Ratio Analysis of Fauji Cement and Lucky Cement

ANALYSIS OF FINANCIAL STATEMENTS

Final project

SUBMITTED TO

SIR KASHIF SAEED

SUBMITTED BY

SYED IMRAN HUSSAIN SHAH (07 ARID 448)

RABIA JALIL (07 ARID 440)

FANAR BATOOL (07 ARID 420)

NEELAM SHEHZADI (07 ARID 439)

ARID AGRICULTURE UNIVERSITY Page 1

Acknowledgment

Am extremely thankful to Allah Almighty who has

enabled me to complete this report on time and in the manner it was required. He provided me the resources to capture the knowledge and avail the opportunities in the world. It is also a matter of immense pleasure for me to express my gratitude to my Teacher Sir.KASHIF SAEED who has been a source of real inspiration for me. His experiences formed an important part in this report. His guidance and encouragement provided me a mean to step ahead towards my objective in a proper way. I also wish to

I


acknowledge the support of all my friends, who helped in completing this report. Without their support and cooperation it was not possible for me to complete this report.


Report contents

Executive summary………………………......3

Cement industry……………………………4

Over view of Companies………………….12 Lucky cement………………12 Fauji cement………………..14

Organizational structure...……………….15

Financial evidences of both companies

Lucky cement……………………………..16

Fauji cement………………………………30

Conclusion………………………………..44


EXECUTIVE SUMMARYThis report is about financial analysis of 2 companies chosen from cement sector. In this report we have shown that


CEMENT INDUSTRYUnprecedented increase in furnace oil and electricity prices was the major reason which had almost crippled down the entire cement industry in Pakistan. The low demand of cement due to fall out of overall economic crisis which started after mid nineties also claimed the blooming growth of 7 per cent to a meager level of even less than 3 per cent in the country. Consequently, the entire cement industry was running much below of its capacity despite having a strong industry base, this important sector had to suffer a loss of billions of rupees in the year 1998-99.

TURNAROUND The lady luck however started getting kind on this sick unit when the decision makers took some bold and timely decision especially the conversion of the cement industry from oil/gas to coal fired system which proved cost effective in the real sense of the term. Those units which were running in huge losses entirely changed their complexion from losses into profits. However, the conversion of fuel system was not only the major contributor for bringing a turnaround change in the cement sector, there were some other forces which helped bring stability in this important sector. And that was the increase in demand both on local front as well as from war ridden Afghanistan where the international community has undertaken the gigantic task of reconstruction of Kabul and other war affected areas in that country.In the year 2002, the cement sector has recovered its losses it had to suffer in the past as all the cement units have performed admirably well. The tremendous recovery achieved by the cement industry reflects in the fact that out of the total 22 cement units listed with the stock exchange, 18 have announced their financial results for the year 2002 with an aggregate net earnings of Rs948 million. This tremendous recovery has reverted the cement sector into a profitable zone-certainly a remarkable performance.


BENEFICIARIES Despite being a rich country in terms of the basic components or ingredients required for producing cement i.e. limestone, clay and gypsum, it is unfortunate that the benefit of availability of all these natural resources is not passed on to the consumers. It is the industry which pockets the profit or the government which claims the lion's share in the form of levies or taxation which are said to be the highest in this region. As a result of making the industry as a source of profit or a source of revenue by the owners or the government respectively the end users are the real sufferers. This statement can be substantiated with the fact that a cement bag of 50 kg is being sold at Rs160 in India as compared to Rs220 or more in Pakistan. It is because of high price of construction material, common man of an average income can only dream of owning a house of his own in Pakistan despite the fact that there is an annual demand for 6 million new housing units in accordance with the growth in population. The existing slums and rapidly increasing katchi abides especially in the urban areas of this country are only because having a house is far beyond the affordable means of the people belonging to average income group what to speak of the people living below the poverty line. It has been a cruel joke with the masses of this country that over the years, people at the helm of affairs never tired to pronounce that the common man the real owners of the resources of the country, but practically speaking all the resources were distributed either on political considerations or to the favorites. Take the example of Karachi where the state land at prime locations allotted to the people belonging to political, religious or social pressure groups at a throw away prices under the amenity clause. Today, these strategically located lands are being used for high commercial gains in the form of hospitals, schools, colleges, marriage halls or marriage gardens. Is there anybody to check why these lands got allotted under the pretext for public welfare is exclusively used for profits and profits alone? As a result of non-availability of land at an affordable price to the common man and high cost of building material including cement the main component for construction, the construction industry had


