CHERAT CEMENT LTD

20/19/2019

IBF PROJECT-1

Authors (SLOT T/T 2nd):

Syed Hassan Ali Shah – 17135
Muhammad Mehdi – 17098
Muhammad Hamza Bakshi -17085
Muhammad Osama Zubair – 17152
Syed Talib Hussain - 17095

CHERAT CEMENT LIMITED

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SUBMIT TO:
MISS. TAHIRA JAFFERY
CHERAT CEMENT LTD

Table of Contents
ABOUT THE COMPANY 2
BUSINESS DESCRIPTION 2
RELEVANT DETAILS FOLLO UP 3
CHERAT CEMENT FINANCIAL ANALYSIS REPORT 3
VERTICAL ANALYSIS 3
HORIZONTAL ANALYSIS 5
RATIO ANALYSIS …………………………………………………………………………...7
LIQUIDITY RATIOS ………………………………………………………………………….7
ASSET MANAGEMENT RATIOS …………………………………………………………...9
DEBT MANAGEMENT RATIOS …………………………………………………………...18
PROFITIBILITY RATIOS …………………………………………………………………...22
MARKET VALUE RATIOS …………………………………………………………………27
SOLVENCY RATIO …………………………………………………………………………32
BIBLIOGRAPHY ……………………………………………………………………………33

ABOUT THE CEMENT INDUSTRY:

The cement industry experienced a significant growth of 13.84% in the last fiscal year with
15.42% increase in domestic consumption and 1.77% increase in exports. Dispatches grew up by
5.5 million tons. According to All Pakistan cement manufactures association (APCMA), the
decline in rupee against dollar has helped the cement industry recover its lost competitiveness.

BUSINESS DESCRIPTION:
Cherat Cement is a premier name in the field of cement manufacturing, producing high quality
grey Portland cement using modern and sophisticated production facilities. It's main business
activity is manufacturing, marketing and sale of cement. It had an annual installed capacity of
around 2.4 million tons.

KEY PEOPLE:
CHAIRMAN: Mr.Omar Faruque
CEO: Mr.Azam Faruque
COMPANY SECRETARY: Mr.Abid Vazir

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EXTERNAL AUDITOR:
EY Ford Rhodes Chartered Accountants

FISCAL YEAR END:

June.

Overview
Cherat is part of the Ghulam Faruque Group (GFG) and was established in 1981 with its plant
located near the district of Nowshera, KP. The GFG group has a range of businesses as part of its
operation with Cherat Cement and Cherat Packaging more prominent ones. The group also deals
in sugar, energy & power and appliances.
Cherat Cement (PSX: CHCC) has been in the business of cement manufacturing since the 1980s
like many of its current peers. It has remained one of the smaller cement firms until very recently
when new expansion brought its capacity at par with some of the mid-tier players. In the third
quarter of FY19, the company has commissioned its third line bringing its total capacity to 4.5
million tons.

Competitors of Cherat Cement

 Kohat Cement ltd has a share price of 45.76. It deals in grey cement, which even cherat
cement deals with. It was founded in 1980.
 Fecto Cement has a share price of 18.76. It deals in grey cement. It was founded in 1952.
 Pioneer Cement has a share price of 21.87. It deals in grey cement.
 Maple leaf cement has a share price of 16.65. It deals in grey cement.

CHERAT CEMENT FINANCIAL ANALYSIS REPORT

Vertical Analysis 2014-2018

 Property, Plant and equipment rose by around 10% in 2016 because of the increase in
capital work in progress of new line and WHR Line-II. The property plant and equipment
although increased in amount but decreased as a percentage of total assets because the
capital work in progress were transferred to inventory section, which let to the increase in
percentage of closing inventory in 2017.
 Intangible assets remained constant around 0.1-0.15% over the period.
 Long term investments increased by 1.48% between 2014-2015, due to increase in AFS
(available for sale securities).Long term investments also rose in 2016 because of
morstpoe investments in related parties i.e, Cherat Packaging Ltd. The decrease in long
term investments came in 2017 also as a factor of percentage 1.58% due to the decrease
in investment in AFS.
 Long term loans, advances and receivables remained negligible over the period around
0.01%.

