.37 70.69 31.89

Sales to working capital ratio of the Pakistan state oil shows a mixed trend. In year 2009 the ratio

of sales to working capital is highest, which means that the firm is undercapitalized. Any change

in the business economy creates major problem for the Pakistan state oil. In year 2010 sales to

working capital is reduced.

Account Payables Turnover Ratio = Net Purchases

Average Gross Payables

Year 2006 2007 2008 2009 2010

Account payable turnover 12.5 10.81 9.60 6.32 6.1

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The account payables turnover ratio indicates a decreasing trend. The account payables ratio of

Pakistan state oil is continuously decreasing from year2006 to 2010, which are not a good sign

for the Pakistan state oil. The current liabilities of the firm are continuously increasing. In year

2010 ratio is lowest in all previous five years which are not a good sign for Pakistan state oil.

Leverage Ratios

Recurring Earnings, Excluding Interest Expense, Tax

Expense, Equity Earnings, and Minority Earning

TIME INTEREST EARNED= Interest Expense, Including Capitalized Interest

Year 2006 2007 2008 2009 2010

Time interest earned 12.74 6.86 16.41 (0.89) 2.80

The times interest earned ratio reflects the number of times before- tax earnings cover interest

expense. This ratio shows how many times we are able to pay the amount of interest of loan

which we borrowed for the annual earning. If it is increases then it is good sign for business. The

investors show more confidence. When we look at the time interest earned ratio of the Pakistan

state oil from 2006 to 2010, there is mixed trends were shown because the cost of goods sold

was increased due to increased in price of petroleum price in international market result of that

the EBIT was decreased an ultimate effect this ratio in the year 2009 this ratio was negative

which is not good sign for the company from investor point of view. In the year 2010 times

interest ratio is also decrease which is not a not sign for the firm, this mean that less earnings are

available to meet interest charges.

Debt ratio = Total Liabilities / Total Assets

Year 2006 2007 2008 2009 2010

Debt ratio 0.70 0.72 0.76 0.860.85

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This ratio indicates the firm long term debt paying ability. Debt ratio of Pakistan state oil follows

increasing trend except fir the year 2010 when the ratio is lower then the previous year. Creditor

would rather see a low debt ratio because there is a greater cushion for creditor losses if the firm

goes bankrupt. Lower debt ratio shows better company positions .if we look at the trends of this

ratio from 2006 to2009 there is increasing trend it means company has acquired more and more

debt especially the item which i observed during my analysis the shot term borrowing of the

Pakistan state oil is increased every year and more assets are financed by debt result in this ratio

was increased and in year 2010 the ratio is lower the only reason of the reduction in the shot term

borrowing the Pakistan state oil made during that year.

Debt to equity ratio = Debt / Equity

Year 2006 2007 2008 2009 2010

Debt to equity 2.37 2.57 3.10 6.355.87

This ratio is a significant measure of solvency since a high degree of debt in the capital structure

may make it difficult for the company to meet interest charges and principal payments at

maturity, from long term debt paying ability point of view the lower this ratio is better, the

company debt position. When we look at the Debt to Equity ratio of Pakistan state oil there is

increasing trend was shown from 2006 to 2009 it means the long term debt paying ability of PSO

is decreasing from 2005 to2009 and creditors are less protected in case of solvency, but in year

2010 debt ratio of the Pakistan state oil is decreasing which is a positive sign for the Pakistan

state and also for the creditors.

Debt to Tangible Net Worth = Total liabilities

Shareholders’ equity – Intangible Assets

year 2006 2007 2008 2009 2010

Debt ratio 2.54 2.58 3.12 6.375.90

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Debt to tangible net worth ratio of the Pakistan state oil shows a mixed trend. The Debt to

tangible net worth ratio is more conservative ratio than other debts ratio like debt ratio or debt to

equity ratio. The only reason is that they exclude intangibles assets in its computation, because

they provide not provide resources to pay creditors debts. In the year 2008 and 2009 the ratio of

the debt to tangible net worth goes extremely high the reason of increasing such ratio is the

increase in the shot term borrowing of the Pakistan state oil, but in year 2010 the ratio is lower

then previous year. The only reason is the reduction of the shot term borrowing and on the other

side increase in the value of the reserve.