almost come to a stand-still in the major cities. It is estimated that at least 80 affiliated industries were also badly affected due to crisis persisting in the construction industry for the last 6-7 years.

TAXATION Despite the fact that cement constitutes as one of the basic necessities for shelter, the policy makers have subjected the cement sector to the highest taxation in the region. The levy of General Sales Tax (GST) on cement is Rs660 per ton in Pakistan as compared to Rs320 in India. The excise duty is Rs1000 per ton of the cement which is 186 per cent higher than India where it is Rs350 per ton. In the light of this tax regime, it is said that Pakistan has one of the highest tax rates on cement in the Asian region. The impact of such tax and duty structure has resulted in almost 40 per cent increase in the cement price per 50 kg bag when compared to India suppressing demand for Pakistan cement.

CONVERSION Conversion from furnace oil plants to coal firing system has already taken place in majority of the cement producing units which have started getting high benefits but they are also reluctant to pass on the benefit to the consumer on the pretext that the industry has suffered great losses in the past due to high price of furnace oil hence unless the losses of the past are recovered they are not in a position to pass on the benefit to the end users. On the contrary, the experience shows that whenever the prices of oil were increased the additional cost was always passed on to the consumers; it is however up to the price control authorities to safeguard the interest of the people.While looking at the conversion process of the cement industry from furnace oil to coal fired system, it comes to notice that Pioneer cement was the first one to convert its cement plant to the coal firing system. During financial year 2001, the company incurred a heavy loss of Rs284 million, which turned into a profit of Rs44 million in the financial year 2002. The conversion of furnace oil plant to coal fired system significantly reduced the production cost of the company resulting in an improved bottom-line. It is reported that the domestic coal is not of a very high quality however the processing and blending the local coal with the imported one can produce required heating content that is


much cost-effective than the furnace oil. The increase in coal usage continues to lower the cost of production for manufacturers. Lucky cement completely switched over to coal in late August this year while DG Khan about to shift on the coal technology. Cherat will take a little longer and the company will be able to fully convert to coal in March 2003. The benefit of this change is visible in the increase in gross profit of the cement units.The annual production of cement in Pakistan comes around 10 million tons while total consumption of furnace account to Rs8.42 billion per annum. On the contrary, the total cost of using coal comes to Rs5.5 billion which translates into a total saving of Rs2.8 billion due to the conversion of the fuel system. Keeping average price of coal per ton with a ratio of 70:30 and furnace oil cost at Rs842 per ton of cement as a benchmark and assuming that the cement plant is fully converted to coal firing system, the saving on cost per ton comes around Rs290. In addition to this the whole cement sector will benefit due to the reduction in production cost. However, the benefit can only be justified and enjoyed when the end users would also be given their due share in the larger interest of the economy, because reduction in price means increase in economic activity.