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 Similar trend was observed in long term deposits and prepayments which fluctuated
around 0.15%.
 Stores, spares and loose tools (SSL), observed the drastic decrease between 2014-2016
ranging between 18%-6.43%, fall. The decrease was mainly due to decrease in amount of
stores and spare parts which meant inventories were being sold. However, opposite trend
was observed in 2017 (stores multiplied by almost 3 times than in 2016). As, SSL rose by
5.32%. Increase was also seen in spare parts.
 Stock in trade remained around 5%. However, it was lowest 1.97% in 2016 because of
decrease in work in progress. Due to similar reason, same trend was observed in 2018 as
well.
 There were no trade debts from 2014 to 2016. And although the trend broke in 2017 and
2018 but the trade debts remained very small percentage of total assets.
 Loans and advances remained constant around 0.2% throughout the period.
 Deposits, short prepayments, and other receivables increased drastically between years
2015-2016 and 2016-2017. The percentage was a small amount in the years 2014-2015
amounting to 1.5% on average. But the increase of around 3-3.5% came in the following
years after 2015 going high up till 5.32% in 2018. The reason for increase was mainly
due to increase in gratuity fund, sale tax adjustable and insurance claim receivables.
 Company was indulged in short term investments in years between 2014-2015 but no
short term investments were seen in the following years, 2016-2018. The main reason we
can hint this analysis to that company had been investing in different companies’ cash,
sovereign, money market funds and governments bonds. However, there were no such
investments observed in the following years.
 Cash and bank balances remained constant over the period and there was no drastic
change observed. This depicts that the company keeps less cash and is more interested in
investments.
 Share capital fell drastically in 2016 with a percentage change of 7.24%. There was no
significant change in the amount of share capital but the decrease in percentage was due
to the increase in long term financing because of the new project (WHRPP). The increase
in long term financing led to the dilution in share capital. Similar trend was observed in
the years following 2016.
 The decrease in Reserves also was due to the above mentioned reason of share capital
and it wasn’t itself decreased in amount but only as a percentage after the year 2016.
 The long term financing rose significantly from 2016 onwards due to the reason of
financing Waste Heat Recovery Loan-Line II. The company also obtained a long term
loan from Islamic banks under diminishing Musharaka Scheme.
 Trade & other payables observed a see-saw trend over the period (2014-2018) due to
changes in creditors, bills payable and retention money.
 Short term borrowings fluctuated around 1% in the period from 2014 to 2016. However,
it rose to 7.98% in 2017 which was attributed to short term financing from conventional
banks amounting to 2265 million.

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HORIZONTAL ANALYSIS 2014-2018

Current assets increased as compared to 2013 around 22 due to short-term investments made and
simultaneously shareholders’ equity increased during the year due to healthy profits and gains on
investments made.
Balance Sheet Current assets decreased as compared to year 2014 due to encashment of short-
term investments whereas shareholders’ equity increased during the year due to issuance of right
shares, healthy profits and unrealized gain on long term investments of the Company. Profit and
Loss Account Turnover has increased over the years from 2010 to 2015 due to increase in sale
price. Gross profit increased from 2010 mainly due to increased sales turnover. Further, company
also applied various measures i.e. alternative fuels, TDF and RDF to save fuel cost.
Current assets decreased as compared to year 2015 due to encashment of short-term investments
for new line project, whereas shareholders’ equity increased during the year due to healthy
profits and unrealized gain on long-term investments of the Company. There has been some
drastic changes in the statement of financial position of this year 2017.
Current assets increased as compared to year 2016 maybe due to increase in the closing stock of
stores, spares & loose tools, stock in trade and this further lead to the induction of credit sales.
Shareholders’ equity increased mainly due to enhanced unappropriated profits of the Company
and somewhat because of acturial gain on gratuity fund.
Non-current assets increased as compared to year 2017 due to increase in Capital Work in
Progress of line I, II & mainly pertaining to Line-III amounting to Rs.9.4 billion. We can also see
an Increase in non-current liabilities which may be associated with long-term loans. Long term
financing obtained from Islamic banks under Diminishing Musharika Scheme and a term loan
from a conventional bank.
Gross profit increased 22% till 2013 and was 33% in year 2014, mainly due to stable prices. For
the year it has declined about 4% due to increasing cost of sales, courtesy of WAPDA terrifs.
Operating profit has also increased positively around 7% in 2014 mainly due to improving gross
profit margin. As also Finance cost has decreased a bit due to reduced gearing.
Operating profit showing increasing trend in 2015 mainly due to improved GP margins, reduced
finance cost and increased investment income. Finance cost decreased due to reduced gearing.
Provision for taxation in current year 2015 has increased significantly due to newly introduced
levy i.e. super tax.
Turnover has increased in 2016 as compared to base year due to increase in sale price and
dispatches. Gross profit increased from 2013 about more than 20% mainly due to increase sales
turnover and dispatches. Further, Company also applied various measures i.e. alternative fuels,
TDF and RDF to cut fuel cost. Operating profit showing increasing trend from 2013 to 2016 ,
around 22% increase to be precise, mainly due to improved GP margins and other income.
Finance cost slightly increased due to working capital requirements of project. Provision for

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taxation in current year 2016 has increased significantly in line with change in local and export
sales ratio. Further, due to newly introduced levy i.e. super tax.
Turnover has been increased over the years from 2013-2017 due to increase in sale price mainly
in the local market and dispatches. The export sales figure is also high as compared to the
previous year because of the high prices of cement. Current year Turnover significantly
increased due to commissioning of Line II and it did not operate for the whole year but its impact
was great. Gross profit increased from 2013 mainly due to increased sales turnover and
dispatches. Further, Company is following the same measures mentioned above to cut cost.
However, during the year gross profit is decreased to 22% from 33% mainly due to increase in
Coal prices and sales of low margin clinker. Operating profit showing increasing trend from
2013 to 2017 mainly due to improved GP margins and other income. Finance costs has
significantly increased due to Line – II, which was previously charged to borrowing costs.
Current year turnover significantly increased as Line-II remain operational for whole year as
against the six (6) months last year. Gross profit increased from year 2013 till 2018 mainly due
to increased turnover and despatches. Current year gross profit decreased due to increase in coal
prices and decreased retention. Despite of increasing coal prices and its raw materials, the
operating profit is still showing increasing trend from year 2013 to 2018 due to increase in profit
margins over the time and other income. Current year operating profit decreased due to increase
in operating and fixed costs mainly due to Line-II of production as it operated for full year as
compared to six months last year.

