KATHMANDU UNIVERSITY

SCHOOL OF MANAGEMENT
BALKUMARI, LALITPUR

ACCOUNTING FOR FINANCIAL DECISIONS [ACC501]

TERM PAPER ON

FINANCIAL STATEMENT ANALYSIS OF HIMALAYAN DISTILLERY LIMITED

Submitted by: Submitted to:

MBA Fall 2022 Group 2 Ms. Nisha Adhikari

Ana Dhoj Adhikari (22101) Assistant Professor

Urbi Dwa (22109) KUSOM

Rashmi Manandhar (22117)

Prativa Paudel (22125)

Sauharda Sigdel (22133)

25th January, 2022
 i

ACKNOWLEDGEMENT

We, Group 2, would like to express our deep sense of thanks and sincere gratitude to
Assistant Professor Ms. Nisha Adhikari, faculty of Kathmandu University School of
Management (KUSOM), for giving us the responsibility to prepare this report as a part of
the course Accounting for Financial Decisions. This report has helped us to test our
analyzing ability and skills of an actual financial statement as well as broaden and expand
our knowledge on the standards followed while preparation of financial statements. It
would not have been possible to complete this report without her guidance, help,
encouragement, valuable advice, continuous encouragement, and motivational support.

Next, we would like to acknowledge Kathmandu University School of Management

(KUSOM) for the inclusion of this course as a part of the MBA curriculum. This was a
wonderful opportunity for us to learn about the financial statements and ratio analysis.

Ana Dhoj Adhikari (22101)

Urbi Dwa (22109)

Rashmi Manandhar (22117)

Prativa Paudel (22125)

Sauharda Sigdel (22133)

 ii

TABLE OF CONTENTS
ACKNOWLEDGEMENT.................................................................................................................i

LIST OF FIGURES.........................................................................................................................iv

LIST OF TABLES............................................................................................................................v

Executive Summary.........................................................................................................................ix

CHAPTER 1: INTRODUCTION.....................................................................................................1

1.1 Shareholding Pattern...............................................................................................................2

1.2 Subsidiaries.............................................................................................................................2

1.3 Vision of the Company...........................................................................................................2

1.4 Mission of the Company.........................................................................................................2

1.5 Company’s Brand...................................................................................................................3

1.6 Objective of the Study............................................................................................................3

1.7 Limitations of the Study.........................................................................................................3

CHAPTER 2: FINANCIAL STATEMENT ANALYSIS................................................................4

2.1. Horizontal Analysis...............................................................................................................7

2.1.2 Horizontal analysis of Income statement.......................................................................14

2.2 Vertical Analysis...................................................................................................................17

2.2.1 Vertical analysis of Balance sheet.................................................................................17

2.2.1 Vertical analysis of income statement...........................................................................22

2.3. Liquidity ratio......................................................................................................................24

2.2.1. Working Capital............................................................................................................25

2.2.2. Current Ratio.................................................................................................................26

2.2.3. Quick Ratio...................................................................................................................28

2.2.4. Cash flow from operation to current liabilities.............................................................30

2.2.5. Account Receivable Turnover Ratio.............................................................................32

2.2.6. Number of Days Sales In Receivables..........................................................................34

2.2.7. Inventory turnover ratio................................................................................................35

 iii

2.2.8. No of Days Sales in Inventory......................................................................................37

2.2.9. Cash Operating Cycle...................................................................................................38

2.2.10. Cash Conversion Cycle...............................................................................................40

2.4. Solvency Ratio.....................................................................................................................43

2.4.1. Debt to equity Ratio......................................................................................................43

2.4.2. Times Interest Earned...................................................................................................45

2.4.3. Debt Service Coverage.................................................................................................47

2.4.4. Cash flow from operation to capital expenditure ratio.................................................50

2.5. Profitability Ratio................................................................................................................52

2.5.1. Gross Profit Margin......................................................................................................52

2.5.2. Net Profit Margin..........................................................................................................54

2.5.3. Return on Assets Ratio.................................................................................................55

2.5.4 Asset Turnover Ratio.....................................................................................................58

2.5.5. Return on Equity Ratio.................................................................................................59

2.5.6. Earnings per share.........................................................................................................61

2.5.7. Price to Earnings Ratio.................................................................................................62

2.5.7. Dividend Payout Ratio..................................................................................................64

2.5.8.Dividend Yield Ratio.....................................................................................................66

2.5.9. DuPont Analysis...........................................................................................................67

CHAPTER 3: CONCLUSION AND RECOMMENDATION......................................................73

3.1. Liquidity Ratio.....................................................................................................................73

3.2. Solvency Ratio.....................................................................................................................74

3.3. Profitability Ratio................................................................................................................75

3.4. DuPont Analysis..................................................................................................................76

3.5. Recommendation.................................................................................................................77

APPENDIX……………………………………………………………………………………….80
 iv

LIST OF FIGURES

Figure 1. 1. Operation Overview......................................................................................................6

Figure 1. 2 Financial Snapshot provided by HDL FY2078/79.........................................................7

Figure 2. 1 Graph Showing Working Capital of HDL 26

Figure 2. 2 Graph of Current Ratio of HDL...................................................................................27
Figure 2. 3 Graph of Quick Ratio for HDL....................................................................................29
Figure 2. 4 Graph Showing Cash Flow from Operations to Current Liabilities.............................31
Figure 2. 5 Graph Showing Account Receivable Turnover Ratio of HDL....................................33
Figure 2. 6 No. of Days sales in recievaable of HDL for 4 years...................................................34
Figure 2. 7 Inventory Turnover Ratio.............................................................................................36
Figure 2. 8 Number of Days’ Sales in Inventory............................................................................38
Figure 2. 9 COC of HDl for 4 years...............................................................................................39
Figure 2. 10 CCC of HDL for 4 years............................................................................................42
Figure 2. 11 DE ratio of HDL for past 4 years...............................................................................44
Figure 2. 12 TIE of HDl for past 4 years........................................................................................46
Figure 2. 13 Debt service Coverage of HDL..................................................................................50
Figure 2. 14 Cash Flow from operation to capital expenditure for HDL.......................................51
Figure 2. 15 Gross Profit Margins of HDL.....................................................................................53
Figure 2. 16 Net Profit Margin for HDL........................................................................................54
Figure 2. 17 Return on Assets.........................................................................................................56
Figure 2. 18 Return On Sales..........................................................................................................57
Figure 2. 19 Asset turnover ratio of HDL.......................................................................................59
Figure 2. 20 Return on Equity of HDL...........................................................................................60
Figure 2. 21 EPS of HDL................................................................................................................62
Figure 2. 22 Price Earning of HDL.................................................................................................63
Figure 2. 23 Dividend Payout ratio.................................................................................................65
Figure 2. 24 Dividend Yield Ratio..................................................................................................66
 v

LIST OF TABLES

Table 1. 1. Shareholders Pattern.......................................................................................................2

Table 1. 2 Subsidiaries......................................................................................................................2
Table 1. 3 Company’s Brand............................................................................................................3

Table 2. 1 Horizontal Analysis of Balance Sheet 8

Table 2. 2 Horizontal Analysis of Income Statement.....................................................................14
Table 2. 3 Vertical Analysis of Balance Sheet...............................................................................18
Table 2. 4 Vertical Analysis of Income Statement.........................................................................22
Table 2. 5 Working Capital of HDL from FY 2074/75 to FY 2078/79..........................................25
Table 2. 6 Current Ratio of HDL from FY: 2074/75 to FY 2078/79.............................................27
Table 2. 7 Calculation of Quick Ratio for HDL.............................................................................29
Table 2. 8 Calculation of Average current liabilities......................................................................30
Table 2. 9 Calculation of Cash Flow from operation to Current Liabilities...................................31
Table 2. 10 Calculation of Account Receivable Turnover Ratio....................................................32
Table 2. 11 Calculation of No. of Days Sales in Receivable..........................................................34
Table 2. 12 Calculation of Average Inventory...............................................................................35
Table 2. 13 Calculation of Inventory Turnover Ratio....................................................................36
Table 2. 14 Calculation of Number of days sales in inventory.......................................................37
Table 2. 15 Calculation of COC.....................................................................................................39
Table 2. 16 Calculation of Purchase for 4 years.............................................................................41
Table 2. 17 Calculation of Average payable...................................................................................41
Table 2. 18 Calculation of Average Payable Turnover Ratio.........................................................41
Table 2. 19 Calculation of No. of Days Payable Outstanding........................................................42
Table 2. 20 Calculation of Cash Conversion Cycle........................................................................42
Table 2. 21 Calculation of Debt to Equity Ration of HDL.............................................................44
Table 2. 22 Calculation of Times Interest Earned..........................................................................46
Table 2. 23 Calculation of Cash flow from Operation before interest and tax payment................48
Table 2. 24 Calculation of interest and principal payment.............................................................48
Table 2. 25 Calculation of Debt Service Coverage........................................................................49
Table 2. 26 Calculation of Cash Flow of operation to Capital Expenditure...................................51
Table 2. 27 Calculation of Gross Profit Margin.............................................................................53
Table 2. 28 Calculation of Net Profit Margin.................................................................................54
Table 2. 29 Calculation of ROA.....................................................................................................55
 vi

Table 2. 30 Calculation of ROS......................................................................................................57

Table 2. 31 Calculation of Asset Turnover Ratio...........................................................................58
Table 2. 32 Calculation of ROE......................................................................................................60
Table 2. 33 Calculation of EPS.......................................................................................................61
Table 2. 34 Calculation of P/E ratio...............................................................................................63
Table 2. 35 Calculation of DPS......................................................................................................64
Table 2. 36 Calculation of Dividend Payout Ratio.........................................................................65
Table 2. 37 Calculation of Dividend Yield Ratio...........................................................................66
 vii

LIST OF ABBREVIATION

AGM - Annual General Meeting

CCC – Cash Conversion Cycle

CCE - Cash and Cash Equivalent

Co - Company

COC – Cash Operating Cycle

COGS – Cost of Goods Sold

CSR - Corporate Social Responsibility

DPR – Dividend Payout Ratio

DPS – Dividend Per Share

EPS - Earnings Per Share

FY – Fiscal Year

HDL - Himalayan Distillery Ltd

MFG – Manufacturing

NPR - Nepalese Rupee

 viii

PER – Price Earning Ratio

PPE - Property and Plant Equipment

RE - Retained Earning

ROA – Return on Assets

ROE - Return on Equity

SOFP -Statement of Financial Position

SOPL -Statement of Profit and Loss

TDS -Tax deducted at Source

TIE – Times Interest Earned

USL -United Spirits Limited

 ix

Executive Summary

The report we have discussed below is of Himalayan Distillery Limited from the Fiscal
year of 2075/76 to Fiscal year 2078/79. We have used the figures from the annual report
of each fiscal year accordingly. HDL being a public company, is in obligation to publish
its report yearly so, the report were downloaded from the companies site. The annual
report presented the figures of HDL group as well as the company separately. We have
discussed and analyzed the figures and ratio of the company. HDL being a manufacturing
company, its main operation is sales and accordingly we have viewed the main operation
of the company through its generation of revenue through its sales while analyzing and
interpreting the figures in the ratios as well as amounts. The report discusses 3 different
types, namely Liquidity ratio, Solvency ratio and Profitability ratio, of the company in
which each ratio includes multiple other ratios that are essential to understand the
financial position of the company. We have interpreted the meaning of each ratio
individually and connected other ratios to observe for all types of stakeholders to
understand the financial health of HDL thoroughly. The report also gives conclusion on
the financial health of the company as a whole after analyzing every ratios and figures. At
last we have recommended the company to keep an eye on the points, process or figures
that might be at risk to the company.
 1

CHAPTER 1: INTRODUCTION

Himalayan Distillery Ltd. (HDL) is a well-known manufacturing company that

thrives on research, development, manufacturing, and marketing quality alcoholic
beverages responsibly and competitively.

It was established on 24 July 1985, beginning as a private company registered

under Company Act 2021. It was converted into a Public Limited Company on 3
November 2000. The company’s value for excellence comes from the legacy it has
inherited from Jawalakhel Distillery Pvt. Ltd. – the legacy company and the largest
player in Nepal’s liquor market at the time. HDL is a culmination of a perfectionist’s
dream – a dream to build a distillery distinct from the competition in all aspects. HDL’s
performance over a period of time has underscored its commitment to lead HDL offers a
wide variety of best-in-class alcoholic products manufactured through hi-tech processes.
It has over 11.76 million liters of production capacity per annum at its factory in Birgunj.
The factory adheres to international production standards to ensure quality products.

HDL works closely with distributors, wholesalers, and retailers to achieve a

shared goal. Additionally, the distillery maintains global standards by consistently
producing high-quality products. In the fiscal year 2021-2022, the company also
experienced a growth in gross sales revenue, increasing from 5.2 billion to 7.5 billion
over the past five years. One of their direct competitors is Nepal Liquors Pvt Ltd which
has a legal license as a franchise to manufacture and market the brands of USL (United
Spirits Limited) .Excise duty is a duty charged for the manufacturing of goods. This duty
is higher, especially for alcohol and tobacco products. HDL on average pays out 51% of
its sales revenue as excise duty.
 2

1.1 Shareholding Pattern

Table 1. 1. Shareholders Pattern

Shareholders 62%
General Public 38%

1.2 Subsidiaries

Table 1. 2 Subsidiaries
Name Percentage of Ownership
Himalayan Multi Agro Ltd. 100
Himalayan Fisheries Ltd. 100

1.3 Vision of the Company

To be the most respected Liquor Company in Nepal in terms of products, service, profit
and shareholder value.

1.4 Mission of the Company

Research, develop, manufacture and market quality alcoholic products profitably in a

responsible manner through continuous improvement and professionalism.
1.1. Core Business Value
● Committed to stringent quality control.
● Foster an atmosphere of openness, motivation and respect for each other.
● Diligent, innovative and creative in achieving our goals.
● Work with uncompromising integrity, teamwork and competitiveness.
● Focus on customer satisfaction.

