RESEARCH QUESTIONS

1- What are the profitability ratios of the company with respect to:

a) Return on Assets

b) Return on equity

c) Net profit margin

d) Gross profit margin

e) Operating profit margin

2- What are the leverage ratios of the company with respect to:

a) Total debt ratio

b) Debt- equity ratio

c) Long-term debt ratio

d) Times interest earned

3-What are the liquidity ratios of the company with respect to:

a) Current ratio

b) Quick ratio

c) Net working capital to assets

4-What are the efficiency ratios of the company with respect to:

a) Total asset turnover

b) Days Sales Inventory

c) Days Sales Outstanding

 d) Days Payables Outstanding

5-What are the cash flows generated from different activities

a) Operating activities

b) Investing activities

c) Financing activities

OBJECTIVES

1. To analyze and interpret the financial report of Mahmood Textile

Mills ltd.

2. To appraise the financial position using the ratio analysis.

3. To accomplish the Income statement & Balance sheet analysis.

4. Interpret post-retirement obligations and funding implications for

future performance.

5. To determine the level of profit generated.

 6. To determine the expense and investments of the company.

SIGNIFICANCE OF THE STUDY

Financial statement analysis is of interest to shareholders, creditors, and the firm’s own
management. Both present and prospective shareholders are interested in the firm’s
current and future level of risk and return. These two dimensions directly affect share
price. The firm’s creditors are primarily interested in the short-term liquidity of the
company and in its ability to make interest and principal payments. A secondary concern
of creditors is the firm’s profitability; they want assurance that the business is healthy and
will continue to be successful. Management, like stockholders, must be concerned with
all aspects of the firm’s financial situation. Thus, this study attempts to operate in a
manner that will be favorable to both owners and creditors.

In addition, management uses ratios to monitor the firm’s financial performance from
period to period. It will also help management to make decisions regarding dividend
policies, investments, lending, borrowings etc.
Sofie Vander Meulen in his study in 2003 states that, investors as well as other
stakeholders heavily rely on a company’s financial statements. It is an important source
of information that is readily available to them at a relatively low cost. The quality of
those statements however is highly variable (aggressive reporting or not, disclosure or
not). Therefore, this research would also be obliging for the company’s investors and
stakeholders.

Through this research many of the society members will be benefited and it will be
advantageous for the economy. Like investors, researchers, creditors, management,
employees, lenders, suppliers, customers, auditors, and analysts will equally be able to
take assistance from this research.
 RESEARCH METHODOLOGY AND DESIGN

 METHOD OF THE STUDY

This study is about the financial statements analysis of Mahmood Textile Mills ltd. The
study is descriptive in nature. The researcher has utilized the descriptive method in
acquiring information for evaluating the financial performance of the selected companies.

 NATURE OF DATA

The research data is secondary in nature as for this particular research. The data is
collected for the year 2009 to 2008, in the form of annual report from the office,
containing:

 Balance sheet
 Cash Flow statement
 Profit & Loss Account

 SAMPLING PROCEDURE

The research, which has been done on the financial analysis of the selected textile

company, the sample procedure for this particular research is

  RESEARCH INSTRUMENT

This research is based on secondary source of data and consists of annual reports, articles,
web sites, and books.

 FINANCIAL TOOLS

To know the desired results and to get the desired information the researcher has applied
many financial tools like ratio analysis, _______

 TREATMENT OF THE DATA

The data and information that was gathered was interpreted and analyzed by using
different financial tools.
 ANALYSIS AND
INTERPRETATION OF DATA
Financial Statements are useful because they provide information that allows investors
and creditors to make better decisions. However, because of selective reporting of
economic events as well as non-comparable accounting methods and estimates, financial
statements are only an approximation of reality. In addition, because of the tendency to
delay accounting recognition, financial statements also tend to lag reality.

A primary objective of financial analysis is to determine comparable risk and return of

companies and their securities. Financial statements include the

 Balance Sheet

 Income Statement

 Cash Flow Statement

The financial statements are interrelated and should be used and analyzed together.
Methods of financial statement analysis may be divided into two general categories,
internal analysis and comparative or external analysis.

Internal analysis uses figures from the financial statements of any one date or period to
gain an understanding of the customer. Comparative analysis may be used to determine
trends when two or more successive sets of figures are reviewed, or may be used to
evaluate a given company's financial statement against industry standards.

