21383838 financial-analysis-of-selected-textile-companies

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  • 1. “FINANCIAL STATEMENT ANALYSIS OF SELECTED TEXTILE COMPANIES IN PAKISTAN” ACKNOWLEDGMENTFinally by the grace of Al-mighty Allah I did mange to finish my final project. Ihave studied “ The Analysis of Financial Statements of Selected TextileCompanies”. It was a healthy learning experience and I ‘m very thankful to myproject supervisor Dr Kashif-ur-Rehman for his sincere gratitude and technicalguidance through out the project. I am also very thankful to my friends speciallyMohsin Rameez Awan, & Ali Abbas Naqvi who supported me through out theproject and gave me the moral encouragement.
  • 2. “This thesis is dedicated to my parents”
  • 3. TABLE OF CONTENTSACKNOWLEDGMENT.................................................................................................................................ITABLE OF CONTENTS.............................................................................................................................IIITABLE OF FIGURES.................................................................................................................................IVTABLE OF TABLES.....................................................................................................................................VEXECUTIVE SUMMARY..........................................................................................................................VIINTRODUCTION........................................................................................................................................IX 1.1- TEXTILE INDUSTRY IN PAKISTAN........................................................XI 1.2- FINANCIAL STATEMENT AND RATIO ANALYSIS..............................XIII 1.3- RESEARCH QUESTIONS.......................................................................XV 1.4- OBJECTIVES........................................................................................XVII 1.5- SIGNIFICANCE OF THE STUDY.........................................................XVIII 1.6- SCOPE AND LIMITATIONS...................................................................XIX 1.7- DEFINITION OF THE TERMS.................................................................XXLITERATURE REVIEW.........................................................................................................................XXI
  • 4. RESEARCH METHODOLOGY AND DESIGN................................................................................XXIX 3.1- METHOD OF THE STUDY...................................................................XXIX 3.2- DATA....................................................................................................XXIX 3.3- SAMPLING PROCEDURE...................................................................XXX 3.4- RESEARCH INSTRUMENT..................................................................XXX 3.5- FINANCIAL TOOLS..............................................................................XXX 3.6-TREATMENT OF THE DATA................................................................XXXANALYSIS AND INTERPRETATION OF DATA............................................................................XXXI 4.1 COMMON-SIZE INCOME STATEMENT...............................................XXXI 4.2 COMMON-SIZE BALANCE SHEET.................................................XXXVIII 4.3 INTERPRETATION OF PROFITABILITY RATIOS...............................XLIV 4.4 INTERPRETATION OF LEVERAGE RATIOS..........................................LII 4.5 INTERPRETATION OF LIQUIDITY RATIOS...........................................LVI 4.6 INTERPRETATION OF EFFICIENCY RATIOS.......................................LIX 4.7 INTERPRETATION OF ASSET UTILIZATION RATIOS.......................LXIII 4.8 CASH FLOW ANALYSIS......................................................................LXVICONCLUSION AND RECOMMENDATION....................................................................................LXIX 5.1 SHORT-TERM LIQUIDITY.....................................................................LXX 5.2 CASH FLOW ANALYSIS.......................................................................LXX 5.3 RETURN ON INVESTED CAPITAL......................................................LXXI 5.4 ASSET UTILIZATION............................................................................LXXI 5.5 OPERATING PERFORMANCE AND PROFITABILITY.......................LXXIIBIBLIOGRAPHY................................................................................................................................LXXIII TABLE OF FIGURESFIGURE 4. 1..........................................................................................................................................XXXIIFIGURE 4. 2.........................................................................................................................................XXXIVFIGURE 4. 3.......................................................................................................................................XXXVIIFIGURE 4. 4 (A)..................................................................................................................................XXXIXFIGURE 4. 4 (B)..................................................................................................................................XXXIXFIGURE 4. 5 (A)........................................................................................................................................XLIFIGURE 4. 5 (B)........................................................................................................................................XLIFIGURE 4. 6 (A).....................................................................................................................................XLIIIFIGURE 4.6 (B)......................................................................................................................................XLIVFIGURE 4. 7.............................................................................................................................................XLVFIGURE 4. 8..........................................................................................................................................XLVII
  • 5. FIGURE 4. 9...................................................................................................................................................LFIGURE 4. 10................................................................................................................................................LIFIGURE 4. 11..............................................................................................................................................LVFIGURE 4.12..............................................................................................................................................LIX TABLE OF TABLESTABLE 4.01………………………………………………………………………..…………..……..24TABLE 4.02…………………………………………………………………..…..…………………..26TABLE 4.03………………………………………………………………………………….………..28TABLE 4.04………………………………………………………………………………...….……..30TABLE 4.05…………………………………………………………………………….…………….32TABLE 4.06……………………………………………………………………………….………….34TABLE 4.07………………………………………………………………………………….……….36TABLE 4.08……………………………………………………………………………….………….38TABLE 4.09………………………………………………………………...………………………..40TABLE 4. 10…………………………………………………………………………………………42TABLE 4. 11……………………………………………………………………………………....…43TABLE 4. 12……………………………………………………………………………………....…44TABLE 4. 13……..………………………………………………………………………………..…45
  • 6. TABLE 4. 14…………………………..…………………………………………………………..…46TABLE 4. 15………………………………………………………………………………….……...47TABLE 4. 16…………………………………………………………………………………………48TABLE 4. 17…………………………………………………………………………………………48TABLE 4. 18…………………………………………………………………………………………49TABLE 4. 19…………………………………………………………………………………………50TABLE 4. 20…………………………………………………………………………………………51TABLE 4. 21…………………………………………………………………………………………52TABLE 4. 22…………………………………………………………………………………………52TABLE 4. 23…………………………………………………………………………………………53TABLE 4. 24…………………………………………………………………………………………54TABLE 4. 25…………………………………………………………………………………………55TABLE 4. 26…………………………………………………………………………………………56TABLE 4. 27…………………………………………………………………………………………57TABLE 4. 28…………………………………………………………………………………………58 EXECUTIVE SUMMARY
  • 7. Pakistans garment and textile are two principal industries contributing more than60 per cent to total export earnings, accounting for 46 percent of totalmanufacturing and employing 38 percent of the manufacturing labor-force.Exports According to official data, textile manufactures exports increased by23.31 percent to US$6,417.83 million during the period July-May 2002-03 ascompared to the corresponding period of previous year. Their share in overallexports stood at 64.88 percent as against 63.70 per cent during July-May 2001-02, thus further reducing the contribution of other categories to exports. Solooking to the increasing trend researcher is doing financial statement analysis ofselected textile companies in Pakistan. As financial statement analysis providedeep insight to the financial position of a company, which is favorable for presentand its future of its existence. Financial ratios are widely used to develop insightsinto the financial performance of companies’ by both the evaluators’ andresearchers’. The firm involves many interested parties, like the owners,management, personnel, customers, suppliers, competitors, regulatory agencies,and academics, each having their views in applying financial statement analysisin their evaluations.This study is about the financial statements analysis of the selected companies inthe textile industry in Pakistan. The study is descriptive in nature. The researcherhas utilized the descriptive method in acquiring information for evaluating thefinancial performance of the selected textile companies. The research data issecondary in nature as for this particular research. The data is collected for theconsecutive five years i.e. from 1998 to 2002, in the form of annual reports fromthe registrar office, containing; balance sheet, income statement and profit & lossaccount. The sample for this particular research is three different companies;(Colony) Sarhad Textile Mills LTD, D.M. Textile Mills LTD, Al- Qadir Textile Mills
  • 8. LTD. This research is based on secondary source of data and consists of annualreports, articles, web sites, and books.By analyzing financial statements the findings are really interesting that Al-QadirTextile Company is performing much better than the industry norms, where it hasfaced several problems in 1998 and 1999. Al-Qadir has the highest ROA andROE for the year 2000. The results and data show that Al-Qadir is highlyfinanced through debt and has improved the debt position, but still it is high thecompany needs to increase its shareholders equity. D.M have a negative net-profit margin for 1998 and 1999. D.M shows a good ROA for the year 2001 andover the years company has reduced its debt burden from 93% to 64%. D.M’scurrent ratio is below one, which means on average 0.46 is its current ratioshowing that company has 0.45 paisas in current assets for every Rs.1 in currentliabilities. D.M has continuous negative ratio due to high credit sales. D.M areenjoying high inventory turnover where (Colony) Sarhad is below the industryaverage. (Colony) Sarhad is having negative results for the consecutive fiveyears; high cost of sales is being the reason for this result. (Colony) Sarhad hasdebt of average 72%. (Colony) Sarhad shows variability in its current ratio.Whereas (Colony) Sarhad has positive ratio of net working capital to total assets,this is because of more assets. (Colony) Sarhad is in a critical situation where itshould try to increase its sales or reduce its cost of sales.
  • 9. INTRODUCTIONFinancial Statements are useful because they provide information that allowsinvestors and creditors to make better decisions. However, because of selectivereporting of economic events as well as non-comparable accounting methodsand estimates, financial statements are only an approximation of reality. Inaddition, because of the tendency to delay accounting recognition, financialstatements also tend to lag reality.A primary objective of financial analysis is to determine comparable risk andreturn of companies and their securities. Financial statements include the • Balance Sheet • Income Statement • Cash Flow StatementThe financial statements are interrelated and should be used and analyzedtogether. Methods of financial statement analysis may be divided into twogeneral categories, internal analysis and comparative or external analysis.Internal analysis uses figures from the financial statements of any one date orperiod to gain an understanding of the customer. Comparative analysis may beused to determine trends when two or more successive sets of figures arereviewed, or may be used to evaluate a given companys financial statementagainst industry standards.