Profitability Ratios

Net Profit Margin = Net Income

Net Sales

year 2006 2007 2008 2009 2010

Net profit Margin 0.03 0.01 0.03 (0.01)0.01

The ratio of net income to net sales is called the net profit margin. It indicates the profitability

generated from revenue and hence is an important measure of operating performance. It also

provide clues to a company s' pricing, cost structure, and production efficiency. The net profit

margin of Pakistan state oil shows a mixed trend. If this ratio is high, it shows that the firm is

earning more profit and this is beneficial for the organization. This ratio is mainly concern with

the income statement of the business. When we compare this ratio with the previous year’s 2006

to 2010 ratios. We have found that the net profit margin is declining so this is not a good sign for

the organization. In year 2009 the net profit margin of the Pakistan state oil is goes in negative,

because of the loss the organization incurred in that particular year. The reason, which I observed

during my analysis, is that in all previous five years and in year 2009, the cost of goods sold and

operating expenses is extremely high, and increased in prices of crude oil in the international

market from last few years so it is very difficult to control the cost of goods sold. However, in

year 2010 the Pakistan state oil comes from a great danger and shows a positive figure of net

profit margin.

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Total Asset Turnover = Net Sales

Average Total Assets

year 2006 2007 2008 2009 2010

Net profit Margin 4.25 4.68 3.89 3.994.93

The total asset turnover ratio is helpful in evaluating a company s' ability to use its asset base

efficiently to generate revenue. This shows that how much the company is generating sales by

the utilizing the assets of the firm. The total asset turnover ratio of the Pakistan state oil shows a

mixed trend. One item like sale is related to the income statement of the company while the

average total assets are related to the balance sheet of the firm. When we compare this ratio with

the previous years from 2006 to 2010. We have found that this ratio is going to increase from

2006 to 2007 but in 2008, it is decreases and again in 2009 however in year 2010 they again

increase. The reason, which I observed in the decline of ratio from 2008 and 2009, is that sale is

not increase with respect to increase in total assets that is why ratio is decreasing. However in

year 2010 the ratio is increasing which is a positive sign for the Pakistan state oil.

Return on Assets = Net Income

Total Assets

year 2006 2007 2008 2009 2010

Average collection period 0.10 0.06 0.11 (0.04)0.05

Return on assets indicates the efficiency with which management has used its available resources

to generate income. This ratio gives a general relationship between net income and the average

total assets of the company. This ratio shows a mixed trend. However, in year 2009 this ratio

goes into negative because the organization is in loss in that particular year. The reason, which I

observed during my analysis, is that in all previous five years and in year 2009, the cost of goods

sold and operating expenses is extremely high, and increased in prices of crude oil in the

international market from last few years so it is very difficult to control the cost of goods sold .

As this ratio decreases from this is a negative indicator for the firm. When we compare this ratio

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with the previous year ratio, we found that the company is going to decline because this ratio is

less. This cause due to net income because we have found that the operating expenses are high

for this reasons the net income decline and this ratio is also decreases.

Operating Income Margin= Operating Profit

Net Sale

Year 2006 2007 2008 2009 2010

Average collection period 0.038 0.022 0.045 (0.009)0.031

The operating income margin of the Pakistan state oil shows a mixed trend. This ratio shows the

relationship between operating profit and net sales. Both items are concerned with income

statement. If operating profit increases it is good sign for the organization. In general, higher, this

ratio is beneficial for the organization. As compared this ratio from 2006 to 2010 this ratio is

decreases and in year 2009 goes into negative except for the 2008 in which this ratio is increased.

Overall decreased in this ratio is not because in these years the operating cost was increase or

because of the increase in petroleum prices in the international market. As the negative trend was

shown in the past few years this decreasing trend is not good sign for Pakistan state oil.

Return on Total Equity = Net income

Total Equity

year 2006 2007 2008 2009 2010

Average collection period 0.361 0.224 0.454 (0.325)0.308

It shows the percentage earned on equity, it include both common and preferred shareholders.