CAPACITY It may be recalled that in 1947, Pakistan had inherited 4 cement plants having total installed capacity of 0.5 million tons. These four units at that time were controlled by India. These inherited cement plants however were closed when they come to their age after 50 years of their operations. During early 30 years of independence, five cement units were established with aggregate capacity of 3.2 million tons of production. Among these units one was established in Hyderabad Sindh in the public sector. It was called Zeal Pak and was set up in 1956. Another unit in the public sector was known as Maple Leaf which was established in the province of Punjab in the same year. Three units were set up during 1965-66 in the private sector. These were Javedan in Sindh, Gharibwal and Mustehkam in the province of Punjab. After nationalization of industries in early seventies, cement industry remained under the control of government till late seventies. During this period, growth in demand of cement was around 7 per cent per annum, whereas new capacities were not coming up to match with the demand. Consequently, Pakistan had to start importing cement in 1976-77 and continued to import cement till 1994-95.After the change in the government in 1977, private sector was allowed to establish cement plants. As a result of change in policy, seven projects having capacity of 2.54 million tons were installed in private sector and simultaneously, State Cement Corporation of Pakistan (SCCP) also brought in 4 more units with a total capacity of 1.6 million tons. Resultantly, the total capacity of the cement industry enhanced to the level of 8.5 million tons by the end of 1990.Those units came in the public sector were Thatta Cement in Sindh, (1983), Dandot (Punjab) 1983, Kohat (NWFP) 1983 and D.G.Khan (Punjab) 1985.The units allowed in the private sector were Cherat (NWFP) 1985, Pakland (Sindh) 1985, Attock (Balochistan) 1986, Dadabhoy (Sindh) 1988, Essa (Sindh) 1988, Fecto (Punjab) 1989 and Anwarzeb White Cement (Sindh) 1988.According to a report of ICMAP, in the early nineties, the SCCP was the market leader hence the private sector had to pursue the policies of the public sector in fixing the prices of cement. With more depreciated


plants in its fold, combined cost of production of plants of SCCP was on lower side. They had a price mechanism whereby surplus profits of depreciated plants were allocated to the new plants having higher depreciation cost and financial changes. The level of cement prices fixed by SCCP therefore remained on the lower side. With the privatization of cement units after 1990, SCCP lost its control over the supply of cement. At that time there was an acute shortage of cement in the Northern areas of the country. In the first half of nineties, Pakistan had to import cement which led to the increase in cement prices exorbitantly making cement companies to earn very high profits. This tempted some of the existing units like Cherat, Pakland, Dadabhoy, Ac Wah, D.G. Khan, Maple Leaf and Kohat to go for expansion in their plants. Simultaneously, 5 more new projects with aggregated capacity of 5 million tons came on the stream. As such, production capacity went up to 16 million tons by the end of 2000. The five new units in the private sector were Pioneer (Punjab) 1994, Lucky (NWFP) 1996, Askari (NWFP) 1997, Fauji (Punjab) 1997 and Best Way (NWFP) 1998.


DEMAND According to a survey, the average demand for cement in Pakistan was increased at the rate of 7.2 per cent per annum to 1.97 million tons in seventies. However the growth rate of cement consumption was arrested at the end of 1980 to 6.8 per cent per annum. During nineties, the pace of demand was accelerated to the level of 7.49 million tons which raised the hopes of the industry that the demand will further grow to 14.73 million tons by the end 2000. However the hopes were dashed with the beginning of the economic crisis mainly due to hopeless management of the economy and excessive politicization in the economy and the demand could reach much less than the expectations at a level of 9.91 million tons at the end of 2000. As against the decline in demand, the production capacity of the cement industry jumped up to the level of 16 million tons by the end of 2000 leaving a huge idle capacity of over 6 million tons. The depressed economic conditions taken as the indicator for demand of cement instilled a depressed thoughts amongst the cement industry that under the prevailing conditions there was a little hope for any positive change regarding increase in demand for the cement in the country. However, the proverbial saying ""exception always proves the rules" came true with the turnaround in the industry as stated earlier. Cement consumption is taken as the representative denominator of the state of development of any economy. Per capita consumption of cement in Pakistan works out to 72 kg per head per annum. This level of per capita consumption is rated as one of the lowest in the world. As against 72 kg per capita consumption in Pakistan, the per capita consumption of cement in India is estimated at 89 kg, Sri Lanka 106 kg, Indonesia 139kg, Vietnam 126 kg, Turkmenistan 159 kg, El Salvador 171 kg, Philippines 220 kg, Mexico 251 kg, Iran 274 kg, Syria 369 kg, China 410 kg, Turkey512 kg, Thailand 600 kg, Malaysia 870 kg and Taiwan 1004 kg.