  • 10. These methods may be used separately or in combination. They are part of thetools that enable experienced credit professionals to reach a credit decision.Financial statements should be spread and analyzed, with appropriate ratios andflows calculated as an aid in the customer evaluation. As an important first stepin internal analysis, the financial statement should be examined for validity andgeneral correctness. After the statement has been accepted as valid andreasonably accurate, ratios should be calculated and the figures analyzed.Internal analysis calls for an examination of items within a single financialstatement for the purpose of judging their significance in relation to the capital ofthe company, its method of operation and conditions prevailing within theindustry. The major tools for internal analysis are balance sheet ratios and aworking knowledge of the line of business including the method of operation andseasonal influences.Ratios are mathematical aids for appraisal and comparison of financialstatements. They are used to supplement currency amount inspection, toexamine inter-item relationships and to compare a specific companysperformance against its industry standard.The use of ratios reduces the influence of currency size on analysis since thesecomparisons are expressed as a percentage, fraction, decimal, or rates ofturnover. Only the combinations that could be made of the items appearing inboth schedules limit the number of ratios that can be developed from the balancesheet and income statement. The type of operation represented by the accountand the nature of the risk has an important bearing on what ratios are to becomputed and studied. This analysis compares financial information generatedfor five periods.
  • 11. 1.1- TEXTILE INDUSTRY IN PAKISTAN Since its creation in 1947, the Pakistan Textile Industry has grown into thelargest and most significant economic sector in the country. The textile industrynow contributes 65% of the total exports to the national economy, 46% of its totalmanufacturing, and 38% of its total employment.The Textile Industry will continue to play an important role in the economy ofPakistan as the country is one of the four largest cotton growers in the world andavailability of large quantity (around 10 million bales per annum) of reasonablequality is the basis of the development and sustenance of the local TextileIndustry. The Pakistan Textile Industry is also very labor intensive with low costsof manufacturing and raw materials.Textile products are a basic human requirement next only to food. In spite of thegovernment’s efforts to diversify export as well as industrial base, the textileremains the backbone of industrial activity in the country. Its share in theeconomy, in terms of GDP, exports, employment, foreign exchange earnings,investment and contribution to the value added in industry; make it the singlelargest determinant of the growth in manufacturing sector with 46 percent sharein overall manufacturing activity. The demand for textiles in the world is around$18 trillion. Pakistan has emerged as one of the major cotton textile productsupplier in the world market and its share in world yarn trade is about 30 percentwhile its share in cotton cloth trade is about 8 percent. However, overall share oftextile exports from Pakistan is around one percent. The share of textile inPakistan’s exports earnings is 68 percent at its present worth of exports isaround $ 7 billion. The value addition in the sector account for 9 percent of GDP
  • 12. and it employ 38 percent of industrial workers. During the last three years,Pakistan’s textile sector is preparing itself to face the challenges of the post-quota regime in 2005.The Government of Pakistan has adopted special steps to boost the countryscotton industry and market through a series of amendments. A standardcommittee has been appointed to look into ways to increase quality cottonproduction, to provide better crop knowledge to growers and to upgrade grading,ginning, and pressing systems to international standards.Pakistans cotton production in 2001-02 was 10.6 million bales. Cotton productionin 2002-03, declined to 10 million bales. The industry was not a major player inthe global arena and fiber textile producers from India were large producers. TheCentral Board of Revenue (CBR) has extended the compensatory duty drawbackon the export of blended fabrics, garments, and blended yarn from June 30, 2003to June 30, 2004. Textile industry is now preparing itself to survive the challengesof new textile market in 2005. The focus is on value addition, quality, and pricing.A huge investment of US $2 billion has been made on balancing, modernization,and replacement, which would help the textile sector to position it in order tosurvive after 2005. The industry exports one billion dollars worth of bed wear,knitwear, and readymade garments. In addition, steps are underway to increasethe exports of synthetic textiles.Pakistans textile industry will have to face tough competition, both in thedomestic and international markets. China will be the biggest competitor, whichafter its accession to the WTO, will corner a very high percentage, which isestimated to be from 40 per cent to 50 per cent of the global textile market.Quality, delivery schedules, and price will be the high marks for all textile goodsin the global markets. Increase in productivity will be vital for our textile industry.Pakistan along with China and India will have advantages, because all these
  • 13. countries have a plentiful supply of the vital raw material i.e. cotton. (The NEWS,14th,July 2003)1.2- FINANCIAL STATEMENT AND RATIO ANALYSISFinancial ratios are a popular way for users of financial statements to developinsights into the financial performance of companies. By controlling for the effectof firm size on the level of performance, ratios enable financial statement users toexamine how a firm has performed relative to its peers and relative to its ownhistorical performance.A firm’s ratios can differ from its peers or its own historical performance becauseit has selected a different product market strategy, because its managementteam has become more effective at implementing its strategy, or because it hasselected a different financial strategy. Sometimes firms can appear to performdifferently because they have selected different accounting methods for reportingthe same underlying economic events. For this reason, a pioneer to effectivefinancial ratio analysis is the development of a clear understanding of how afirm’s accounting decisions compare with those of its competitors, or with its owndecisions in prior years.In assessing the significance of various financial data, managers often engage inratio analysis, the process of determining and evaluating financial ratios. Afinancial ratio is a relationship that indicates something about a companysactivities, such as the ratio between the companys current assets and currentliabilities or between its accounts receivable and its annual sales. The basicsource for these ratios is the companys financial statements that contain figures
  • 14. on assets, liabilities, profits, and losses. Ratios are only meaningful whencompared with other information. Since they are often compared with industrydata, ratios help managers understand their companys performance relative tothat of competitors and are often used to trace performance over time.Ratio analysis can reveal much about a company and its operations. However,there are several points to keep in mind about ratios. First, a ratio is just onenumber divided by another. Financial ratios are only "flags" indicating areas ofstrength or weakness. One or even several ratios might be misleading, but whencombined with other knowledge of a companys management and economiccircumstances, ratio analysis can tell much about a corporation. Second, there isno single correct value for a ratio. The observation that the value of a particularratio is too high, too low, or just right depends on the perspective of the analystand on the companys competitive strategy. Third, a financial ratio is meaningfulonly when it is compared with some standard, such as an industry trend, ratiotrend, a ratio trend for the specific company being analyzed, or a statedmanagement objective.Financial ratios can also give mixed signals about a companys financial health,and can vary significantly among companies, industries, and over time. Otherfactors should also be considered such as a companys products, management,competitors, and vision for the future.
  • 15. 1.3- RESEARCH QUESTIONS1- What are the profitability ratios of the textile companies with respect to: a) Return on Assets b) Return on equity c) Net profit margin d) Gross profit margin e) Operating profit margin2- What are the leverage ratios of textile companies with respect to: a) Total debt ratio b) Debt- equity ratio c) Long-term debt ratio d) Times interest earned
  • 16. 3-What are the liquidity ratios of textile companies with respect to: a) Current ratio b) Quick ratio c) Cash ratio d) Net working capital to assets4-What are the efficiency ratios of textile companies with respect to: a) Total asset turnover b) Fixed asset turnover c) Inventory turnover d) Receivable turnover e) Payable turnover5-What is the performance of the textile companies in term of: a) Common-size analysis6-What are the cash flows generated from different activities a) Operating activities b) Investing activities
  • 17. c) Financing activities1.4- OBJECTIVESThe following are the objectives of this research:1. To analyze and interpret the financial reports of selected textile companies.2. To appraise the financial position using the ratio analysis.3. To accomplish the common size analysis.4. Interpret post-retirement obligations and funding implications for futureperformance.5. To determine the level of profit generated.6. To determine the expense and investments of the company.
  • 18. 1.5- SIGNIFICANCE OF THE STUDYFinancial statement analysis is of interest to shareholders, creditors, and thefirm’s own management. Both present and prospective shareholders areinterested in the firm’s current and future level of risk and return. These twodimensions directly affect share price. The firm’s creditors are primarily interestedin the short-term liquidity of the company and in its ability to make interest andprincipal payments. A secondary concern of creditors is the firm’s profitability;they want assurance that the business is healthy and will continue to besuccessful. Management, like stockholders, must be concerned with all aspectsof the firm’s financial situation. Thus, this study attempts to operate in a mannerthat will be favorable to both owners and creditors.
  • 19. In addition, management uses ratios to monitor the firm’s financial performancefrom period to period. It will also help management to make decisions regardingdividend policies, investments, lending, borrowings etc.Sofie Vander Meulen in his study in 2003 states that, investors as well as otherstakeholders heavily rely on a company’s financial statements. It is an importantsource of information that is readily available to them at a relatively low cost. Thequality of those statements however is highly variable (aggressive reporting ornot, disclosure or not). Therefore, this research would also be obliging for thecompany’s investors and stakeholders.Through this research many of the society members will be benefited and it willbe advantageous for the economy. Like investors, researchers, creditors,management, employees, lenders, suppliers, customers, auditors, and analystswill equally be able to take assistance from this research.1.6- SCOPE AND LIMITATIONSThe sample of this research is basically three textile companies in Pakistan andfive year data has been taken for the analysis. The selected textile companiesare: 1. (Colony) Sarhad Textile Mills LTD. 2. D.M. Textile Mills LTD. 3. Al- Qadir Textile Mills LTD.