These methods may be used separately or in combination. They are part of the tools that
enable experienced credit professionals to reach a credit decision. Financial statements
should be spread and analyzed, with appropriate ratios and flows calculated as an aid in
the customer evaluation. As an important first step in internal analysis, the financial
statement should be examined for validity and general correctness. After the statement
has been accepted as valid and reasonably accurate, ratios should be calculated and the
figures analyzed. Internal analysis calls for an examination of items within a single
financial statement for the purpose of judging their significance in relation to the capital
of the company, its method of operation and conditions prevailing within the industry.
The major tools for internal analysis are balance sheet ratios and a working knowledge of
the line of business including the method of operation and seasonal influences.

Ratios are mathematical aids for appraisal and comparison of financial statements. They
are used to supplement currency amount inspection, to examine inter-item relationships
and to compare a specific company's performance against its industry standard.

The use of ratios reduces the influence of currency size on analysis since these
comparisons are expressed as a percentage, fraction, decimal, or rates of turnover. Only
the combinations that could be made of the items appearing in both schedules limit the
number of ratios that can be developed from the balance sheet and income statement. The
type of operation represented by the account and the nature of the risk has an important
bearing on what ratios are to be computed and studied.

FINANCIAL STATEMENT AND RATIO ANALYSIS

Financial ratios are a popular way for users of financial statements to develop insights
into the financial performance of companies. By controlling for the effect of firm size on
the level of performance, ratios enable financial statement users to examine how a firm
has performed relative to its peers and relative to its own historical performance.

A firm’s ratios can differ from its peers or its own historical performance because it has
selected a different product market strategy, because its management team has become
more effective at implementing its strategy, or because it has selected a different financial
strategy. Sometimes firms can appear to perform differently because they have selected
different accounting methods for reporting the same underlying economic events. For this
reason, a pioneer to effective financial ratio analysis is the development of a clear
understanding of how a firm’s accounting decisions compare with those of its
competitors, or with its own decisions in prior years.

In assessing the significance of various financial data, managers often engage in ratio
analysis, the process of determining and evaluating financial ratios. A financial ratio is a
relationship that indicates something about a company's activities, such as the ratio
between the company's current assets and current liabilities or between its accounts
receivable and its annual sales. The basic source for these ratios is the company's
financial statements that contain figures on assets, liabilities, profits, and losses. Ratios
are only meaningful when compared with other information. Since they are often
compared with industry data, ratios help managers understand their company's
performance relative to that of competitors and are often used to trace performance over
time.

Ratio analysis can reveal much about a company and its operations. However, there are
several points to keep in mind about ratios. First, a ratio is just one number divided by
another. Financial ratios are only "flags" indicating areas of strength or weakness. One or
even several ratios might be misleading, but when combined with other knowledge of a
company's management and economic circumstances, ratio analysis can tell much about a
corporation. Second, there is no single correct value for a ratio. The observation that the
value of a particular ratio is too high, too low, or just right depends on the perspective of
the analyst and on the company's competitive strategy. Third, a financial ratio is
meaningful only when it is compared with some standard, such as an industry trend, ratio
trend, a ratio trend for the specific company being analyzed, or a stated management
objective.

Financial ratios can also give mixed signals about a company's financial health, and can
vary significantly among companies, industries, and over time. Other factors should also
be considered such as a company's products, management, competitors, and vision for the
future.
Focus of Ratio Analysis

Ratio analysis involves evaluating different aspects of a business enterprise which are of
great importance to different users such as management, investors, creditors, bankers,
analysts, investment advisers etc. Generally, the following ratios analyses are made while
making financial statement analysis:

I. Liquidity Ratio Analysis.

II. Profitability Ratio Analysis.
III. Leverage Ratio Analysis.
IV. Efficiency Ratio Analysis.
V. Cash Flow Analysis.

I. Liquidity Ratio Analysis

Liquidity or short-term solvency analysis aims to determine the ability of a business to

meet its financial obligations during the short-term and to maintain its short-term debt-
paying ability. The aim of liquidity analysis is for a company to have adequate funds on
hand to pay bills when they are due and to meet unexpected needs for cash.