1.5 Company’s Brand

Table 1. 3 Company’s Brand

Product Market Share
 3

Golden Oak 7.3%

Black Oak 58.%
Blue Oak 0.3%
Royal Treasure 0.1%
Himalayan Aila N/A

1.6 Objective of the Study

The objectives of this study are as follow:

1. To assess the profitability or earning capacity of the company
2. To assess the operational efficiency of the company
3. To assess the short term as well as long term solvency position of the company

1.7 Limitations of the Study

1. The analysis was solely company based. However, we know that for a complete
financial analysis, we need to look at the other companies in the industry and have a
comparative study.
2. The data provided in the report are inconsistent on a yearly basis with some figures
eliminated and some added under similar accounts.
3. Monetary data alone is contemplated in financial analysis while non-monetary factors
are overlooked. So, the results should not be taken as an indication of good or bad
management. Managerial ability could not be assessed by this analysis.
4. The financial statements of FY 2076/77 and most of 2077/78 cannot be particularly
compared with the preceding and succeeding year. This is because of COVID-19
pandemic which affected the company. The figures are not in line with the general trend
of the company’s performance.

CHAPTER 2: FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is the process of evaluating a company's financial

performance and position by reviewing its financial statements, including the income
statement, balance sheet, and cash flow statement. The analysis involves comparing
 4

financial data to industry averages and trends, as well as to the company's own historical
performance. The goal of financial statement analysis is to understand a company's
financial health and to make informed investment decisions.
For the purpose of conducting financial analysis of Himalayan Distillery Limited
(HDL) data has been taken from the Annual Reports published by the company in its
website. The following statements have been used for calculating various ratios and its
interpretation.
1. Statement of Financial Position: A statement of financial position, also known as a
balance sheet, is a financial statement that reports a company's assets, liabilities, and
equity at a specific point in time. The statement of financial position provides a snapshot
of a company's financial health, including what it owns (assets) and what it owes
(liabilities), as well as the equity that remains after liabilities are subtracted from assets
2. Statement of Profit and Loss: A statement of profit and loss, also known as an
income statement, is a financial statement that reports a company's financial performance
over a specific period of time, such as a quarter or a fiscal year. The income statement
shows a company's revenues, expenses, and net income (or net loss) for the period.
3. Statement of Cash Flow: A statement of cash flows is a financial statement that
reports the cash generated and used by a company during a specific period of time, such
as a quarter or a fiscal year. The statement of cash flows shows the cash inflows and
outflows for three categories: operating activities, investing activities, and financing
activities. The statement of cash flows provides important information about a company's
liquidity and financial flexibility. It helps investors and analysts understand how a
company generates and uses cash, and whether the company is able to meet its financial
obligations. Additionally, it helps to understand the company's ability to generate cash
from its operations, and the company's ability to invest in new projects and opportunities.
4. Schedules and Notes: Schedules and notes in a financial report are additional
information that is included to provide more detailed information about the information
presented in the financial statements. They are typically included to provide additional
context, to clarify certain items or to explain any assumptions or methods used in the
financial statements. The notes to the financial statements are considered an integral part
of the financial statements. They provide information that is necessary for a full
 5

understanding of the financial statements and are used to explain some of the information
in the financial statements. They include details such as the accounting policies used by
the company, any significant events that have occurred during the period and any
contingencies that the company may be facing. Additionally, they may also provide other
relevant information such as breakdown of revenue and expenses by geography, segment
or product, or any other significant disclosures that might affect the understanding of the
financial statements.
5. Consolidated Financial Statements: Consolidated financial statements are financial
statements that present the financial information of a parent company and its subsidiaries
as if they were a single economic entity. In other words, they combine the financial
statements of multiple companies into one set of financial statements that present the
combined financial position, results of operations and cash flows of the group.
The process of creating consolidated financial statements involves combining the
financial statements of the parent company and its subsidiaries and eliminating any
intercompany transactions and balances. This includes combining the assets, liabilities,
revenues, and expenses of the parent company and its subsidiaries, and eliminating any
transactions between the parent company and its subsidiaries. The purpose of preparing
consolidated financial statements is to give a true and fair view of the financial position
and performance of the group as a whole.
Consolidated financial statements are typically required for public companies that
have subsidiaries, and for companies with complex ownership structures. They are also
used by companies with multiple subsidiaries to report the financial results of the entire
group to its shareholders, as well as for internal decision making, and to meet regulatory
requirements. In the case of HDL, the financial statements are consolidated from the
subsidiaries: Himalayan Multi Agro Ltd and Himalayan Fisheries Ltd.
We have used schedules, wherever necessary, to provide an even deeper analysis
of the financial information where required. We have conducted the financial analysis of
Himalayan Distillery Limited for a consecutive period of 4 years from Fiscal year
2074/75 to Fiscal year 2079/80. We conducted our analysis by dividing the financial
ratios into five components:
i. Horizontal/ Vertical Analysis
 6

ii. Liquidity Analysis

iii. Solvency Analysis
iv. Profitability Analysis
v. Du-Pont Analysis
2.1. Financial Snapshot
The following operational overview and financial highlights are provided by HDL
in their latest annual report of FY 78/79. In our analysis, we will be conducting our own
ratio analysis to see how close to the auditor’s approved report we get. We will also be
looking for if/any discrepancies.

Figure 1. 1. Operation Overview

 7

Figure 1. 2 Financial Snapshot provided by HDL FY2078/79

2.1. Horizontal Analysis

Horizontal analysis, also known as trend analysis, is a method of financial

statement analysis that compares financial data over a period of time. It involves
comparing financial data for a specific period, such as the current year, to a base period,
such as the previous year. The goal of horizontal analysis is to identify trends and
patterns in a company's financial performance over time.
There are two main types of horizontal analysis:
i) Absolute horizontal analysis: It compares the current year's financial data to the base
year's data, showing the dollar difference and the percentage change. It helps to
understand the absolute change in the financial statements over a period of time.
ii) Relative horizontal analysis: It compares each year's financial data to the base year's
data, showing the percentage change. It helps to understand how each line item in the
financial statement has grown or declined over a period of time.
Horizontal analysis can be used to identify trends in a company's revenues,
expenses, profitability, and liquidity. By comparing the financial data of a company over
time, it helps to identify patterns and changes in a company's performance and to identify
 8

areas of the business that may need further analysis or attention. Additionally, it also
helps to identify the performance of the company in relation to its competitors and
industry.
Horizontal analysis reads the financial value from right to left to compare one
year’s result with the next as a rupee amount of change and as a percentage of change
from year to year. To calculate the rupees change and percentage change, we have to first
select the base year and comparison year.
For calculating the rupee change, subtract the value in the base year from the
value in the comparison year.
Rupees Change = Comparison Year − Base Year
Similarly, for calculating the percentage change, divide the rupee change by the
base year amount and multiply by 100.
Percentage Change = (Rupee Change/ Base Year Amount) × 100%
2.1.1 Horizontal Analysis of Balance Sheet
Table 2. 1 Horizontal Analysis of Balance Sheet
PARTICULARS 2079/78 2078/77 2077/76 2076/75
ASSETS
NON-CURRENT ASSETS
a. Property, Plant and -3.18% -7.82% -7.88% -0.66%
Equipment
b. Capital work-in- -100.00% -100.00%
progress
c. Intangible assets 92.11% -48.38% -37.24% -27.15%
d. Right to use assets
e. Financial Assets
Advance for -100.00% 0.00% 16994.02%
investments in equity
instruments
f. Investments 46.52%
g. other non-current -13.82% 16.03% 0.00% -0.52%
assets
 9

Total non-current 4.02% 1.39% -7.45% -0.21%

assets
CURRENT ASSETS
a. Inventories 25.69% -61.29% 41.27% -21.45%
b. Financial Assets
Trade receivables 122.49% -43.27% 126.10% 216.60%
Cash and cash 22.79% 7390.50 237.66% -34.16%
equivalents %
c. other current assets -22.04% 222.58% -28.76% 35.56%
Total 50.40% 23.00% 82.88% 36.98%
Non-current assets -100.00%
held for sale
Total current assets 50.40% 21.88% 84.56% 36.98%
TOTAL ASSETS 38.22% 15.74% 42.17% 16.90%
Non-current assets
held for sale
EQUITY AND LIABILITIES
EQUITY
a. Equity
Share Capital 75.00% 50.00% 50.00% 0.00%
b. Other equity
Reserves and Surplus 16.65% 68.69% 11.80% 46.74%
Total equity 41.90% 60.06% 26.70% 24.11%
NON-CURRENT LIABILITIES
a. Financial Liabilities
Borrowings -100.00% -99.38% -48.05% -25.78%
Lease Payables
b. Deferred tax -9.05% 20.39% 3.72% -10.82%
liabilities
Total Non-current 16.57% 12.97% -2.31% -12.87%
Liabilities
 10

CURRENT LIABILITIES
a. Financial Liabilities
Borrowings -100.00% -99.02% -7.57% -10.30%
Lease Payables
Trade payables 81.35% -62.00% 80.13% 46.16%
other financial 26.47% -41.61% 11.07% 46.43%
liabilities
b. other current 1.52% -44.10% 223.86% 99.77%
liabilities
c. Current tax -76.16% -79.58% 988.01% -87.90%
liabilities(net)
Total current 13.66% -62.14% 85.87% 4.28%
liabilities
TOTAL EQUITY 38.22% 15.74% 42.17% 16.90%
AND LIABILITIES

Interpretation

After analyzing the SOFP of Himalayan Distillery Ltd. through horizontal

analysis (trend analysis of 5 years), following are the interpretations:

i) The rate of decrease in Property, Plant and Equipment has increased by -0.66% in FY
2075/76 to -7.88% in FY 2076/77. This indicates that the company has sold more assets
and invested much less in purchasing which led to negative change from FY 2075/76 to
FY 2076/77. However, in FY 2078/79 slight heavy investment is being made in Property,
Plant and Equipment for the expansion of its business as the rate of decrease in PPE has
decreased by -7.82% in FY 2077/78 to -3.18% in FY 2078/79.
ii) There was negative percentage change in capital work-in-progress which was -100% in
FY 2075/76. Then there was no any percentage change in capital work-in-progress in
both FY 2076/77 and FY 2077/78. But again there was negative percentage change in
capital work-in-progress which was -100% in FY 2078/79 which indicates that company
incurred less cost in construction or development of assets.
 11

iii) Intangible assets include computer software, licenses, patents etc. The rate of decrease in
intangible assets has increased by -27.15% in FY 2075/76 to -48.38% in FY 2077/78 due
to amortization. However, in FY 2078/79 the percentage change is very high i.e. 92.11%
which indicates new intangible assets had been purchased.
iv) Likewise, the percentage change in advance for investments in equity instruments has
been very high in FY 2075/76 which was 16994.02% which indicates that company paid
higher amount in advance for investment in equity instrument in FY 2075/76. But there
was negative percentage change in advance for investments in equity instruments which
was -100% in FY 2077/78. However, there was no any percentage change in advance for
investments in equity instruments in both FY 2078/79.
v) There is negative percentage change in other non-current assets which was -0.52% in FY
2075/76. Then the percentage change in other non-current assets increased by 16.03% in
FY 2077/78. But again there was negative percentage change in other non-current assets
which was -13.82% in FY 2078/79.
vi) The total non-current assets have increased by 4.02% in FY 2078/79 from 1.39% in FY
2077/78 after consecutive decrements in FY 2076/77 and FY 2075/76. This increment is
influenced by the additional investment made in 2077/78 of Rs.69,000,000 and in FY
2078/79 of Rs.32,100,000.
vii) There was negative percentage change in inventories which was -21.45% in FY 2075/76.
This is due to the inventories having been sold out or there was less production than the
previous year. Then the percentage change in inventories have increased by 41.27% in
FY 2076/77. But again there was negative percentage change in inventories which was -
61.29% in FY 2077/78, it may be due to Covid-19 had impacted the production of the
company. However, the percentage change in inventories have increased by 25.69% in
FY 2078/79. This indicates the inventories have increased due to high production or less
sales.
viii) The percentage change in trade receivables was 216.60% in FY 2075/76. There
was also positive percentage change in trade receivables in FY 2076/77 which was
126.10% but lower percentage change than previous fiscal year. It may be due to impact
of Covid-19. There is negative percentage change in trade receivables which was -
 12

43.27% in FY 2077/78, but percentage change in trade receivables have increased by

122.49% in FY 2078/79.
ix) Cash and cash equivalents refer to the cash at bank and cash in hand. There was negative
percentage change in cash and cash equivalents which was -34.16% in FY 2075/76. Then
the percentage change in cash and cash equivalents have increased by 237.66% in FY
2076/77 to 7390.50% in FY 2077/78. This may be due to decrement in investment. There
was also positive percentage change in cash and cash equivalents in FY 2078/79 which
was 22.79% but lower percentage change than previous FY 2077/78.
x) Likewise, the percentage change in other current assets was 35.56% in FY 2075/76.
There was negative percentage change in other current assets in FY 2076/77 which was -
28.76%. Again the percentage change in the other current assets have increased by
222.58% in FY 2077/78, then followed by negative percentage change in other current
assets in FY 2078/79 which is -22.04%.
xi) There was negative percentage change in non-current assets held for sale in FY 2077/78
which was -100%. This indicates that company has placed non-current assets held for
sale of amount Rs.12,727,970 in year 2077 B.S but did not held any non-current assets
for sale in 2078 B.S.
xii) The percentage change in total current assets has increased by 36.98% in FY 2075/76 to
50.40% in FY 2078/79. It is due to effect of increment of percentage change in trade
receivable, and slight increment of percentage change in inventories in FY 2078/79 in
comparison to previous fiscal years.
xiii) Similarly, the percentage change in total assets has increased by 16.90% in FY
2075/76 to 38.22% in FY 2078/79. It is due to effect of increment of percentage change
in total non-current assets and in total current assets in FY 2078/79 in comparison to
previous fiscal years.
xiv) The percentage change in share capital of Himalayan Distillery Ltd. has increased
by 0% in FY 2075/76 to 75% in FY2078/79 which means there has been made additional
contribution by the shareholders.
xv) Likewise, the percentage change in reserve and surplus has decreased by 46.74% in FY
2075/76 to 16.65% in FY 2078/79 which means there has been created little amount of
cumulative retained earnings and net profit has reduced in FY 2078/79 in comparison to
 13