The industry has now entered into a new phase where the scale of production and plant location will play a major role in determining the profitability of the company. In past, the difference between the large and small players was very thin which has now widened drastically and


may have a significant impact with respect to future performance of the industry.


Over view of Companies

Lucky cement

The Vision

To be the market leader in domestic and exports from the Country by supplying high quality cement at the most competitive rates with customers’ satisfaction and discharge our social responsibilities for the benefit of under privileged.

The Mission

To be the largest and fastest growing cement producer using state of the art technology at the most competitive cost by utilizing our experience for maximizing profits for our shareholders.

The Strategy

To be the leading exporter of cement from Pakistan for the regional countries as well as to explore the other potential export markets. As a part of future strategy, to explore investment possibilities out side Pakistan in the cement industry to become global producer.


Lucky cement


Fauji cement

A longtime leader in the cement manufacturing industry, Fauji Cement Company, headquartered in Islamabad, operates a cement plant at Jhang Bahtar, Tehsil Fateh Jang, and District Attock in the province of Punjab.

The company has a strong and longstanding tradition of service, reliability, and quality that reaches back more than 10 years. Sponsored by Fauji Foundation the Company was incorporated in Rawalpindi in 1992.

The VisionTo transform into a role model cement FCCL manufacturing Company fully aware of generally accepted principles of corporate social responsibilities engaged in nation building through most efficient utilization of resources and optimally benefiting all stake holders while enjoying public respect and goodwill”.

The Mission“While maintaining its leading position in FCCL quality of cement and through greater market outreach will build up and improve its value addition with a view to ensuring optimum returns to the shareholders”.


Organizational structure


LUCKY CEMENT

LIQUIDITY RATIOSA fully liquidity analysis requires the use of cash budgets, but by relating the amount of cash and other current assess to current obligations, ratio analysis provides a quick, easy-to-use measure of liquidity.

2006Current ratio= Current Asset Current Liabilities = 4455494000 4752035000Current ratio = 0.938 times

2007Current ratio= Current Asset Current Liabilities = 5402678000 6352556000Current ratio= 0.85 times

ANALYSIS:Although in both years the position of the company to pay off its short term debt is not very good. It is necessary for the company that its current ratio remains above 1 time to meet its short term obligations and in the case of lucky cement the current of year 2007 is declining because the short obligations (liabilities) are increasing at a faster pace than its current assets.


2006Quick ratio= Current Asset- Inventory Current Liabilities = 4455494000 - 431418 000 4752035000Quick ratio= 0.847 times

2007Quick ratio= Current Asset- Inventory Current Liabilities = 5402678000-676256000 6352556000Quick ratio= 0.744 times

ANALYSIS Here the Quick Ratio of year 2007 is declining because company is holding huge amount of inventory as compared previous year. The quantitative sales of company in year 2007 is 4.64 mtpa against the last year sale of 2.2 mtpa because there is a growth in Pakistani cement industry and there is overall an increase in sale of the cement so that’s why there is a need to hold much bigger amount of inventory as compared to year 2006 and the quick ratio of both years is less than 1.


ASSET MANAGEMENT RATIOSAsset Management Ratio tells us how efficient company utilizes its total assets for generating sales.

2006Inventory turnover = Sales . Avg inventory = 8054101000 431418000Inventory turnover= 18.669 times

2007Inventory turnover = Sales . Avg inventory = 12521861000 676256000Inventory turnover= 18.516 times

ANALYSIS:Inventory Turnover Ratio indicates the effectiveness of the inventory management practices of the firm. The inventory turnover of year 2007 is less than the inventory turn over of year 2006 but as the whole cement industry is growing and the company is maintaining a big amount of inventory as compare to the inventory of year 2006 so that’s why the inventory turnover is decreasing and the inventory turnover ratio of year 2006 was 18.669 which indicates that 18.669 times in a year the inventory of the firm is converted into receivables or cash. However, in 2007, the inventory turnover ratio decreased to 18.516. This was due to the fact that the company, in 2007, invested more in inventory as compared to previous year.