Liquidity analysis mainly focuses on balance sheet relationships that indicate the ability
of a business to liquidate current and non-current liabilities.
 1. Working Capital Position

The working capital of a business is the excess of current assets over current liabilities;
this is computed by the subtracting current liabilities from the current assets. The
resulting working capital figure is taken as one of the primary indications of the short-
term solvency of the business.
Working capital= Current assets – Current liabilities

The financial statement of the company (Mehmood Textile Mills) FY 2009 indicates the
following data for the calculation of Working Capital:

Total Current Assets (FY 2008) = 2,263,757,417 PKR

Total Current Assets (FY 2009) = 2,441,209,096 PKR

Total Current Liabilities (FY 2008) = 1,924,504,789 PKR

Total Current Liabilities (FY 2009) = 1,972,157,401 PKR

Working capital (FY 2008) = 2,263,757,417 – 1,924,504,789

= 339,252,628 PKR
Working capital (FY 2009) = 2,441,209,096 – 1,972,157,401
= 469,051,695 PKR

The analysis reveals that there was a 38% increase in the working capital position of the
company from FY`08 to FY`09 which shows that the company payed-off its short-term
liabilities efficiently.

2. Current Ratio:

Current ratio expresses the relationship of current liabilities. It is widely used as a broad
indicator of a company’s liquidity and short-term debt-paying ability. The current ratio
formula is as follows:
 Current ratio = Current Assets
___________
Current Liabilities

The financial statement of the company (Mehmood Textile Mills) FY 2009 indicates the
following data for the calculation of Current Ratio:

Total Current Assets (FY 2008) = 2,263,757,417 PKR

Total Current Assets (FY 2009) = 2,441,209,096 PKR

Total Current Liabilities (FY 2008) = 1,924,504,789 PKR

Total Current Liabilities (FY 2009) = 1,972,157,401 PKR

Current ratio (FY 2008) = 2,263,757,417

___________
1,924,504,789

= 1.2

Current ratio (FY 2009) = 2,441, 209,096

___________
1,972,157,401

= 1.2

Since the Industry average is 1, hence the results reveal that the company maintained its
current ratio on a satisfactory level i.e. pay-off current obligations efficiently and has
maintained adequate margin of safety to the creditors.

3. Acid Test or Quick Ratio:

The current ratio does not take into account the make-up or composition of current assets.
The quick ratio is designed to overcome this problem by relating the most liquid assets to
current liabilities. Cash, marketable securities or short-term investments, receivables and
prepaids are included within the meaning of most liquid assets; inventory is excluded.
The acid test ratio is as follows:

Quick Ratio = Current Assets – Inventory

____________________

Current Liabilities
The financial statement of the company (Mehmood Textile Mills) FY 2009 indicates the
following data for the calculation of Quick Ratio:

Total Current Assets (FY 2008) = 2,263,757,417 PKR

Total Current Assets (FY 2009) = 2,441,209,096 PKR

Total Current Liabilities (FY 2008) = 1,924,504,789 PKR

Total Current Liabilities (FY 2009) = 1,972,157,401 PKR

Total Stock-in-trade (Inventory) (FY 2008) = 1,589,307,570 PKR

Total Stock-in-trade (Inventory) (FY 2009) = 1,443,806,234 PKR

Quick ratio (FY 2008) = 2,263,757,417- 1,589,307,570

_________________________
1,924,504,789
= 0.4

Quick ratio (FY 2009) = 2,441,209,096 - 1,443,806,234

_________________________
1,972,157,401
= 0.5

The analysis reveals that the Quick ratio of the company increased from 0.4 in FY`08 to
0.5 in FY`09 which shows that the company`s currents assets are highly dependent on
inventory (since it is less than working capital ratio).
 2009 2008

Working Capital 469,051,695 339,252,628

Position PKR PKR

Current Ratio 1.2% 1.2

Quick Ratio 0.5% 0.4

 II. Profitability Ratio Analysis

Profitability ratios focus on the firm’s earnings. Each relates the returns of the firm to its
sales, equity, assets, or share value. Owners, creditors, and management pay close
attention to boosting profits due to great importance placed on earnings in the market
place.

1. Gross Profit Margin:

A financial metric used to assess a firm's financial health by revealing the proportion of

money left over from revenues after accounting for the cost of goods sold. Gross profit
margin serves as the source for paying additional expenses and future savings.

