Financial Analysis of Pakistan State Oil for

the period July 2017-June 2020

SUBMITTED BY
• Nida Hameed Khan
• Amin Merchant
• Umm e Laila Abbas
• Swaleha Arshad
• Amna Khan
• Maria Rashid
• Adil Iqbal
• Amir Khan

FINAL TERM REPORT – BUSINESS FINANCE 1

INSTITUTE OF BUSINESS ADMINISTRATION |
Contents
About Pakistan State Oil ........................................................................................................................ 3
Financial Highlights and Ratio Analysis of PSO 2017-2020 ............................................................ 3
Financial Highlights of PSO 2017-2020 ............................................................................................ 3
Liquidity Ratios ...................................................................................................................................... 4
Current Ratio ..................................................................................................................................... 4
Quick Ratio ........................................................................................................................................ 5
Cash Ratio.......................................................................................................................................... 5
Cash Conversion Cycle ................................................................................................................. 6
Solvency Ratios..................................................................................................................................... 6
Debt to Asset Ratio .......................................................................................................................... 6
Equity Ratio ........................................................................................................................................ 7
Interest Coverage Ratio................................................................................................................. 8
Profitability Ratios ................................................................................................................................. 8
Gross Profit Margin ........................................................................................................................... 9
Net Profit Margin .............................................................................................................................. 9
Return on Assets ............................................................................................................................. 10
Return on Equity ............................................................................................................................. 11
Weighted Average Cost of Capital (WACC) ............................................................................ 11
WACC for PSO (2018-2020) ......................................................................................................... 11
Free Cash Flow to the Firm (FCFF) ................................................................................................. 13
FCFF Calculation for PSO (2018-2020) ...................................................................................... 13
Free Cash Flow of Equity .................................................................................................................. 15
Free Cash Flow of Equity for PSO (2017-2020)........................................................................ 15
Investment Ratios ............................................................................................................................... 16
Dividend Yield ................................................................................................................................. 16
Dividend Payout Ratio.................................................................................................................. 18
DuPont Analysis .................................................................................................................................. 19
Working Capital Management Policy ............................................................................................. 20
Receivables Management ............................................................................................................. 20
Current Assets Investments Policy ................................................................................................. 21
Inventory Management................................................................................................................... 21
About Pakistan State Oil
Pakistan State Oil (PSO) is a Pakistani state-owned petroleum corporation that is involved in the
marketing and distribution of petroleum products. It was founded on December 30, 1976,[1] after
Pakistan's government took over the management of Pakistan National Oil (PNO) and Dawood
Petroleum Limited, Esso Eastern and renamed into POCL (Premier Oil Company Limited) for
marketing of Petroleum Products. PSO is the first public company in Pakistan to pass the PKR 1
trillion revenue mark. Pakistan State Oil has been a member of the prestigious World Economic
Forum since 2003. The network boasts of more than 3,600 filling stations. Being the largest fuel
marketing company of Pakistan, it controls over 60% share of the total oil market with customer
portfolios including dealers, government agencies, autonomous bodies, IPPs and other corporate
customers.

In addition to marketing, PSO has an extensive network of import, storage, and distribution of a
range of petroleum products including gasoline, diesel, fuel oil, jet fuel, LPG, CNG and
petrochemicals. Besides supplying fuel to national power utilities like WAPDA and K-Electric, PSO
is the sole furnace oil supplier to all Independent Power Projects (IPPs) in Pakistan with a share of
over 80% in furnace oil market. Moreover, PSO is also playing its due role in meeting the growing
energy demand of the country.