The return on total equity of the Pakistan state oil show a mixed and negative trend as well. This

ratio shows the relationship between net income and total equity. The net income is concerned

with the income statement while the equity is equity is concerned with balance sheet. If this ratio

increases, it is good signal for organization. When we see this there is decreasing tend were

shown from 2006, 2007, and 2009.In year 2009 the ratio goes into negative because the loss

faced by the Pakistan state oil. This is not good sign for the growth of Pakistan state oil. This

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ratio was decreased because net income was also decreases in these years. In year 2010, the ratio

shows some growth, which is slightly a good sign for the Pakistan state oil.

Gross Profit Margin = Gross Profit

Net Sale

year 2006 2007 2008 2009 2010

Average collection period 0.058 0.035 0.060 0.0040.033

The gross profit margin of the Pakistan state oil shows a mixed trend. This ratio shows a

relationship between the gross profit and the net sales of the organization. Gross profit is concern

with the income statement while the net sales are also concern with the income statement. In

general higher this ratio is higher is the benefit for the organization. When we compare it with

the previous five year’s gross profit margin, we have found that there is negative and positive

trend are shown. However, in year 2009 ratio is more decreasing the reason, which i observed is

that the cost of goods sold of the organization is increased too much that’s why they earn low

gross profit. In year 2010 they is a great move shown in the gross profit margin of the Pakistan

state oil. So it is recommended that the company should have to reduce their costs and increase

this margin to earn high profit.

Sales to Fixed Assets = Net Sales

Average Net Fixed Assets

(Excluding Construction in Progress)

year 2006 2007 2008 2009 2010

Average collection period 44.3 52.0 74.3 98.38130.3

This ratio shows the firm ability to use its fixed assets effectively in generating the revenue. The

sales to fixed assets of the Pakistan state oil shows a increasing trend. Construction in progress is

not included in the computation of the sales to fixed assert ratio. As shown from the above-

mentioned table the ratio is continuously increasing. In year 2010 the ratio in its peak the reason

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which I during my analysis is that the value of net sales is increased with great pace as compared

with the value of net fixed assets.

Return on Common Equity = Net income Before Nonrecurring Items- preferred dividends

Average Common Equity

year 2006 2007 2008 2009 2010

Average collection period 54.1 35.4 68.1 15.4731.10

The return on common equity measures the rate of return earned on the common equity. The

return on common equity of the Pakistan state oil shows a mixed trend. In year 2009 the ratio is

decreasing with a great pace the reason, which I observed, is that in 2009 the organization is in

loss because of the increase in the cost of goods sold and high operating expenses the

organization faced in that particular year. However, in year 2010 the ratio is moved up again

which is favorable sign for the growth of the Pakistan state oil.

Market Value ratios

Earnings per Share = Net income- preferred dividends

No of common share outstanding

year 2006 2007 2008 2009 2010

Average collection period 43.90 27.30 81.90 (39.05)52.76

Earnings per share indicate the amount of earnings for each common share held. Earning per

share is s a useful indicator of the operating performance of the company as well as of the

dividends that may be expected. Higher earning per share is better for shareholders and they

consider the organization as a healthy company. As we analyze this ratio from 2006 to 2010 we

find that there is big ups and down. This ratio in its peak forms in year 2008 because the

company shows more net income in that particular year than no of share outstanding. The one

important thing, which I observed during my analysis in the earning per share, is that the

company common share outstanding remains same in last previous five years. The company

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issues no common shares outstanding. When we look at the 2009 figure this figure is negative

because in this year Pakistan state oil was in the loss so this figure is negative which is not

healthy sign for the company.In year 2010 the ratio shows better position which is a favorable

sign for the growth of the Pakistan state oil.

Dividend payout = Dividend per common share

Diluted earnings per share

year 2006 2007 2008 2009 2010

Average collection period 77.5 76.8 28.7 ------15.16

The dividend payout ratio of the Pakistan state oil shows a negative trend. This is not a good sign

for the growth of the Pakistan state oil. Dividend payout ratio means the portion of the earning

per common share are being paid in dividends to the shareholders. As shown from the above

mentioned table they is continuously decline in the dividend payout ratio, which are not good for

investor point of view. In year 2009 the the company dividend payout ratio is zero, because in

that year the earning per share is negative and then we compute the dividend payout ratio the

value goes into negative which means they paid no dividend in the portion of earning per

common share. In year 2010 the ratio goes up which are good sign for the Pakistan state oil in

that difficult financial crisis

.