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RATIO ANALYSIS
Industry
Company

LIQUIDITY RATIOS
CURRENT RATIO:

The current ratio is a liquidity ratio that measures a company's ability to pay short-term
obligations or those due within one year. It tells investors and analysts how a company can
maximize the current assets on its balance sheet to satisfy its current debt and other payables.
Current ratio was highest in 2014 of Cherat Cements (3.30) because of high inventory, short
term investments, and comparatively less trade in other payables. However, ratio fell
drastically in 2016 as company decided not to invest in short term investments. Moreover,
trade & other payables also doubled from that in 2015. Short term borrowings also increased
in 2016 by 137.8%. The ratio increased by minimal amount in 2017 & 2018 being around
1.7%. The slight increase was due to increase in inventory, trade debts and other receivables.
The increase can also be associated to decrease in payables in 2017 (43.7%). The industry
average was highest in 2017 i.e, 2.98. However, the company being at 1.78, it still lies in the
range of healthy business. Overall the industry average is higher than the company average in
the later years. This might mean that the competitors were less interested in long term
investments.

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QUICK RATIO:
The quick ratio is an indicator of a company’s short-term liquidity position and measures a

company’s ability to meet its short-term obligations with its most liquid assets. The company
only had satisfactory quick ratio in year 2014. From 2015-2018 it had ratio of less than 1, which
means that the company was not able to meet its liabilities without selling its inventory. This was
mainly because of significant increase in the retention money in 2016 by 118 times than in 2015,
the decrease in short term investments double the effect, which let to the lowest quick ratio for
that period amounting to 0.39. The quick ratio increased in 2017-18 because of increase in trade
debts, reduction in short term borrowings from conventional banks by 35.7%. Other receivables
also increased by 62.3% in 2018.
The industry had the satisfactory quick ratio over the period except 2014, (0.9), which means that
the company was far behind in this measure than the competitors. The industry’s quick ratio
averaged 1.17 for the period of 2015-18, which means that the competitors were able to meet
their current liabilities with its liquid assets.

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ASSET MANAGEMENT RATIOS

INVENTORY TURNOVER (TIMES):

Inventory turnover is a ratio showing how many times a company has sold and replaced
inventory during a given period. A company can then divide the days in the period by the
inventory turnover formula to calculate the days it takes to sell the inventory on hand.
Calculating inventory turnover can help businesses make better decisions on pricing,
manufacturing, marketing and purchasing new inventory.
The company inventory turnover averaged 3.1 times over the period which is slightly below
the satisfactory range of 4-6. Moreover, there was no drastic change observed during the
period. The only increase was seen in 2018. As, it increased by 15%. This was because of the
increase in cost of sales of about 74.8% between the year 2017 & 2018. Although the stores,
spares, and loose tools increased by 25.7% in 2018 but there was a much larger proportionate
increase in cost of sales. Apparently, the company is able to sale more inventory but its cost
has significantly increased. Which let to the decrease in gross profit margin and net profit
margin. The increase in cost of sales was because of increase in fuel cost, labor cost,
packaging cost and freight export charges.
The industry’s inventory turnover averaged 3.13% which is almost equal to that of the
company. The competitors inventory turnover decreased very slightly each year with
maximum 3.32 in 2014 and minimum is 2.93 in 2017.

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RECEIVABLE TURNOVER (TIMES):

The accounts receivable turnover ratio is an accounting measure used to quantify a company's
effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a
company uses and manages credit, it extends to customers and how quickly that short-term debt
is collected or is paid. The receivables turnover ratio is also called the accounts receivable
turnover ratio.

The company had no receivables in the first three years, which might mean that the company
was operating on cash basis. However, receivable turnover was 147.52 for the year 2017 and
90.2 for the year 2018. This means that company was receiving cash very quickly after the sales
were made. Moreover, the company is very reluctant on selling on credit terms as the trade
receivables were only 1.35% of total sales in 2017 and a similar trend was seen in 2018.

The industry observed a fluctuating pattern in collecting its receivables on time. The highest
turnover was 80.78 times in 2014. This was mainly because of high receivable turnover of Kohat
Cement which was 269.4 times. It averaged around 40 in the later years with only outlier in 2017
when the industry average was 67.21 times. This was because of high receivable turnover of
Cherat Cement.