Financial Highlights and Ratio Analysis of PSO 2017-2020

Financial Highlights of PSO 2017-2020

(in PKR '000)

2020 2019 2018 2017
Net Income (6,465,552) 10,586,553 15,461,257 18,225,625
Operating Costs 14,688,505 17,113,224 15,263,097 13,616,041
Total Assets 341,718,126 417,079,525 402,562,332 392,442,964
Total Liabilities 228,657,125 297,898,838 292,109,857 289,593,362
Total Equity 113,061,001 119,180,687 110,452,475 102,849,602

The financial position of PSO shows a declining trend in its profitability as can be seen from the net
income figures. The loss recorded in 2020 can be largely associated to the COVID pandemic. The
company decreased its assets as well its liabilities which shows an efficient performance in its asset
management policy. An analysis based on the different financial metrics is discussed next.
Liquidity Ratios
Liquidity ratios of a company are metrics that help you evaluate the ability of a company to meet
its short-term debt obligations. They mainly measure whether a company can pay off its short-term
liabilities when they are due. Liquidity ratios represent the number of times the short-term debt
obligations can be covered by the company’s cash and liquid assets.

Overall, the higher the liquidity ratios are, the higher the margin of safety a company must meet
its current liabilities. A value of liquidity ratios which is greater than 1 represents that short-term
obligations can be fully covered by the company. This indicates that the company is in good
financial health and is not very likely to face financial difficulties.

The most common liquidity ratios are:

• Current ratio
• Quick ratio,
• Cash ratio
• Cash conversion cycle

Current Ratio
The current ratio of PSO has been steady and has slightly increased over the span of 2017 to 2020
from 1.31 to 1.35. This shows that the short-term obligations of PSO can be easily covered by the
company. A current ratio of 1.35 in the year 2020 shows the company is in good financial health.
Moreover, the current ratio of PSO is almost double of Shell’s current ratio which was 0.61 in 2020.
This data shows PSO has a higher margin of safety to meet its current liabilities as compared to
Shell.

Current Ratio
1.60
1.35 1.32 1.32 1.31
1.40
1.20
1.00 0.81
0.69 0.75
0.80 0.61
0.60
0.40
0.20
0.00
2020 2019 2018 2017

PSO Shell
Quick Ratio
The quick ratio of PSO like current ratio has also been quite stable in the period of 2017 to 2020.
PSO’s quick ratio has had slight fluctuation from 1.07 in 2017 to 1.03 and 1.01 in 2018 and 2019
respectively. In comparison to Shell which has a quick ratio of 0.32 in 2020, PSO’s quick ratio of 1.08
in 2020 is approximately 3 times higher. This shows that PSO as a company has higher liquidity as
compared to shell. This higher liquidity suggests that PSO is not likely to face financial difficulties in
paying off their current liabilities.

Quick Ratio
1.50
1.08 1.01 1.03 1.07
1.00
0.48
0.50 0.32 0.32 0.32

0.00
2020 2019 2018 2017

PSO Shell

Cash Ratio
The cash ratio is another measurement of a company’s liquidity. This ratio of cash and cash
equivalents to a company’s current liabilities calculates the ability of the company to repay short-
term debt immediately with cash or near-cash resources. The cash ratio is far more conservative
than other liquidity ratios as it only considers the company’s most liquid resources hence its bound
to be much lower than 1.

The cash ratio of PSO has increased slightly from 0.01 in 2017 to 0.02 in 2020 which is a positive sign.
However, the cash ratio of PSO in 2020 which is 0.02 is less than half of Shell’s cash ratio of 0.05 in
2020. This shows Shell as a company has a relatively higher ability to pay off short-term debt
immediately with cash or near-cash resources than PSO.

Cash Ratio
0.10 0.09
0.08
0.05 0.05
0.06 0.05
0.04
0.02 0.02 0.02 0.01
0.02
0.00
2020 2019 2018 2017

PSO Shell
Cash Conversion Cycle
The cash conversion cycle is the number of days a company will take to convert its input resources
into liquid cashflow. This metric is used to measure how much time the company takes to sell its
inventory and collect its receivable in order to pay off its operation expenses without any delays.

As seen in the graph below, the cash conversion cycle of PSO has decreased in the period of 2017
to 2020 from 181 days to 133 days. This is a positive sign as the company has reduced number of
days it takes to convert its resources into liquid cashflow significantly.