FY 2075/76. In FY 2076/77, the impact of Covid-19 was seen in the net profit of the
company which decreased by a high percentage and led to decrement in percentage
change in reserve and surplus in FY 2076/77 which was 11.80%.
xvi) Hence, The percentage change in total equity has increased by 24.11% in FY
2075/76 to 41.90% in FY 2078/79 due to effect of increment of share capital and reserve
and surplus in FY 2078/79.
xvii) There was negative percentage change in total non-current liabilities which was -
12.87% in FY 2075/76 which indicates that company had less financial obligation which
was Rs.32,290,495 in 2076 B.S. in comparison to Rs. 37,058,082 in 2075 B.S . Then the
percentage change in total non-current liabilities have increased by 12.97% in FY 77/78
to 16.57% in FY 2078/79 which indicates that company increased financial obligation to
be paid.
xviii) The rate of decrease in borrowing has increased by -10.30% in FY 2075/76 to -
100% in FY 2078/79 which indicates that company has decreased short term obligation
in form of borrowing in each successive fiscal years and did not borrow anything short
term borrowing in 2079 B.S.
xix) Likewise, percentage change in trade payables have increased by 46.16% in FY
2075/76 to 81.35% in FY 2078/79 due to increment in payable of creditors for expenses.
Also other financial liabilities have decreased by 46.13% in FY 2075/76 to 26.47% in FY
2078/79.
xx) Other current liabilities have also been decreased by 99.77% in FY 2075/76 to 1.52% in
FY 2078/79. This indicates that company was able to reduce short term debt.
xxi) Hence the percentage change in total current liabilities has increased by 4.28% in
FY 2075/76 to 13.66% in FY 2078/79 due to effect of increment of trade payable in FY
2078/79 in comparison to previous fiscal years.
xxii) Therefore, the percentage change in total equity and liabilities have increased by
16.90% in FY 2075/76 to 38.22% in FY 2078/79 due to effect of increment of total
equity, total non-current liabilities as well as of total current liabilities in FY 2078/79 in
comparison to previous fiscal years.
 14

2.1.2 Horizontal analysis of Income statement

Table 2. 2 Horizontal Analysis of Income Statement

PARTICULARS 2078/79 2078/77 2077/76 2076/75 2075/74

Revenue from 16.535% 36.501% -25.970% 22.974% 5,236,349,62

operations 9
Less: Excise duties 25.522% 18.836% -27.529% 17.095% 2,783,896,90
3
less: Cost of goods 2.214% 22.436% -23.069% 13.926% 1,244,324,25
sold 1
Less: 61.718% 76.537% -42.839% 14.113% 121,117,222
manufacturing
expenses

Gross Profit 11.767% 80.150% -23.937% 49.375% 1,087,011,25

3
Other operating - 7506.234 -45.951% 7807.789 22,441
income 92.682% % %
Total income from 8.451% 85.912% -23.961% 49.535% 1,087,033,69
operations 4
Employee benefit 11.754% 72.012% -12.599% 35.969% 135,769,509
expenses
Administration and - -30.729% -14.144% 68.333% 101,626,652
other expenses 22.875%
Selling and 41.740% 100.336% -51.403% 32.939% 341,648,615
distribution
expenses
Operating Profit 0.019% 108.811% -13.311% 60.563% 507,988,918

Depreciation and 7.317% 2.819% -10.909% 16.762% 47,767,049

 15

amortization
Finance costs - -43.126% 52.867% 8.299% 18,294,872
87.481%
Profit before Tax 0.824% 124.548% -15.264% 67.461% 441,926,997

Income Tax expenses

Current tax 1.476% 126.689% -22.936% 33.744% 154,378,139

Deferred tax - 468.022% - -46.895% -6,515,431

153.425 130.699
% %
Profit for the year 1.493% 123.037% - 82.628% 294,064,289
13.058%

1. The revenue from operation had increased in FY 78/77 from the previously
negative growth due to covid by 36.5%. But, looking at the percentage growth in
FY 79/78 it is 16.53% which is a decrease in the percent increase from the
previous year. This decrease is seen because the 36.5% increase is growth from
the negative growth from the FY 77/76 which was the covid hit year. But if
amount increase is observed then the company has been growing its operational
revenue every year except the covid hit period. This income also includes the
revenue from the Royalty.
2. The excise duty has also grown this year from the last year by 25.5% than the
18.83% last year. The covid hit period was the only period this amount decreased
other than that it has increased in all the years. This shows the increase in
operation or the sales of the product.
3. The cost of goods sold has increased just by 2.214% in FY 79/78 which can either
show that the operation has been more efficient or the inflation in price of
supplies is minimum. This amount was increased by 22.435% in FY 78/77 due to
 16

operation resumed this year meaning they had purchased more than the previous
year which is obvious.
4. The growth of MFG expenses has decreased from 76.537% to 61.718% of the FY
78/77 and 79/78 respectively. Although the percent increased had declined the
amount increase in huge from the last year which is Rs 8,60,78,299 from last
year’s Rs 6,04,66,572. So, the decrease in percent can be misleading of decrease
in amount which is not the point. The MFG expenses has increased by a big
percent which is concerning.
5. The gross profit has increased in FY 79/78 by 11.767% which is less than the
obvious increase of the FY 78/77 which has increase of 80.15% due to a decrease
of profit in the covid hit period. This year’s growth can be due to more increase in
Revenue from operation and less increase in COGS.
6. Other incomes has decreased this year shown by the -92.682% decrease from the
last years increase of 7506.234% form the covid hit period. This is the result from
decrease of Rent income from Rs 60,000 to Rs 16,000 and complete elimination
of Liabilities written of and gain from sales of no current assets of Rs 34,76,354
and Rs 6,83,72,030 respectively.
7. From this the total income from operation increased just by 8.451% in FY 79/78
which is extremely low from the 85.912% increase in FY 78/77. This is because
of massive gap in other income and the FY 78/77 increase shows the resume of
operation from the covid hit period. Rather than looking at this the increase in
revenue of operation would be a better outlook of the company.
8. Both the operating expenses in the name of Employee benefit expenses and
Selling and Distribution expenses has increased in two consecutive years. The
Employee benefit expenses ha increased by 11.754% in FY 79/78 and by
72.012% in FY 78/77. The selling and distribution expenses increased by 41.74%
in FY 79/78 and by 100.336% in FY 78/77. But the Administrative and has
decreased in 3 consecutive years. This year it decreased by 22.875% and last year
by 30.729%. This shows that the company has a huge expense in selling and
distribution expenses which means that the company has invested largely in trade
 17

and marketing promotion of the brand and the delivery expenses has also risen
mainly because of rise in the petroleum prices.
9. The company has shown a decrease in finance cost in 2 consecutive years by
87.481% in FY 79/78 and by 43.126% in FY 78/77 which shoes that the company
is paying less interest. This means the company has less liabilities to pay for
which means the company has done a better job in maintaining its liquidity every
year.
The profit before and after tax has increased this year with little rise in depreciation. The
company has been able to perform at the standard level expected by the stakeholders.
This shoes that the tax paid has also risen in amount too because the profit has risen too.

2.2 Vertical Analysis

Vertical analysis, also known as common-size analysis, is a method of financial statement

analysis that expresses each item on a financial statement as a percentage of a base
amount. The goal of vertical analysis is to evaluate the relative importance of different
items on a financial statement and to compare financial data across companies of
different sizes.
There are two main types of vertical analysis:
i) Balance sheet vertical analysis: It expresses each item on the balance sheet as a
percentage of total assets. This helps to understand the proportion of each item on the
balance sheet in relation to the total assets of the company.
ii) Income statement vertical analysis: It expresses each item on the income statement as
a percentage of net sales. This helps to understand the proportion of each item on the
income statement in relation to the net sales of the company.
Vertical analysis can be used to evaluate the relative importance of different items on a
financial statement, such as the proportion of a company's assets that are financed by debt
or equity, or the proportion of a company's revenue that is spent on expenses. It also
helps to compare financial data across companies of different sizes, by expressing all
items as a percentage of a common base, it helps to identify the trends and proportions of
financial data, which allows for comparison of companies of different sizes and
industries.
 18

2.2.1 Vertical analysis of Balance sheet

The vertical analysis of the Balance Sheet of Himalayan Distillery Ltd. is mentioned in
table 2 below.

Table 2. 3 Vertical Analysis of Balance Sheet

PARTICULARS 2078/79 2077/78 2076/77 2075/76 2074/75

ASSETS

NON-CURRENT ASSETS

a. Property, Plant and

Equipment 15.58% 22.25% 27.93% 43.11% 50.73%

b. Capital work-in-progress 0.00% 0.00% 0.00% 0.00% 1.38%

c. Intangible assets 0.03% 0.02% 0.04% 0.10% 0.16%

d. Right to use assets 0.36% 0.00% 0.00% 0.00% 0.00%

e. Financial Assets 0.00% 0.00% 0.00% 0.00% 0.00%

Advance for investments in

equity instruments 0.00% 0.00% 1.00% 1.42% 0.01%

f. Investments 3.17% 2.99% 0.00% 0.00% 0.00%

g. other non-current assets 0.63% 1.01% 1.01% 1.44% 1.69%

Total non-current assets 19.77% 26.27% 29.99% 46.07% 53.97%

CURRENT ASSETS

a. Inventories 6.49% 7.14% 21.35% 21.49% 31.98%

b. Financial Assets

Trade receivables 36.04% 22.39% 45.68% 28.72% 10.61%

 19

Cash and cash equivalents 34.97% 39.36% 0.61% 0.26% 0.45%

c. other current assets 2.73% 4.84% 1.74% 3.46% 2.99%

Total 80.23% 73.73% 69.37% 53.93% 46.03%

Non-current assets held for

sale 0.00% 0.00% 0.64% 0.00% 0.00%

Total current assets 80.23% 73.73% 70.01% 53.93% 46.03%

TOTAL ASSETS 100.00% 100.00% 100.00% 100.00% 100.00%

EQUITY

a. Equity

Share Capital 47.57% 37.57% 28.99% 27.47% 32.12%

b. Other equity 0.00% 0.00% 0.00% 0.00% 0.00%

Reserves and Surplus 41.54% 49.22% 33.77% 42.95% 34.22%

Total equity 89.11% 86.79% 62.76% 70.42% 66.34%

NON-CURRENT LIABILITIES

a. Financial Liabilities 0.00% 0.00% 0.00% 0.00% 0.00%

Borrowings 0.00% 0.00% 0.10% 0.27% 0.42%

Lease Payables 0.29% 0.00% 0.00% 0.00% 0.00%

b. Deferred tax liabilities 1.01% 1.54% 1.48% 2.03% 2.66%

Total Non-current
Liabilities 1.30% 1.54% 1.58% 2.30% 3.09%

CURRENT LIABILITIES
 20

a. Financial Liabilities

Borrowings 0.00% 0.06% 7.54% 11.59% 15.11%

Lease Payables 0.10% 0.00% 0.00% 0.00% 0.00%

Trade payables 2.45% 1.87% 5.69% 4.49% 3.59%

other financial liabilities 1.38% 1.51% 2.99% 3.83% 3.06%

b. other current liabilities 5.55% 7.55% 15.64% 6.86% 4.02%

c. Current tax liabilities(net) 0.12% 0.67% 3.80% 0.50% 4.80%

Total current liabilities 9.59% 11.67% 35.66% 27.28% 30.58%

TOTAL EQUITY AND

LIABILITIES 100.00% 100.00% 100.00% 100.00% 100.00%

Interpretation

After analyzing the Balance Sheet of Himalayan Distillery Ltd through vertical analysis,
following findings and interpretations are drawn:
i. The total non-current assets held 53.97% out of 100% of total assets in FY
2074/75 . where a high percentage was covered by PPE as the company had
invested huge amounts in PPE as compared to following years. The proportion
was reduced to 19.77% in FY 2078/79 as the company had invested less amounts
in PPE as compared to previous fiscal years
ii. The proportion of cash and cash equivalents in the FY 2077/78 and FY 2078/79
B.S. are exceptionally well in comparison to previous years.
iii. The proportion of trade receivables was 10.61% in FY 2074/75. The proportion of
trade receivables increased to 45.68% in the FY 2076/77 due to the impact of
Covid-19 in which the company let the customers to buy on credit.
iv. The total current assets held 46.03% out of 100% of total assets in FY 2074/75
due to the effect of the proportion of inventories in FY 2074/75 which was
 21

31.98% out of total assets. Out of the FY from FY 2074/75 to FY 2078/79, the
highest proportion of total current assets is 80.23% in FY 2078/79 due to more
effect of the proportion of trade receivable in FY 2078/79 which is 36.04% out of
total assets in comparison to other components of total current assets.
v. The total equity held 66.34% out of 100% total equity and liabilities in FY
2074/75, where a high percentage was covered by reserve and surplus. But the
proportion of total equity decreased to 62.76% in FY 2076/77 due to decrease in
reserve and surplus. This is because the Covid-19 has impacted the net profit of
the company.
vi. The proportion of equity in FY 2078/79 has increased to 89.11% .This indicates
that the company has increased finance towards the business from shareholders
rather than borrowing from others to finance.
vii. The proportion of total non-current liabilities is high in FY 2074/75 which is
3.09% as compared to the following fiscal years due to the effect of increment of
long term borrowing which was 5,072,834. However, the proportion of total non-
current liabilities in the FY 2078/79 is 1.30% where borrowing covered 0% which
implies that the company did not borrow any non-current debt.
viii. The total current liabilities held a high percentage which was 35.66% in
FY 2076/77 as compared to other fiscal years where a high proportion is of other
current liabilities i.e. 15.64%. It is due to the impact of Covid-19 which led the
company to buy goods/services on credit by creditor. However, the proportion of
total current liabilities in FY 2078/79 is 9.59% where borrowing covered 0%
which implies that the company did not borrow any short term debt.