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PAYABLES TURNOVER RATIO:

Payable turnover ratio is a short term liability measure used to quantify the rate at which a
company pays off its suppliers. Accounts payable turnover shows how many times a company
pays off its accounts payable during a period.
The payable turnover was around 7-8 times over the period, the only exception being in 2016 in
which payables turnover was 4.09. The reason was drastic increase i.e,, (120.9%) increase In
trade & other payables. Moreover, the purchases increased but by only a minimal amount of
4.21% so a more proportionate increase in payables than purchases led to decrease of payable
turnover ratio. This meant that the company was delaying its payments which might result in loss
of discounts and other opportunities.
The industry’s average of payable turnover was around 4 times, the only exception being 2014 in
which the payable turnover was 5.27 times. This trend was seen in all the competitors in 2014’s
payable turnover ratio. However, the industry average is lower than the company which means
that the company was quicker than industry in paying creditors.

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DAYS SALES OUTSTANDING (DAYS):

Days sales outstanding (DSO) is a measure of the average number of days that it takes a
company to collect payment after a sale has been made. DSO is often determined on a monthly,
quarterly or annual basis, and can be calculated by dividing the amount of accounts receivable
during a given period by the total value of credit sales during the same period, and multiplying
the result by the number of days in the period measured.

The company showed a zero DSO for the first three years as there was no receivables for that
period. The days sales outstanding was very low in the following years i.e, 2.47 in 2017, 4.05 in
2018, which means that the company was very efficient in its credit term policy and was able to
collect cash back within a short period of sales.

The industry average was around 6 in 2014-2016. However, it rose to 9.43 in 2017 and doubled
to 18.30 in 2018. The increase was mainly seen in Pioneer Cement as days sales outstanding rose
to 22.89 in 2017 as compared to 13.22 in 2016 (73% increase). The same is the reason for
increase in 2018. The increase is slightly attributed to increase in DSO of Kohat Cement. In
comparison to our company the industry was collecting the receivables slightly at a slower pace.

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DAYS SALES INVENTORY (DAYS):

The days sales of inventory (DSI) is a financial ratio that indicates the average time in days that a
company takes to turn its inventory, including goods that are a work in progress, into sales.

The company had an average days sales of inventory (DSI) around 117 days. However, the
lowest was observed in 2018 106.86. Although this is apparently an improvement in the
company’s performance it was at the cost of decline in profits. As it was seen that the net profit
margin declined by 26.9% and gross profit margin declined 34.5% in 2018.Cost of sales
increased which was due to the increase in fuel price, packaging price and export freight charges.
The DSI for other years was also not in the normal range and was slightly below it.

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DAYS PAYABLE OUTSTANDING (DAYS):

Days payable outstanding (DPO) is a financial ratio that indicates the average time (in days) that
a company takes to pay its bills and invoices to its trade creditors, which include suppliers,
vendors or other companies. The ratio is calculated on a quarterly or on an annual basis, and it
indicates how well the company’s cash outflows are being managed.

Days payable outstanding fluctuated around 50 days on average except for 2016 in which the
DSO of the company 89.14. This was because of the increase in trade and other payables by
120.9% in contrast to 4.21% increase in purchases. This meant that the company took quite
longer than the average to pay its creditors.
The industry average is around 133 over the period with the exception of 81.58 in 2014. This
trend was seen with most of the competitors in 2014 with days payable outstanding. However,
the industry takes more days as compared to Cherat Cement in paying off its creditors. 123.11 is
the industry’s average of DPO. Whereas, the company’s DPO of 57.46 suggests that the
company was efficient in paying off its creditors than the competitors.

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OPERATING CYCLE (DAYS):

The operating cycle is the sum of the following: the days' sales in inventory

(365 days/inventory turnover ratio), plus. The average collection period DSO
(365 days/accounts receivable turnover ratio).
In the first 3 years the company’s operating cycle is equal to its days sales of inventory which
means that the company is immediately receiving cash as soon as the sales are made. In the
last 2 years there is a very slight difference in DSI and Operating cycle. This represents that
the company has a very strict credit terms policy and obtains cash within few days after the
sales has been made.
Industry’s operating cycle is low in the first 3 years but it increases by 32.9% in 2017. And a
slight increase was seen in 2018.

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CASH CONVERSION CYCLE (DAYS):

The cash conversion cycle (CCC) is a metric that expresses the time (measured in days) it takes
for a company to convert its investments in inventory and other resources into cash flows from
sales. Also called the Net Operating Cycle or simply Cash Cycle, CCC attempts to measure how
long each net input dollar is tied up in the production and sales process before it gets converted
into cash received.

TOTAL ASSETS TURNOVER (TIMES):

The asset turnover ratio measures the value of a company's sales or revenues relative to the value
of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a
company is using its assets to generate revenue.

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The company averaged around 0.53 over the period with the exception in 2014 when the ratio
was 1. The decrease was associated with more proportionate increase in total assets than in sales.
The ratio was lowest in 2016 (0.46) because the total assets increased by 63.3%. However, the
sales increased by 7.8%. The increase in total assets was due to the increase in property, plant
and equipment, increase in long term investments. The company is not very efficient as it is
generating less revenue in accordance with the sales.