When compared to Shell’s cash conversion cycle, PSO has had a higher cash conversion cycle
of 183 days and 158 days in 2018 and 2019 respectively. Shell had a much shorter cash conversion
cycle of 109 days and 118 days in 2018 and 2019 respectively. However, in the year 2020 PSO
manages to reduce its cash conversion cycle to 133 days which is quite close to Shell’s cash
conversion cycle of 129 days for the same year.

Cash Conversion Cycle

200 183 181
180 158
160
133 129 135
140 118
120 109
100
80
60
40
20
0
2020 2019 2018 2017

PSO Shell

Solvency Ratios
Solvency ratios are a key metric to measure a company’s ability to pay off its long-term debt
obligations. This metric is often used by business lenders to evaluate a company. A solvency ratio
represents whether the company’s cashflow is sufficient to meet the long-term liabilities of the
company hence these ratios help us analyze the financial health of a company.

Debt to Asset Ratio

The debt to asset ratio mainly depicts a company’s financial leverage. It measures to which
degree a company’s assets are financed by its liabilities (debt) as compared to its equity. This ratio
is often used to measure the growth of a company through the assets it has acquired over time.

The debt to asset ratio of PSO has decreased over a span of 4 years from 0.74 in 2017 to 0.67 in
2020. This means the company’s assets which are financed by liabilities have decreased over the
years which is a positive sign. PSO’s debt to asset ratio of 0.67 in 2020 is much lower than Shell’s
debt to asset ratio of 1.01 in the same year. This depicts that PSO compared to Shell has lesser
assets financed by its liabilities as compared to its equity.

Debt to Asset Ratio

1.20
1.01
1.00 0.92 0.87
0.80 0.71 0.73 0.74 0.74
0.67
0.60
0.40
0.20
0.00
2020 2019 2018 2017

PSO Shell

Equity Ratio
The equity ratio of a company shows how much of the company’s assets are funded by issuing
stock as compared to borrowing money. The closer an equity ratio is to 1, the more assets have
been financed by stock rather than debt. This ratio can depict the financial stability of a company
in the long run.

As shown in the graph below, PSO’s equity ratio has been increasing over the years from 0.26 in
2017 to 0.33 in 2020 which is a positive sign. Moreover, PSO’s equity ratio is much higher than Shell’s
equity ratio in 2020 although both the companies had an equity ratio of 0.26 in 2017.

Equity Ratio
0.35 0.33
0.29 0.27
0.30 0.26 0.26
0.25
0.20
0.15 0.13
0.10 0.08
0.05
0.00
-0.05 2020
-0.01 2019 2018 2017

PSO Shell
Interest Coverage Ratio
The interest coverage ratio mainly measures the number of times a company will be able to cover
its existing interest payments with its available earnings. The ratio is calculated by dividing EBIT by
the interested expenses of a company for the same period. The lower the interest coverage ratio
is of a company, the more the company is troubled by its debt expenses.

The interest coverage ratio of PSO has significantly decreased from 5.9 in 2017 to 0.6 to 2020. This
shows that the company is burdened by its interest payments. However, the interest coverage
ratio of Shell has increased steadily from 0.74 in 2017 to 1.01 in 2020. This is a negative sign for PSO
as it is financially strained by its debt expenses.

Interest Coverage Ratio

20.0
15.8
15.0

10.0
6.2 5.9
5.0 2.9
0.6 0.3
0.0
2020 2019 2018 2017
-1.8
-5.0 -2.9

PSO Shell

Profitability Ratios
Profitability ratios are metrics that are used to assess a company’s ability to generate earnings relative to
its revenue or other factors. These ratios are also employed as an effective financial tool to analyze how
effectively the organization is using its assets/resources to generate value for shareholders.

The more commonly used profitability ratios are

• Gross Profit Margin

• Net Profit Margin
• Return on Assets
• Return on Equity
• Return on Capital Employed

For our analysis of PSO’s profitability ratios, we have selected the following ratios.
Gross Profit Margin
The gross profit margin of PSO was recorded as 1.1% in 2020 (3.1% in 2019). The revenue has
decreased by approximately 4% over the period whereas the cost of goods has decreased by
approximately 2%. Gross profit ratio has declined primarily due to significant inventory losses during
the year on account of decline in international oil prices.