In the FY 2078/79, the majority of proportion is held by total equity which is

89.11%, whereas total non-current liabilities and total current liabilities hold 1.30% and
9.59% respectively. This shows that the company raised its maximum capital from its
shareholders rather than borrowing from its creditors. From this we can say that the
company is capable of withstanding more leverage and is missing out on expansion
possibilities by taking debt. This indicates decrease in the use of borrowing but increasing
financing by relying on its equity and reserve and surplus by this company.
 22

2.2.1 Vertical analysis of income statement

Table 2. 4 Vertical Analysis of Income Statement

PARTICUL 2079 2078 2077 2076 2075
ARS
Revenue 7,583,029, 6,507,081, 4,767,060, 6,439,356, 5,236,349,62
from 044 210 471 932 9
operations
Less: Excise 46.47% 43.14% 49.56% 50.62% 2,783,896,90
duties 3
less: Cost of 18.00% 20.52% 22.88% 22.01% 1,244,324,25
goods sold 1
Less: 2.97% 2.143% 1.66% 2.15% 121,117,222
manufacturing
expenses
Gross Profit 32.794% 34.19% 25.91% 25.22% 1,087,011,25
3
Other 0.070% 1.12% 0.02% 0.03% 22,441
operating
income
Total income 32.864% 35.31% 25.93% 25.24% 1,087,033,69
from 4
operations
Employee 4.09% 4.27% 3.38% 2.87% 135,769,509
benefit
expenses
Administratio 1.03% 1.56% 3.08% 2.66% 101,626,652
n and other
expenses
Selling and 8.27% 6.80% 4.63% 7.05% 341,648,615
distribution
expenses
 23

Operating 19.47% 22.69% 14.83% 12.67% 507,988,918

Profit
Depreciation 0.72% 0.79% 1.04% 0.87% 47,767,049
and
amortization
Finance costs 0.03% 0.26% 0.64% 0.31% 18,294,872

Profit before 18.72% 21.64% 13.15% 11.49% 441,926,997

Tax
Income Tax
expenses
Current tax 4.83% 5.54% 3.3378% 3.21% 154,378,139

Deferred tax -0.04% 0.09% 0.0223% -0.05% -6,515,431

Profit for the 13.94% 16.00% 9.7947% 8.34% 294,064,289

year

We have taken proportion from the revenue from sales with each income and
expenses. Since it is a company that produces and sells the drinks, this would be a fair
evaluation to make because their main income comes from the sales.
1. The manufacturing expenses has the largest portion just like every year with
totaling almost 67% of the revenue from sales. This portion has remained similar
throughout the years. This means that the company has been losing its profit
mostly on its factories.
2. The other income portion has always been the least contributing factor in the total
income of the company which is a good point to the investors. This shows that the
incomes from other sources rather than the operating source are not huge.
3. The operating expenses in the company has grown its portion on the revenue
earned from the sales. From a consistent 11% for FY 76-78 to 13% in the FY
 24

79/78. This is a small portion increase from the last two FY. This increase is
mainly due to huge investments done in promotional activities and delivery cost.
4. The non-operating expenses, for the 3 consecutive years have a similar portion
compared to the revenue from the sales amounting to 1% of the total value. This
also shows the expenses are mostly from the operational aspect which are good
for a company. Hefty portion of non-operating expenses would give a sense of
having more interest expenses compared to the revenue from sales which means
the co has more liabilities to pay off and the money is not being utilized in the
proper way.
5. The profit before and after tax has decreased in portion of revenues from sales
even though the profit has increased in value. This shows the effect of growth of
operation expenses in the portion and value too because of high promotional
activities the company has invested on.

2.3. Liquidity ratio

The process of determining a company's capacity to pay its debts when they
become due is known as a liquidity study. To do this, a company's cash and cash
equivalents as well as its capacity to swiftly and cheaply convert assets into cash are
often examined.
Analysts employ a number of liquidity indicators, such as the current ratio, quick
ratio, and cash ratio. To evaluate if a corporation has adequate assets to fulfill its short-
term commitments, the current ratio compares a company's current assets to its current
liabilities. While the quick ratio is similar to the current ratio, it does not include
inventory as current assets since it might be difficult to swiftly dispose inventory. The
cash ratio, which contrasts a company's cash and cash equivalents to its current
obligations, is the most stringent method of measuring liquidity.
Analysts evaluate a company's liquidity in addition to these financial statistics by
taking into account its capital raising and credit availability. They also look for patterns
or warning signs of future issues in the cash flow and liquidity trends over time for a
corporation. Overall, liquidity analysis is a crucial tool for investors and analysts to
employ when assessing a firm's financial health since it may provide them information
 25

about how well a company can handle unforeseen occurrences and satisfy its short-term
commitments.

2.2.1. Working Capital

Working capital is a gauge of a business's capacity to pay its debts and short-term
liquidity. It is determined by subtracting a company's current liabilities from its current
assets, which include cash, accounts receivable, and inventory. A company with a
positive working capital has adequate short-term assets to pay for its short-term
obligations. On the other hand, a low level of working capital suggests that a business
would have trouble paying its short-term debts.
Formula : Working Capital = Current Assets - Current Liabilities
Table 2. 5 Working Capital of HDL from FY 2074/75 to FY 2078/79

Fiscal Year Current Assets(NPR) (A) Current Working Capital

Liabilities(NPR) (B) (NRS) (A-B)

2078/79 2,561,267,665 306,242,583 2,255,025,082

2077/78 1,702,916,473 269,426,907 1,433,489,566

2076/77 1,397,178,123 711,640,483 685,537,640

2075/76 757,012,003 382,864,202 374,147,801

2074/75 552,663,843 367,145,377 185,518,466

Figure 2. 1 Graph Showing Working Capital of HDL

Interpretation,
 26

With the exception of a tiny decline from 2077/78 to 2078/79, it seems that the
company's current assets have been rising throughout the previous five fiscal years. With
the exception of a modest decline from 2077/78 to 2078/79, the company's current
liabilities have likewise been rising during the previous five fiscal years.
As a consequence, throughout the previous five fiscal years, the company's
working capital (current assets less current liabilities) has increased. The firm is in a good
position to pay its short-term financial commitments, as shown by the working capital of
FY 2078/79, which is 2,255,025,082 NPR, which is greater than the previous year and
the highest in the past five years. This is good news for investors since it shows that the
firm has adequate liquidity and can pay its short-term financial commitments. Overall,
the company's financial condition seems to be improving over the past five fiscal years as
working capital is expanding.

2.2.2. Current Ratio

The capacity of a business to satisfy its short-term financial commitments is

gauged by the current ratio, a financial ratio. It is determined by dividing the current
assets by the current liabilities of the organization. A corporation is said to have a healthy
current ratio of 1:1, meaning that its current assets are equal to its current liabilities. If the
ratio is more than 1:1, the corporation is seen to be in a healthier financial situation since
it has more current assets than liabilities. If the ratio is less than 1:1, the business may be
in danger of being unable to pay its short-term debts since it has more current liabilities
than assets. The ideal current ratio to aim is 2:1.
Current Ratio = Current Assets/ Current Liabilities

Table 2. 6 Current Ratio of HDL from FY: 2074/75 to FY 2078/79

Fiscal Year Current Ratio (A/B)

2078/79 8.37

2077/78 6.33

2076/77 1.97
 27

2075/76 1.98

2074/75 1.51

Figure 2. 2 Graph of Current Ratio of HDL

Interpretation
The current ratio of the corporation seems to have varied throughout the last five
fiscal years. The firm has a good liquidity position with a current ratio of 8.37, which is
fairly high. This means that the company will be able to comfortably fulfill its short-term
financial commitments since its current assets are greater than its current liabilities by
more than 8 times.
The current ratio for 2077/2078 is 6.33, which is similarly healthy and shows the
firm has adequate liquid assets to fulfill its short-term obligations. The current ratio in
2076/77 is 1.97, which is less than ideal and suggests that the firm would struggle to
satisfy its short-term commitments if its current assets did not rise or fall. The current
ratio in 2075/76 is 1.98, which is somewhat better than in 2076/77 but still falls short of
the optimum ratio of 2:1. The current ratio in 2074/75 is 1.51, which is the lowest value
over the last five years and suggests that the firm would have trouble covering its
immediate commitments.
Investors should keep an eye on the company's liquidity situation and track the
movements in the current ratio over time since the company's current ratio has generally
fluctuated over the last five fiscal years.
 28

2.2.3. Quick Ratio

The quick ratio, commonly referred to as the acid-test ratio, is a financial ratio
that assesses a business's capacity to satisfy its immediate financial commitments using
its most liquid assets. It is computed by dividing a company's current liabilities by its
current assets, less its inventory. A quick ratio of 1:1, like the current ratio, is seen as
healthy, meaning that a corporation has enough liquid assets to cover its current
obligations. A ratio greater than 1:1 indicates that the business is in a better financial
position and has more liquid assets than liabilities. If the ratio is less than 1:1, the firm
has more current liabilities than liquid assets and may not be able to pay its short-term
obligations, especially if there is unsold inventory. Since inventory, which might be
difficult to sell quickly, is not included in the quick ratio, it is seen to be a more cautious
indicator of liquidity than the current ratio.
Quick Ratio = Quick Assets/ Current Liabilities
Where,
Quick Assets = Current Assets- Inventory- Prepayments- Current Tax Assets

Table 2. 7 Calculation of Quick Ratio for HDL

Fiscal Year 2078/79 2077/78 2076/77 2075/76

2,561,267,66 1,702,916,47 1,397,178,12

Total Current Assets 5 3 3 757,012,003

Inventory 207,327,472 164,953,755 426,104,882 30,163,2908

Prepaid Expenses 2,841,309 2,441,194 3,390,332 2,619,294

Quick Assets 2,351,098,88 1,535,521,52 967,682,909 452,759,801

 29

4 4

2,037,319,55 38,s286,420
Total Current Liabilities 2 269,426,907 71,164,0483 2

Quick Ratio 1.15 5.7 1.36 1.18

Figure 2. 3 Graph of Quick Ratio for HDL

Interpretation
The company's quick ratio over the past 5 fiscal years has fluctuated, with
2078/79 having a ratio of 1.15 which is lower than ideal. 2077/78 has a ratio of 5.7 which
is strong. 2076/77 and 2075/76 has a ratio of 1.36 and 1.18 which are lower than ideal.
The investors should monitor the trend of the quick ratio over time as a low ratio may
indicate difficulty in meeting short-term obligations.

2.2.4. Cash flow from operation to current liabilities

Cash flow from operations to current liabilities describes the money that a firm
generates from its core operations and uses to settle short-term obligations like accounts
payable, taxes, and other liabilities that are due within a year. This indicator is crucial for
analysts and investors to take into account when assessing a firm's financial health since
it shows how well the company is able to pay its short-term debts and preserve liquidity.
A company may be able to pay off its debts as they become due if it has a positive cash
flow from operations to current liabilities, however, a negative cash flow may signal
 30

financial pressure and probable trouble in fulfilling commitments. The formula to

calculate the ratio is:

Cash Flow from operation to current liabilities =

Cash Flow ¿ operation ¿
Average Current liabilities

Table 2. 8 Calculation of Average current liabilities

Fiscal Year Average Current Working

Liabilities

2078/79 287,834,745 (306242583+269426907)/2

2077/78 490,533,695 (269426907+711640483)/2

2076/77 547,252,342 (711640483+382864202)/2

2075/76 375,004,789 (382864202+36714377)/2

Table 2. 9 Calculation of Cash Flow from operation to Current Liabilities

Cash flow from operation to

Fiscal Year Current liabilities Working

2078/79 1.71 493239720/287834745

2077/78 2.70 1324634886/490533695

2076/77 0.50 273408792/547252342.5

2075/76 1.15 430739586/375004789.5

 31

Figure 2. 4 Graph Showing Cash Flow from Operations to Current Liabilities

Interpretation
The fiscal year cash flow from operations to current liabilities of 1.71 in FY
2078/79 suggests that the company may have difficulty paying off its short-term debts
and maintaining liquidity. This is a decrease from the previous year of 2.70 and higher
than the figures of 0.5 in 2076/77 and 2075/76. This could be a sign of financial strain
and potential difficulty in meeting obligations in the future. It's worth noting that this is a
single metric and should be considered alongside other financial indicators to gain a
holistic view of the company's financial health.

2.2.5. Account Receivable Turnover Ratio

The account receivable turnover ratio, also known as the accounts receivable
turnover, is a financial metric used to measure a company's efficiency in collecting its
accounts receivable. It is calculated by dividing the net credit sales by the average
accounts receivable balance during a specific period. A high account receivable turnover
ratio means that a company is effectively collecting its receivables and generating cash
quickly, while a low ratio may indicate that the company is struggling to collect on its
accounts receivable. This ratio is typically used by investors and analysts to evaluate a
company's liquidity and credit risk. A high ratio indicates that a company is able to
collect on its accounts receivable quickly and efficiently, which can provide a positive
indication of its financial health. Conversely, a low ratio may suggest that a company is
having difficulty collecting on its accounts receivable, which could signal financial stress
 32

Account Receivable Turnover Ratio = Net Credit Sales/ Average Accounts Receivable
Table 2. 10 Calculation of Account Receivable Turnover Ratio

Fiscal Year 2078/79 2077/78 2076/77 2075/76

476706047 643935693
Net Sales 7583029,044 6507081210 1 2

Beginning
Amount
Receivables 517130075 911576 403175744 127346457

Ending Account
Receivables 1150583354 517130075 911576944 403175744

Average
Account
Receivables 833856714.5 714353510 657376344 265261101

Account
Receivable
Turnover Ratio 9.09 9.11 7.25 24.28
 33

Figure 2. 5 Graph Showing Account Receivable Turnover Ratio of HDL

Interpretation
The table shows the net sales and account receivable turnover ratio for the fiscal
years 2078/79 to 2075/76. The net sales figures are showing an increasing trend over the
years and the account receivable turnover ratio is quite consistent over the years. It's
worth noting that the account receivable turnover ratio is quite high with an average of
9.09, which suggests that the company is effectively collecting its accounts receivable
and generating cash quickly. A high ratio indicates that a company is able to collect on its
accounts receivable quickly and efficiently which can provide a positive indication of its
financial health. This may indicate that the company is not facing any difficulty in
collecting its debts and is able to manage its liquidity well. From accounts receivable
turnover ratio of 24.28 in FY 2075/76, the ratio has significantly decreased to 9.09 in FY
2078/79. The company seems to have took a serious hit in this aspect in FY 2076/77 due
to the pandemic and has been struggling to recover to their previous position ever since.