2006Average collection period = Account Receivable * 365 SalesAccount Receivables = Trade debts+ other receivables = 98389000+83912000 = 182301000Average collection period = 182301000 * 365 8054101000Average collection period = 8.262 days

2007Inventory turnover = Sales Avg inventory = 12521861000 676256000Inventory turnover= 18.516 times

ANALYSISInventory Turnover Ratio indicates the effectiveness of the inventory management practices of the firm. The inventory turnover of year 2007 is less than the inventory turn over of year 2006 but as the whole cement industry is growing and the company is maintaining a big amount of inventory as compare to the inventory of year 2006 so that’s why the inventory turnover is decreasing and the inventory turnover ratio of year 2006 was 18.669 which indicates that 18.669 times in a year the inventory of the firm is converted into receivables or cash. However, in 2007, the inventory turnover ratio decreased to 18.516. This was due to the fact that the company, in 2007, invested more in inventory as compared to previous year.


2006Average collection period = Account Receivable * 365 SalesAccount Receivables = Trade debts+ other receivables = 98389000+83912000 = 182301000Average collection period = 182301000 * 365 8054101000Average collection period = 8.262 days

2007Average collection period= Account Receivable * 365 SalesAccount Receivables = Trade debts+ other receivables = 476667000+176546000 = 653213000Average collection period = 653213000 * 365 12521861000Average collection period = 19.041 days

ANALYSIS:Credit policy is defined as the maximum time period allowed to the customer to pay back.The average collection period in the year 2006 was 8.262 days which means that the firm is able to collect its receivables within approximately 10 days. However, in 2007, the average collection period increased to 19.041 days, thus now the company is collecting its receivable within approximately 20 days. There could be many reasons for this increase in average collection period such as, problem in management, lack of incentive given to its customers or undependable customer.


2006Fixed Asset turnover= Sales Fixed Asset = 8054101000 19165108000Fixed Asset turnover = 0.42 times

2007Fixed Asset turnover= Sales Fixed Asset = 12521861000 20318908000Fixed Asset turnover = 0.616 times

ANALYSIS:The fixed turnover ratio measures how effective the firm uses plant and equipment. The role of fixed asset is to support the sales. The fixed Asset turnover ratio of year 2007 is 0.616 times and in year 2006 was 0.42 this shows that as the fixed asset increases there is also an increase in the sales.


2006Total Asset turnover= Sales Total Asset = 8054101000 23622777000Total Asset turnover = 0.341 times

2007 Total Asset turnover= Sales Total Asset = 12521861000 25723761000Total asset turnover = 0.487 times

ANALYSIS:The final asset management ratio the total asset turn over ratio measures the turnover of all the firm assets and help us to identify when problem occur that is a problem in fixed assets or in current assets.. In 2006, it was 0.341 times and in year 2007 is 0.487 this change was brought about by an increase of 55.5% in the sales. Where as the total assets only increased by 8.8%.


DEBT MANAGEMENT RATIOShows the extent to which the firm is financed by debt.

2006Debt ratio = Total Debt Total Asset = 16553144000 23622777000Debt ratio = 70.1 %

2007Debt ratio= Total Debt Total Asset = 16370211000 25723761000Debt ratio = 63.6 %

ANALYSIS:The debt to equity ratio in 2006 was 70.1% which shows that 70.1% of financing through debt. However in 2007 the debt to equity ratio decreased to 63.6% which shows that the company curtails its financing through debts although there is an decline in the risk the company facing but still the firm debt financing on the higher side as compared to ideal situation which is 60% equity & 40% debt.