However, compared to one of its major competitors, the gross profit margin was always
significantly lower of the past few years. Although PSO managed to decrease its cost of products
sold as compared to the previous year, the net sales declined alongside as well and by a greater
amount, leading to a relatively sharper decline in gross profit margin in 2020 .

Net Profit Margin

Net Profit Margin (NPM) is the variation of profit margin ratio that assesses the company’s ability to
generate earnings after taking into consideration Cost of Goods Sold (COGS), Operating and
other expenses (E), Interest on debts (I) and taxes (T). For simpler understanding, NPM can be
inferred as how much of each dollar/rupee collected in revenue is translated as profit. It helps the
stakeholders to evaluate whether operating costs and other expenses are being contained or
not.

The operating expenses decreased to Rs. 14.7 million (FY19: Rs. 17 million), with a major decrease
reported in reversal for impairment on financial assets and other expenses. Other income
increased during the year to Rs. 10 Million as compared to Rs. 7 Million in FY19, primarily due to
income from financial assets such as interest / mark-up received on delayed payments. However,
due to the decrease in sales in FY20, the net profit ratio declined into a loss. The net loss ratio vs.
net profit ratio in FY19 occurred mainly due to significant inventory losses during the year on
account of decline in international oil prices and increase in finance cost on account of higher
average policy rate of SBP in FY20.

The net profit margin of PSO stood at -0.6% in 2020 as compared to 0.9% in the last year, doing
better from its competitor where profit margin turned into a loss from 2018 and onwards. This could
help PSO earn a competitive edge over its competitor. Although Shell had a higher Gross Profit
Margin, PSO seems to be doing better in terms of Net Profit.

Return on Assets
The return in assets of PSO in 2020 was -1.9% which was better than that of Shell’s which was
recorded as -8.8% in the same year. However, a negative return on asset implies that the assets
may not be efficiently managed, seeing how the company is making a loss in the current year.
Over the years, the return on assets for PSO was gradually declining, however, with the increase
in international oil prices and the decline in revenue led to the return on assets to become
negative.
Return on Equity
Return on Equity is a measure of management's ability to generate income from
the equity available to it. PSO’s return on equity declined to a negative 6% in 2020 (9% in 2019)
due to loss during the year. The total equity of the company decreased by 5% while the company
also incurred a net loss of Rs. 6 million in 2020 leading to the return on equity to become negative.
However, comparatively, the return on equity of Shell was worse off due to consistent net loss for
the past 3 years.

Weighted Average Cost of Capital (WACC)

The weighted average cost of capital (WACC) is a measure of the firm’s total cost of capital
including debt financing and equity. As each section of financing has a separate risk associated
with them, the expected rate of return and subsequently its cost is different. The capital in question
involves common stock, preferred stocks, bonds, or any long-term debt.

WACC can be calculated by individually calculating the cost of debt of each component of the
capital structure namely

1. Debt
2. Preferred Stocks (SP)
3. Common Equity (Ec)

WACC = (% of debt) (Cost of Debt) + (% of SP) (Cost of SP) + (% of Ec) (Cost of Ec)

The cost of debt is the rate at which the firm is repaying its debts. The cost of equity, on the other
hand, is the rate of return that the firm pays to its common and preferred stockholders as dividend.

WACC for PSO (2018-2020)

The interest paid against debt financing has been on an increasing trend from the year 2018-2020
as can be seen from the quantitative analysis below. PSO is a heavily debt-financed organization
and therefore the company is perceived as a high-risk investment venture for common
stockholder. Yet, the risk is marginalized by state security and as a result, the only factors that
affect the company’s performance are political and macro-economic policies. The analysis
shown below describe the yearly changes in the capital structure and WACC.