  • 20. LIMITATIONS: 1. There is a limitation related to the analysis of the result, as researcher doesn’t have modern software available to analyze the findings so the result is based on manual work. 2. The availability of funds is the one of the limitations while doing this research as a student it is difficult for the researcher to manage the funds. 3. The time period for the research is very short because it is difficult to conduct a full time research for a student.1.7- DEFINITION OF THE TERMS1. Income Statement: Financial statement that shows the revenues, expenses,and net income of a firm over a period of time.2. Balance Sheet: Financial statement that shows the value of the firm’s assetsand liabilities at a particular time.
  • 21. 3. Liquidity: Ability of an asset to be converted to cash Quickly at low cost.4. Shareholders: Any one with a financial interest in the firm.5.Cash Flow Statement: Financial statement that shows the firm’s cash receiptsand cash payments over a period of time.6. Ratio Analysis: Involves the methods of calculating and interpreting financialratios to assess the firm’s performance and status.7. Current assets: The sum of a firm’s cash, account receivable, inventory,prepaid expenses and marketable securities which can be converted to cash within a single operating cycle.8. Current Liabilities: Measurable debt owned within one year, includingaccounts payable, accrued liabilities, taxes due, and notes payable. LITERATURE REVIEWRatios are a valuable analytical tool when used as part of a thorough financialanalysis. They can show the standing of a particular company, within a particularindustry. However, ratios alone can sometimes be misleading. Ratios are justone piece of the financial jigsaw puzzle that makes up a complete analysis.(Leslie Rogers, 1997)
  • 22. Financial ratios are widely used to develop insights into the financial performanceof companies’ by both the evaluators’ and researchers’. The firm involves manyinterested parties, like the owners, management, personnel, customers,suppliers, competitors, regulatory agencies, and academics, each having theirviews in applying financial statement analysis in their evaluations. Evaluators’use financial ratios, for instance, to forecast the future success of companies,while the researchers main interest has been to develop models exploiting theseratios. Many distinct areas of research involving financial ratios can bedifferentiated. (Barne, 1986)Financial ratios can be divided into several, sometimes overlapping categories.A financial ratio is of the form X/Y, where X and Y are figures derived from thefinancial statements or other sources of financial information. One-way ofcategorizing the ratio is on the basis where X and Y come from. In traditionalfinancial ratio analysis both the X and the Y are based on financial statements.If both or one of them comes from the income statement the ratio can be calleddynamic while if both come from the balance sheet it can be called static. Theconcept of financial ratios can be extended by using other than financialstatement information as X or Y in the X/Y ratio. For example, financialstatement items and market-based figures can be combined to constitute theratio. (Salmi, Vitanen, and Olli, 1990)In trend analysis, ratios are compared over time, typically years. Year-to-yearcomparisons can highlight trends and point up the need for action. Trendanalysis works best with three to five years of ratios. The second type of ratioanalysis, cross-sectional analysis, compares the ratios of two or more companiesin similar lines of business. One of the most popular forms of cross-sectionalanalysis compares a companys ratios to industry averages. These averages aredeveloped by statistical services and trade associations and are updatedannually. (Ezzamel, Mar-Molinero and Beecher, 1987)
  • 23. Financial ratios can also give mixed signals about a companys financial health,and can vary significantly among companies, industries, and over time. Otherfactors should also be considered such as a companys products, management,competitors, and vision for the future. (Fieldsend, Longford and McLeay, 1987)There are many different ratios and models used today to analyze companies.The most common is the price earnings (P/E) ratio. It is published daily with thetransactions of the New York Stock Exchange, American Stock Exchange, andNASDAQ. These quotations show not only the most recent price but also thehighest and lowest price paid for the stock during the previous fifty-two weeks,the annual dividend, the dividend yield, the price/earnings ratio, the days tradingvolume, high and low prices for the day, the changes from the previous daysclosing price. The price to earnings (P/E) ratio is calculated by dividing thecurrent market price per share by current earnings per share. It represents amultiplier applied to current earnings to determine the value of a share of thestock in the market. The price-earnings ratio is influenced by the earnings andsales growth of the company, the risk (or volatility in performance), the debt-equity structure of the company, the dividend policy, the quality of management,and a number of other factors. A companys P/E ratio should be compared tothose of other companies in the same industry. (Garcia-Ayuso, 1994)Several accounting and finance textbooks present a subjective classification offinancial ratios based on the practical experience or views of the authors. It iscommon that the classifications and the ratios in the different categories differbetween the authors. In very general terms three categories of financial ratios aremore or less common: profitability, long-term solvency (capital structure) andshort-term solvency (liquidity). (Courtis, 1978)
  • 24. Financial ratios can be divided for convenience into four basic groups orcategories: liquidity ratios, activity ratios, debt ratios, and profitability ratios.Liquidity, activity, and debt ratios primarily measure risk; profitability ratiosmeasure return. (Owens and Epstein, 1995)The following is a listing of some of the ratios to be aware of in analyzing acompanys balance sheet and income statement. These ratios fall into fourcategories — liquidity, profitability, asset management (efficiency), and debtmanagement (leverage). (Perttunen and Martikainen, 1990)When a firm borrows money, it promises to make a series of interest paymentsand then to repay the amount that it has borrowed. If profits rise, the debt holderscontinue to receive a fixed interest payment, so that all the gains go to theshareholders. Of course, the reverse happens if profits fall. In this caseshareholders bear all the pain. If times are sufficiently hard, a firm that hasborrowed heavily may not be able to pay its debts. The firm is then bankrupt andshareholders lose their entire investment. Because debt increases returns toshareholders in good times and reduces them in bad times, it is said to createfinancial leverage. Leverage ratios measure how much financial leverage the firmhas taken on. (Brealey, Myers, and Marcus, 2001)If you are extending credit to a customer or making a short-term bank loan, youare interested in more than the company’s leverage. You want to know whether itwill be able to lay its hands on the cash to repay you. That is why credit analystsand bankers look at several measures of liquidity. Liquid assets can be convertedinto cash quickly and cheaply. (McLeay and Fieldsend, 1987)Once you have selected and calculated the important ratios, you still need someway of judging whether they are high or low. A good starting point is to comparethem with the equivalent figures for the same company in earlier years. Alsoknown as benchmarking or cross-sectional analysis in which the firm’s ratio
  • 25. values are compared to those of a key competitor or a group of competitors,primarily to isolate areas of opportunity for improvement. (Gitman, 1997)Following are the cautions while doing financial analysis. First, a single ratio doesnot generally provide sufficient information from which to judge the overallperformance and status of the firm. Only when a group of ratios is used canreasonable judgments be made. If an analysis is concerned only with certainspecific aspects of a firm’s financial position, one or two ratios may be sufficient.Second, It is preferable to use audited financial statements for ratio analysis. Ifthe statements have not been audited, there may be no reason to believe thatthe data contained in them reflect the firm’s true financial condition. Third, thefinancial data being compared should have been developed in the same way.The use of differing accounting treatments, especially relative to inventory anddepreciation can distort the results. (Whitis and Keith, 1993)Time-series analysis is applied when a financial analysts evaluates performanceover time. Comparison of current to past performance, using ratio analysis,allows the firm to determine whether it is progressing as planned. Using multiyearcomparisons can see developing trends, and knowledge of these trends shouldassist the firm in planning future operations. As in cross-sectional analysis, anysignificant year-to-year changes can be evaluated to access whether they aresymptomatic of a major problem. Time-series analysis is often helpful in checkingthe reasonableness of a firm’s projected financial statements. A comparison ofcurrent and past ratios to those resulting from an analysis of projectedstatements may reveal discrepancies. (Gitman, 1997)It is important to analyze trends in ratios as well as their absolute levels, fortrends give clues as to whether a firm’s financial condition is likely to improve orto deteriorate. Common size analysis and percent change analysis are two othertechniques that can be used to identify trends in financial statements. Commonsize analysis is also useful in comparative analysis. In a common size analysis,
  • 26. all income statement items are divided by sales, and total assets divide allbalance sheet items. Thus, a common size income statement shows each itemas a percentage of sales, and a common a common size balance sheet showseach item as a percentage of total assets. (Brigham and Ehrhardt, 2001)Financial statement analysis applies analytical tools and techniques to general-purpose financial statements and relates data to derive estimates and inferencesuseful in business decisions. It is a screening tool in selecting investment ormerger candidates, and is a forecasting tool of future financial conditions andconsequences. It is a diagnostic tool in assessing financing, investing, andoperating activities, and is an evaluation tool for managerial and other businessdecisions. Financial statement analysis reduces our reliance on hunches,guesses, and intuition, and in turn it diminishes our uncertainty in decision-making. It does not lessen the need for expert judgment but rather establishes aneffective and systematic basis for making business decisions. (Bernstein andWild, 1990)The accounting equation is the basis of the financial reporting system: Assets = Liabilities + shareholder’s equityThe left-hand side of this equation relates to the economic resources controlledby a company, or assets. These resources are valuable in representing potentialsources of future revenues through operating activities. To engage in operatingactivities, a company obtains funding to invest in assets. The right-hand side ofthis equation identifies funding sources. Liabilities are funding from creditors andrepresent obligations of a company or, alternatively, claims of creditors onassets. Shareholder’s equity is a total of (1) funding invested or contributed byshareholders (contributed capital) and (2) accumulated earnings since inception