The industry averaged around 0.75 over the period. This was a better average than Cherat
Cement which means that the industry was more efficient in generating revenue from their total
assets. The lowest was 0.63 which was observed in 2018. This was due to Maple Leaf, Pioneer
and Fecto overall decrease in total asset turnover.

FIXED ASSET TURNOVER (TIMES):

The fixed asset turnover ratio (FAT) is, in general, used by analysts to measure operating
performance. This efficiency ratio compares net sales (income statement) to fixed assets (balance
sheet) and measures a company's ability to generate net sales from its fixed-asset investments,
namely property, plant and equipment (PP&E).
Fixed asset turnover was highest in 2014 which is 1.83 times because the fixed assets were less
than the sales for that period. However, the fixed asset turnover was less than 1 in the later
years. It was due to increase in property, plant and equipment by around 600% as compared to
2014. Long term investment also rose by 439% in 2016 as compared to 2014.
The industry averaged around 1.41 which is much higher than the company which means that the
company is more efficient in generating revenues from their total assets. this also means that the
company needs to pay more attention on its productivity and efficiency to attract investors and to
be able to obtain loans from creditors. This is because the company is below the industry’s
standard and might face difficulty in attracting investments.

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DEBT MANAGEMENT RATIOS

DEBT TO ASSET RATIO:

The debt to asset ratio is a leverage ratio that measures the amount of total assets that are
financed by creditors instead of investors. In other words, it shows what percentage of assets is
funded by borrowing compared with the percentage of resources that are funded by the investors.
Basically it illustrates how a company has grown and acquired its assets over time..
Cherat Cement is in a favourable state in this regard as its debt is covered by a larger base of
assets although it does not match the cement industry median ratio of 0.2. It is none the less in a
respectable state, but the situation may get worse if it keeps on funding itself on debt. The
phenomenon can be seen from the 2018 ratio where it shows a tendency to grow unless the
proportion is curtailed. Increase in non-current liabilities is associated with long-term loans
pertaining to Line-III and Captive Power Plant. It includes borrowing costs capitalized during the
year amounting to Rs. 215.75 million in respect of Islamic banking by using a capitalization rate
of 7.38%.

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DEBT TO EQUITY RATIO:

Each industry has different debt to equity ratio benchmarks, as some industries tend to use more
debt financing than others. A debt ratio of .5 means that there are half as many liabilities than
there is equity. In other words, the assets of the company are funded 2-to-1 by investors to
creditors. This means that investors own 66.6 percent of every Rs.1 of company assets while
creditors only own 33.3 percent on the Rupees. A lower debt to equity ratio usually implies a
more financially stable business. Companies with a higher debt to equity ratio are considered
more risky to creditors and investors than companies with a lower ratio. Unlike equity financing,
debt must be repaid to the lender.
The computation of this ratio brings to life the fact that Cherat Cement has not been able to feed
its financing through equity as its ratios are considerably higher than the favourable “1 or less.”
The debt to equity ratio of Cherat cement are less than 1 from 2014-2017 and considerably lower
in 2014 and 2015, which means that it could easily fulfill its liabilities back then, but now the
situation could be alarming as their ratio is constantly rising and as of 2018 it is above ‘1.5’
where as the ratio of the industry is still stable and the reason for the rise in its ratio is the heavy
debt financing in 2018. During the year, the Company increased its debt to cater the financing
needs for expansion projects. Early repayments have also been made owing to the healthy cash
flows during the year. long-term financing obtained from Islamic banks under Diminishing
Musharika Scheme and a term loan from a conventional bank. It carries mark-up at the rate of 6
months KIBOR + 0.7% per annum. The financing is repayable in 10 equal semi-annual
installments commencing after a grace period of 36 months from the date of first draw down i.e.
March 2019. The financing is secured against first pari-passu hypothecation charge of Rs. 12,670
million on plant and machinery and immovable fixed assets of the Company.

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LONG TERM DEBT RATIO:

A company can build assets by raising debt or equity capital. The ratio of long-term debt to total
assets provides a sense of what percentage of the total assets is financed via long-term debt. A
higher percentage ratio means that the company is more leveraged and owns less of the assets on
balance sheet. In other words, it would need to sell more assets to eliminate its debt in the event
of a bankruptcy. The company would also have to generate strong revenue and cash flow for a
long period in the future to be able to repay the debt.
Management typically uses this financial metric to determine the amount of debt the company
can sustain and manage the overall capital structure of the firm. Long Term debt to Total Assets
Ratio = Long Term Debt / Total Assets. Long-term debt refers to the liabilities which are due
more than 1 year from the current time period. The Company has been able to maintain a good
long term debt ratio in 2014 and 2015, which is approximately in line with the industry average
and then it starts to rise drastically and it has continued to rise till 2018. Still in 2018 the ratio has
only increased to ‘0.5’ which indicates that now for every one liability the company has 2 assets.
The unforeseen political issues of the country have affected the share price during the year 2018,
however, the investor confidence has been maintained due to stable and improved growth in the
financial position of the Company. Over the years the Industry average ratio got to 0.19 from
0.08 approx, whereas the increase in the company’s ratio was from 0.1 to around 0.5. The major
sources of financing were through banks (Islamic and Conventional) which amounted to 13000m
and 1100m.