(in '000)
2020 2019 2018
Equity 4,694,734 3,912,278 3,260,232
Debt 66,433,196 106,997,130 89,846,517
Total 71,127,930 110,909,408 93,106,749
Tax Rate 29% 29% 30%

% of debt 93% 96% 96%

% of Equity 7% 4% 4%

Interest/Markup Paid 13,427,312 8,939,012 5,123,344

Cost of debt 20% 8% 6%

Cost of Equity 27% 31% 23%

Industry Average 15% 15% 15%

WACC 21% 9% 6%

2020 2019 2018

Risk Free Rate 7% 13% 7%
Market Risk Premium 15% 13% 12%
Beta 1.33 1.33 1.33

The WACC for PSO for the year 2020 is 21% which is a sharp increase from 2019 with a value of
9%. This infers that the company had to pay more in terms of interests during the year 2020 and
that the cost of acquiring capital was significantly higher. This was largely due to the recession
faced by oil companies during 2020. The average industry WACC for Oil and Gas industry in
Pakistan was rated at 15%.
Free Cash Flow to the Firm (FCFF)
FCFF is one of the more important financial metrics that is used by investors and analysts alike to
determine the investment risk and the intrinsic value of the firm. Free cash flow to the firm or free
cash flow represents the cash flow that can be distributed after deductions due to accounting
for depreciation expenses, taxes, investments and working capital take place. If FCFF is positive,
a firm has amount remaining after all its expenses. However, a negative FCFF indicates that the
firm did not generate enough revenue to cover its expenses.

FCFF can be calculated as following

FCFF= Net Income + Non-cash charges + (Interest × (1−Tax Rate)) – Long term investments –
Investments in working capital

FCFF Calculation for PSO (2018-2020)

PSO recorded a loss before tax of PKR 5,134 million during the year 2020 due to the oil recession of
COVID-19. This contrasted with the profits recorded during 2018 and 2019. As has been explained
above, the interest expense has increase during the period 18-20 and so the company’s EBIT has
also seen a declining trend. The FCFF metric is affected by the EBIT, NOPAT and the net investment
in operating capital during the year. It can be seen from the analysis below that PSO has increased
its long-term assets while the current operating assets decreased. As would be seen below, PSO
boasts of a high FCFF for 2020 which infers that company’s cash flow structure has been managed
smoothly. Trade debt has decreased during the years 2018-2020 which is a positive sign and a
decline in receivables suggests that recovery has been smooth.
 Free Cash Flow Calculations
2020 2019 2018
Tax Rate 29% 29% 30%
EBIT 8,293,293 26,463,392 32,283,824
NOPAT 5,888,238 18,789,008 22,598,677

Current Operating Assets 282,212,459 372,274,484 365,086,785

Current Operating Liabilities 147,460,348 180,042,553 192,145,744
Net Operating Working Capital 134,752,111 192,231,931 172,941,041
Operating Long term Assets 9,993,564 8,187,159 7,327,476
Total Net Operating Working Capital 144,745,675 200,419,090 180,268,517
Net Investment in Operating Capital (55,673,415) 20,150,573 16,154,521

Free Cashflow for Firms (FCFF) 61,562 (1,362) 6,444

PSO’s FCFF increased to PKR 61 million at FY 2020 close and this represents that the firm has
enough funds available to utilize for its stockholders, retained earnings, capital expenditures and
for preferred stocks.

FCFF FOR PSO 2020-2018

70,000
61,562
60,000

50,000

40,000

30,000

20,000

10,000 6,444

-
(1,362)
(10,000)
2020 2019 2018
FCFF in PKR millions 61,562 (1,362) 6,444
Free Cash Flow of Equity
Free cash flow of equity (FCFE) and Free cash flow of the firm (FCFF) are two important examples
of Liquidity ratios. Liquidity ratios are used to determine a debtor’s ability to pay off current debt
obligations without having the need to raise external additional capital. They determine the
margin of safety by pitting the liquid assets against the short-term debt obligations.

FCFE analyses the availability of cash that is available to the equity shareholders of an organization
after all expenses, debts and retained earnings are paid-off. The main components in FCFE
calculations include net income, capital expenditures, working capital and debt. It can be
inferred through calculations whether the company has used its cash flow to pay dividends
and/or repurchase stocks or it has used external funding (debt and retained earnings) to pay-off
its shareholders. The investor would want to see dividend payments made entirely out of FCFE
rather than external financing as it poses a lower risk and instills higher trust in the operations of the
company.