Calculated as:

Gross Profit Margin = Sales – COGS

____________

Sales

 Gross Profit = Sales - COGS

The Income Statement of the company (Mehmood Textile Mills) FY 2009 indicates the
following data for the calculation of Gross Profit Margin:

Gross Profit (FY 2008) = 562,288,148 PKR

Gross Profit (FY 2009) = 1,084,242,845 PKR

Sales (FY 2008) = 5,073,168,667 PKR

Sales (FY 2009) = 6,811,267,831 PKR

Gross Profit Margin (FY 2008) = 562,288,148

____________

5,073,168,667

= 0.1

Gross Profit Margin (FY 2009) = 1,084,242,845

____________

6,811,267,831

= 0.2

The analysis reveals that the Gross Profit Margin of the company increased from 0.1 in
FY`08 to 0.2 in FY`09 which shows that the company can efficiently pay additional
expenses and future savings.

2. Operating Profit Margin:

Operating margin is a measurement of what proportion of a company's revenue is left

over after paying for variable costs of production such as wages, raw materials, etc. It
indicates how effective a company is at controlling the costs and expenses associated
with their normal business operations.
A healthy operating margin is required for a company to be able to pay for its fixed costs,
such as interest on debt.

Operating Profit Margin = Operating Income

____________

Net Sales

The Income Statement of the company (Mehmood Textile Mills) FY 2009 indicates the
following data for the calculation of Operating Profit Margin:
Operating Income (FY 2008) = 271,248,824 PKR
Operating Income (FY 2009) = 571,453,864 PKR

Sales (FY 2008) = 5,073,168,667 PKR

Sales (FY 2009) = 6,811,267,831 PKR

Operating Profit Margin (FY 2008) = 271,248,824

____________

5,073,168,667

= 5.3 %

Operating Profit Margin (FY 2009) = 571,453,864

____________

6,811,267,831

= 8.4 %

The analysis reveals that the Operating Profit Margin of the company increased from 5.3
% in FY`08 to 8.4 % in FY`09 which shows that the company is efficiently controlling
the costs and expenses associated with its operations and it can pay for its fixed costs,
such as interest on debt efficiently.
 3. Net Profit Margin:

A ratio of profitability calculated as net income divided by revenues, or net profits

divided by sales. It measures how much out of every dollar of sales a company actually
keeps in earnings.

Profit margin is very useful when comparing companies in similar industries. A higher

profit margin indicates a more profitable company that has better control over its costs
compared to its competitors.
Net Profit Margin = Net Income
____________

Sales

The Income Statement of the company (Mehmood Textile Mills) FY 2009 indicates the
following data for the calculation of Net Profit Margin:

Net Income (FY 2008) = (4,979,641) PKR

Net Income (FY 2009) = 102,843,981 PKR

Sales (FY 2008) = 5,073,168,667 PKR

Sales (FY 2009) = 6,811,267,831 PKR

Net Profit Margin (FY 2008) = (4,979,641)

____________

5,073,168,667

= - 0.1 %

Net Profit Margin (FY 2009) = 102,843,981

____________
 6,811,267,831

= 1.5 %

The analysis reveals that the Net Profit Margin of the company increased from a loss of
(0.1 %) in FY`08 to 1.5 % in FY`09 which shows that the company earned profit and its
pricing policies are improved, has gained better ability to control costs and has a
satisfactory margin of safety.

4. Return On Assets:

An indicator of how profitable a company is relative to its total assets. ROA gives an

idea as to how efficient management is at using its assets to generate earnings.
ROA tells us what earnings were generated from invested capital (assets). ROA for
public companies can vary substantially and will be highly dependent on the industry.

Calculated as:

Return on Assets = Net Income

___________

Total Assets

The Income Statement & Balance Sheet of the company (Mehmood Textile Mills) FY
2009 indicates the following data for the calculation of Return on Assets:

Net Income (FY 2008) = (4,979,641) PKR

Net Income (FY 2009) = 102,843,981 PKR

Total Assets (FY 2008) = 4,296,653,569 PKR

Total Assets (FY 2009) = 4,418,368,036 PKR
 Return on Assets (FY 2008) = (4,979,641)
____________

4,296,653,569

= - 0.1 %

Return on Assets (FY 2009) = 102,843,981

____________

4,418,368,036

= 2.3 %
The analysis reveals that the Return on Assets of the company increased from a loss of
(0.1 %) in FY`08 to 2.3 % in FY`09 which shows that the company improved its ROA
and the management is efficiently using its assets to generate earnings.