  • 27. in excess of distributions to shareholders (retained earnings). From theshareholders point of view, these amounts represent their claim on companyassets.A balance sheet summarizes the financial position of a company at a given pointin time. Most companies are required under accepted accounting practices topresent a classified balance sheet. In which assets and liabilities are separatedinto current and non-current accounts. Currents assets are expected to beconverted to cash and used in operations within one year or the operating cycle,which ever is longer. Current liabilities are obligations that the company mustsettle in the same time period. The difference between current assets and currentliabilities is working capital. (Gitman, 1997)Income statement measures a company’s financial performance betweenbalance sheet dates and hence, reflects a period of time. It lists revenues,expenses, gains, and losses of a company over a time period. Net income,shows the increase (or decrease) in net worth of a company before consideringdistributions to and contributions from shareholders. (Brigham and Ehrhardt,2001)Cross-sectional analysis involves the comparison of different firms’ financialratios at the sane point in time. The typical business is interested in how well ithas performed in relation to other firms in the industry. Frequently, a firm willcompare its ratio values to those of a key competitor or group of competitors thatit wishes to follow. (Judy Ward, 1995)Financial statement users are broadly classified into two groups. Internal users,primarily the managers of a company, are involved in making operating andstrategic decisions for the business. As employees, they typically have completeaccess to a company’s information system. Internally generated financial reportsare, therefore, specifically tailored to the unique information needs of an internal
  • 28. decision maker, such as CEO, CFO, or internal auditor. External users areindividuals not directly involved in the company’s operations. These users mustrely on information provided by management as part of the financial reportingprocess.There are many classes of external users of financial statements. Creditors arebankers, bondholders, and other individuals who lend money to businessenterprises. Creditors look to financial statements for evidence concerning theability of the borrower to pay periodic interests payments and repay the principalamount when the loan matures.Equity investors include existing and potential shareholders of a company.Exiting shareholders need financial information in deciding whether to continueholding the stock or sell it. Potential shareholders need financial information tohelp in choosing among competing alternative investments. Equity investors aregenerally interested in assessing the future profitability or riskiness of a company.Merger and acquisition analysts are interested in determining the economicvalue and assessing the financial and operating compatibility of potential mergercandidates.Auditors use financial analysis techniques in determining areas warrantingspecial attention during their examination of a client’s financial statements. Acompany’s board of directors, in their role as appointees of shareholders,monitors management’s actions. Regulatory agencies utilize financialstatements in the exercise of their supervisory functions, including the Securitiesand Exchange Commission, which watchfully oversees published financialstatements for compliance with federal rites law. Other users include employees,intermediaries, suppliers, and customers. (Bernstein and Wild, 1990)
  • 29. RESEARCH METHODOLOGY AND DESIGNThis chapter presents the basic methodology and requirements in research. Itincludes the method of research, source of data, treatment of data, and tools,which were used in the study.3.1- METHOD OF THE STUDYThis study is about the financial statements analysis of the selected companies inthe textile industry in Pakistan. The study is descriptive in nature. The researcherhas utilized the descriptive method in acquiring information for evaluating thefinancial performance of the selected companies.3.2- DATAThe research data is secondary in nature as for this particular research. The datais collected for the consecutive five years i.e. from 1998 to 2002, in the form ofannual reports from the registrar office, containing: • Balance sheet • Income statement • Profit & Loss account
  • 30. 3.3- SAMPLING PROCEDURE The research, which has been done on the financial analysis of the selected textile companies, the sample procedure for this particular research is three different companies: • (Colony) Sarhad Textile Mills LTD. • D.M. Textile Mills LTD. • Al- Qadir Textile Mills LTD.3.4- RESEARCH INSTRUMENTThis research is based on secondary source of data and consists of annualreports, articles, web sites, and books.3.5- FINANCIAL TOOLSTo know the desired results and to get the desired information the researcherhas applied many financial tools like trend- analysis, cross-sectional analysis,common-size analysis, ratio analysis etc.3.6-TREATMENT OF THE DATAThe data and information that was gathered was interpreted and analyzed byusing different financial tools.
  • 31. ANALYSIS AND INTERPRETATION OF DATA4.1 COMMON-SIZE INCOME STATEMENTIn common-size income statement, each item is expressed as a percentage ofsales, thus enabling the relationship between sales and specific revenues andexpenses to be easily evaluated. Three frequently cited ratios of profitability thatcan be read directly from the common-size income statement are gross-profitmargin, operating-profit margin, and the net-profit margin. Al- Qadir Textile Mills Limited Common-size Income Statement For Year 1998 – 2002 TABLE 4. 1 2002 2001 2000 1999 1998 Net Sales 100% 100% 100% 100% 100% Cost of Sales 92.93 86.70 78.89 87.14 88.89 Gross Profit 7.07 13.30 21.10 12.86 11.12 Operating Expense 3.22 2.63 4.71 4.50 4.49 Operating Profit 3.85 10.75 16.40 8.36 6.62 Other Income 0.19 0.11 0.02 0.11 0.10 4.04 10.86 16.42 8.46 6.72 Financial Charges (3.38) (4.79) (6.89) (9.30) (8.23) Worker’s Participation Fund (0.01) (0.30) (0.48) ___-__ ___-__ Profit/Loss Before Taxation 2.82 5.77 9.06 (0.84) (1.51) Taxation: Current- year 0.79 0.50 - 0.63 0.23 Prior-year 0.08 0.01 1.07 ___-__ 0.74 Profit After Tax 1.95 4.21 7.99 (1.46) (0.97)Starting with the cost of sales the company’s average cost of sales for five yearsare 86.91% for five years, moreover which has changed each year as it dependson many other factors like raw-material consumed, salaries and wages, electricity
  • 32. used etc. Gross-profit has gradually decreased for the first four years but for thelast year it is maximum with respect to previous years. Similar is the case withoperating expense; the company has reduced its operating expense, in 2001these expenses are minimum the attractive thing to note here is company’s salesare highest for this year and that is Rs. 707,050,099.Company has also concentrated its financial obligations by the end of 2002. Forthe year 1998 and 1999 profit before taxation is negative additionally that makesthe company to bear loss and for three years reduction can be seen in the profitboth before and after taxation. Al- Qadir Textile Mills Limited Common-size Income Statement For Year 1998 – 2002 FIGURE 4. 1 AL-QADIR TEXTILE MILL LTD. 120 Net Sales 100 PERCENTAGE 80 Cost of Sales 60 Gross Profit 40 Operating Expense 20 Operating Profit 0 1998 1999 2000 2001 2002 YEARS
  • 33. Figure 4.1 shows the common-size analysis of Al-Qadir textile mill, in which salesare shown as 100 percent and other item as a percentage of sales. When cost ofgoods sold is subtracted from the sales we get gross-profit. The company’s costof sales is lowest for the year 2000, which is the company’s best performing year;and year 2002 as highest cost of sales leaving lowest operating profit. D.M Textile Mills Limited Common-size Income Statement For Year 1998 – 2002 TABLE 4. 2 2002 2001 2000 1999 1998 Net Sales 100% 100% 100% 100% 100% Cost of Sales 86.60 85.70 86.40 92.20 93.13 Gross Profit 13.4 14.3 13.6 7.8 6.87 Operating Expense 3.5 3.6 3.3 3.4 4.7 Operating Profit 9.8 10.72 10.34 4.40 2.17 Other Income 0.2 0.36 0.10 0.12 0.16 10.00 11.08 10.44 4.52 2.33 Financial Charges 6.05 5.87 7.89 8.36 12.13 Loss on sale of fixed assets 0.01 - - - - Worker’s Participation Fund 0.19 0.26 0.13 ___-__ ___-___ Profit/Loss Before Taxation 3.75 4.95 2.46 (3.84) (9.79) Taxation: Current- year 0.50 0.50 0.50 0.50 0.50 Prior-year 0.05 0.03 0.42 0.001 - Deferred ___-__ ___-__ ___-__ 1.63 __-___ Profit/ Loss After Taxation 3.21 4.42 1.50 (2.71) (10.29)As it can be seen from the profit & loss account of D.M textile in the appendixsection that its sales has always increased but the company has specialized toreduce its cost of sales, it shows like they are properly utilizing the economies of
  • 34. scale, by lowering the cost of production, which is also proved by the gross profitfrom 6.87% in 1998 it increased to 14.3% in 2001 and 13.4% in 2002. We cansee that there is a reduction in operating expense of a company, which furtherprovides high operating profit. Financial charges are reduced but due to short-term borrowing it has increased for the last year 2002. Company has incurredloss for two years that is for 1998 and 1999 and for other years is also notmaking profit after tax of more than 4.42% in 2001. D.M Textile Mills Limited Common-size Income Statement For Year 1998 – 2002 FIGURE 4. 2
  • 35. D.M TEXTILE MILL LTD. 120 100 Net Sales 80PERCENTAGE Cost of Sales 60 Gross Profit 40 Operating Expense 20 Operating Profit 0 1998 1999 2000 2001 2002 YEARSFigure 4.2 shows D.M textile costs of sales that are high for the first two yearsand i.e. above 90 % whereas for other three years 2000 to 2002 it is almost86%. The company’s highest operating profits are for the year 2001. (Colony) Sarhad Textile Mills Limited Common-size Income Statement For Year 1998 – 2002
  • 36. TABLE 4. 3 2002 2001 2000 1999 1998 Net Sales 100% 100% 100% 100% 100% Cost of Sales 102.71 100.53 112.93 115.75 105.75 Gross Profit/ Loss (2.71) (0.53) (12.93) (15.75) (5.75) Operating Expense 5.54 5.59 10.64 11.43 4.39 Operating Profit/ Loss (8.25) (6.12) (23.57) (27.18) (10.14) Other Income 2.88 0.49 14.22 0.99 0.16 (5.37) (5.63) (9.35) (26.19) (9.98) Financial Charges 3.60 2.69 11.19 11.22 3.13 Loss on sale of fixed assets - - - 6.52 - Other charges 2.65 3.79 17.76 20.81 2.74 Profit/Loss Before Taxation (11.62) (12.11) (37.70) (64.74) (15.85) Taxation: Current- year 0.50 0.50 0.50 0.50 0.50 Profit After Tax (12.12) (12.61) (38.20) (65.24) (16.35)Company’s common-size income statement depicts its poor performance. Thesales of the company are not even the 50% of the sales of other companiesincluded in the research. Moreover its cost of sales is higher than its sales, whichon the very first step takes the company into loss. As gross profit of the companyshows on average its cost of sales are 7.5% more than its sales. The company isalso incurring high operating expenses that further more adds to the loss incurredby the company. For the year 1999 it’s loss after taxation is 65.24% of the sales.