FCFE can be calculated by the formula given below

FCFE = Cash from Operations – CAPEX + Net Debt Issued

Free Cash Flow of Equity for PSO (2017-2020)

PSO’s FCFE is affected by the net borrowings, the interest expense and FCFF. The free cash flow to
the firm as calculated above increased during the year 2019-2020 and as a result the company
had enough funds to pay-off its stockholders. The FCFE for 2020 stood at PKR 27,756 mil which was
an exponential increase from 2019. Even though the FCFF in 2019 was negative, PSO paid off its
stockholder through the increased borrowing as can be seen in the data below.

(in PKR million)

2020 2019 2018
FCFF 61,561,653 (1,361,565) 6,444,156
Net Borrowing (24,272,505) 8,631,191 (7,580,221)
Interest Expense 13,427,312 8,986,552 5,123,344
Tax Rate 29% 29% 30%
Free Cashflow for Equity (FCFE) 27,756 889 (4,722)

FCFE of PSO from 2018-2020

30,000

25,000

20,000

15,000

10,000

5,000

(5,000)
2020 2019 2018
FCFE 27,756 889 (4,722)
Investment Ratios
Investment ratios, also known as market ratios, are analyzed to determine the share price and
investment portfolio strength of a company. Different metrics are utilized to infer the security for
potential investors, return on investments, profitability to stockholders, risk profiling of investment
etc.

The most used market ratios are

• Earnings per share

• Price Earnings Ratio
• Price to Book Ratio
• Dividend Yield

To inspect the market ratios of PSO, we have chosen the following ratios.

Dividend Yield
Dividend yield measures the amount of cash dividends distributed to common shareholders
relative to the market value per share, and is mainly used by investors to determine returns on their
investments in a certain firm. A high dividend yield indicates that the investors are receiving a
large dividend compared to the market value of stock, and are therefore getting highly
compensated for their investments as compared to lower yielding stocks.
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑 =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

PSO’s Dividend per share can be seen, in fig. 1, to have a declining trend for the past few years
primarily because PSO was paying off its debts (decreasing trend in Financial Leverage Ratio – fig.
2) and was performing poorly (decreasing trend in Earnings per share – fig. 3). Further, PSO’s
Market Value per share has also declined (fig. 1), mainly due to decreased demand of PSO’s
stock. Even then PSO has been able to maintain a fairly stable value of Dividend Yield for the past
few years as compared to its competitor Shell Pakistan (fig. 4).

In the year 2020, Oil and Gas Sector saw a very sharp decline in petroleum demand due to COVID-
19 pandemic, which impacted PSO’s financial performance as well. The company had to face a
Net Loss, which is why it was decided to not recommend any dividend for FY 20. For this reason
Dividend per share for the year 2020 was 0, resulting in a Dividend Yield of 0.

Dividend Yield
600 8
6
400
4
200
2
0 0
FY 2020 FY 2019 FY 2018 FY 2017

Dividend per share (Rs.)

Market Value per share (year end) (Rs.)
Dividend Yield (%)
Dividend Payout Ratio
The dividend payout ratio measures total amount of dividend paid out to shareholders relative
to the net income of the company. This ratio indicates return to shareholders versus how much
the company is keeping on hand to reinvest in growth, pay off debt, or add to cash reserves
(retained earnings). A high value of Dividend Payout ratio indicates that a large chunk of profits
is being paid out as dividends while a low value indicates a high profit retention.
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑜𝑢𝑡 =
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

PSO’s declining Dividend payout ratio shows that for the past few years it has been retaining
more of its profits instead of giving them out as dividends. Further, for FY 20 Dividend Payout ratio
stood at 0 since, as mentioned before, no dividends were paid.

Further, PSO has maintained a better position than Shell Pakistan in terms of Dividend Payout
Ratio for the past few years.
DuPont Analysis
DuPont analysis is a useful technique used to decompose the different drivers of return on equity
(ROE). The decomposition of ROE allows investors to focus on the key metrics of financial
performance individually to identify strengths and weaknesses. There are three major financial
metrics that drive return on equity (ROE): operating efficiency, asset use efficiency and financial
leverage.