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TIME INTEREST EARNED RATIO:

Times interest earned ratio measures a company’s ability to continue to service its debt. It is

an indicator to tell if a company is running into financial trouble. A high ratio means that
a company is able to meet its interest obligations because earnings are significantly greater than
annual interest obligations. However, a high ratio can also mean that a company has an
undesirably low level of leverage or pays down too much debt with earnings that could be used
for other investment opportunities to get higher rate of return.
A lower times interest earned ratio means fewer earnings are available to
meet interest payments.Times interest earned ratio of the company is constantly declining from
2014-2018 which is 0.5971 in the beginning to only 0.702 towards the end. However the same
ratio of the industry average is quite different with its ups and downs in between. The major
change or rather decrease in the ratio came about in the year 2018which took a hit from around
to and landed to 0.6 approx. The Profits of the company are stable and the major reason for the
decrease in its ratio in all these years came beacause of its debt financing. The latest financing of
2018 resulted in the Company increasing its debt to cater expansion projects. Early repayments
have also been made owing to the healthy cash flows during the year. The Company also
managed its financing at competitive rates to finance expansion projects. Higher loans and debts
resulted in higher mark ups of long and short term loans along with the bank charges and
commission.

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Profitability Ratios
Gross Profit Margin
Gross profit margin is a metric used to assess a company's financial health and business model
by revealing the amount of money left over from sales after deducting the cost of goods sold.
The gross profit margin is often expressed as a percentage of sales and may be called the gross
margin ratio.

Cherat cement’s gross profit margin reduced significantly from 32.59% to 21.82%. In 2014 to
2015 the company gross profit margin declined from 32.59% to 30.21% due to increased
electricity tariff, increased royalty on limestone and imposition of super tax. The net sales
increased 1.7%. The cost of good sales increased 5%. Hence the gross profit margin falls;
However, the industry gross profit margin increased, since every other company’s gross profit
margin increased. The gross profit margin increased from 2015 to 2016 from 30.21% to 37.21%.
This happened because due to enhanced dispatches, improved sales price, and implementation of
better cost management techniques and controls. The sales increased 7.8% and the cost of goods
sold decreased 3%. The industry average also increased. It increased to 40%. IN 2017 the
company’s gross profit margin fall. Though sales of company increased; However, cost of goods
sales increased highly due to increase in depreciation. The sales ratio increased 36.8%; However,
the cost of goods sale ratio increased 44.6%. The gross profit margin of 2018 fall to 21.82%. It
fluctuated the most at that time period. The Cost of sales increased due to increase in fuel and
power cost because of increase in international coal prices and foreign currency fluctuations, and
depreciation expense. The cost of sales increased 75%. The industry average also fall from
37.57% to 26.44%. This is because of foreign currency fluctuations and increase in international

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coal prices. It is seen that in all 5 years the company’s gross profit marging has been below the
industry average. This mean they are underperforming.

Net Profit Margin

Net profit margin is the percentage of revenue left after all expenses have been deducted from
sales.

The net profit margin of the company remained constant from 2014 to 2017; However, in 2018
the company’s profit fall in 2017 to 2018. It fall over 5.46%. The company’s profit margin was
highest at 2014 and lowest at 2018.
The fall at net profit margin between from 2017 to 2018 occurred because of increase in coal
prices. The fuel and power increased up to 64.5%. The expenses also increased due to foreign
currency exchange. Hence it could be seen that purchases has also increased upto 40%. The
depreciation expense also increased upto 58%. So hence the cost of goods sold increased upto
75%. The finance cost increased upto 89%. This lead to a big fall in net profit margin in 2018.
Kohat, Maple leaf, Pioneer, Fecto Cement faced a fall in net profit margin. Hence the net profit
margin of them also fall in 2018. The It is seen that net profit margin remained constant in 2017
whereas gross profit margin fall. This is because the company has good control over expenses.
It is seen that in all 5 years the company gross profit margin was below the industry’s company
average. Hence it is seen that it underperformed.

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Operating Profit Margin

Operating Profit Margin is a profitability or performance ratio used to calculate the percentage
of profit a company produces from its operations, prior to subtracting taxes and interest charges.

The operating profit margin fall from 26.61% to 17.40%. Between 2015 to 2016 the operating
profit margin increased from 26.03% to 29.59%. The biggest fluctuation occurred from 27.97%
to 17.40%.
Between 2015 to 2016 the gross profit margin increased from 30.21% to 37.21%. Hence as a
result of this the operating profit margin increased; However, the expenses increased up to
22.4%. To reduce the effect. The operating profit margin of Pioneer fall minutely whereas Maple
leaf, Fecto and kohat cement increased. In 2018 the operating profit margin fall from 27.97% to
17.40. The industry operating profit margin fall. The operating margin fall because The fuel and
power increased up to 64.5%. The expenses also increased due to foreign currency exchange.
Hence it could be seen that purchases has also increased upto 40%. The depreciation expense
also increased upto 58%. So hence the cost of goods sold increased upto 75%. The finance cost
increased upto 89%. This lead to a big fall in net profit margin in 2018. Kohat, Maple leaf,
Pioneer, Fecto Cement faced a fall in net profit margin.