2.2.6. Number of Days Sales In Receivables

The number of days sales in accounts receivable shows the number of days it took
on average to collect the company’s account receivables. The formula to calculate the
number of days sales in receivables is shown below.No. of Days Sales in Receivables =
Number of Days in Period/ Account Receivable Turnover Ratio
 34

Table 2. 11 Calculation of No. of Days Sales in Receivable

Year No. of Days Sales in Recievable Working

2079/78 39.6039604 360/9.09

2978/77 39.51701427 360/9.11

2077/76 49.65517241 360/7.25

2076/75 14.82701812 360/24.28

Figure 2. 6 No. of Days sales in recievaable of HDL for 4 years

Interpretation

Number of days sales in receivables indicates the number of days a company took
on average to collect its accounts receivable. In the year 2078/79 HDL nearly took about
40 days in collecting its accounts receivable and continued holding the receivables for a
greater number of days in the following years. In 2077/78, the company took about 40
 35

days to convert its account receivables into cash which is similar to the recent year. This
is a decrease in the ratio than the year 2076/77. The decrease in the number of days
indicates that HDL has been waiting for a short time to collect its receivables as
compared to the previous years which is a good signal. This means there is efficiency in
the operation to collect the receivables. We also see a sharp incline in the ratio in FY
2076/77 which is the covid hit period, it is due to the lockdown.However, it is not clear
that if the company has fully recovered to its original state, as there is mention of a sharp
increase in the number of days from 14 to 39.

2.2.7. Inventory turnover ratio

The inventory turnover ratio is a financial metric that measures a company's

efficiency in managing and selling its inventory by dividing the cost of goods sold by
average inventory. A high ratio indicates efficient inventory management and sales, while
a low ratio may indicate difficulty selling products or carrying excess inventory. This
ratio is important for investors and analysts to evaluate a company's inventory
management, sales efficiency and liquidity.
Formula: Inventory Turnover Ratio = Cost of Goods Sold/ Average Inventory

Table 2. 12 Calculation of Average Inventory

Fiscal Year Average Inventory Working

186140613.5 (207327472+164953755)/2
2078/79

295529318.5 (164953755+426104882)/2
2077/78

363868895 (426104882+301632908)/2
2076/77
 36

342816240 (301632908+383999572)/2
2075/76

Table 2. 13 Calculation of Inventory Turnover Ratio

Fiscal Year Inventory Turnover Ratio Working

2078/79 7 times (1364817677/186140613)

2077/78 4.52 times (1335253891/295529318.5)

2076/77 2.998 times (1090572082/363868895)

2075/76 4.14 times (1417605922/342816240)

Figure 2. 7 Inventory Turnover Ratio

Interpretation
The table shows the inventory turnover ratio for the fiscal years 2078/79 to
2075/76.The ratio for the fiscal year 2078/79 is 7 which is higher than the previous year
of 4.52 and higher than the ratio of 2.998 and 4.14 in the fiscal years 2076/77 and
2075/76 respectively. This suggests that the company is selling its inventory efficiently
and effectively managing it. A high inventory turnover ratio indicates that the company is
able to sell its products quickly and efficiently, which can provide a positive indication of
 37

its financial health and liquidity. It also suggests that the company is able to efficiently
manage its inventory levels, which can help to minimize carrying costs.

2.2.8. No of Days Sales in Inventory

The number of days sales in inventory is a financial metric that measures the
average number of days it takes a company to sell its inventory. It is calculated by
dividing the average inventory by cost of goods sold per day. A low number indicates
efficient inventory management and quick sales, while a high number may indicate
difficulty in selling products or carrying excess inventory. This ratio is important for
investors and analysts to evaluate a company's inventory management, sales efficiency,
and liquidity. The Formula to Calculate the ratio is :

360
No. of Days Sales in Inventory =
Inventory turnover ratio

Table 2. 14 Calculation of Number of days sales in inventory

No. of days' sales in

Fiscal Year inventory Working

2078/79 51.5 360/7

2077/78 79.7 360/4.52

2076/77 120.1 360/2.998

2075/76 87 360/4.14
 38

Figure 2. 8 Number of Days’ Sales in Inventory

Interpretation:
This table shows the number of days sales in inventory for the fiscal years
2078/79 to 2075/76. The number of days for the fiscal year 2078/79 is 51.5 which is
lower than the previous year of 79.7 and lower than the number of days of 120.1 which is
double the previous years’ because the co couldn’t sell its inventory due to Covid and 87
in the fiscal years 2076/77 and 2075/76 respectively. This suggests that the company is
selling its inventory efficiently and effectively managing it. A low number of days sales
in inventory indicates that the company is able to sell its products quickly, which can
provide a positive indication of its financial health and liquidity. It also suggests that the
company is able to efficiently manage its inventory levels, which can help to minimize
carrying costs.

2.2.9. Cash Operating Cycle

It measures the number of days and times taken by the company to purchase raw
materials and inventory and collect cash from the sales of the final goods. It is the
number of days between purchase and collection of cash. A high number of days sales in
receivable suggests that the company may have difficulty in collecting its debts quickly,
while a low number of days sales in inventory indicates efficient inventory management
and quick sales. The Cash Operating Cycle is calculated by adding the number of days'
sales in inventory to the number of days' sales in receivable and subtracting the number
 39

of days' payable. A high COC indicates a long time to convert investments into cash and
could signal financial stress. A lower COC is more favorable as it indicates efficient
working capital management and quick cash generation.It measures the efficiency of a
business on how quickly purchase is converted into cash.
Cash Operating cycle = No. of days’ sales in receivable + Number of days sales
in inventory
Table 2. 15 Calculation of COC

Fiscal Year 2078/79 2077/78 2076/77 2075/76

Number of Day's Sales in

Receivable 54.62 39.52 49.64 14.83

Number of Day's Sales in

Inventory 51.5 79.7 120.1 87.06

Cash Operating Cycle (in

days) 106.12 119.22 169.74 101.89

Figure 2. 9 COC of HDl for 4 years

Interpretation
 40

The table and graph shows the number of days sales in receivables, number of
days sales in inventory and the Cash Operating Cycle for the fiscal years 2078/79 to
2075/76. We can see that the COC is in a decreasing trend for the past two years which
means that management has been more efficient than the year on 77/76. The COC 106.12
days is interpreted as the company is able to purchase raw material and collect the cash
after sales in 106.12 days which is less than previous year of almost 120 days. The
decreasing trend of COC shows the efficiency of Company specially in converting the
purchase to inventory or stock, but the company has been inefficient in collecting the
cash in this year particularly. If they were efficient in collecting the cash this year too just
like the inventory, they would have been more efficient in COC.

2.2.10. Cash Conversion Cycle.

Cash Conversion Cycle is a metric that measures the amount of time a company
takes to convert its inventory into cash. It basically shows how fast a company can
convert its fund invested in production and sales to cash. 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.This metric takes into account how much time the company needs to sell its
inventory, how much time it takes to collect receivables, and how much time it has to pay
its bills.The CCC is one of several quantitative measures that help evaluate the efficiency
of a company’s operations and management. The Formula to calculate the CCC is given
below:
CCC = Cash operating Cycle - No. of Days Payable Outstanding
So, we need to Calculate the No. of days payable Outstanding which is done by
the Formula:
360
No. of Days Payable Outstanding =
Accounts Payable Turnover ratio

So, we again need to Calculate the Accouunt payable turnove ratio through the formula:

Purchase
Accounts payable turnover ratio =
Average Accounts Payables
 41

So at the end we need to calculate both Purchase and Aveage Accounts Payable.
Purchase is calculated by:
Purchase = Cost of Goods Sold + Ending Inventory - Opening Inventory
The tabulation in provided below with for all the calculation needed to calculate CCC:
Table 2. 16 Calculation of Purchase for 4 years
Fiscal Year COGS Opening Inventory Closing Inventory Purchase

2078/79 1364817677 164953755 207327472 1407191394

2077/78 1335253891 426104882 164953755 1074102764

2076/77 1090572082 301632908 426104882 1215044056

2075/76 1417605922 383999572 301632908 1335239258

Table 2. 17 Calculation of Average payable

Fiscal Year Opening Payables Closing Payables average

2078/79 43167987 78285481 60726734

2077/78 113601123 43167987 78384555

2076/77 63065724 113601123 88333423.5

2075/76 43147483 63065724 53106603.5

Table 2. 18 Calculation of Average Payable Turnover Ratio

Fiscal Year Purchase Average payables APTR

2078/79 1407191394 60726734 23.17251894

2077/78 1074102764 78384555 13.70298988

2076/77 1215044056 88333423.5 13.75520169

2075/76 1335239258 53106603.5 25.14262201

Table 2. 19 Calculation of No. of Days Payable Outstanding

 42

Fiscal Year No of Days Payable Outstanding Working

2078/79 15.53564379 360/23.17

2077/78 26.27163875 360/13.70

2076/77 26.17191723 360/13.755

2075/76 14.31831572 360/25/14

Table 2. 20 Calculation of Cash Conversion Cycle

Fiscal Year COC No of Days Sales outstanding CCC

2078/79 106.12 15.54 90.58

2077/78 119.22 26.27 92.95

2076/77 169.74 26.17 143.57

2075/76 101.89 14.32 87.57

Figure 2. 10 CCC of HDL for 4 years

Interpretation
 43

Lower cash conversion cycle often indicates that the company has the best
management since shorter the number of days, the companies is trying its best to be
efficient. Looking at the 4 years trend of HDL, it can be seen that it had the highest cash
conversion cycle of 143.57 days in the year 2076/77 as compared to the other years
which indicates that it took more time to convert its resources into cash. However, the
company has been trying its best to sell its inventory and decrease its cash conversion
rate in the year 2077-79 by 53 days. The effort to decrease CCC is commendable. The
90.58 days of CCC indicates that the can convert its fund invested in production and
sales to cash in that day. This also indicates the invested amount being hold up in
inventory for 90.58 days. The decrease in CCC is the result of decrease in COC aswell
because the company has lowered the days in payables outstanding, which the highere the
better.

2.4. Solvency Ratio

Solvency refers to a company's ability to meet its long-term financial obligations

such as repayment of debts that it has owed. Solvency analysis is prominently used to
measure the company’s ability to meet its long-term obligations which in general,
measures the size of the company's profitability and compares it to its obligations. An
investor or an analyst can gain insight into how likely the company would meet its debt
obligations by interpreting the solvency ratios. These ratios are different from the
liquidity ratios because they look into the firm’s ability to meet long term obligations as
opposed to short term obligations which are met by the liquidity ratios. This ratios are
mostly looked into by prospective lenders of the company. A solvency ratio indicates
whether a company’s cash flow is sufficient to meet its long term obligations and thus
measure its financial health. An unfavorable solvency ratio can indicate that the company
may default in its obligations and vice versa.

2.4.1. Debt to equity Ratio

Debt to equity ratio compares a company's total liabilities to its shareholders

equity which can be used to evaluate how much leverage the company is using. This can
be calculated by dividing the company’s total liabilities by shareholders’ equity. More
 44

significantly, this ratio expresses the ability of the shareholder equity to cover the
outstanding debts in the event of a business downturn. The ratio looks at how much of the
debt can be covered by equity if the company needed to liquidate. The higher the ratio,
the more debt a company has on its books, meaning the likelihood of default is higher.

Total Liabilities
Debt to Equity Ratio =
Total Equity

Table 2. 21 Calculation of Debt to Equity Ratio of HDL

Fiscal Year Total liabilities (A) Total Equity (B) DE ratio (A/B)

2078/79 347778693 2844609829 0.12

2077/78 305060046 2004594937 0.15

2076/77 743183949 252432296 0.59

2075/76 415154697 988486658 0.42

Figure 2. 11 DE ratio of HDL for past 4 years

Interpretation
 45

From the above table and figure we can see that the DE ratio was maximum at
2077/76 fiscal year at 0.59 which means that for every rupee the shareholder has invested
the company is financed by NPR 0.59 by creditors. We can see from the figure that the
ratio is in a decreasing path after the increase in the last two years which is a good sign.
This means that the company has decreased its payoffs than the shareholders equity. The
recent fiscal year saw a ratio of 0.12, decreasing from the already good ratio of 0.15 from
last year. This also shows the confidence of the shareholders in the company as they have
hugely invested in it. The ratio also means that the company can pay off the liabilities
easily with the shareholders equity as well. The Debt-to-Equity ratio of less than 1 over
the 5-year period means that the company primarily relies on its internal funds rather than
outside financing to finance its operations and assets.

2.4.2. Times Interest Earned

The times interest earned (TIE) ratio, also known as the interest coverage ratio,
measures how easily a company can pay its debts with its current income. This ratio is
also another medium of measuring the financial health of a company. This interest shows
the ability of the company to cover its interest fees through its pre-tax earnings. If a
business struggles to pay fixed expenses like interest, it runs the risk of going bankrupt.
In this way, the ratio gives an early indication that a business might need to pay off
existing debts before taking on more. The TIE specifically measures how many times a
company could cover its interest expenses during a given period. While it’s unnecessary
for a company to be able to pay its debts more than once, when the ratio is higher it
indicates that there’s more income left over. A higher discretionary income means the
business is in a better position for growth, as it can invest in new equipment or pay for
expansions. It’s clear that the company’s doing well when it has money to put back into
the business. The formula to calculate the ratio is:

Net Income + Income Tax+ Interes expeneses

Times Interest Earned =
Interest Expenses
 46

Table 2. 22 Calculation of Times Interest Earned

Fiscal Year Net Income (A) Income tax Interest TIE

expenses (B) expenses (C) (A+B+C)/C

2078/79 1056940486 362794362 2156551 659.34

2077/78 1041396766 366728249 17225869 82.74

2076/77 466916954 160176678 30287614 21.7

2075/76 537042746 203011567 19813073 38.35

Figure 2. 12 TIE of HDl for past 4 years

Interpretation
In the case of HDl, it has significantly improved its TIE by increasing its pre-tax
income and decreasing its interest expenses by lowering its obligations. The company
was able to jump its TIE by more than 8 times from 82.74 in FY 2078/77 to 659.31 in
FY 2079/78. Since the net income decreased in the covid hit period the company has
maintained its ability to increase its income every year for 2 years. The huge ratio means
that the company’s earnings are significantly greater than annual interest obligations
which shows that HDL is not running into financial trouble. The latest years’ 659.31 ratio
 47

means that the pretax income is 659 time more that the interest obligation of the company
which means the financial health of the company is extremely good.
2.4.3. Debt Service Coverage
Debt service coverage ratio is the measurement of a firm’s available cash flow to
pay current debt obligations and the ratio shows whether the company has enough
income to pay its debts or not. This ratio is applicable to corporate, government and
personal finance. Debt service coverage is calculated by dividing net operating income by
the total debt service, where net operating income is the difference between revenue and
certain operating expenses. This ratio shows the stakeholders of the company about the
ability to pay off the companys’ debt with the cash flow from the operation throughout
the year. The higher the ratio the better for the stakeholders, because it shows the ability
of cash flow to pay its interest as well as principal amount of the obligation.The formula
to calculate debt service coverage ratio is given below.

