COMSATS UNIVERSITY, ISLAMABAD

MANAGEMENT SCIENCES DEPARTMENT

CREDIT MANAGEMENT
ASSIGNMENT # 4

Submitted To
Ma’am Shagufta Parveen

Submitted By
Abdul Moiz SP20-BAF-004
Ayyat Ali SP20-BAF-018
Asra Mumtaz SP20-BAF-017
Syed Abdul Rab Ali SP20-BAF-089
Abdul Rafey SP20-BAF-007
Syed Anique Haider Shah SP20-BAF-091

Dated: 12/10/22

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Table of Contents
Financial performance of last 5 years (Trend analysis).......................................................................................3
Notes to Financial Statement...............................................................................................................................10
Stock Price............................................................................................................................................................11
Credit Rating of The Group................................................................................................................................11
Use of Credit Management System.....................................................................................................................12
Other Sources of Information.............................................................................................................................13
Strengths and weaknesses....................................................................................................................................13
Recommendation..................................................................................................................................................14
Conclusion.............................................................................................................................................................14
Reference...............................................................................................................................................................14

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 Financial performance of last 5 years (Trend analysis)

PROFITABILITY RATIOS
1. NET PROFIT MARGIN 2017-2021

2021 2020 2019 2018 2017

Net profit margin 2.42 (0.58) 0.92 1.45 2.08

NET PROFIT MARGIN % OVER 2017-2021

3
2.42
2.5 2.08
2
1.45
1.5
0.92
1
0.5
0
NET PROFIT MARGIN
-0.5
-1 -0.58

2017 2018 2019 2020 2021

2. RETURN ON EQUITY % 2017-2021

2021 2020 2019 2018 2017

RETRUN ON 20.82 (5.72) 8.88 14.00 17.72
EQUITY %

R ETur N ON EQU ITY 2017-2021

2017 2018 2019 2020 2021

25
20
15
10
5
0
-5
-10

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3. RETURN ON ASSETS 2017-2021

2021 2020 2019 2018 2017

RETRUN ON 7.4% (3.9) % 03.3% 03.8% 4.6%
ASSET %

Return on assests 2017-2021

10
8
6
4
2
0
2017 2018 2019 2020 2021
-2
-4
-6

Series 1

Profitability ratios interpretation: The net profit margin shows how much net income a business
produces relative to total sales. PSO Ltd.'s net profit margin declined from 2017 to 2020, a period in
which it suffered losses, but in 2021 the company achieved its greatest net profit margin percentage of
2.42%. According to the trend analysis of the ROE graph, the company was most successful in 2021 at
making a profit from its current assets. According to the greatest ROA percentage in the previous five
years of 7.4%, the company did a terrific job of boosting its profits with each investment Rupee it made
in the year 2021 after ROA fell from 4.6% in the year 2017 to -3.9% in the year 2020.

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 LIQUIDITY RATIOS
4. CURRENT RATIO RUPEES IN MILLIONS

2021 2020 2019 2018 2017

Current Ratio 1.27 1.44 1.35 1.32 1.32

CURRENT RATIO RUPEES IN MILLIONS

1.45
1.4
1.35
1.3
1.25
1.2
1.15
2017 2018 2019 2020 2021

5. Quick ratio

2021 2020 2019 2018 2017

ACID TEST/QUICK RATIO 1.10 1.09 1.01 1.03 1.07

ACID TEST/QUICK RATIO

1.12 Liquidity
1.1 ratio

1.08

1.06

1.04

1.02

0.98

0.96
QUICK RATIO Rs. MILLIONS

2017 2018 2019 2020 2021

interpretation: Due to a bigger percentage growth in current assets than current liabilities, the current
ratio has somewhat improved in the year 2021, however, the company’s current ratio shows the highest

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record of 1.44 in the year 2020 in which PSO ltd faced loss if we look at the reason the current assets
have increased mainly due to increase in stock in trade and trade debts.