2006Time interest earned= EBIT Interest = 2770075000 80458000Time interest earned= 34.429 times

2007Time interest earned= EBIT Interest = 3066113000 853399000Time interest earned = 3.593 times

ANALYSIS:Indicates a firm’s ability to cover the interest charges. The interest coverage ratio was 34.429 in 2006 which have decreased to 3.593 in 2007 therefore the company are not able to cover the interest expense at a higher margin of safety.


PROFITABILITY RATIOSThis ratio shows the combined effect of liquidity, asset management and debt management ratios.

2006Profit margin = Net income Sales = 1935950000 8054101000Profit margin = 24%

2007Profit margin = Net income Sales = 2547292000 12521861000Profit margin = 20.3 %

ANALYSIS:Profit margin of year 2007 declined because of the high cost which occurs because of inefficient operations and heavy use of debt.


2006 Basic Earning Power= EBIT Total Asset = 2770075000 23622777000Basic Earning Power= 11.7%

2007Basic Earning Power= EBIT Total Asset = 3066113000 25723761000Basic Earning Power = 11.9%

ANALYSIS:This ratio shows the raw earning power of the firm asset before the influence of taxes and leverage and it is useful for comparing firm with difference tax situations and different degrees of financial leverage. The BEP of year 2006 was 11.7 % which increased little bit in 2007 to 11.9% the result shows that operating profit of year 2007 is growing bY1.1% .

2006Return on Asset= Net income Total Asset = 1935950000 23622777000Return on Asset = 8.19 %

2007Return on Asset= Net income Total Asset = 2547292000 25723761000Return on Asset = 9.9 %


ANALYSIS:The Return on Assets gradually rose in year 2007, to 9.9% from 8.19%, in year 2006. Total asset increased by 8.8%.This shows that the company uses its total assets more efficiently over these years which also increased net income over the years. This ratio shows that how much company has earned on its assets.

2006Return on equity = Net income Common equity = 1935950000 7069633000Return on equity = 27.4%

2007Return on equity= Net income Common equity = 2547292000 9353550000Return on equity = 27.2%

ANALYSIS: This ratio is the most important ratio for investor point of view. This ratio shows that how much investors get return on their money that they have invested in company stocks. If we compare the ROE of 2006 to 2007 there is a decline on ROE by 0.02% and this is not a good sign for the investors to invest in company shares and this is also a threat to Lucky cement because it is the goal of every company to maximize its shareholders wealth.


MARKET VALUE RATIOSIt relates the firm’s stock price to its earning, cash flow, and book value per share. These ratios give management an identication of what investors think of the company’s past performance and future prospects.

2006Price per share / EPS = Price per share EPS = 127 7.35Price per share / EPS = 17.279 times

2007Price per share / EPS = Price per share EPS = 127 9.67Price per share / EPS = 13.133 times

Analysis:(P/E) ratio shows how much investor are willing to pay per Rupee of reported profits. In comparison of 2006 and 2007 (P/E) ratio there is a decline in (P/E) ratio by 4.146 times in 2007. This shows that there is a weak growth prospect of the company and the company is much riskier then other companies in the industry and the investors are not willing to take risk.


2006Market / Book value ratio = Market value per share Book value per share Book value = Common equity No of outstanding shares = 7069633000 263394558 = 26.840 Market/Book value ratio = 127 26.840

Market/Book value ratio = 4.732 times

2007Market / Book value ratio = Market value per share Book value per share Book value = Common equity No of outstanding of shares = 9353550000 263422130 = 35.508 Market/Book value ratio = 127 . 35.508Market/Book value ratio = 3.577 times

Analysis:This ratio of stock’s market price to its book value gives another indication of how investors regard the company. This ratio shows that how much investor is willing to pay more for the stocks than their accounting book value. As the M/B ratio is decline in 2007 to 3.577 times this shows that investors willingness to buy the Lucky cement share is decreasing and this also a bad sign for the Lucky cement company.