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Return on Total Assets

The return on assets ratio formula is calculated by dividing net income by average total assets.

It is seen that company’s return on total assets has fallen from 16.39 to 9.93. Between 2016 and
2017 the return on total assets has remained constant otherwise it has fallen. It has greatly
fluctuated from 2014 to 2015 and 2018 to 2019.
If we see the industries from 2014 to 2016 the return on total assets has increased; However,
from 2016 to 2018 it has fallen.
In 2014 the assets of the company were 6430968 whereas in 2018 the assets of the company
were 30,519,561. They have almost increased almost up to 400 times. The company has invested
heavily on Plant & Machinery. Hence because of this Return on Total Assets have continuously
fall. At this time, Pioneer cement, Maple leaf cement and Fecto Cement. Kohat cement ratios
have increased.

Return on Common Equity

The Return on Common Equity (ROCE) ratio refers to the return that common
equity investors receive on their investment.

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The company’s faced a fall on common equity from 2014 to 2018. From 2014 to 2015 the
company faced a major fluctuation on Return on Common Equity from 2014 to 2015 the
company faced a major fluctuation from 27% to 16%. However after 2016 the return on common
equity started to increase from 2016 to 2018. It rose from 15.37% to 19.08%.
The industry also faced a fall in return on Common Equity. It fall from 28.3% to 15.03%.
From 2014 to 2015 the sales increased upto 1.7%. Whereas the equity increased up to 31.1%. So
hence this is why the return on common equity fall.In industry return on common equity ratio
fall from 28.3% to 25.4%. This occurred because due to a fall from 36.74% to 30.77% of Kohat
Cement. It also faced the greater relative increase of shareholder funds as compare to equity.
From 2016 to 2017 the return on common equity increased from 15.37% to 18.7%. This was
because the sales increased up to 36%. Whereas equity increased 12.6%. At the same time all
competitive companies ratio fall.

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MARKET VALUE RATIOS

Price to earnings ratio:

The price-earnings ratio, also known as P/E ratio, P/E, or PER, is the ratio of a company's share
price to the company's earnings per share. The ratio is used for valuing companies and to find out
whether they are overvalued or undervalued.
The company has a very low P/E ratio in 2014 (5.23), which means that the investors are not
anticipating higher growth in the future. The P/E ratio kept increasing from 2015-2017 in which
it was 16.14 which means that investors confidence increased and they were expecting better
returns in the future. However, the P/E ratio dropped by 100% in the year 2018. Which was
because of the crash in the stock exchange market which led to the fall in market price of share
by almost 45%. The similar trend was seen in the industry. One of the reasons of a low P/E ratio
in 2018 is the increase in EPS by 8.9% which means that the investors’ anticipation about the
company’s future cash flows was a pessimist one.
The P/E ratio of industry followed a similar trend to that of the company i.e, being lowest in
2014 and increasing from 2015 to 2017 and then again decreasing in 2018. This might be
because of favourable economic conditions and decent investment opportunities in later era of
Nawaz Sharif. The industry overall experienced a fall in market price in 2018 which directly
impacted the P/E ratio.

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Market to book ratio

The Market to Book ratio (also called the Price to Book ratio), is a financial valuation metric
used to evaluate a company’s current market value relative to its book value. The market value is
the current stock price of all outstanding shares (i.e. the price that the market believes the
company is worth). The book value is the amount that would be left if the company liquidated all
of its assets and repaid all of its liabilities. The book value equals the net assets of the company
and comes from the balance sheet. In other words, the ratio is used to compare a business’s net
assets that are available in relation to the sales price of its stock.
The market to book ratio increased over the period 2014-2017 ranging from 1.41 to 3.02, which
means that the company is overvalued i.e, it has performed well and the investors considers it as
a sound investment. However, the ratio declined in 2018 by almost 49% which means that the
company wasn’t performing up to the mark and the investors’ confidence has decreased. This
can also give an impression that you are paying too much for what would be left if the company
went bankrupt. Overall, the ratio was in a satisfactory range.

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The industry’s market to book ratio was almost 2.5 times to that of company’s, which means that
the investors had more confidence in competitors’ securities. Similar to the company’s trend the
market to book ratio fell but by a more bigger margin i.e, 65%. Similar to the reasoning in P/E
ratio it can also be concluded here that the overall stock exchange market was not efficient and
wasn’t giving desired results in the year ended 2018.

Dividend Yield

The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the
price per share. It is also a company's total annual dividend payments divided by its market
capitalization, assuming the number of shares is constant. It is often expressed as a percentage.
Although the dividend yield ratio was in the satisfactory range but it fell in the period 2014-
2017. This means that the investors were getting a less dividend return on the amount invested
this can also be because the company is diverting its resources towards the re-investments (may
be company is diverting its resources towards WHRPP), in the business which can enhance the
company’s performance in the upcoming years. The dividend yield ratio increased in 2018 by
103% but this was mainly because of the fall in share price because the DPS increased by 11.1%
only. Although the investors might receive more returns in short term but this is an adverse
indicator of the bigger picture –in long term.
The industry average was similar to that of company’s, however, the only change was that the
ratio increased by 75% in 2018. This was because the competitors’ DPS also decreased in 2018
but the increase was in less proportion as compared to the decrease in share price.