DEBT RATIOS
6. FINANCIAL LEVERAGE RATIO

2021 2020 2019 2018 2017

Financial leverage 41.00 59.00 90.00 81.00 127.00
ratio

FINANCIAL LEVERAGE RATIO 2017-2021

127

90
81
59
41

2017 2018 2019 2020 2021

7. INTEREST COVER RATIO Rs.

2021 2020 2019 2018 2017

Interest cover ratio 5.30 0.62 2.94 6.30 5.95

INTEREST COVER RATIO

7

0
2017 2018 2019 2020 2021

INTEREST COVER RATIO

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DEBT RATIOS: Due to a decrease in finance costs and a growth in earnings before interest and taxes,
interest cover has increased after the year 2020 to 2021. However, the company had a minimal increase
in interest coverage from 2017 to 2018 but after it dropped till the year 2020
If we look at the constant negative slope of financial leverage, we understand that due to a drop in short-
term borrowings and a rise in shareholder equity, financial leverage has declined during the course of
the year.
Note: D/E ratio has not been calculated as the company has no long-term debt.

ASSET ACTIVITY RATIO

8. AVERAGE COLLECTION PERIOD
2021 2020 2019 2018 2017
AVERAGE COLLECTION 54.00 58.00 63.00 64.00 65.00
PERIOD

70

60

50

40

30

20

10

0
avg. collection period (days)

2017 2018 2019 2020 2021

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9. Inventory Turnover Ratio
2021 2020 2019 2018 2017
Inventory Turnover Ratio 16.88 14.93 13.06 13.84 14.36

Inventory Turnover
14.93
14.36 13.84
13.06

10.89

2017 2018 2019 2020 2021

invetory turnover

10. Account payable ratio (days)

2021 2020 2019 2018 2017
Account payable ratio (days) 16.51 12.51 10.15 10.75 11.64

18
16
14
12
10
8
6
4
2
0
Category 1

2017 2018 2019 2020 2021

ASSET ACTIVITY RATIO INTERPRETATION: As the corporation converts its inventory into sales
more quickly, inventory turnover has grown.

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  The rise in debtor turnover is mostly attributable to an increase in the gross income of 9.4%, as
opposed to an increase in average debtors of only 0.15%.
 The early payment of suppliers for purchases made on credit has helped reduce the turnover of
creditors.

Investment Ratios
11. Price earning ratio (P/E)
2021 2020 2019 2018 2017
Price earning ratio 3.6 (11.5) 7.5 9.7 10
(P/E)

P/E RATIO
15

10

0
2017 2018 2019 2020 2021
-5

-10

-15

P/E

12. Dividend payment ratio

2021 2020 2019 2018 2017
Dividend payment ratio 24.2 - 44.3 45.5 64.4

Divident payment ratio

70

60

50

40

30

20

10

0
2017 2018 2019 2020 2021

Divident payment ratio

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Investment Ratios interpretation: Due to the PKR cash dividend declaration, the dividend payout and
dividend yield percentages have increased compared to FY20. 15.0 Per share in FY21 versus no
dividend the previous year. Due to an increase in EPS for the year, the dividend cover ratio has risen.

Notes to Financial Statement

Inventory turnover has increased as the company is quickly covering its inventory into sales.
Debtors’ turnover has increased primarily due to an increase in gross revenue by 9.4% whereas average
debtors have increased by 0.15% only.
Creditors’ turnover has improved primarily due to prompt payments made to suppliers for purchases on
credit. - Operating cycle has remained almost the same.
Total Asset turnover has improved due to a more proportionate increase in sales than average total
assets. An increase in sales is due to both positive volume and price variance.