  • 37. (Colony) Sarhad Textile Mills Limited Common-size Income Statement For Year 1998 – 2002 FIGURE 4. 3 (COLONY) SARHAD TEXTILE MILL LTD. 140 120 100 Net Sales 80 PERCENTAGE Cost of Sales 60 40 Gross Profit/ Loss 20 Operating Expense 0 -20 1998 1999 2000 2001 2002 Operating Profit/ -40 Loss YEARSThe unusual company performance can be observed by the figure 4.3. Costs ofsales are even higher than its sales. The company is bearing loss for five years.Supreme gross-loss is for the year 1999 and an operating loss of 27.18%.
  • 38. 4.2 COMMON-SIZE BALANCE SHEETCommon-size analysis of financial statements is expressing each item as apercentage of its major item. As in common-size balance sheet each componentis expressed as a percentage of current assets and current liabilities. Common-size analysis is especially useful in comparing the performance for a particularyear with that for current year. Following are the results of the analysis of thecompanies’ common-size balance sheet. Al- Qadir Textile Mills Limited Common-size Balance Sheet For Year 1998 – 2002 TABLE 4. 4 2002 2001 2000 1999 1998 Current Assets: Inventory 2.86% 3.14% 4.78% 6.08% 5.67% Stock in trade 47.67 50.16 58.64 65.28 53.54 Trade Debts 12.05 7.97 1.59 5.47 9.69 Advances, Deposits, prepayments 10.43 4.64 9.38 19.89 24.58 and other receivables Cash & Bank Balances 26.90 34.09 25.60 3.28 6.52 Total current assets 100% 100% 100% 100% 100% Current Liabilities: Current portion of Long-term 14.42 15.16 25.85 12.27 29.58 Liabilities Short-term borrowings - - - 57.09 34.30 Creditors, accrued & other liabilities 82.95 79.46 65.68 28.24 35.15 Provision for Tax 2.23 1.76 0.48 2.40 1.11 Proposed Dividends - 1.96 7.99 - - Unclaimed Dividend 0.40 1.66 __-__ __-__ __-__ Total current liabilities 100% 100% 100% 100% 100%Al-Qadir textiles current assets have increased over the years as can be seenfrom the balance sheet in the appendix. The company has reduced its inventory
  • 39. from 5.67% in 1998 to 2.86% in 2002, which is good in a sense as inventory isthe most illiquid form of current assets. Stock in trade is almost 50% of thecurrent assets for all five years. Trade debts are considerably low as comparedwith the industry, but have gradually increased in the year 2002. Advances,deposits, prepayments, and other receivables show a variation in the data. Lastcash and bank balances have increased for the last three years.Current liabilities were low in the year 2001 and 2000 of Rs.95, 039,484 andRs.94, 565,386 respectively and for other years it has been above Rs. 10 million.Short-term borrowings are only for two years i.e. 1998 and 1999. Creditors,accrued, and other liabilities constitute the major portion of current liabilities. Thesame data is depicted in the figure 4.4 (a) and figure 4.4 (b). Al- Qadir Textile Mills Limited Common-size Balance Sheet For Year 1998 – 2002 FIGURE 4. 4 (a) CURRENT ASSETS Cash & Bank Balances 100% 80% Advances, Deposits, PERCENTAGE prepayments and other 60% receivables Trade Debts 40% 20% Stock in trade 0% 1998 1999 2000 2001 2002 Inventory YEARS FIGURE 4. 4 (b)
  • 40. CURRENT LIABILITIES Unclaimed Dividend100% Proposed Dividends 80% Provision for Tax 60% 40% Creditors, accrued & other liabilities 20% Short-term borrow ings 0% 1998 1999 2000 2001 2002 Current portion of Long-term Y EAR S Liabilities D.M Textile Mills Limited Common-size Balance Sheet For Year 1998 – 2002 TABLE 4. 5 2002 2001 2000 1999 1998Current Assets:Inventory 3.68% 6.21% 4.43% 6.35% 9.29%Stock in trade 44.51 36.57 57.25 54.93 30.96Trade Debts 7.45 10.02 6.21 - -Advances, Deposits, prepayments 39.26 41.13 22.70 36.08 55.42and other receivablesCash & Bank Balances 5.10 6.07 9.41 2.63 4.32Total current assets 100% 100% 100% 100% 100%Current Liabilities:Current portion of Long-term 22.12 23.41 23.07 39.75 42.66LiabilitiesShort-term borrowings 19.03 21.09 28.39 20.29 14.79Creditors, accrued & other liabilities 54.02 48.24 46.50 37.24 38.38Provision for Tax 4.82 7.26 2.04 2.72 4.17Proposed Dividends - - - - -Unclaimed Dividend 0.14 __-__ __-__ __-__ __-__Total current liabilities 100% 100% 100% 100% 100%
  • 41. D.M textile has also increased its current assets for five years. Inventory of thecompany shows a decreasing trend as can be seen from the table 4.5, startingfrom 9.29% in 1998 it has reduced to 3.68% in 2002, although high in year 2001.Stock in trade represent the major portion of current assets and showdissimilarity over the years. There are no trade debtors in 1998 and 1999.Company has reduced the advances, deposits, prepayments, and otherreceivables, which is also the major component of current assets. Averagecurrent liabilities are almost equal to Rs. 80 million for five years and there is lessfluctuation in it. D.M Textile Mills Limited Common-size Balance Sheet For Year 1998 – 2002 FIGURE 4. 5 (a) CURRENT ASSETS Cash & Bank Balances 100% Advances, Deposits, PERCENTAGE prepayments and other receivables Trade Debts 50% Stock in trade 0% Inventory 1998 1999 2000 2001 2002 YEARSThe above figure shows the current assets for D.M textile. Where major portionof current assets is in stock in trade and in advances, deposits, prepayments andother receivables. In addition, inventory is almost less than 10% for five years. FIGURE 4. 5 (b)
  • 42. Unclaimed Dividend CURRENT LIABILITIES Proposed Dividends PERCENTAGE 100% 80% Provision for Tax 60% Creditors, accrued & 40% other liabilities 20% Short-term 0% borrow ings 1998 1999 2000 2001 2002 Current portion of Long-term Liabilities YEARSThe current liabilities are more due to creditors, accrued and other liabilities. Thecompany is also liable to pay current portion of long term liabilities which hasreduced (Colony) Sarhad Textile Mills Limited Common-size Balance Sheet For Year 1998 – 2002 TABLE 4. 6 2002 2001 2000 1999 1998 Current Assets: Inventory 49.15% 50.08% 50.01% 48.28% 42.78% Trade Debts 1.32 0.06 - 2.61 26.83 Advances, Deposits, 49.25 49.45 49.69 49.12 30.07 prepayments and other receivables Cash & Bank Balances 0.28 0.41 0.30 0.13 0.32 Total current assets 100% 100% 100% 100% 100% Current Liabilities: Current portion of Long-term - - - - 1.04 Liabilities Short-term borrowings 55.35 55.07 59.32 44.74 15.94 Creditors, accrued & other 41.99 42.44 38.28 52.86 83.02 liabilities Provision for Tax 2.66 2.49 2.40 2.40 __-__
  • 43. Total current liabilities 100% 100% 100% 100% 100%Poor performance can be revealed through its common-size balance sheetanalysis, as the company has not made respectable sales to cover its cost ofproduction so its inventory is almost 50% of its current assets, trade debts arevery low. Advances, deposits, prepayments, and other receivables are 49% ofcurrent assets. Further more the company cash and bank balances remains lessthan 1% for all the years.There are no current portions of long-term liabilities except for the year 1998. Thecompany have more of the short-term borrowings for all the five years which arealmost of average 46% of current liabilities and 51% of average are creditors,accrued, and other liabilities. (Colony) Sarhad Textile Mills Limited Common-size Balance Sheet For Year 1998 – 2002 FIGURE 4. 6 (a) CURRENT ASSETS Cash & Bank Balances 100% Advances, Deposits, 80% PERCENTAGE prepayments and other receivables 60% Trade Debts 40% 20% Inventory 0% 2002 2001 2000 1999 1998 Current Assets: YEARS
  • 44. The company’s current assets can only be seen in two colors in the figure 4.6 (a)reflecting inventory and advances, deposits, prepayments and other receivables.Moreover some portion of trade debt can be seen in 1998 and 1999. FIGURE 4.6 (b) CURRENT LIABILITIES Provision for Tax 100% Creditors, PERCENTAGE 80% accrued & other 60% liabilities Short-term 40% borrowings 20% Current portion of Long-term 0% Liabilities Current 2002 2001 2000 1999 1998 Liabilities: YEARSThe same is the case for current liabilities there are more of the short-termborrowings and creditors, accrued and other liabilities.4.3 INTERPRETATION OF PROFITABILITY RATIOSProfitability ratios focus on the firm’s earnings. Each relates the returns of thefirm to its sales, equity, assets, or share value. Owners, creditors, andmanagement pay close attention to boosting profits due to great importanceplaced on earnings in the market place. Al- Qadir Textile Mills Limited Profitability Ratios For Year 1998 – 2002 TABLE 4. 7 2002 2001 2000 1999 1998