5. Return On Equity:

The amount of net income returned as a percentage of shareholders equity. Return on

equity measures a corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested. 
Net income is for the full fiscal year (before dividends paid to common stock holders but
after dividends to preferred stock.) Shareholder's equity does not include preferred shares.
ROE is also referred as “Return on Net Worth”

Calculated as:

Return on Equity = Net Income

___________

Shareholder’s Equity

The Income Statement & Balance Sheet of the company (Mehmood Textile Mills) FY
2009 indicates the following data for the calculation of Return on Assets:
 Net Income (FY 2008) = (4,979,641) PKR
Net Income (FY 2009) = 102,843,981 PKR

Total Shareholder`s Equity (FY 2008) = 1,623,589,865 PKR

Total Shareholder`s Equity (FY 2009) = 1,711,456,511 PKR

Return on Equity (FY 2008) = (4,979,641)

____________

1,623,589,865

= - 0.3 %
Return on Equity (FY 2009) = 102,843,981
____________

1,711,456,511

= 6.0 %

The analysis reveals that the Return on Equity of the company increased from a decline
of (0.3 %) in FY`08 to 6.0 % in FY`09 which shows that the company improved its ROE
and the management efficiently generated profit with the money shareholders invested in
year 2009.

2009 2008

Gross Profit Margin 16 % 11%

Operating Profit Margin 8.4 5.3

 Net Profit margin 1.5 (0.1)

Return on Assets 2.3 (0.1)

Return on Equity 6.0 (0.3)

III. Leverage Ratio Analysis

When a firm borrows money, it promises to make a series of interest payments and then
to repay the amount that it has borrowed. If profits rise, the debt holders continue to
receive a fixed interest payment, so that all the gains go to shareholders, whereas if the
reverse happens and profits fall shareholders bear all the pain.

1. Debt Ratio:

A ratio that indicates what proportion of debt a company has relative to its assets. The
measure gives an idea to the leverage of the company along with the potential risks the
company faces in terms of its debt-load. Used in conjunction with other measures of
financial health, the debt ratio can help investors determine a company's level of risk.

Calculated as:

Debt Ratio = Total Debt

___________

Total Assets
The Balance Sheet of the company (Mehmood Textile Mills) FY 2009 indicates the
following data for the calculation of Debt Ratio:

Total Assets (FY 2008) = 4,296,653,569 PKR

Total Assets (FY 2009) = 4,418,368,036 PKR

Total Liabilities/ Debt (FY 2008) = 2,673,063,704 PKR

Total Liabilities / Debt (FY 2009) =2,706,911,525 PKR

Total Debt Ratio (FY 2008) = 2,673,063,704

____________

4,296,653,569

= 0.62 or 62 %

Total Debt Ratio (FY 2009) = 2,706,911,525

____________

4,418,368,036

= 0.61 or 61 %

The analysis reveals that the company management maintained a satisfactory debt/asset
ratio which is less than 1. This indicates that the company has more assets than debt and
is utilizing its assets efficiently.

2. Debt- Equity Ratio:

A measure of a company's financial leverage, calculated by dividing its total liabilities
by stockholders' equity. It indicates what proportion of equity and debt the company is
using to finance its assets.
Calculated as:

Debt-Equity Ratio = Total Debt

___________

Total Equity

The Balance Sheet of the company (Mehmood Textile Mills) FY 2009 indicates the
following data for the calculation of Debt-Equity Ratio:

Total Liabilities/ Debt (FY 2008) = 2,673,063,704 PKR

Total Liabilities / Debt (FY 2009) =2,706,911,525 PKR
Total Shareholder`s Equity (FY 2008) = 1,623,589,865 PKR
Total Shareholder`s Equity (FY 2009) = 1,711,456,511 PKR

Total Debt-Equity Ratio (FY 2008) = 2,673,063,704

____________

1,623,589,865

= 1.7

Total Debt-Equity Ratio (FY 2009) = 2,706,911,525

____________

1,711,456,511

= 1.6

A high debt/equity ratio generally means that a company has been aggressive in financing
its growth with debt. The analysis reveals that the company management reduced the
debt/equity ratio in the year 2009 which means that it used less debt and made an
efficient use of its assets to generate revenue.

3. Interest Coverage Ratio:

A ratio used to determine how easily a company can pay interest on outstanding debt.
The interest coverage ratio is calculated by dividing a company's earnings before interest
and taxes (EBIT) of one period by the company's interest expenses of the same period.
The lower the ratio, the more the company is burdened by debt expense.