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Dividend payout

The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders
relative to the net income of the company. It is the percentage of earnings paid to shareholders in
dividends. The amount that is not paid to shareholders is retained by the company to pay off debt
or to reinvest in core operations. It is sometimes simply referred to as the 'payout ratio.'
The dividend payout ratio provides an indication of how much money a company is returning to
shareholders versus how much it is keeping on hand to reinvest in growth, pay off debt, or add to
cash reserves (retained earnings).
An increasing trend was seen in the dividend payout ratio of the company as it rose from 23.96%
in 2014 to 41.43% in 2018. It increased year by year which means that the company was giving
out more part of its net income as dividends. This can also mean that the company believed in
progressive dividend policy. This could also be because of the fact that the DPS increased by a
very narrow amount each year but a sharp decline in EPS could have resulted in increasing the
value of ratio.However, the only fact to notice was that the payout ratio increased by a very
narrow percentage in the later years. This was also the time when the company was investing in
WHRPP which can also be the reason for constant payout ratio.
The industry has been generous in paying out dividends through the period, however, an almost
constant rate was seen in the period from 2015 to 2018. The dividend payout ratio rose by 45.8%

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in the year 2015 as compared to 2014 which means that the industry was also following a
progressive dividend policy and may be not looking at future investment uptill the year 2015.

Dividend Cover

Dividend cover, also commonly known as dividend coverage, is the ratio of company's earnings
(net income) over the dividend paid to shareholders, calculated as net profit or loss attributable to
ordinary shareholders by total ordinary dividend.

Basically dividend cover ratio is the inverse of dividend payout ratio. So as dividend payout
ratio of the company increased over the period, so similarly dividend cover ratio declined.
Which means that the company’s ability to cover its dividends has decreased. It was highest in
2014(4.17) and lowest in 2018(2.41) showing a decline of 42.2%. It was stable in the period
2016-2017. The reason for this sharp decline can be associated to decrease in EPS because of fall
in profits which was due to the increase in costs due to reasons mentioned in previous ratios. If
the current situation prevails, then the shareholders might see a decline in dividends received
because the company is facing difficulty in distributing part of its income as profits.
The dividend cover of the industry declined from 2014-2015, however a sharp rise was seen in
2016 as the dividend cover rose to 7.20 with an increase of 193.9% from last year. The main
reason for this was an increase in dividend cover of Kohat cements. It was because the DPS fell
to Rs 1 from Rs 4 in 2015. Moreover the EPS rose by 32.7% in the year which multiplied the
effect. In the years after the DPS fell to 4.47 in 2017 and 1.61 in 2018. The decline in dividend
cover in the last year was seen in all the companies as the Eps declined across the board because
of deteriorating economic conditions.

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SOLVENCY RATIO:

The solvency ratio is a key metric used to measure an enterprise’s ability to meet its debt
obligations and is used often by prospective business lenders. The solvency ratio indicates
whether a company’s cash flow is sufficient to meet its short term and long-term liabilities. The
lower a company's solvency ratio, the greater the probability that it will default on its debt
obligations.
Cherat cement had a satisfactory solvency ratio in the first two years i.e it was above 1 which
means that it could pay its obliagtions. However the ratio fell drastically by 75.2% and it kept
falling in the years ahead. It was because of two reasons. Firstly the net income didn’t increased
by much amount in mid years, even it decreased in the last year and secondly the liabilities rose
by the larger amount because of the WHRPP. The company obtained very large amount of loans
to finance this project. The company’s non-current liabilities rose by 638.38% in the year 2016
because of the reason mentioned. Moreover the company’s trade payables also increased, also its
short term borrowing also increased in the later years which led to the fall in solvency ratio to
0.17 in 2018.However this project is expected to generate much higher cash flows in the future
which will improve the profitability position of the company and will also improve the solvency
ratio once the company out these debts.
The industry overall had a solvency ratio of less than 1. Similar to the company, the lowest was
in 2018 (0.32). However opposite to the company, the solvency rose in mid years. This rise can
be associated to increase in solvency ratios of kohat cement which rose by 47.5% in 2016 and to
Fecto cement which rose by 108.5% in 2016. This was because the profit of Fecto cement

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increased but the long term liabilities remained almost constant. Overall the industry isn’t able to
meet its obligations it they had fallen due.

BIBLIOGRAPHY:

http://gfg.com.pk/ccl/page.php?page=28&cat=4444
http://pioneercement.com/financials/accounts/
https://www.fectogroup.com/financials/
http://www.kohatcement.com/latest_annual_fs.aspx
https://www.annualreports.pk/demo?fil=MapleLeafCement
https://www.psx.com.pk
https://www.globalvillagespace.com/pakistans-world-of-cement-opportunities-and-challenges/

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