Debt service coverage =

Cashflow ¿ operation before interest∧tax ¿
interest∧princiapal payment
 48

Table 2. 23 Calculation of Cash flow from Operation before interest and tax
payment

Fiscal Year Net cash Interest Paid Income tax Cash flow
provided by (B) paid (C) from
operating operation
activities (A) before interest
and tax
payment
(A+B+C)

2078/79 493239720 2156551 377824353 873220624

2077/78 1,324,634,886 17,225,869 421,093,142 1762953897

2076/77 273,408,792 30,287,614 90,189,515 393885921

2075/76 424,323,152 19,700,655 257,155,626 701179433

Table 2. 24 Calculation of interest and principal payment

Fis Interest paid Retirement. Of Repayment of Interest and

cal (A) short term loan term loan (C) principal
Yea (B) payment
r (A+B+C)

2078/79 2156551 0 2156551 4313102

2077/78 17,225,869 145,000,000 2,282,898 164508767

 49

2076/77 30,287,614 56,000 1,562,761 31906375

2075/76 19,700,655 56000 14,579,247 34335902

Table 2. 25 Calculation of Debt Service Coverage

Cash flow from

operation before Interest and
Fiscal interest and tax principal Debt Service
Year payment payment Coverage Ratio

873220624 4313102
2078/79 239.9500942

1762953897 164508767
2077/78 10.72

393885921 31906375
2076/77 12.35

701179433 34335902
2075/76 20.42
 50

Figure 2. 13 Debt service Coverage of HDL

Interpretation
From the tables and figure above we can see that HDL has improved significantly
in covering its annual debt and interest expense from its operating cash flow only. The
ratio of 239. 95 times shows that the operating cash flow alone is almost 240 times more
than the annual debt including the interest. The tables show the company has improved
immensely in its sales revenue and has decreased its annual payment too. This is the best
thing for the companies’ stakeholders which ensure the ability of the company to pay off
its annual debt through its operation alone. Though the improvement is seen in this year
alone the improvement is huge, the stakeholders should have that in their mind too.

2.4.4. Cash flow from operation to capital expenditure ratio

Cash flow from operation to capital expenditure ratio measures the company’s
ability to acquire long term assets using free cash flow. This ratio often fluctuates as the
company’s business goes through the cycle of large and small capital expenditures. A
higher ratio indicates the business has a low requirement of using debt or equity to assist
its capital expenditure requirement. Similarly, a low ratio shows that the management
may be constrained by funding availability and so may require to retain fixed assets
longer than would normally be the case. Lower ratio also means that the management
may acquire assets through debt if the operational cash flow is not enough. So, the
shareholders would want to save their cash and invest in assets through the earning from
the operating income. The formula to calculate the ratio is:
 51

Cash Flow from Operation to Capital Expenditure =

Cash Flow ¿ operation−Total dividend paid ¿
Cash paid for Acquisition
Table 2. 26 Calculation of Cash Flow of operation to Capital Expenditure

Fiscal Cash flow Total Cash Paid Cash Flow from

Year from Dividend for Operations to
Operation Paid (B) Acquisitions( capital
(A) C) expenditure ratio
(A-B)/C

2078/7 21543072
9 493239720 4 34591411 8.03

2077/7 132463488 28061764

8 6 7 13162332 79.32

2076/7 20176861
7 273408792 6 19237336 3.72

2075/7 32757027
6 424323152 7 59314054 1.63

Figure 2. 14 Cash Flow from operation to capital expenditure for HDL

 52

Interpretation
As we can see from the table, the company's operating income per rupee invested
in assets has plunged to 8.03 in FY 2078/79 from 79.32 of Fy 2077/78 because in that
particular year the acquisition of capital assets were more than twice. This can be
interpreted as the efficiency of the company in operation activity has degraded as it
earned less this latest FY 78/79 than the previous FY 77/78. This ratio of 8.03 meant that
per rupee invested in assets gave the investors or the company NPR 8.03. The drop in the
ratio has also been due to the larger investment in acquisition of assets in FY 2078/79
which is more than 2.5 times than the investment last year. This ratio is still better than
the ratio of FY 2075/76 and FY 2076/77 which means the operating efficiency has
increased even though the investment was larger in FY 2075/76.

2.5. Profitability Ratio

The main objective of a company is to earn profit. Profit is both means and an end
to the company. It is very necessary to earn maximum profit for the successful running of
a business concern. Therefore, profitability shows the overall efficiency of the company.
Profitability ratios are the measure of its overall efficiency. Generally, profitability ratios
can be calculated in terms of a company's sales, investment, earning, dividend etc.

2.5.1. Gross Profit Margin

Gross profit ratio is also termed as gross profit margin. This ratio shows the
relationship between gross profit and net sales and it measures the overall profitability of
the company in terms of sales. The ascertainment of gross profit is completed by
reducing the cost of goods sold from sales. Gross profit margin is generally expressed in
percentage. It is calculated by using following formula:

Gross Profit Margin= (Gross profit/Net sales) * 100

 53

Table 2. 27 Calculation of Gross Profit Margin

Gross Profit
Fiscal Year Gross Profit (in Rs) Net Sales Margin

2075/76 1623724730 6439356932 25.216%

2076/77 1235053382 4767060471 25.908%

2077/78 2224945161 6507081210 34.193%

2078/79 2486754628 7583029044 32.794%

Figure 2. 15 Gross Profit Margins of HDL

Interpretation

Since gross profit margin measures how efficiently a company earns gross profit
from the sales of products of a company, the greater the gross profit margin, the more
efficient the company will be in order to cover other expenses. From the above table, it is
found that out of the five fiscal years, the highest gross profit margin earned was
34.193% in FY 2077/78 which implies that the company earned good gross profit after
deducting the cost of producing its goods and services from sales revenue generated.
 54

Gross profit margin kept on increasing up to fiscal year 2077/78, but in FY 2078/79 gross
profit margin decreased due to lesser gross profit in comparison to net sales.

2.5.2. Net Profit Margin

Net profit ratio is also termed as net profit margin. This ratio measures the overall
profitability of a business by establishing the relationship between net profit and net
sales. The amount after subtracting the whole operating expenses, income tax, interest,
etc. from the gross profit is known as net profit. To ascertain this ratio, the net income is
divided by net sales. This ratio is expressed in terms of percentage. It is calculated by
following formula:

Net Profit Margin= (Net income/Net sales)*100

Table 2. 28 Calculation of Net Profit Margin

Net Profit
Fiscal Year Net Sales (in Rs) Net Income Margin

2075/76 6439356932 537042746 8.340%

2076/77 4767060471 466916954 9.795%

2077/78 6507081210 1041396766 16.004%

2078/79 7583029044 1056940486 13.938%

Figure 2. 16 Net Profit Margin for HDL

 55

Interpretation

From the above table, it is found that net profit margin kept on increasing up to
FY 2077/78 but in the FY 2078/79, net profit margin decreases due to higher net sales
which is Rs.7,583,029,044 in comparison to net income which is Rs.1,056,940,486. The
highest net profit margin earned is 16.004% in the FY 2077/78. Likewise, the net profit
margin in FY 2078/79 is 13.938% which implies that the company was able to earn good
profit, better utilize total resources than previous fiscal years. However, in FY 2078/79,
the decrease in margin shows that the company is incurring higher expenses.

2.5.3. Return on Assets Ratio

This ratio measures the relationship between the total assets and net profit after
tax plus interest. It measures the productivity of the assets and determines how effectively
the total assets have been used by the company. The ROA ratio expresses how much
after-tax profit a firm makes for every dollar of assets it owns. This ratio is expressed in
percentage. It is calculated by following formula:

Return on assets ratio= (Net income + interest expenses, net of tax) / Average total assets

Table 2. 29 Calculation of ROA

Average Total
Fiscal Year Assets Net Income Interest Expense ROA

2075/76 1,302,144,877 537,042,746 19,813,073 42.765%

2076/77 1,699,628,800 466,916,954 30,287,614 29.254%

2077/78 2,152,635,614 1,041,396,766 17,225,869 49.178%

2078/79 2,751,021,752 1,056,940,486 2156,551 38.498%

 56

Figure 2. 17 Return on Assets

Interpretation:

From the above table and graph, it is found that return on assets are 42.765%,
29.254%, 49.178% and 38.498% respectively from FY 2075/76 to 2078/79. Out of return
on assets from these five fiscal years, the highest return on asset earned is 49.178% in FY
2077/78 due to more net income earned and interest expenses incurred in comparison to
other fiscal years. However, return on assets in FY 2078/79 is 38.498% which is 10.68%
lesser than return on assets in FY 2077/78. This implies that the company provided
10.68% less return to creditors and owners of capital in FY 2078/79 in comparison to FY
2078/79. This can also be explained by the significant increase in assets acquisition in
this year compared to previous year. Nevertheless, a 38% ROA is a good figure.

Return on Sales

The return on sales (ROS) ratio is used to assess a company's operational

efficiency. This ratio measures earnings before payments to creditors. Return on sales is a
measure of how efficiently a company turns sales into profits. This ratio is calculated by
following formula:

Return on sales= (Net income + interest expenses, net of tax) / Net sales

Table 2. 30 Calculation of ROS

Fiscal Year Net Income Interest Expense Net Sales ROS
 57

2075/76 537042746 19813073 6439356932.000 8.648%

2076/77 466916954 30287614 4767060471.000 10.430%

2077/78 1041396766 17225869 6507081210.000 16.269%

2078/79 1056940486 2156551 7583029044.000 13.967%

Figure 2. 18 Return On Sales

Interpretation:

From the above table and graph, it is found that return on sales are 8.648%, 10.430%,
16.269% and 13.967% respectively from FY 2075/76 to 2078/79. It implies that return on
sales kept on increasing up to FY 2077/78, then in FY 2078/79 return on sales decreased
due to higher net sales in comparison to net income and interest expenses incurred. The
highest return on sales earned is 16.629% in FY 2077/78 due to greater net income
earned and interest expenses incurred in comparison to net sales. Likewise, return on
sales earned is 13.967% in FY 2078/79 which is lesser in comparison to ROS of FY
2077/78 due to less interest expenses incurred in FY 2078/79 in comparison to interest
expenses incurred in FY 2077/78.
 58

2.5.4 Asset Turnover Ratio

The asset turnover ratio measures how efficiently a company uses its assets to generate
revenue. It is calculated by dividing net sales with the average total assets. The asset
turnover ratio may also be used to assess how well a company utilizes its assets to
generate revenue. It is calculated by dividing net sales by the average total assets. This
ratio is calculated by following formula:

Asset turnover ratio= Net sales / Average total assets

Table 2. 31 Calculation of Asset Turnover Ratio

Fiscal Year Average total assets Net Sales Asset turnover ratio

2075/76 1,302,144,877.5 6,439,356,932 4.945 times

2076/77 1,699,628,800.0 4,767,060,471 2.805 times

2077/78 2,152,635,614.0 6,507,081,210 3.023 times

2078/79 2,751,021,752.0 7,583,029,044 2.756 times

Figure 2. 19 Asset turnover ratio of HDL

Interpretation
 59

Asset turnover ratio measures how efficiently a company utilizes their assets in
order to generate revenue for the company. Hence the more asset turnover ratio, the
greater the company is utilizing their assets in order to generate revenue and vice-versa.
From the above table, it is found that out of the five years, the highest asset turnover ratio
earned was 4.95 times in FY 2075/76 which implies that in that year the company was
able to utilize their assets properly in order to generate revenue. Himalayan Distillery
Limited’s asset turnover ratio kept on increasing up to FY 2075/76, and then in FY
2076/77 asset turnover ratio decreased but the company was able to utilize assets that
increased asset turnover ratio in FY 2077/78. However, again the asset turnover
decreased in FY 2078/79 B.S which is 2.76 times, which implies that the company is not
able to utilize assets efficiently to generate revenue for the company in comparison to
previous year.

2.5.5. Return on Equity Ratio

The return on equity ratio measures the profitability of a business in relation to its
equity. Since shareholder’s equity can be calculated by subtracting the liabilities from
total assets, ROE can also be thought of as Return on Assets minus the liabilities. ROE is
calculated by subtracting preferred dividends from net income and then dividing it by
average shareholders’ equity.

ROE= Net income - preferred dividend / Average shareholders’ equity

Table 2. 32 Calculation of ROE

Fiscal Year Net Income Average shareholder’s equity ROE

2075/76 537,042,746 385,645,500 139.258%

2076/77 466,916,954 482,056,875 96.859%

2077/78 1,041,396,766 723,085,312 144.021%

2078/79 1,056,940,486 1,193,090,765 88.588%

 60

Figure 2. 20 Return on Equity of HDL

Interpretation

The table shown above shows a high percentage of return on equity which means
that the company is good at turning its equity financing into profit. We can see that the
highest ROE earned by the company is 144.021% which was in FY 2077/78, but it has
significantly decreased to 88.588% in FY 2078/79. The decreasing trend may not be a
good sign since it means that the company’s efficiency in converting its equity to profit is
decreasing. But as we can see from the table above, the ROE had decreased from
139.258% in FY 2075/76 to 96.859% in FY 2076/77 but increased again to 144.021% in
FY 2077/78. There is a fluctuation in the ROE ratio of the company over the years but a
five year average shows that the ROE of Himalayan Distillery Limited is 109.153%
which is a very good number.