Calculated as:

Interest Coverage Ratio = EBIT

___________

Interest Charges
The Income Statement of the company (Mehmood Textile Mills) FY 2009 indicates the
following data for the calculation of Interest Coverage Ratio:

EBIT (FY 2008) = 271, 248,824 PKR

EBIT (FY 2009) = 571,453,864 PKR

Interest Charges (FY 2008) = 221,160,302 PKR

Interest Charges (FY 2009) = 381,249,583 PKR

 EBIT = Profit Before Taxation(EBT) + Finance Cost

 Finance Cost = Interest Charges

Interest Coverage Ratio (FY 2008) = 271, 248,824

____________
 221,160,302

= 1.2

Interest Coverage Ratio (FY 2009) = 571,453,864

____________

381,249,583

= 1.5

An interest coverage ratio below 1 indicates the company is not generating sufficient

revenue to satisfy interest expenses.
The analysis shows that the company management increased the interest coverage ratio in
the year 2009 which means that it is able to pay the interest on the debt outstanding easily
and is generating sufficient revenues to satisfy interest expenses.

2009 2008

Debt Ratio 0.61 0.62

Debt-Equity Ratio 1.6 1.7

Interest Coverage Ratio 1.5 1.2

 IV. Efficiency Ratio Analysis

Ratios that are typically used to analyze how well a company uses its assets and liabilities
internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of
liabilities, the quantity and usage of equity and the general use of inventory and
machinery.  Efficiency ratios are to judge how efficiently the firm is using its assets or we
can say the speed with which various accounts are converted into sales or cash.

1. Total asset Turnover:

Asset turnover measures a firm's efficiency at using its assets in generating sales or

revenue - the higher the number the better. It also indicates pricing strategy: companies
with low profit margins tend to have high asset turnover, while those with high profit
margins have low asset turnover.

Calculated as:
 Total Asset Turnover = Sales
_________

Total Assets

The Income Statement & Balance Sheet of the company (Mehmood Textile Mills) FY
2009 indicates the following data for the calculation of Total Asset Turnover:

Total Assets (FY 2008) = 4,296,653,569 PKR

Total Assets (FY 2009) = 4,418,368,036 PKR

Sales (FY 2008) = 5,073,168,667 PKR

Sales (FY 2009) = 6,811,267,831 PKR

Total Asset Turnover (FY 2008) = 5,073,168,667

____________

4,296,653,569

= 1.2

Total Asset Turnover (FY 2009) = 6,811,267,831

____________

4,418,368,036

= 1.5
The analysis shows that the company`s total asset turnover no. is satisfactory and is
above industry average i.e. 1. This means that for Mehmood Textile Mills each rupee of
assets produce rupees 1.5 of sales in year 2009.
This shows that the firm is efficiently utilizing its assets in generating sales-revenues.

2. Days Sales Outstanding:

A measure of the average number of days that a company takes to collect revenue after a
sale has been made.

Calculated as:

DSO = Account Receivable

________________
Annual Sales/365

The Income Statement & Balance Sheet of the company (Mehmood Textile Mills) FY
2009 indicates the following data for the calculation of Days sales outstanding:

Sales (FY 2008) = 5,073,168,667 PKR

Sales (FY 2009) = 6,811,267,831 PKR

A/R (FY 2008) = 145,330,859 PKR

A/R (FY 2009) = 387,579,261 PKR

DSO (FY 2008) = 145,330,859

____________

5,073,168,667/365

= 10 days

DSO (FY 2009) = 387,579,261

____________

6,811,267,831/365

= 21 days

 A low DSO number means that it takes a company fewer days to collect its accounts
receivable. A high DSO number shows that a company is selling its products to
customers on credit and taking longer to collect money.
The analysis shows that the company is taking longer time to collect it receivables in
2009 than it used to in 2008. The more quickly it’ll collect its receivables, the more easily
it can re-invest the amount and generate more sales

3. Days Sales Inventory:

A financial measure of a company's performance that gives investors an idea of how long

it takes a company to turn its inventory (including goods that are work in progress, if
applicable) into sales. Generally, the lower (shorter) the DSI the better, but it is important
to note that the average DSI varies from one industry to another.