Trade Debts
2021 2020 2019 2018 2017
123.52% 110.57% 123.18% 137.75% 119.27%
Trade debts went up in FY21 primarily due to lower recoveries from SNGPL. Further, as per horizontal
and vertical analysis, it was highest in FY18 due to a delay in payments by the power sector which
receivables started to decline from FY19 due to recoveries.
Trade and Other Payables
2021 2020 2019 2018 2017
122.66% 108.12% 131.69% 140.55% 106.99%
Trade and other payables have increased in FY21 primarily due to an increase in trade payables on
account of the rise in international oil prices. However, as per horizontal and vertical analysis, it was the
highest in FY18 due to the rise in liabilities relating to product purchases in FY18 because of the surge
in international oil prices.
Gross profit for FY21 is higher than FY20 and highest in the last five years as per vertical and horizontal
analysis due to higher volumes, margins, and a favorable price regime.
Other income has increased primarily due to a significant recovery of interest income on delayed
payments during the year. Further, as per horizontal analysis, other income is highest in FY21 in all five
years.
Finance cost in FY21 has decreased compared to last year due to lower borrowing levels and average
markup rates in FY 21 vs. FY 20. Finance cost is highest in FY20 as per horizontal and vertical analysis

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mainly due to higher policy rates by SBP. There were no liabilities with remaining contractual maturity
of more than three months from reporting date.

Stock Price
The total number of shares: 469,473,300
The market capitalization of PSO: 68,632,301.73
52-WEEK RANGE PRICE VARIATION: 139.71 — 199.00
The total number of shares of PSO that are readily available for trading at the Stock Exchange (FREE
FLOAT): is 211,262,985.
ASK PRICE: 192.00
BID PRICE: 189.00
Average stock price: The price of PSO Share is Rs.146.19 as of 12 December 2022 7:59 PM
The highest share price of 5 years of PSO is 352.13 as of August 13, 2018, 4:14 PM
The stock price of PSO has reduced over the period of 5 years. The value of the company simply shrinks
when the price of stocks is reduced. The stock market is governed by the forces of supply and demand.
The demand for PSO stocks has significantly reduced.

Credit Rating of The Group

During the year credit rating of the group companies has been reassessed by the relevant values and
maintained as follows:
COMPANY Long Term Short Term
PSO A1+ AA+
PRL A- A2

These ratings depict high credit quality and a low expectation of credit risk i.e., a strong capacity for
timely payments of financial commitments.

Use of Credit Management System

Pakistan State Oil Company Limited has adopted SAP Ariba; a marketplace where customers and
vendors from over 190 countries have interactions with each other. Through SAP Ariba, the acquisition
process of PSO is improved by making access to online PSO tenders easy and improving cost-

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effectiveness. To keep these workflows moving smoothly and contain operational costs, the company
uses IBM® DominoⓇ applications to digitize many of its key processes.
The Group uses default rates based on customers’ credit ratings from which receivables are due to
calculate its expected credit losses (ECL) for certain types of loans and overdrafts. The trade debts are
secured by Export Letters of Credit on sales made by the Subsidiary Company.
Credit Management structure
Risk is inherent in the Group's activities, but it is managed through monitoring and controlling activities
which are based on limits established by the internal controls set on different activities of the Group by
the Board of Management through specific directives. The Group's finance department is in charge of
managing financial risk when market circumstances change. Risk-taking operations within the Group
are managed by suitable rules and procedures. Financial risks are identified, measured, and managed by
the Group's risk tolerance and policies.
The Group's customers and their businesses have been impacted by the impact of the global economic
slowdown, according to an analysis carried out by the Group's Risk Management function. The level of
impact has been assessed based on sectors/Industries as well as short-term and long-term outlooks.
The Group attempts to control credit risk by monitoring its customers' credit exposures and limiting
transactions with specific customers. The Group’s liquidity management involves projecting cash flows
and considering the level of liquid assets necessary to meet the financial liabilities, monitoring liquidity
ratios, and maintaining debt financing plans.
The Group uses its incremental borrowing rate - the rate of interest it would pay to borrow over a similar
term, and with a similar security - to measure its liabilities. The IBR is the rate at which the Group
would have to pay to obtain an asset of a similar value in a similar economic environment.
Borrowing costs are recognized as an expense in the period in which these are incurred, except where
such costs are directly attributable to the acquisition, construction, or production of a qualifying asset.
Management exercises judgment when determining which assets are qualifying assets, considering the
nature of the asset.
Interest is charged by the terms of the agreement on the account payable balance. Security deposits are
deposited to the Holding Company under the terms of related agreements. The Group manages its
currency risk by close monitoring of currency markets. There is no foreign currency risk involved in
group borrowings.
The benchmark is set by the group for cash flow interest rate risk only. The credit risk on a liquid fund is
limited because the counterparties are banks with reasonably high credit ratings. Credit risk in the public
sector is estimated to be higher than that of the private sector as retail sales are covered to the maximum
possible extent through legally binding contracts.