  • 45. Gross Profit Margin 7.07% 13.30% 21.10% 12.86% 11.12% Operating Profit Margin 3.85 10.75 16.40 8.36 6.62 Net Profit margin 1.95 4.21 7.99 (1.46) (0.97) Return on Assets 2.24 5.42 10.12 (2.38) (2.18) Return on equity 16.64 39.38 72.03 (10.18) (16.15)To know the proportion of revenue that finds its way into profits, we look at profitmargin. Gross-profit, operating-profit and net-profit margin reveals the sametrend. Naturally a firm prefers a high profit margin. A high-price and high-marginstrategy typically results in lower sales, whereas a low-margin but high-volumestrategy can be quite successful.Al-Qadir’s profit margin is greater than its competitors. Company’s greaterreturns are for the year 2000 in which its gross-margin is 21.10%, operating-profitof 16.40% and the net-profit margin of 7.99%. Additionally, return on assets(ROA) and return on equity (ROE) are also high fro the year 2000 but decreasesfor the next two years. Al- Qadir Textile Mills Limited Profitability Ratios For Year 1998 – 2002 FIGURE 4. 7
  • 46. PROFITABILITY RATIOS 80 Gross Profit Margin 70 Operating Profit 60 Margin Net Profit margin 50 Return on Assets 40 PERCENTAGE 30 Return on equity 20 10 0 1998 1999 2000 2001 2002 -10 -20 -30 YEARSThe above figure shows the profitability ratio of the company over the years. Itcan be clearly observed that gross-profit, operating-profit and net-profit margin ison the same trend. Return on equity is at its peak in year 2000.Managers often measure the performance of a firm by the ratio of net-income tototal assets. However, because net-income measures profit net of interestexpense, this practice makes the apparent profitability of the firm a function of itscapital structure. D.M Textile Mills Limited Profitability Ratios For Year 1998 – 2002 TABLE 4. 8
  • 47. 2002 2001 2000 1999 1998 Gross Profit Margin 13.4% 14.3% 13.6% 7.8% 6.87% Operating Profit Margin 9.8 10.72 10.34 4.40 2.17 Net Profit margin 3.21 4.42 1.50 (2.71) (10.29) Return on Assets 3.05 5.35 1.73 (2.92) (10.62) Return on equity 38.6 50.2 15.74 (24.52) (91.09)D.M textile gross-profit margin is showing an escalating process and so isoperating-profit margin. However the company’s net-profit margin is negative anda company bears loss for the first two years. The highest net-profit is received forthe year 2001 of 4.42%. D.M Textile Mills Limited Profitability Ratios For Year 1998 – 2002 FIGURE 4. 8
  • 48. PROFITABILITY RATIOS 60 40 20 Gross Profit Margin PERCENTAGE 0 Operating Profit 1998 1999 2000 2001 2002 Margin -20 Net Profit margin -40 Return on Assets -60 Return on equity -80 -100 YEARSThe above figure shows the profitability performance of D.M textile mill. Thecompany did improve its gross-profit over the years. Net-profit margin is goingfrom negative to positive in the mid of year 1999. Return on equity did alsoincreased in the same time period giving highest return in the year 2001.
  • 49. (COLONY) SARHAD Textile Mills Limited Profitability Ratios For Year 1998 – 2002 TABLE 4. 9 2002 2001 2000 1999 1998 Gross Profit Margin (2.71%) (0.53%) (12.93%) (15.75%) (5.75%) Operating Profit (8.25) (6.12) (23.57) (27.18) (10.14) Margin Net Profit margin (12.12) (12.61) (38.20) (65.24) (16.35) Return on Assets (1.63) (2.28) (3.70) (5.58) (4.77) Return on Equity (25.41) (35.73) (58.24) (89.39) (76.30)The company starting from negative gross-profit margin continues its impact onprofitability ratios. The company is not at all profitable, thus the return on assetsand return on equity are also negative for this reason.
  • 50. (COLONY) SARHAD Textile Mills Limited Profitability Ratios For Year 1998 – 2002 FIGURE 4. 9 PROFITABILITY RATIOS 10 0 Gross Profit Margin 1998 1999 2000 2001 2002 -10 -20 Operating Profit Margin -30 PERCENTAGE -40 Net Profit margin -50 Return on Assets -60 -70 Return on Equity -80 -90 -100 YEARSThe above figure shows the profitability performance of (Colony) Sarhad mill. Thecompany remains below the zero percent line, which can be very evidentlyobserved from the figure the highest loss incurred is in the year 1999.
  • 51. INDUSTRY AVE (COLONY) RAG AL-QADIR D.M SARHAD EGross Profit Margin 13.09 11.194 -7.534 5.58Operating Profit Margin 9.196 7.486 -15.052 0.54Net Profit margin 2.344 -0.774 -28.904 -9.11Return on Assets 2.644 -0.682 -3.592 -0.54Return on Equity 20.344 -2.214 -57.014 -12.96 FIVE-YEAR COMPANY’S AVERAGE (PROFITABILITY RATIOS) TABLE 4.10 FIGURE 4. 10 FIVE YEARS AVERAGE (PROFITABILITY RATIOS) 30 20 10 AL-QADIR 0 -10 RATIOS D.M -20 -30 -40 (COLONY) SARHAD -50 -60 AVERAGE -70 COMPANIES
  • 52. The above given table and figure shows the industry average of profitability ratiosfor five years. It clearly depicts Al-Qadir textile above the industry average, D.Mtextile on the second position but still enjoying being above the industrial norms,whereas (Colony) Sarhad is the company below the industry average.4.4 INTERPRETATION OF LEVERAGE RATIOSWhen a firm borrows money, it promises to make a series of interest paymentsand than to repay the amount that it has borrowed. If profits rise, the debt holderscontinue to receive a fixed interest payment, so that all the gains go toshareholders, whereas if the reverse happen and profits fall shareholders bear allthe pain. Al- Qadir Textile Mills Limited Leverage Ratios For Year 1998 – 2002 TABLE 4. 11 2002 2001 2000 1999 1998Total Debt Ratio 0.86 0.86 0.85 0.87 0.87Long-term Debt Ratio 2.17 2.37 2.66 3.25 2.77Debt-equity ratio 3.72 3.67 3.94 4.75 4.70Times Interest ratio 1.73 1.30 2.32 0.91 1.18
  • 53. The company’s data shows it is highly financed through debt that is of average86%. Its total debt ratio is almost stable. The highest long-term debt ratio is 3.25for year 1999. The company’s TIE-ratio has eventually improved in 2000 andthen reduced to 1.73. Banks prefer to lend to those firms whose earnings are farin excess of interest payments. The regular interest payment is a hurdle thatcompanies must keep jumping if they are to avoid default. This ratio measureshow much clear air there is between hurdle and hurdler. D.M Textile Mills Limited Leverage Ratios For Year 1998 – 2002 TABLE 4. 12 2002 2001 2000 1999 1998Total Debt Ratio 0.64 0.89 0.86 0.88 0.93Long-term Debt Ratio 0.78 0.64 0.70 1.16 1.01Debt-equity ratio 8.17 7.89 8.66 8.13 8.06Times Interest ratio 1.65 1.83 1.31 0.54 0.19The market value of the company finally determines whether the debt holders gettheir money back, so the ratio is calculated of total debt. D.M textile has reducedits debt burden from 93% to 64%. Long-term Debt includes not just bonds orother borrowings but also the value of long-term leases. Total long-term capitalalso called total capitalization, is the sum of long-term debt and shareholders’equity. Thus this means in year 2002 there are 0.73 paisas of every rupee oflong-term capital is in the form of long-term debt.
  • 54. The company’s earnings before interest and taxes are more than 1.00 for threeyears that means company is earning far in excess than its interest payments.The data for five years shows the company has improved its times interest ratioafter facing trouble in 1998 and 1999. (COLONY) Sarhad Textile Mills Limited Leverage Ratios For Year 1998 – 2002 TABLE 4. 13 2002 2001 2000 1999 1998Total Debt Ratio 0.77 0.75 0.73 0.70 0.67Long-term Debt Ratio 0.83 0.87 0.79 0.82 0.12Debt-equity ratio 3.46 3.25 2.99 2.69 2.42Times Interest ratio -2.29 -2.27 -2.11 -2.43 -2.80(Colony) Sarhad is financed on average 72 percent with debt, both long-term andshort-term and 28 percent with equity. The company could be said to have a debtratio of 0.83 (the long-term debt ratio) or 0.77 (total debt ratio) for the year 2002.Since company is incurring losses therefore its times interest ratio is negative thecompany is not in a position to pay the interest payments.