Calculated as:
DSI =
Inventory
___________
COGS /365
The Income Statement & Balance Sheet of the company (Mehmood Textile Mills) FY
2009 indicates the following data for the calculation of Days sales Inventory:

Inventory (FY 2008) = 1,589,307,570 PKR

Inventory (FY 2009) = 1,443,806,234 PKR

COGS (FY 2008) = 4,336,860,614 PKR

COGS (FY 2009) = 5,546,902,513 PKR

 Inventory = Stock-in trade

 COGS = Cost of goods sold -- depreciation

DSI (FY 2008) = 1,589,307,570

____________

4,336,860,614 /365

= 134 days
 DSI (FY 2009) = 1,443,806,234
____________

5,546,902,513 /365

= 95 days

The analysis shows that the company utilized its inventory quickly and more efficiently
converting it into sales in FY`09. A reduction from 134 days to 95 days is an efficient
decrease in the time period which is good for the company`s financial health.

4. Days Payable Outstanding:

Day’s payable outstanding (DPO) is an efficiency ratio that measures the average
number of days a company takes to pay its suppliers. DPO is an indicator of how long a
company is taking to pay its trade creditors.
DPO is typically looked at either quarterly or yearly (90 or 365 days).

Calculated as:
DPO = Account Payable
___________
COGS /365

The Income Statement & Balance Sheet of the company (Mehmood Textile Mills) FY
2009 indicates the following data for the calculation of Days sales Inventory:

COGS (FY 2008) = 4,336,860,614 PKR

COGS (FY 2009) = 5,546,902,513 PKR

 Account Payable = Stock-in trade

 COGS = Cost of goods sold -- depreciation

DPO (FY 2008) =

____________

4,336,860,614 /365

= 3 days

DPO (FY 2009) =

____________

5,546,902,513 /365

= 3 days
The calculations shows that the company has maintained a satisfactory DPO and is
paying to its creditors in time and efficiently.

2009 2008

Total Asset Turnover 1.5 1.2

Days Sales Outstanding 21 days 10 days

Days Sales Inventory 134 days 95 days

Days Payable 3 days 3 days

Outstanding
 V. Cash Flow Analysis

Cash flow analysis is the study of the cycle of a business' cash inflows and outflows,
with the purpose of maintaining an adequate cash flow for your business, and to provide
the basis for cash flow management.

Cash flow analysis involves examining the components of a business that affect cash
flow, such as accounts receivable, inventory, accounts payable, and credit terms. By
performing a cash flow analysis on these separate components, we can be able to more
easily identify cash flow problems and find ways to improve the cash flow of the
company.

2009 2008
Rupees Rupees

Cash Flows from

Operating Activities 572,818,825 (160,036,676)
 Cash Flows from
Investing Activities (78,329,642) (202,173,281)

Cash Flows from

Financing Activities (492,874,375) 360,972,636

Increase/ (Decrease) in 1,614,808 (1,237,321)

Cash

Cash & Cash 9,226,439 7,611,631

Equivalents At Year End

ANALYSIS:
 PRODUCTION DATA ANALYSIS

 Production Data (Yarn)

2009 2008

No. of Spindles 84,912 84,912

Installed

No. of Spindles-shifts 91,040,076 86,125,545

Worked
 Actual Production 31,003,601 29,245,027
(converted into 20`s Kgs. Kgs.
count)

Analysis:

According to the production data of Yarn, we notice that there was no change in the no.
of spindles installed. The company by utilizing the same no. of spindles increased its
production capacity to about 8% i.e. from 29,299,452 Kgs. in FY`08 to 31,616,586
Kgs.
The actual production has increased from 29,245,027 Kgs. to 31,003,601 Kgs. i.e. 6%
increase.
This increase was mainly due to:

 Increase in no. of shifts i.e. from 1,089 FY`08 to 1,093

FY`09 & hence increasing the capacity utilization.
 Production Data (Cloth)

2009 2008

No. of looms Installed 88 88

No. of looms-shifts 96,184 85,648

Worked
 Actual Production 17,856,211 14,540,633
(converted into 60 Sq.mtrs Sq. mtrs
picks)

Analysis:

According to the production data of Cloth, we notice that there was no change in the no.
of spindles installed. The actual production has increased from 14,540,633 Sq. mtrs to
17,856,211 Sq. mtrs i.e. 23% increase.

This increase was mainly due to:

 Increase in no. of shifts i.e. from 1,063 FY`08 to 1,093

FY`09 & hence increasing the capacity utilization.

