ANALYSIS OF FINANCIAL

STATMENTS
Question: Select a company/ firm (of your own choice) Analyze its cash flow
statement for the year 2020 in detail and answer the following questions?

1. What are the major sources of cash for your selected company?
CASH GENERATED FROM OPERATING ACTIVITIES

Cash generated from operations = 4,014,282,000

Exchange gain on forward exchange contracts received = 107,279,000

Net cash generated from operating activities =1,560,005,000

CASH FLOW FROM INVESTING ACTIVITIES

Proceeds from sale of property, plant, and equipment =91,403,000

Repayment of loans from subsidiary companies =37,941,748,000

Interest received =388,113,000

Dividends received= 2,044,302,000

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from long term financing = 4,245,115,000

Short term borrowings - net = 1,347,506,000

Net cash from financing activities = 2,820,113,000

The major source of cash of NISHAT MILLS LIMITED is from the financing activities as the
amount of Rupees 2,820,113,000 which is the greatest value among my cash sources.

What are the major uses of cash?

CASH GENERATED FROM OPERATING ACTIVITIES

Finance cost paid = (1,511,521,000)

Income tax paid = (1,009,748,000)

Net increase in long term loans = (49,864,000)

= (2,571,133,000)

CASH FLOW FROM INVESTING ACTIVITIES

Capital expenditure on property, plant, and equipment = (5,132,005,000)

Investments made = (808,410,000)

Loans and advances to subsidiary companies = (39,353,653,000).

Net cash used in investing activities = (4,828,502,000)

= (50,122,570,000)
CASH FLOWS FROM FINANCING ACTIVITIES

Repayment of long-term financing = (1,363,699,000)

Dividend paid = (1,408,809,000)

= (2,772,508,000)

The major use of cash occurred in the investing sector as per the amount is rupees
(50,122,570,000) used in year 2020.

2. What is the relationship between net income and cash flow from operating
activities?

Net cash generated from operating activities is 1,560,005,000 and the net income of the company
is 3,506,284,000 which shows a negative relation. As the net income of Nishat mills limited is
less than the cash generated from operating activities, it shows there is manipulation in the
company.

The relationship is not justified. There can be many reasons of it which a company don’t want to
reveal like to maintain a positive picture in front of the investors or delaying the expenses to
show the excessive income. This is because the operating income does not include the
discontinued operations of the company or it is because of the extraordinary transactions. The
earning quality of the company is questionable.

3. Is cash flow from operating activities sufficient to cover capital

expenditures?
Capital expenditure on property, plant and equipment is rupees 5,132,005,000 which is much
more than the Net cash generated from operating activities rupees 1,560,005,000. It means it is
not sufficient to fulfill the requirement of capital expenditure.

4. Other than capital expenditures, is cash being used or generated in

investing activities?
Yes, the cash being used by the following:

Capital expenditure on property, plant, and equipment = (5,132,005,000)

Investments made = (808,410,000)

Loans and advances to subsidiary companies = (39,353,653,000).

Net cash used in investing activities = (4,828,502,000)

= (50,122,570,000)
And generated as:

Proceeds from long term financing = 4,245,115,000

Short term borrowings - net = 1,347,506,000

Net cash from financing activities = 2,820,113,000

5. What types of financing cash flows does your selected company have?
The financing flow of NISHAT MILLS LIMITED shows different aspects of cash being used
and cash that being generated, as follows:

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditure on property, plant and equipment (5,132,005,000)

Proceeds from sale of property, plant and equipment 91,403,000

Investments made (808,410,000)

Loans and advances to subsidiary companies (39,353,653,000)

Repayment of loans from subsidiary companies 37,941,748,000

Interest received 388,113,000

Dividends received 2,044,302,000

Net cash used in investing activities (4,828,502,000)

6. While answering above questions, analyze Firm’s overall position and

apply Porter’s five forces framework.
The firms overall financial condition is good as The Company recognized net revenue of Rupees
60,904.096 million for the year ended 30 June 2020. We identified recognition of revenue as a
key audit matter because revenue is one of the key performance indicator of the Company and
gives rise to an inherent risk that revenue could be subject to misstatement to meet expectations
or targets.

Revenue of the Company decreased by Rs. 2,594.933 million (4.09%) in the current year ended
30 June 2020 as compared to the corresponding year ended 30 June 2019. The main reason was
decrease in export sales by Rs. 2,451.650 million due to unfavorable quantity variance because
of lockdown, during the last quarter, in USA, Europe and China which are our main markets.
Still the Company was able to cross the mark of Rs. 60.904 billion in its topline which is the
second highest during the last five years.
The Company earned EBITDA of Rs. 8,719.892 million during the year which reflects
continuation of a steady trend over the last five years. EBITDA to sales percentage was 14.32%.
The strong EBITDA is the evidence of robust cashflows of the Company which enables us to
carry out regular BMR and finance working capital requirements, Profit after tax to sales %
decreased from 9.23% in the last year to 5.76% in the current year due to decrease in other
income.