  • 55. FIVE-YEAR COMPANY’S AVERAGE (LEVERAGE RATIOS) TABLE 4. 14 (COLONY) INDUSTRY AL-QADIR D.M SARHAD AVERAGETotal Debt Ratio 0.862 0.84 0.724 0.80Long-term Debt Ratio 2.644 0.858 0.686 1.39Debt-equity ratio 4.156 8.182 2.962 5.1Times Interest ratio 1.488 1.104 -2.38 0.070Here is the compiled data for five years. Total debt ratio is 86.2 percent for Al-Qadir, 84 percent for D.M, and 72.4 percent for (Colony) Sarhad whereas theindustry average is 80 percent. FIGURE 4. 11
  • 56. FIVE YEARS AVERAGE( LEVERAGE RATIOS) 10 8 6 AL-QADIR RATIOS 4 D.M 2 (COLONY) SARHAD 0 AVERAGE -2 -4 COMPANIESFigure 4.11 shows the average leverage ratios of the companies with the industryaverage. Al-Qadir and D.M textile being above the industry average and (Colony)Sarhad below the industrial average.4.5 INTERPRETATION OF LIQUIDITY RATIOSCreditors extending credit to its customer or making a short-term bank loan, areinterested in more than a company’s leverage. They want to know whether thecustomer will be able to lay its hand on the cash to repay. Liquid assets can beconverted into cash quickly and cheaply. Al- Qadir Textile Mills Limited Liquidity Ratios For Year 1998 – 2002 TABLE 4. 15 2002 2001 2000 1999 1998Current Ratio 1.38 1.29 0.96 0.89 0.64Quick Ratio 1.34 1.25 0.71 0.86 0.59
  • 57. Cash Ratio 0.37 0.44 0.24 0.03 0.04Net Working Capital To 0.38 0.29 -0.05 -0.11 -0.36AssetsAl-Qadir’s current ratio has improved each year showing for the last year Rs.1.38in current assets for every Rs. 1.00 in current liabilities. As some assets arecloser to cash than others, if there is a trouble inventory may not sell at anythingabove fire-sale price, thus quick or Acid-test ratio is useful to calculate. Thecompany’s quick ratio has also improved, as there is no much difference afterextracting inventory from its current assets.A company’s most liquid assets are its holdings of cash and marketablesecurities, however a low cash ratio may not matter if the firm can borrow onshort notice. Al-Qadir’s cash ratio is low as its position is strong in the industry itcan easily handle emergency situations by borrowing money on short notice. D.M Textile Mills Limited Liquidity Ratios For Year 1998 – 2002 TABLE 4. 16 2002 2001 2000 1999 1998 Current Ratio 0.57 0.52 0.57 0.37 0.30 Quick Ratio 0.53 0.49 0.51 0.36 0.28 Cash Ratio 0.03 0.03 0.05 0.01 0.01 Net Working Capital To -0.43 -0.48 -0.43 -0.63 -0.69 Assets
  • 58. D.M textile current ratio on average is 0.46, which means the company ishaving Rs. 0.46 in current assets for every Rs. 1.00 in current liabilities.Company’s current ratio and quick ratio are also not varied, as its inventory islow in current assets. Net working capital to total assets is negative due tolarge short-term borrowings. (COLONY) Sarhad Textile Mills Limited Liquidity Ratios For Year 1998 – 2002 TABLE 4. 17 2002 2001 2000 1999 1998 Current Ratio 2.12 2.33 2.52 3.04 2.59 Quick Ratio 1.07 1.16 1.26 1.57 1.45 Cash Ratio 0.01 0.01 0.01 0.004 0.03 Net Working Capital 1.12 1.33 1.52 2.04 1.36 To AssetsThis company’s current ratio illustrate that its currents assets are far more thanits current liabilities. The decrease in current ratio signifies trouble, thatcompany has drag out its payables by delaying payment of its bill that causeincrease in its current liabilities and decrease in current ratio. Cash ratio isvery poor since company is not having enough money in its current assets. FIVE-YEAR COMPANY’S AVERAGE FOR LIQUIDITY RATIOS TABLE 4. 18
  • 59. (COLONY) INDUSTRY AL-QADIR D.M SARHAD AVERAGE Current Ratio 1.032 0.466 2.52 1.33 Quick Ratio 0.95 0.434 1.302 0.89 Cash Ratio 0.224 0.026 0.0128 0.08 Net Working Capital To Assets 0.03 -0.532 1.474 0.32The above table is about the industry average and average of the companies’liquidity ratios for five years. FIGURE 4.12 FIVE YEARS AVERAGE (LIQUIDITY RATIOS) 3 AL-QADIR 2.5 2 D.M 1.5 RATIOS 1 (COLONY) 0.5 SARHAD 0 AVERAGE -0.5 -1 COMPANIESThe important aspect to note here is that this graph is about liquidity position ofthe companies the line above the industry average shows bad performance ofthe company and vice versa.4.6 INTERPRETATION OF EFFICIENCY RATIOS
  • 60. Efficiency ratios are to judge how efficiently the firm is using its assets or we cansay the speed with which various accounts are converted into sales or cash. Al- Qadir Textile Mills Limited Efficiency Ratios For Year 1998 – 2002 TABLE 4. 19 2002 2001 2000 1999 1998Total asset turnover 1.15 1.29 1.27 0.95 0.87Fixed asset turnover 1.59 1.66 1.52 1.15 1.05Inventory turnover 132.68 158.59 139.29 76.60 83.64Receivable turnover 39.16 123.88 80.41 89.06 57.64Payable turnover 2.51 2.21 1.81 1.28 1.23The asset turnover ratio shows how hard the firm’s assets are being put to use.Al-Qadir’s asset turnover has increased over time. For Al-Qadir textile eachrupee of assets produce Rs. 1.15 of sales, and each rupee of fixed assetsproduce Rs. 1.59 of sales in year 2002.Efficient firms turn over their inventory rapidly and don’t tie up more capital thanthey need in raw materials or finished goods. Thus this company is a betterperformer in this aspect too. D.M Textile Mills Limited Efficiency Ratios
  • 61. For Year 1998 – 2002 TABLE 4. 20 2002 2001 2000 1999 1998Total asset turnover 0.95 1.21 1.15 1.08 1.03Fixed asset turnover 1.13 1.62 1.43 1.23 1.13Inventory turnover 142.27 110.06 118.26 126.39 125.31Receivable turnover 15.39 19.39 26.69 24.32 22.57Payable turnover 1.28 1.23 1.04 1.02 1.02D.M textile asset turnover was highest in the year 2001 where each rupee ofassets produce Rs. 1.21 of sales, and each rupee of fixed assets produce Rs.1.62 of sales. Its inventory turnover is acceptable than the industry norms.Whereas receivable turnover are much better than any other company.
  • 62. (COLONY) Sarhad Textile Mills Limited Efficiency Ratios For Year 1998 – 2002 TABLE 4. 21 2002 2001 2000 1999 1998 Total asset turnover 0.13 0.18 0.10 0.09 0.21 Fixed asset turnover 0.21 0.28 0.15 0.13 0.32 Inventory turnover 0.79 1.03 0.62 0.58 1.61 Receivable turnover 0.77 1.04 0.56 0.49 2.21 Payable turnover 0.18 0.24 0.15 0.14 0.33(Colony) Sarhad Textile Company is much below the average efficiency. Thecompany’s asset turnovers are below 1.00 for all the five years. It shows thatthey are unable to produce even Rs. 1.00 of sales for each rupee of assets. Thecompany’s inventory turn over is very low due to low sales and very highinventory level. FIVE-YEAR COMPANY’S AVERAGE FOR EFFICIENCY RATIOS TABLE 4. 22 (COLONY) INDUSTRY AL-QADIR D.M SARHAD AVERAGE Total asset turnover 1.106 1.084 0.142 0.77 Fixed asset turnover 1.394 1.308 0.218 0.97 Inventory turnover 118.16 124.458 0.926 81.18 Receivable turnover 78.03 21.672 1.014 33.57 Payable turnover 1.808 1.118 0.208 1.04
  • 63. The above table 4.22 shows the industry average and companies five-yearaverage efficiency ratios.4.7 INTERPRETATION OF ASSET UTILIZATION RATIOSAsset utilization ratio measures asset intensity in generating revenues to reach asufficient profitability level. Al- Qadir Textile Mills Limited Asset Utilization Ratios For Year 1998 – 2002 TABLE 4. 23 2002 2001 2000 1999 1998Sales to cash & 15.14 16.86 29.47 162.98 81.81EquivalentsSales to Receivables 39.16 123.88 80.41 89.06 57.64Sales to Inventories 142.78 183.09 157.73 87.91 94.09Sales Working-Capital 14.91 25.29 -161.96 -42.54 -9.35Sales to Fixed Assets 1.59 1.66 1.52 1.15 1.05Sales to Total Assets 1.15 1.29 1.27 0.95 0.87Sales to Short-term 6.78 9.36 10.98 8.31 9.91LiabilitiesAs Al-Qadir’s asset turnover is escalating over previous five years. Up till nowthis increase in asset earnings makes major variation in turnover for individualasset components. Cash and equivalents evidence the most significant variabilityduring this period, which is also evidenced from common-size balance sheet.Company’s account receivables shows a slight improvement in year 2001.
  • 64. Regarding inventory turnover, company expressed desire to decreaseinventories at every stage of its manufacturing process is revealing itself throughan improved turnover ratio. It is important to note that Al-Qadir’s asset and assetcomponent turnover ratios often compare favorable to industry norms. D.M Textile Mills Limited Asset Utilization Ratios For Year 1998 – 2002 TABLE 4. 24 2002 2001 2000 1999 1998Sales to cash & 118.57 131.34 64.30 333.09 289.65EquivalentsSales to Receivables 15.39 19.39 26.69 24.31 22.57Sales to Inventories 164.29 128.42 136.89 138.02 134.56Sales Working-Capital -7.94 -8.64 -7.94 -5.10 -5.36Sales to Fixed Assets 1.13 1.62 1.43 1.23 1.13Sales to Total Assets 0.95 1.21 1.52 1.08 1.03Sales to Short-term 18.04 19.67 12.11 15.95 25.39LiabilitiesD.M’s asset turnover is fluctuating over the years as it has decreased for the lastyear 2002. Cash and equivalents also show a fluctuating trend. Accountreceivable turnover has decreased for the last year but was better in the previousyears. Inventory turnover ratio has improved continuously for all the years.