Divided yield = Dividend per common share

Market price per share

year 2006 2007 2008 2009 2010

Average collection period 0.11 0.054 0.056 0.0230.0307

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The dividend yield of the Pakistan state oil shows a mixed trend. In year 2009 the ratio shows

more decreasing value then all previous five years the reason which I observed is that in that year

the company paid less dividend from its retained earnings because of the loss they face d in that

particular year. In year 2010, the dividend yield ratio increases, which are a good for the

organization.

Divided per share = Total dividend

No of Common Share Outstanding

year 2006 2007 2008 2009 2010

Average collection period 34 21 23.5 58

The dividend per sha2re of the Pakistan state oil shows a mixed trend. In year, 2009 dividend per

share goes into more decreasing value than all previous five years, which are not a good signal

for the Pakistan state oil. The main of decreasing dividend per share is that observed is that in

that year the company paid less dividend from its retained earnings because of the loss they faced

in that particular year. In 2010 the dividend per share of the Pakistan state oil is moved up

slightly as compared to the previous five years, which are slightly better sign for the Pakistan

state oil.

Book value per share = Total stockholders Equity- Preferred stock Equity

Number of Common Shares Outstanding

year 2006 2007 2008 2009 2010

Average collection period 121 121.7 180 121.34171

The book value per share of the Pakistan state oil shows a increasing trend, except for the year in

2009 when book value per share goes down as compared to all previous five years. The no of

common shares outstanding are remains same for the last five years. The company issues no

other common shares outstanding. In year 2010 the book valu2e of the company goes again

increasing which is very good sign for the future growth of the Pakistan state oil.

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Percentage of earnings retained = Net income – All Dividends

Net Income

year 2006 2007 2008 2009 2010

Average collection period 0.51 0.46 0.69 0.560.43

The percentage of earnings retained of the Pakistan state oil shows a decreasing trend except for

the year in 2008 when the ratio of the retained earnings is hightest. Percentage of retrained

earning means proportion of retained earnings for internal growth of the company. In year, 2009

and 2010 the ratio of percentage of earnings retained decreased respectively.

Price/Earning ratio = Market price per share

Diluted Earning per share

year 2006 2007 2008 2009 2010

Average collection period 14.3 7.0 5.1 (5.47) 4.9

Price/Earning ratio is equal to the market price per share of stock divided by the earnings per

share. A high price /earning ratio are good because it indicates that the investor considers the

company in a favorable light. The Price/Earning ratio of the Pakistan state oil shows a negative

trend, which are not a positive sign for the Pakistan state oil and the investors. In year 2009, the

ratio is in negative and in next year 2010 the ratio is improving but less than the all previous five

years.

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Recommendations:In the above analysis of Pakistan State Oil (PSO) for the year 2006 to 2010, we found that the

earning per share of the Pakistan state is decreases and even in the year 2009 it is negative. It is

not a good sign for Pakistan State Oil Company Limited (PSO). The net sales are increases but

cost of goods sold with a higher rate are also increases because of the increase in petroleum

prices in the international market that’s why the Gross profit, profit from operation and net profit

decreases. In year 2010 the finance cost of Pakistan state oil is very much increase from all

previous five years. This shows company borrows more loans. The shot term borrowings of the

Pakistan state oil increased every year. During my analysis of the Pakistan state oil i observed

that the market share of the company is continuously increasing, also when they face difficult

financial crisis in previous years. The company used that opportunity as a competitive edge and

attracts more investors. The company paid dividends to their shareholders and attract more

investors to invest in the Pakistan state oil. In year 2009 the company is in loss, but they paid

dividends to the share holders. This shows the strength of Pakistan state oil that’s why their

market share is continuously increasing. After brief and comprehensive discussion we may

safely conclude that the overall performance of Pakistan is not good, but market Share increased

which is positive sign for the future long term growth.

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Reference

www.pso.com

www.business.recorder

Analysis of Financial statement by Charles H Gibson

www.wickypedia.com

www.kse.com.pk

Financial Management by Vein Hon

www.google.com

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