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 Other Sources of Information
We have performed 360 analyses. We gathered information from PSO’s website and stocks price
from PSX’s website. We have also looked for information regarding their performance from their
audited consolidated financial statements that have been provided online. PSO’s CFO was also
another source of information regarding the software that PSO is using currently and other relevant
information. Lastly, we have looked for articles on the business recorder.

Strengths and weaknesses

Strengths
 PSO has a high net profit margin, and the company will remain resilient in periods of unexpected
losses which is an indicator of creditworthiness.
 Company has an acid test ratio above 1.0, which means PSO is financially strong and can meet
its short-term liabilities. It has enough short-term assets to cover its immediate liabilities.
 PSO has less chance of bankruptcy due to less incurred debts and ultimately less financial
leverage ratio. This is a positive indicator for lenders.
 PSO is doing well in paying interest due on outstanding debts and is self-assured to pay its debt.
This increases the lender’s trust in the company.
 Company has a low average collection period that is preferable by credit analysts because the
company is efficiently paying off its receivables.
 Company’s operating profit is higher and also net income increased which is making it less risky
for lending.
 Company is effectively managing its supplier’s bills and fully paying off its creditors. Thus, high
accounts payable ratio.
 Price earnings ratio is lower than in the past years which is good for both business and potential
investors.

Weaknesses

 In recent year company’s liquidity ratio decreased. A high liquid ratio suggests a company is
more liquid and can pay off outstanding debts more easily.
 Also, there is a huge variation in the net profit margin of the company during the past 5 years
which makes it unpredictable and riskier from the lender’s perspective.

Recommendation
 The company can also improve its DSO. Negotiate better payment terms, set up shorter payment
terms, advance payments, and early payment discounts. Strengthening its invoicing process, and
improving DSO often requires a focus on making sure that invoices are going out on time,
contain all necessary information, and are free of errors.

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  PSO can increase its liquidity ratios by controlling overhead expenses (rent, utilities) to go
digital rather than having a paper trail.
 PSO can sell unnecessary assets (surplus business equipment) to reduce the average cost of
equipment maintenance.
 There is nothing wrong with the line of credit because the account payable ratio is high, so the
company need not worry about this.
 Variations in profit margins are due to the global pandemic COVID-19, which affected the
overall world and economies. The company should increase its risk appetite to tackle these
situations in the future.
 The company needs to perform cashflow sensitivity analysis for variable instruments
periodically this will help it forecast the cash situation and address any shortfalls. It will also
decrease its interest rate risk because it seems to have a large impact on the company's short-term
borrowings.

Conclusion
Overall, PSO showed historical financial results at the end of the year 2021, that too shortly after the global
pandemic which is remarkable. Through effective policies, it almost nullified the negative impact of losses of the
year 2021.
From a credit analyst perspective, companies have an excellent credit management system and enough resources
to satisfy lenders. Companies just need to improve their liquidity through effective policies.
PSO is leading the market by a large margin, delivering a phenomenal performance over and above the industry
average.

Reference
https://www.psopk.com/en/investors/financial

https://dps.psx.com.pk/company/PSO

https://www.brecorder.com/search?cx=6edf03d708607468f&cof=FORID%3A10&ie=UTF-8&q=pso

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