  • 65. (Colony) Sarhad Textile Mills Limited Asset Utilization Ratios For Year 1998 – 2002 TABLE 4. 25 2002 2001 2000 1999 1998Sales to cash & 136.94 118.44 92.08 180.54 203.29EquivalentsSales to Receivables 0.77 1.04 0.56 0.49 1.14Sales to Inventories 0.77 1.02 0.55 0.50 1.52Sales Working-Capital 0.71 0.89 0.46 0.36 1.18Sales to Fixed Assets 0.21 0.28 0.15 0.13 0.32Sales to Total Assets 0.13 0.18 0.10 0.09 0.21Sales to Short-term 1.60 2.16 1.17 1.63 9.14Liabilities(Colony) Sarhad ‘s asset turnover has decreased. Inventory turnover is muchlower than the industry norms, as company’s cost of sales are high and moreoverinventory constitutes about 50% of assets. Receivable turnover is also very lowas more of their sales are on credit. The depressing blow of sales can be seenthroughout the analysis.
  • 66. 4.8 CASH FLOW ANALYSIS Al- Qadir Textile Mills Limited Cash Flows For Year 1998 – 2002 TABLE 4. 26 2002 2001 2000 1999 1998 Rupees Rupees Rupees Rupees RupeesCash 21,969,593 52,872,333 74,371,921 2,966,040 14,007,027Flows fromOperatingActivitiesCash (3,841,698) (1,797,925) (19,922,155) (12,790,708) (7,172,889)Flows fromInvestingActivitiesCash (17,386,931) (32,273,166) (34,542,709) 7,059,934 (6,876,559)Flows fromFinancingActivitiesIncrease 740,964 18,801,242 19,907,057 3,228,545 5,993,279(Decrease)in CashAl-Qadir’s operating cash flows is high for the year 2000, reason being low costof sales, which have resulted in high profit before taxation. This analysis revealscash flows are steady source of cash, with a substantial increase in year 2000.The cash down turn in year 1999 is due primarily to financial charges. Investingactivities were more in 1999 and 2000, due to major out flow of fixed capital
  • 67. expenditure. Financing out flows are more for the last three years, wheredividends are paid in year 2001 and 2002. D.M Textile Mills Limited Cash Flows For Year 1998 – 2002 TABLE 4. 27 2002 2001 2000 1999 1998 Rupees Rupees Rupees Rupees RupeesCash 28,768,565 40,351,744 17,315,639 22,815,401 1,836,244Flows fromOperatingActivitiesCash (19,665,511) (16,354,183) (17,158,917) (2,171,480) (4,924,553)Flows fromInvestingActivitiesCash (8,637,153) (26,333,169) 3,986,573 (20,746,316) 3,198,789Flows fromFinancingActivitiesIncrease 465,901 (2,335,608) 4,143,295 (102,395) 110,480(Decrease)in CashD.M have been able to maintain high cash flows from operations even afterincurring loss before taxation for the year 1998 and 1999. Cash flow hasdecreased for the year 2002 because of more payments made to creditors.Investment has increased for 2001 and 2002 by acquiring fixed assets. Whereas
  • 68. financing out flow is more for the year 2001 as company made a repayment oflong-term loan. Al- Qadir Textile Mills Limited Cash Flows For Year 1998 – 2002 TABLE 4. 28 2002 2001 2000 1999 1998 Rupees Rupees Rupees Rupees RupeesCash (6,098,470) 230,093 (19,908,780) (21,881,180) (993,496)Flows fromOperatingActivitiesCash (5,893) 64,047 10,589 1,893,920 (260,035)Flows fromInvestingActivitiesCash 5,760,173 127 20,251,705 19,632,506 (535,235)Flows fromFinancingActivitiesIncrease (344,190) 294,267 358,515 (354,754) (1,788,766)(Decrease)in Cash(Colony) Sarhad has incurred losses all the way through the years, which hasaffected its operating activities. They are not having enough sales even to cover
  • 69. their production costs. In spite of incurring losses they have an addition to fixedasset in year 1998 and 2002, that shows an out flow. CONCLUSION AND RECOMMENDATIONFinancial statement analysis focuses on one or more elements of a company’sfinancial condition or operating results. Researcher emphasizes five areas ofinquiry, with varying degrees of importance. • Short-Term Liquidity. Ability to meet short-term obligations. • Cash Flow Analysis. Future availability and disposition of cash. • Return on Invested Capital. Ability to provide financial rewards sufficient to attract and retain financing. • Asset utilization. Asset intensity in generating revenues to reach a sufficient profitability level. • Operating performance and Profitability. Success at minimizing revenues and minimizing expenses from operating activities over the long run.
  • 70. 5.1 SHORT-TERM LIQUIDITYImportant measures of short-term liquidity for the last five years have beenanalyzed by the use of liquidity ratios. Al-Qadir’s current assets have increasedeach year except for the year 2000. From 1998 to 2002 its assets have increasedby approximately 40%. The company’s current liabilities remained high up till1999 and did reduced for two years then again increases in 2002, as they havemore short-term borrowings for the last year. Al-Qadir’s liquidity position is farmuch better then the industry average.D.M’s current assets also show an increasing trend, but that is slow with respectto increase in current liabilities. Current liabilities have accelerated for the reasonof more creditors, accrued and other liabilities.(Colony) Sarhad liquidity position is not favorable they have increased theircurrent assets especially inventories and they are not making enough sales, so ifthey sell those assets they can’t even recover the cost. And amounts of theirliabilities have increased due to excessive short-term borrowings. They are in atrouble to meet their short-term obligations.5.2 CASH FLOW ANALYSISAl-Qadir’s operating cash flows is high for the year 2000, reason being low costof sales, which have resulted in high profit before taxation. This analysis revealscash flows are steady source of cash, with a substantial increase in year 2000.The cash down turn in year 1999 is due primarily to financial charges. Investingactivities were more in 1999 and 2000, due to major out flow of fixed capitalexpenditure. Financing out flows are more for the last three years, wheredividends are paid in year 2001 and 2002.
  • 71. D.M have been able to maintain high cash flows from operations even afterincurring loss before taxation for the year 1998 and 1999. Cash flow hasdecreased for the year 2002 because of more payments made to creditors.Investment has increased for 2001 and 2002 by acquiring fixed assets. Whereasfinancing out flow is more for the year 2001 as company made a repayment oflong-term loan.(Colony) Sarhad has incurred losses all the way through the years, which hasaffected its operating activities. They are not having enough sales even to covertheir production costs. In spite of incurring losses they have a addition to fixedasset in year 1998 and 2002, that shows an out flow.5.3 RETURN ON INVESTED CAPITALAl-Qadir return on assets (ROA) shows a variation due to constant increase inassets and fluctuating net income. Net income is supreme for the year 2000.Return on equity (ROE) similarly shows the same trend as ROA.D.M return on assets (ROA) is also changing according to the net incomereceived. Its return on assets (ROA) is lowest for the year 1998 as the cost ofsales and operating expenses are high.(Colony) Sarhad is not having any positive return from its assets for the reason ofcontinuously incurring losses for the successive five years.5.4 ASSET UTILIZATION
  • 72. Al-Qadir’s asset turnover is increasing over last five years. Yet this increase is inasset turnover makes significant changes in turnover for individual assetcomponents. Cash and equivalents evidence the most significant variabilityduring this period, which is also evidenced from common-size balance sheet.Company’s account receivables shows a slight improvement in year 2001.Regarding inventory turnover, company expressed desire to decreaseinventories at every stage of its manufacturing process is revealing itself throughan improved turnover ratio. It is important to note that Al-Qadir’s asset and assetcomponent turnover ratios often compare favorable to industry norms.D.M’s asset turnover is fluctuating over the years as it has decreased for the lastyear 2002. Cash and equivalents also show a fluctuating trend. Accountreceivable turnover has decreased for the last year but was better in the previousyears. Inventory turnover ratio has improved continuously for all the years.(Colony) Sarhad ‘s asset turnover has decreased. Inventory turnover is muchlower than the industry norms, as company’s cost of sales are high and moreoverinventory constitutes about 50% of assets. Receivable turnover is also very lowas more of their sales are on credit.5.5 OPERATING PERFORMANCE AND PROFITABILITYAl-Qadir’s gross-profit margin has increased for the first three years and reduceseventually for the year 2001 and 2002, as cost of sales are highest for the year2002. Operating-profit margin is following the same trend in spite that over theyears they have reduced their operating expenses. Net-profit margin is negativefor year 1998 and 1999 as they have paid the financial charges and reduced theirdebt burden.
  • 73. D.M’s gross-profit margin is stable for the last three years and was low for 1998and 1999, as their cost of sales were 93% and 92% respectively. Company’soperating profit show an increasing trend, excluding the year 2002, theiroperating expenses are very much stable for five years. Net-profit margin ishighest for the year 2001 due to less cost of sales.(Colony) Sarhad starts from the negative gross-profit margin as its cost of salesare higher than its net sales. Therefore, operating-profit and net-profit margin arealso negative. BIBLIOGRAPHY
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