DuPont Analysis
2020 2019 2018 2017
Net Profit Margin (0.006) 0.009 0.015 0.021
Asset Turnover 3.243 2.768 2.625 2.238
Equity Multiplier 3.022 3.500 3.645 3.816

DuPont -5.7% 8.9% 14.0% 17.7%

The DuPont of the company resulted in an ROE of -5.7% during 2020 due to the loss recorded in
the fiscal year. The assets turnover ratio improved mainly due to a decline in the total assets by
18% while the sales decreased by 4%. It can be emphasized that even though a higher asset
turnover ratio is feasible for a potential investor, a deeper analysis suggests that the higher ratio
does not ascertain more efficient usage of the assets.

The net profit margin is seen to decline since 2017 which suggests that the company has not
performed well during the past few years. The ROE trend and the shift of other metrics is shown
below.

DuPont Analysis of PSO 2017-2020

4.50

4.00

3.50

3.00
Net Profit Margin
2.50
Asset Turnover
2.00
Equity Multiplier
1.50
ROE
1.00

0.50

0.00
2020 2019 2018 2017
-0.50
Working Capital Management Policy
Working capital management policy is a business strategy designed that ensures company
operations are running efficiently by monitoring and using its current assets and liabilities to the
best way possible. PSO strives to lower its days of working capital at the same time ensuring to
maintain minimum level of inventory required to fulfill the demand in unforeseen situation to avoid
business loss. The difficulty in working capital’s management is one of the factors that are
responsible for the low profitability. Thus, better planning, organization and controlling of working
capital must be taken into an account because the right utilization of optimum amount of working
capital increases the net operating margin to the greater extent.

Receivables Management
PSO has 60% for Pakistan’s total market share it deals with government agencies, autonomous
bodies, independent power projects and other corporate customers. At the end of the financial
year 2020, the receivables from the Power Sector stood at Rs. 101.4 bn against Rs. 120.2 bn in FY19
reflecting a reduction of Rs. 18.8 bn. However, during the year, receivables from SNGPL increased
steeply from Rs. 64.7 bn to Rs. 97.6 bn. During the financial year 2020, average borrowing of the
Company stood at Rs. 105.8 bn vs 116.4 bn in FY19. The company also received significant amount
under Late Payment Surcharge from HUBCO and KAPCO.

To manage liquidity challenges, the Company is taking the following measures:

• Exploring and suggesting modalities and proposals to GOP & its customers from the Power
Sector, PIA and SNGPL for earliest resolution of long-outstanding receivables and further
build-up in future
• Focusing on cash customers.
• Venturing into new business models/lines. Despite the challenging liquidity position in FY20,
the Company managed to discharge its debts on time except for few payments which
were delayed due to default in payments to PSO by SNGPL.
 • PSO is actively following up with the customers and respective authorities for the settlement
of long outstanding dues, meanwhile managing its working capital requirement through
commercial banks and keeping the spread to minimum.

Current Assets Investments Policy

PSO has moderate current assets investment policy. It focusses on prudent management and
utilization of working capital, while ensuring availability of adequate credit lines. PSO tries to
generate Operational cash flow via business growth. The company continuously repairs and
improves its current infrastructure.

Inventory Management
The PSO stretches from Karachi to Gilgit. With 9 installations and 23 depots located across the
country PSO's storage capacity of approximately a million metric tons represents 68% of the
total storage capacity owned by all the oil marketing companies. PSO’s commitment to its
customers is the primary objective of its core existence. Its stringent supply planning process,
reliable and diversified sourcing, adequate inventory reserves, reliable infrastructure and efficient
logistics across the country are successfully always contributing towards meeting customer
demand. However, the demand and supply equilibrium is affected when other OMCs maneuver
their procurement and sales strategies to take advantage of arbitrage opportunities in the market,
thus creating unprecedented onus on the Company’s supply chain in trying to maintain the
equilibrium.