INCOME STATEMENT ANALYSIS

FY 2009 FY 2008

Sales 6,811,267,831 PKR 5,073,168,667 PKR

GP Margin % 16% 11%

COGS 5,727,024,986 4,510,880,519

SGA % 8.6% 6.6%

 Financial Charges % 5.6% 4.4%

Net Income (Loss) 102,843,981 (4,979,641)

Net Profit Margin % 1.5% (0.1%)

Net sales of Company increased by 34% from PKR 5,073 M in FY`08 to PKR 6,811 M
in FY`09. The details of sales data for yarn and cloth is depicted in below table: In
addition to yarn and cloth, company sales also include proceeds from sales of waste,
electricity sale to WAPDA and exchange gain fluctuations gains on exports.

Graph

1. Sales Analysis

Sales Analysis FY 2009 FY 2008

Yarn (Local) 2,534,866,659 PKR 1,802,901,509 PKR
Yarn (Export) 2,203,344,886 1,478,390,317
Yarn (Purchased) 4,600,945 296,997,827

Total Yarn Sales 4,742,812,490 3,578,289,653

 Cloth (Local) 104,769,164 224,349,428
Cloth (Export) 1,247,179,370 794,415,512
Cloth (Purchased) --- 25,649,318

Total Cloth Sales 1,351,948,534 1,044,414,258

Electricity sales to WAPDA 408,055,746 251,537,364

Cotton Purchased 105,255,318 25,714,731

From the above table it is depicted that the sales of yarn and cloth have increased in
FY`09. The increase is explained below:
 Yarn sales increase by 33%
 Cloth sales increase by 29%

In absolute terms growths as witnessed in percentage in more in yarn sales as compare to

cloth sales. This is owing to the fact that in FY`09 margin in yarn is higher than cloth.

There is also an increase in exports of both cloth and yarn as well.

 Total exports of yarn in FY `08 were PKR 1,478 M which
has now increased in FY `09 to PKR 2,203 M i.e. 49%
increase.
 Total exports of cloth in FY `08 were PKR 794,42 M
which has now increased in FY `09 to PKR 1,247 M i.e.
57% increase (more than that of yarn).
 Cotton purchased locally has shown an increase in sales of
about 309% in FY`09.

This increase in sales is majorly due to increase in sales volume, exports of cloth and
yarn and locally purchased cotton sales.
 2. Cost of Goods Sold Analysis:

COGS Analysis FY 2009 FY 2008

Cost of goods sold 5,727,024,986 PKR 4,510,880,519 PKR

COGS % 84% 89%

The COGS has decreased as a percentage of sales from 89% in FY`08 to 84% in
FY`09.
But in absolute terms COGS increased by 27% in FY`09 i.e. from PKR 4,510 M to PKR
5,727 M.
This increase in absolute terms was due to the following changes:

 Raw Material consumption increased by 24%, due to

increased consumption of Yarn and Cloth.
 Stores consumed increased by 42% in FY`09.
 Power and fuel increased by 42% in FY`09.

Overall sales increased by 34% in comparison to increase in COGS by 27%.

3. Selling & Administrative Expense Analysis:

SGA Expenses increased as a % of sales from 6.6% in FY`08 to 8.6% in FY`09. This
increase was mainly due to the following changes:

 Commission expenses increase by 150%.

 Travelling and conveyance expense increase by 84%.
  Vehicle Running & Maintenance increase by 79%.
 Loss on sale of shares increase by 834%.

4. Finance cost/ Mark-up:

FY 09 FY 08
Finance Cost 381,249,583 221,160,302

Finance Cost % 4.1% 1.8%

The mark-up is showing an increase of 4.1%, as a percentage of sales, as compared to

last year 1.8% as the company increases its average utilization of funds from financial
institutions.
 Mark-up has increased by 112% on short-term
borrowings.

This is mainly due to the increase in short-term borrowings

BALANCE SHEET ANALYSIS

FY 2009 FY 2008

Current Assets 2,441,209,096 PKR 2,263,757,417 PKR

Current Liabilities 1,972,157,401 1,924,504,789

Fixed Assets 1,977,158,940 2,032,896,152

 Long-Term Financing

Short-Term Borrowings

Leverage

Current Ratio 1.2 1.2

The total assets of company amounted to PKR 4,418 M with current assets of PKR 2,441
M and fixed assets of PKR 1,977 M.

1. Current Assets:

Current assets of Company have increased by 8%. This increase is due to following
reasons:
 Trade Debts (A/R) increase by 167%.
 Short-term investments increase by 54%.
 Other Receivables increase by 89%.

Trade debts show a 332% increase in secured export bills, while a 55% increase in
unsecured bills. Receivable against sale of shares showed a 114% increase in FY`09.