2.5.6. Earnings per share

Earnings per share denote the monetary value of earning per outstanding share of
common stock of any given company. The higher the earnings per share the higher the
profitability of the company. It is a measure of the company’s profitability and is also
 61

often used to compute the company’s stock price. It can be easily calculated by
subtracting preferred dividends from net income and then dividing that amount by the
weighted average of the number of common shares outstanding.

Earnings per share= Net income - preferred dividend/ weighted average number of
common share outstanding

Table 2. 33 Calculation of EPS

Average number of
Fiscal Year Net Income Stockholders EPS

2075/76 537,042,746 3,856,455 139.258

2076/77 466,916,954 4,820,568 96.859

2077/78 1,041,396,766 7,230,853 144.021

2078/79 1,056,940,486 11,930,907 88.588

Figure 2. 21 EPS of HDL

Interpretation
 62

The high EPS of Himalayan Distillery Ltd tells us that it is a profitable company
and the shareholders are getting high values for their existing shares. The average of four
years of HDL’s EPS is Rs.117.182 which means that HDL has been performing well in
the past 4 years. But we can see a huge decline in the EPS from FY 2077/78 to FY
2078/79, which might suggest that it is not performing as well as it was last year.

2.5.7. Price to Earnings Ratio

Price to earnings ratio also known as PER or P/E ratio is the ratio of the
company’s share price to its earnings per share. It is a measure to understand if the
company’s shares are overvalued or undervalued. Normally a high PER suggests that its
shareholders are expecting a higher earning growth in the near future. It is calculated by
dividing the current market price by the company’s earnings per share.

Price/Earning ratio= Current Price/EPS

Table 2. 34 Calculation of P/E ratio

Current Price (as of 15th
Fiscal Year July) EPS P/E Ratio

2075/76 1,674 139.258 12.021

2076/77 1,600 96.859 16.519

2077/78 5,748 144.021 39.911

2078/79 3,040 88.588 34.316

 63

Figure 2. 22 Price Earning of HDL

Interpretation

Since the P/E ratio is used to understand if the company is overvalued or

undervalued, high P/E ratio is an indicator of higher earning growth in the future. Among
the given fiscal years, the highest EPS earned by the company was 39.911 times which
implied that in that fiscal year stock price may have overpriced or stock price may have
been excessively greater in comparison to earning per share. Likewise, the P/E ratio in
FY 2078/79 is 34.316 times which implies that investors are ready to pay Rs. 34.316 in
order to earn Rs.1 from this company.

As we can see from the table above, HDl’s P/E ratio has rapidly increased in the
past five fiscal years. Even though there is a slight decline in the recent P/E ratio
compared to last fiscal year, the P/E ratio is still pretty high which suggests that its
market price might increase in the near future. This is a good indicator to the prospective
shareholders and also to the existing shareholders as well.
 64

2.5.7. Dividend Payout Ratio

Dividend payout ratio also commonly referred to as DPR is the amount of

dividend paid to shareholders compared to the net income of the company. It is an
important measure that is often looked at by dividend investors meaning that people who
invest in companies solely to earn a dividend. A higher dividend payout ratio suggests
that the company pays out more dividends to the shareholders rather than holding onto
the cash as retained earnings. It is calculated by dividing the dividend per share by the
earnings per share.

Dividend payout ratio= DPS/EPS

Table 2. 35 Calculation of DPS

Fiscal Year Dividend Paid Number of Shareholders DPS

2075/76 335881261 3856455.000 87.096

2076/77 201768616 5784682.500 34.880

2077/78 280617647 8677023.750 32.340

2078/79 215430724 15184791.560 14.187

 65

Table 2. 36 Calculation of Dividend Payout Ratio

Dividend
Fiscal Year DPS EPS payout ratio

2075/76 87.096 139.258 62.543%

2076/77 34.880 96.859 36.011%

2077/78 32.340 144.021 22.455%

2078/79 14.187 88.588 16.015%

Figure 2. 23 Dividend Payout ratio

Interpretation

As we can see from the above table, the DPR has significantly decreased in the
past five years. We can understand that HDL has started to increase its retained earnings
compared to five years ago. The DPR for FY 2075/76 was 62.543% whereas for FY
2078/79 was 16.015%, which suggests that the dividend earned per share has rapidly
decreased so dividend investors are most likely to not invest in HDL. Generally a DPR of
30-50% is considered good, in regards to that the DPR for HDL for FY 2075/76 was
really good but it has become lower in the past 3 fiscal years bringing it down to 16.015%
in FY 2078/79.
 66

2.5.8.Dividend Yield Ratio

Dividend yield ratio measures the annual value of dividend received as compared
to the market value per share of the company. The dividend yield ratio measures how
much a company pays out in dividends each year relative to its stock price. It can be
calculated by following formula:

Dividend yield ratio= DPS/ Market price

Table 2. 37 Calculation of Dividend Yield Ratio

Fiscal Year DPS Market price (as of 15th July) Dividend yield ratio

2075/76 87.096 1674 5.203%

2076/77 34.880 1600 2.180%

2077/78 32.340 5748 0.563%

2078/79 14.187 3040 0.467%

Figure 2. 24 Dividend Yield Ratio

 67

Interpretation

From the above table and graph, it is found that the dividend yield ratio kept on
decreasing over the years. The highest dividend yield ratio earned is 5.203% in FY
2075/76 which implies that in that fiscal year the company paid a significant portion of
its earnings to shareholders in the form of dividends. Likewise, the dividend yield ratio in
FY 2078/79 is 0.467% which implies that investors just got 0.467% return on their
investment. This signifies that the company retained more of its earnings may be for
reinvestment or for other purposes. Since dividend yield ratio is one of measures that
many investors depend on to invest in a company as this ratio indicates the level of return
on their investment, so from this trend of dividend yield ratio it can be interpreted that
new investors might be skeptical to invest in a company due to decreasing trend of
dividend yield ratio. But however, dividend yield ratio is not only an indicator of stock’s
performance, investors should use dividend yield ratio in conjunction with other
financial ratios and metrics, as well as an analysis of the company's fundamentals, to
make a well-informed investment decision.

2.5.9. DuPont Analysis

DuPont analysis is a method of financial statement analysis that breaks down a

company's return on equity (ROE) into three components: net profit margin, asset
turnover, and equity multiplier. The DuPont analysis is used to identify the factors that
are contributing to a company's ROE and to evaluate a company's overall financial
performance.
The DuPont analysis equation is:
ROE = (Net Profit Margin x Asset Turnover) x Equity Multiplier
● Net Profit Margin: This component measures the company's profitability, by
calculating the net income as a percentage of sales. It is calculated by dividing the
net income by the total sales.
● Asset Turnover: This component measures the company's efficiency in utilizing
its assets to generate sales. It is calculated by dividing the total sales by the total
assets.
 68

● Equity Multiplier: This component measures the company's leverage, by

calculating the proportion of assets financed by debt. It is calculated by dividing
the total assets by the shareholder's equity.
The DuPont analysis can be used to identify the factors that are contributing to a
company's ROE, and to evaluate a company's overall financial performance. By breaking
down ROE into these three components, it can help analysts to identify the areas of a
company's operations that are contributing to its ROE, and to understand how changes in
net profit margin, asset turnover, and equity multiplier can affect ROE.
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡y= (𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒/ 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠) X (𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠/𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠)
X (𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠/ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑞𝑢𝑖ty)
Calculation:
We have the following extracts from Balance Sheet and Statement of Profit and Loss:
 69

Table : Calculation of Total Assets, Total Equity, Net Sales and Net Income for DuPont
Analysis for HDL

Particulars 2078/79 2077/78 2076/77 2075/76

Total Assets 3,192,388,522 2,309,654,983 1,995,616,245 1,403,641,355

Total Equity 2844609829 2004594937 252432296 988486658

Net Sales 7583029044 6507081210 4767060471 6439356932

Net Income 1056940486 1041396766 466916954 537042746

From the above data, we can obtain the following values of average total assets and
average equity which is shown in table 42 and 43 respectively.

Table : Average Total Assets for HDL

Fiscal Year Average Total Assets

2075/76 1302144877.500

2076/77 1699628800.000

2077/78 2152635614.000

2078/79 2751021752.000

Table : Average Total Equity for HDL

Average stockholders
Fiscal Year equity

2075/76 385645500.0

2076/77 482056875.0
 70

2077/78 723085312.5

2078/79 1193090765.5
 71

Now we calculate the Return on Equity for Dupont Analysis which is shown in table 44
below.

Table 43: Return on Equity for DuPont Analysis

Particulars 2078/79 2077/78 2076/77 2075/76

Profit Margin (a) 13.94% 16.00% 9.80% 8.34%

Asset turnover
2.756 3.023 2.805 4.945
ration (b)

Financial Leverage
2.31 3.53 3.38
(c) 2.98

Return on Equity
89% 144.17% 97% 139%
(a*b*C)

Interpretation

The asset turnover ratio measures how efficiently a company uses its assets to generate
revenue. Asset turnover ratio is one of component of ROE. Himalayan Distillery
Limited’s asset turnover ratio kept on increasing up to FY 2075/76, then in FY 2076/77
asset turnover ratio decreased but the company was able to utilize assets that increased
asset turnover ratio in FY 2077/78 The asset turnover decreased in FY 2078/79 which is
2.76 times, which implies that the company is not able to utilize assets efficiently to
generate revenue for the company in comparison to previous year. As per the ideal ratio
of asset turnover ratio 2.5 times , it is found that company was able to earn good asset
turnover ratio as in all fiscal year company has earned more than 2.5 times.

Net profit margin is another component of ROE. The highest net profit margin earned is
16.004% in the FY 2077/78. From the above table, it is found that net profit margin kept
on increasing up to FY 2077/78, but net profit margin decreases in FY 2078/79 which is
 72

13.94% which implies company incurred higher expenses so company earned lesser net
income in comparison to net sales.

Likewise, financial leverage is another third component of ROE. Financial leverage is an

indirect analysis of a company's use of debt to finance its assets. From the above table, it
is found that financial leverage earned by company was good in FY 2075/76 and FY
2076/77. However, it is found that there is decreasing trend of the financial leverage in
FY 2077/78 and FY 2078/79 which impacted on ROE of company .

The return on equity ratio measures the profitability of a business in relation to its equity.
From the above table, it is found that there is fluctuation in ROE over the years. The ROE
earned in FY 2075/76 was 139%, then the ROE decreases in FY 2076/77 which was
97%, again company was able to increase ROE in FY 2077/78 which was 144.17% being
the highest ROE earned among all the fiscal years. However, in FY 2078/79 the company
earned ROE of 89% which is less in comparison to FY 2077/78. It is because company
earned lower financial leverage as well as lower asset turnover ratio in FY 2078/79 in
comparison to previous fiscal years.
 73

CHAPTER 3: CONCLUSION AND RECOMMENDATION

Established on 24 July 1985, beginning as a private company registered under Company

Act 2021, Himalayan Distillery Ltd. (HDL) was converted into a Public Limited
Company on 3 November 2000. It is a well-known manufacturing company that thrives
on research, development, manufacturing, and marketing quality alcoholic beverages
responsibly and competitively. HDL’s performance over a period of time has underscored
its commitment to lead HDL offers a wide variety of best-in-class alcoholic products
manufactured through hi-tech processes. It has over 11.76 million liters of production
capacity per annum at its factory in Birgunj. HDL works closely with distributors,
wholesalers, and retailers to achieve a shared goal. Additionally, the distillery maintains
global standards by consistently producing high-quality products. In the fiscal year 2021-
2022, the company also experienced a growth in gross sales revenue, increasing from
5.2 billion to 7.5 billion over the past five years. Various ratios were calculated to analyze
the financial performance of HDL as follows.

3.1. Liquidity Ratio

i) HDL is in a good position to pay its short-term financial commitments, as shown by the
working capital of FY 2078/79, which is 2,255,025,082 NPR, which is greater than the
previous year and the highest in the past five years.

ii) HDL has a good liquidity position with a current ratio of 8.37, which is fairly high.
This means that the company will be able to comfortably fulfill its short-term financial
commitments since its current assets are greater than its current liabilities by more than 8
times.

iii) HDL’s quick ratio over the past 5 fiscal years has fluctuated, with 2078/79 having a
ratio of 1.15 which is lower than ideal. With respect to current ratio, this is a significant
difference which shows that the company has more current assets tied to inventories and
receivables.
 74

iv) The cash flow from operations to current liabilities of 1.71 in FY 2078/79 which is a
decrease from the previous year of 2.70. This suggests that the company may have
difficulty paying off its short-term debts and maintaining liquidity.

v) From accounts receivable turnover ratio of 24.28 in FY 2075/76, the ratio has
significantly decreased to 9.09 in FY 2078/79. The company seems to have taken a
serious hit in this aspect in FY 2076/77 due to the pandemic and has been struggling to
recover to their previous position ever since. This is also reflected in their No. of days’
sales in receivable which has increased from 14 days to almost 40 days in that time
period.

vi)The inventory turnover ratio for the fiscal year 2078/79 is 7 times which is higher than
the previous year of 4.52 times and higher than the ratio of 2.998 and 4.14 times in the
fiscal years 2076/77 and 2075/76 respectively. This suggests that the company is selling
its inventory efficiently and effectively managing it. This has also reflected in the No. of
Days sales in inventory which is slowly decreasing from 120 days in FY 2076/77 to 59
days in FY 2078/79

vii)The Cash Operating Cycle of 106.12 days in FY 2078/79 is interpreted as the

company is able to purchase raw material and collect the cash after sales in 106.12 days
which is less than previous year of almost 120 days in FY 2077/78. However, the figure
is still not good enough as it is nearly half the operating cycle. This has also resulted in a
higher cash conversion cycle of 90 days.