The pandemic of COVID-19 that rapidly spread all across the world has not only endangered
human lives but has also adversely impacted the global economy. On 23 March 2020, the
Government of the Punjab and the Government of Sindh announced a temporary lock down as a
measure to reduce the spread of the COVID–19. Complying with the lockdown, the Company
temporarily suspended its operations. After implementing all the necessary Standard Operating
Procedures (SOPs) to ensure safety of employees, the Company resumed its operations and took
all necessary steps to ensure smooth and adequate continuation of its business in order to
maintain business performance despite slowdown in economic activity. The lockdown caused
disruptions in supply chain including supply of goods to the customers resulting in a decline in
sales. Subsequent to the year ended 30 June 2020, due to significant reduction in outbreak,
demand for the Company’s goods is fast reverting back to normal levels. Due to this,
management has assessed the accounting implications of these developments on these financial
statement.

Porter's Five Forces is a framework for analyzing a company's competitive environment.

7. For Nishat mills limited porter’s framework will be applied as follows:

The weaving, bleaching, dyeing printing, stitching, buying, selling and otherwise dealing in
yarn, linen, cloth and other goods and fabrics made from raw cotton, synthetic fiber and cloth,
and to generate, accumulate, distribute and supply electricity. Company is providing quality
products to its customers within the Pakistan and outside the Pakistan. Presently company is
exporting its all kinds if apparel products.

MAJOR COMPETITORS Nishat competitors are

 Crescent
 Sapphire
 Gul Ahmed
 Khadi
 Chenab
 Arzoo
 Alkarm
 Sitara
 Firdous
 Kohinoor
 Amtex

THREATS :

As always competitors bring threats though we cannot avoid competition but we can always stay
ahead of them by reforming our strategies and educating our entrepreneurs so as to move one
step forward in every aspect. Fashion life cycle Fashion changes day by day these days. Media
has so much penetrated in our daily lives that we easily adapt ourselves as it wants us to. This
has resulted in shortening the fashion lifecycle thus increasing the fashion risk.

Now the buyer does not want to wait long for his consignment because he is insecure that by the
time it will reach to him he will lost its demand due to change in fashion. Therefore, they prefer
to buy from neighboring countries even at higher cost to get their products instantly rather than
to wait weeks or months for their consignments to reach them. Stiff competition from developing
countries especially China and India. Pricing pressure Location disadvantage International labor
and environmental laws.

OPPERTUNITIES: Organization can expand product lines. Currently the Nishat not dealing in
knitwear they can expand their product line by producing knitwear. They have plants and the
extra cost for the production will be low for Nishat. And they also have better market repute.
Organization can reduce the cost by proper utilization of resources. If the cost of different
matters which is not utilizing properly is controlled by the Nishat management, they can produce
more in a few costs. It has to develop a further systematic process for controlling and managing
resources. Organization can hire more well-educated and experienced person. They can take
advantages by hiring more skilled people and they should hire young, fresh and energetic staff
for their betterment. Shift in domestic market to branded readymade garments. Increased
disposable income. Emerging mall culture and retail expansion.

BARGAINING POWER OF SUPPLIERS:

The bargaining power of suppliers in an industry tries to evaluate the scene of the supply market
of the textile and clothing industry. The main raw material of textile and clothing industry is
cotton. The textile industry in Pakistan achieves cost advantage in the segment of apparel as well
as home textiles with the help of unending supply of local staple cotton which have been
domestically produced. Further, Government and other policy makers have taken definitive steps
for improving the amount and quality of cotton yield for making sure that higher productivity
can be achieved.

BARGAINING POWER OF CUSTOMERS;

The bargaining power of customers is also a threat for a firm operating in industry. The buyers
affect the profitability in such a way that he wants discounts and other services which might
lower the margin of profit for the company. The demand forces inside the industry can be
evaluated with the help of bargaining power which the buyers of the industry possess.

RIVALRY AMONG EXISTING FIRMS

The amount of rivalry within the competitors who already exist in the industry is highly
dependent on the following factors: the structure of competition, the structure of industry costs,
strategic objectives, and degree of differentiation, entry and exit barriers, and switching
costs .Another threat for Nishat mills is the hyper competition in industry. The firms currently in
the industry are also the threat for Nishat mills because their actions affect the profitability of the
Nishat mills .

Suppose if one competitor reduces the prices so Nishat will also have to reduce which in result
will affect the profitability of company.

THREAT OF NEW ENTRANTS

This factor that is threat of new entrants helps in increasing the competitive nature inside the
industry to a greater level. On the other hand the threat is also instrumental in bringing increased
amount of capacity in the market. Threat of new Entrants For Nishat mills there has been a threat
of entering new firms, So to defend themselves from this threat they gain economies of scale
And the other barriers which Nishat mills create for entrants are; Product differentiation &
Switching cost.

THREAT OF SUBSTITUTE PRODUCTS

The factor of threat of substitutes is dependent upon several different factors. These factors are
the relative price and performance of substitutes, consumers’ interest in the substitute products
and the cost the consumers’ have to bear for switching to other substitutes The substitute product
means any product which satisfies the same needs. So substitute products in market are also a
major threat for Nishat mills.