FAUJI CEMENT

LIQUIDITY RATIOSA fully liquidity analysis requires the use of cash budgets, but by relating the amount of cash and other current assess to current obligations, ratio analysis provides a quick, easy-to-use measure of liquidity.

2007Current ratio= Current Asset Current Liabilities = 1, 953, 527000 1,442,287000Current ratio = 1.35 times

2006Current ratio= Current Asset Current Liabilities = 1, 579, 381000 1,267,198000Current ratio= 1.24 times

ANALYSIS:In both years the position of the company to pay off its short term debt is good. It is necessary for the company that its current ratio remains above 1 time to meet its short term obligations and in the case of Fauji cement the current of year 2007 is incresing because the current assets increased more than the current liabilities.


2006Quick ratio= Current Asset- Inventory Current Liabilities = Quick ratio= 1.13 times

2007Quick ratio= Current Asset- Inventory Current LiabilitiesQuick ratio= 1.23 times

ANALYSIS Here the Quick Ratio of year 2007 is increasing because company is not holding huge amount of inventory as compared previous year.


ASSET MANAGEMENT RATIOSAsset Management Ratio tells us how efficient company utilizes its total assets for generating sales.

2006Inventory turnover = Sales Avg inventory = 4,286,138,000 490,887,000Inventory turnover= 8.731 times

2007Inventory turnover = Sales Avg inventory = 3, 463, 283000/ 479828000Inventory turnover= 7.21times

ANALYSIS:Inventory Turnover Ratio indicates the effectiveness of the inventory management practices of the firm. The inventory turnover of year 2007 is less than the inventory turns over of year 2006; inventory turnover ratio of year 2006 was 8.731 times which indicates that 8.731 times in a year the inventory of the firm is converted into receivables or cash. However, in 2007, the inventory turnover ratio increased to 7.21 times. This was due to the fact that the company, in 2007, the sales of the company decreased.


2006Average collection period = Account Receivable * 365 SalesAccount Receivables = Trade debts+ other receivables = 25, 475000+70, 339000 = 95814000Average collection period = 95814000 * 365 4,286,138000Average collection period = 8.15 days

2007Average collection period= Account Receivable * 365 SalesAccount Receivables = Trade debts+ other receivables = 19, 558000+858, 758000 = 878316000Average collection period = 878316000 * 365 3,463,283000Average collection period = 92.56 days

ANALYSIS:Credit policy is defined as the maximum time period allowed to the customer to pay back.The average collection period in the year 2006 was 8.15 days which means that the firm is able to collect its receivables within approximately 9 days. However, in 2007, the average collection period increased to 93.56 days, thus now the company is collecting its receivable within approximately 94 days. There could be many reasons for this increase in average collection period such as, problem in management, lack of incentive given to its customers or undependable customer.


2006Fixed Asset turnover= Sales Fixed Asset

Fixed Asset turnover = 0.97 times

2007Fixed Asset turnover= Sales Fixed Asset

Fixed Asset turnover = 0.81 times

ANALYSIS:The fixed turnover ratio measures how effective the firm uses plant and equipment. The role of fixed asset is to support the sales. The fixed Asset turnover ratio of year 2007 is 0.81 times and in year 2006 was 0.97 this shows that as there is a decrease in sales or the fixed assets are increased but can’t boost up sales.


2006Total Asset turnover= Sales Total AssetTotal Asset turnover = 0.69times

2007 Total Asset turnover= Sales Total AssetTotal asset turnover = 0.54 times

ANALYSIS:The final asset management ratio the total asset turn over ratio measures the turnover of all the firm assets and help us to identify when problem occur that is a problem in fixed assets or in current assets..


DEBT MANAGEMENT RATIOShows the extent to which the firm is financed by debt.