3.2. Solvency Ratio

i) The debt- to- equity ratio has stood fairly low in HDL and is in a decreasing trend. It
has decreased from 0.4 to 0.12. The Debt-to-Equity ratio of less than 1 over the 5-year
period means that the company primarily relies on its internal funds rather than outside
financing to finance its operations and assets. This also shows the confidence of the
shareholders in the company as they have hugely invested in it.
 75

ii) The ratio where HDL has shown remarkable growth is Times Interest Earned. The
company was able to jump its TIE by more than 8 times from 82.74 in FY 2078/77 to
659.31 in FY 2079/78. This has resulted due to continuous reduction of debt while
simultaneously being able to increase the Net Income. This has also resulted in increased
debt service coverage ratio. The ratio of 239. 95 times shows that the operating cash flow
alone is almost 240 times more than the annual debt including the interest.

iii) The company's operating income per rupee invested in assets has plunged to 8.03 in
FY 2078/79 from 79.32 of Fy 2077/78 because in that particular year the acquisition of
capital assets were more than twice.

3.3. Profitability Ratio

i)The gross profit margin of HDL is 32.794 in FY 2078/79. Even though it is a slight
decrease from the previous year, it is still a good margin. This shows that the company
has around a 30% markup in the cost of goods sold.

ii) HDL has a net profit margin of 13.938 % in FY 2078/79 which is lower than 2077/78.
The decrease in margin shows that the company is incurring a higher proportion of
expenses. This figure is also similar to the Return on Sales.

iii) The return on assets in FY 2078/79 is 38.498% which is 10.68% lesser than return on
assets in FY 2077/78. This implies that the company provided 10.68% less return to
creditors and owners of capital in FY 2078/79 in comparison to FY 2078/79. This can
also be explained by the significant increase in assets acquisition in this year compared to
previous year. Nevertheless, a 38% ROA is a good figure.

iv) The highest ROE earned by the company is 144.021% which was in FY 2077/78, but
it has significantly decreased to 88.588% in FY 2078/79. The decreasing trend may not
be a good sign since it means that the company’s efficiency in converting its equity to
profit is decreasing. But as we can see from the table above, the ROE had decreased from
139.258% in FY 2075/76 to 96.859% in FY 2076/77 but increased again to 144.021% in
FY 2077/78.
 76

v) The asset turnover ratio has been decreasing since FY 2075/76 even though the net
sales have been increasing after 2076/77. This can be explained by the increase in
average total assets. The company has been acquiring more and more assets resulting in
the percentage decline in the turnover.

vi) The Earning per Share of HDL is very fluctuating even though the net income is only
rising since FY 2076/77. This can be due to the rise in the number of common
shareholders. On the other hand, the P/E ratio has increased post pandemic showing that
the public does have confidence in the company.

vii) The DPR has significantly decreased in the past five years. We can understand that
HDL has started to increase its retained earnings compared to five years ago. The DPR
for FY 2075/76 was 62.543% whereas for FY 2078/79 was 16.015%. This can also
explain why debt to equity ratio is declining as the company is keeping more retained
earnings. The figure is also cohesive with the dividend yield ratio as it has also
significantly declined over the years from 5.20% in FY 2075/76 to 0.467% in 2078/79.

3.4. DuPont Analysis

i) The return on equity ratio measures the profitability of a business in relation to its
equity. From the above table, it is found that there is fluctuation in ROE over the years.
The ROE earned in FY 2075/76 was 139%, then the ROE decreases in FY 2076/77 which
was 97%, again company was able to increase ROE in FY 2077/78 which was 144.17%
being the highest ROE earned among all the fiscal years. However, in FY 2078/79 the
company earned ROE of 89% which is less in comparison to FY 2077/78. It is because
company earned lower financial leverage as well as lower asset turnover ratio in FY
2078/79 in comparison to previous fiscal years.
 77

3.5. Recommendation

Based on the above analysis, we have few recommendations to the Himalayan

Distillery Limited.

Looking at the current and quick ratio, we see that there is significant difference
between them showing that the company has more of its current assets tied to inventories
and receivables. This might not have been that big of an issue if the Cash Operating
Cycle was small but as we know, it is more than 100 days. We can also see that the cash
flow from operation to current liabilities ratio has also decreased. This means that the
company may face issues when needed to fulfill current obligations sooner than expected.
The company also seems to have been hit hard by the pandemic, liquidity crisis and
import ban. The number of days’ sales in inventory is 59 days while days’ sales in
receivables is 40 days. Further, the company also has a CCC of 90 days which means
their days’ sale outstanding is significantly low. So, our recommendation to the company
is to create the environment where the inventories are sold sooner and receivables are
also collected faster. Along with that, we recommend negotiating better terms with the
creditors to increase their days’ sales outstanding.

Next we have solvency ratios. The company seems to have a lesser and lesser
Debt to Equity ratio every year. On one hand, it might show that the investors are
confident to keep on increasing their equity; however, we can see that the company has
been continuously acquiring assets post pandemic. The company has one major product
that has majority market share and it has subsidiaries producing little to no income. In
such a scenario, taking lower debt and only trying to finance from equity is something to
keep an eye on. The company is earning higher sales post pandemic but it has kept most
as retained earnings. The Times Interest Earned has increased significantly due to lesser
debt while the Cash Flow from Operation to Capital Expenditure has plunged to 8.03 in
FY 2078/79 from 79.32 of Fy 2077/78 because in that particular year the acquisition of
capital assets were more than twice. We can also see that it is the current asset that is
taking the most weightage while investment is 6% and PPE is 15%. We can see that more
than 35% of assets are receivable. This might show the revenue being high but having so
 78

much in receivable is risky especially considering the projected recession in 2023 AD.
So, we recommend HDL to decrease their receivable cycle and not give out more on
receivables when the shareholders are not being given much dividend. The company
should either obtain more debt to balance the receivables or else invest rather than using
it all to buy inventory and selling so much in credit.

HDL has a 32% gross profit margin while 13% net profit margin. The statements
show that most of the non-operating expenses are selling and distribution expenses. The
company needs to see their marginal return on selling expenditure and try not to incur
more expenses than required in this aspect. Both the ROA and ROE have decreased but
ROE has decreased by more than 40%. As mentioned earlier, the equity is increasing
rapidly due to higher retained earnings while sales are only increasing at a steady pace.
The asset turnover ratio is also decreasing due to the higher proportion of receivables
accumulation post pandemic. This might show the investors that the company’s return is
not good enough so looking at these ratios as well, we recommend HDL to try and
decrease their receivables and inventories while also decreasing their equity financing by
some extent at least until the liquidity crunch in the market is resolved and the
receivables are recovered faster. The common shareholders still have a high confidence
in the company as the P/E ratio is increasing; however, the decreasing EPS and slowing
dividend payment along with decreasing returns might make the public skeptical,
affecting the share price. Thus, the company needs to be careful on the assets
accumulation in the form of inventories and receivables.
 79

APPENDIX
Balance Sheet

PARTICULARS 2079 2078 2077 2076

ASSETS
NON-CURRENT
ASSETS
a. Property, Plant 497,483,67 513,811,75
557,370,760 605,043,243
and Equipment 1 2
b. Capital work-in-
44,596
progress
c. Intangible assets 866,938 451,264 874,220 1,392,967
d. Right to use
assets 11,477,106
e. Financial Assets
Advance for
investments in 20,000,000 20,000,000
equity instruments
101,100,00
69,000,000
f. Investments 0
g. other non-current
23,430,898 20,193,142 20,193,142
assets 20,193,142
Total non-current 631,120,85 606,738,51
598,438,122 646,629,352
assets 7 0
CURRENT ASSETS
207,327,47 164,953,75
426,104,882 301,632,908
a. Inventories 2 5
b. Financial Assets
1,150,583,3 1,150,583,3 1,150,583,35
Trade receivables 54 54 4 1,150,583,354
Cash and cash 1,116,268,7 909,119,07
12,136,959 3,594,383
equivalents 77 8
c. other current 111,713,56
34,631,368 48,608,968
assets 87,088,062 5
1,702,916,4 1,623,456,56
1,504,419,613
Total 73 3
 80

Non-current assets
12,727,970
held for sale
2,561,267,6 1,702,916,4 1,636,184,53
757,012,003
Total current assets 65 73 3
3,192,388,5 2,309,654,9 1,995,616,24
1,403,641,355
TOTAL ASSETS 22 83 5

EQUITY AND
LIABILITIES
EQUITY
a. Equity
1,518,479,1 867,702,37
578,468,250 385,645,500
Share Capital 56 5
b. Other equity
Reserves and 1,326,130,6 1,136,892,5
673,964,046 602,841,158
Surplus 73 62
2,844,609,8 2,004,594,9 1,252,432,29
988,486,658
Total equity 29 37 6
NON-CURRENT
LIABILITIES
a. Financial
Liabilities
Borrowings 12,195 1,956,030 3,765,256
Lease Payables 9,138,595
b. Deferred tax
35,620,944 29,587,436 28,525,239
liabilities 32,397,515
Total Non-current
35,633,139 31,543,466 32,290,495
Liabilities 41,536,110
CURRENT
LIABILITIES
a. Financial
Liabilities
Borrowings 1,470,430 150,395,638 162,710,868
Lease Payables 3,100,775
Trade payables 78,285,481 43,167,987 113,601,123 63,065,724
other financial 44,099,727 34,869,420 59,718,139 53,765,058
 81

liabilities
b. other current 177,060,97 174,416,37
312,024,491 96,346,426
liabilities 1 9
c. Current tax
15,502,691 75,901,092 6,976,126
liabilities(net) 3,695,629
Total current 306,242,58 269,426,90
711,640,483 382,864,202
liabilities 3 7
TOTAL EQUITY AND 3,192,388,5 2,309,654,9 1,995,616,24
1,403,641,355
LIABILITIES 22 83 5
 82

Income Statement

PARTICULARS 2079 2078 2077 2076

7,583,029, 6,507,081, 4,767,060, 6,439,356,
Revenue from operations 044 210 471 932
3,523,909, 2,807,412, 2,362,432, 3,259,816,
Less: Excise duties 081 800 221 063
1,364,817, 1,335,253, 1,090,572, 1,417,605,
less: Cost of goods sold 677 891 082 922
225,547,6 139,469,3 79,002,78 138,210,2
Less: manufacturing expenses 57 58 6 17

2,486,754, 2,224,945, 1,235,053, 1,623,724,

Gross Profit 628 161 382 730
72,955,11
Other operating income 5,339,132 8 959,149 1,774,587
2,492,093, 2,297,900, 1,236,012, 1,625,499,
Total income from operations 760 279 531 317

310,158,4 277,536,1 161,346,7 184,604,8

Employee benefit expenses 78 79 35 63
78,468,63 101,742,0 146,875,2 171,070,7
Administration and other expenses 7 75 15 12
626,746,7 442,180,8 220,719,8 454,182,6
Selling and distribution expenses 44 09 43 09
1,476,719, 1,476,441, 707,070,7 815,641,1
Operating Profit 901 216 38 33
54,828,50 51,090,33 49,689,49 55,773,74
Depreciation and amortization 1 2 2 7

17,225,86 30,287,61 19,813,07

Finance costs 2,156,551 9 4 3
Profit before Tax 1,419,734, 1,408,125, 627,093,6 740,054,3
 83

848 015 32 13

Income Tax expenses

366,017,7 360,694,7 159,114,4 206,471,5
Current tax 91 41 81 76

Deferred tax -3,223,429 6,033,508 1,062,197 -3,460,009

1,056,940, 1,041,396, 466,916,9 537,042,7
Profit for the year 486 766 54 46

Other comprehensive income

Items that will not be reclassified to
profit or loss
i) Remeasurement of Defined Benefit
Obligations
ii) Income tax credit/(charge) relating
to these items

Total other comprehensive income

Total comprehensive income for the 1,056,940, 1,041,396, 466,916,9 537,042,7
year 486 766 54 46
 84

Cashflow

Particulars 2078/79 2077/78 2076/77

A. Cash Flow From
Operating Activities
1,408,125,0 627,093,
Profit before tax 1,419,734,848 15 632
Adjustments for :
Depreciation and 49,689,4
amortisation 54,828,501 51,090,332 92
(Gain)/loss on sale of
property, plant and
equipment (net) -1,994,832 -1,028,367 -7,334
(Gain)/loss on sale of non
current asset - held for sale -68,372,030
Bad Debts 46,996 157,394
30,287,6
Interest expense 2,156,551 17,225,869 14
Liabilities written back -3,476,354 -871,815
Operating profit before 1,403,611,4 706,348,
working capital changes 1,474,725,069 61 983
Adjustments for :
-
(Increase)/decrease in 124,471,
inventory -42,373,717 261,151,127 974
(Increase)/decrease in -
trade receivables, loans 494,580,
and other assets -605,590,020 317,317,676 994
Increase/(decrease) in
trade payables
other liabilities and - 276,302,
provisions 44,303,240 236,352,236 292
Cash generated from 871,064,572 1,745,728,0 363,598,
 85

operation 28 307
-
- 90,189,5
Income tax paid -377,824,853 421,093,142 15
Net cash from operating 1,324,634,8 273,408,
activities 493,239,720 86 792
B. Cash Flow From
Investing Activities
Purchase of property, plant -
and equipment & 19,237,3
intangible assets -34,591,411 -13,162,332 36
Sale of property, plant and
equipment 2,166,749 2,122,124 551,806
Sale of non-current assets
held for sale 81,100,000
Investment in equity
instument of subsidiaries -32,100,000 -49,000,000
Net cash generated from / -
(used in) investing 18,685,5
activities -64,524,662 21,059,792 30
C. Cash Flow From
Financing Activities
Increase/(decrease) in short -
term loan 145,000,000 56,000
-
1,562,76
Repayment of term loan -1,482,625 -2,282,898 1
Payment of Lease Liabliity -2,495,459
-
- 201,768,
Dividend paid -215,430,724 280,617,647 616
-
30,287,6
Interest paid -2,156,551 -17,225,869 14
Net cash generated from / -221,565,359 - -
 86

(used in) financing 233,562,

activities 445,126,414 991
Net increase / (decrease) in 21,160,2
cash and cash equivalents 207,149,699 900,568,264 71
-
Cash and cash equivalents 12,609,4
at the beginning of the year 909,119,078 8,550,814 57
Cash and cash equivalents 8,550,81
at the end of the year 1,116,268,77 909,119,078 4
Cash and cash equivalents
comprise of:
Cash on hand 156,141 23,358 12,483
Balance with banks in 12,124,4
current accounts 1,116,112,636 909,095,720 76
-
3,586,14
Bank overdraft 5
8,550,81
Total 1,116,268,777 909,119,078 4