2006Debt to equity = Total Debt

Shareholder equity

Debt to equity = 0.60 times

2007Debt to equity = Total Debt Shareholder equity

Debt to equity = 0.38 times

ANALYSIS:The debt to equity ratio in 2006 was 0.60 times which shows that debt is 0.60 times than equity. However in 2007 the debt to equity ratio decreased to 0.38 which shows that the company curtails its financing through debts although there is a decline in the risk the company facing and the firm is to ideal situation which is 60% equity & 40% debt.


2006Time interest earned= EBIT Interest = 2,041,984000 264,297000Time interest earned= 7.72 times

2007Time interest earned= EBIT Interest = 995,285000 207,105000Time interest earned = 4.80 times

ANALYSIS:Indicates a firm’s ability to cover the interest charges. The interest coverage ratio was 7.72 in 2006 which have decreased to 4.80 in 2007 therefore the company are not able to cover the interest expense at a higher margin of safety.


PROFITABILITY RATIOSThis ratio shows the combined effect of liquidity, asset management and debt management ratios.

2006Profit margin = Net income SalesProfit margin = 28.08 %

2007Profit margin = Net income SalesProfit margin = 18.66 %

ANALYSIS:Profit margin of year 2007 declined because of the high cost which occurs because of inefficient operations.


2006 Basic Earning Power= EBIT Total Asset = 2,041,984000 6,198,107000Basic Earning Power= 32.94 %

2007Basic Earning Power= EBIT Total Asset = 995,285000 6,400,688000Basic Earning Power = 15.54 %

ANALYSIS:This ratio shows the raw earning power of the firm asset before the influence of taxes and leverage and it is useful for comparing firm with difference tax situations and different degrees of financial leverage. The BEP of year 2006 was 32.94 % which decreased in 2007 to 15.54 %.

2006Return on Asset= Net income Total Asset = 1,203,735000 6,198,107000Return on Asset = 19.42 %

2007Return on Asset= Net income Total Asset = 646,323000 6,400,688000Return on Asset = 10.09 %


ANALYSIS:The return has decreased from 19.42 % to 10.09 that means that the assets are not efficiently used.

2006Return on equity = Net income Common equityReturn on equity = 28.70 %

2007Return on equity= Net income Common equity

Return on equity = 15.41%

ANALYSIS: This ratio is the most important ratio for investor point of view. This ratio shows that how much investors get return on their money that they have invested in company stocks. If we compare the ROE of 2006 to 2007 there is a decline on ROE by 13.29% is not a good sign for the investors to invest in company shares and this is also a threat to Fauji cement because it is the goal of every company to maximize its shareholders wealth.


MARKET VALUE RATIOSIt relates the firm’s stock price to its earning, cash flow, and book value per share. These ratios give management an identication of what investors think of the company’s past performance and future prospect

Earning per share

2006EPS = total shareholder equity attributable to C/s No of outstanding common stock

EPS = 3.25

2007EPS = total shareholder equity attributable to C/s No of outstanding common stock

EPS = 1.74

Analysis Earnings per share ratio (EPS Ratio) are a small variation of return on equity capital ratio and are calculated by dividing the net profit after taxes and preference dividend by the total number of equity shares. As its shows that the earning power of the company has decreased.


2006

DPS = dividends paid ÷ number of shares in issue

DPS = 1.50

2007DPS = dividends paid ÷ number of shares in issue

DPS = nil

AnalysisDividend per share (DPS) is a simple and intuitive number. It is the amount of the dividend that shareholders have (or will) receive for each share they own. The company paid dividend in 2006 but in 2007 it didn’t paid any dividend.


2006Price per share / EPS = Price per share EPS

Price per share / EPS = 19.38 RS

2007Price per share / EPS = Price per share EPS

Price per share / EPS = 20.09 RS

Analysis:(P/E) ratio shows how much investor is willing to pay per Rupee of reported profits. There is an increase in P/E ratio. This shows that there is a little growth prospect of the company and the company is not much riskier then other companies in the industry and the investors are willing to take risk.


Conclusion


Documents

Ratio Analysis of Fauji Cement and Lucky Cement