Strategic Financial Analysis JS vs Arif Habib

3. Pakistan’s financial sector is dominated by 38 banks, which held 73.9% of the Rs15,039 billion ($152 billion) of the
financial sector’s assets at the end of fiscal year (FY) 2014.
Other participants include the National Savings Schemes (NSSs), which held 16.4% of assets; development finance
institutions (DFIs) and other non-bank financial institutions (NBFIs) with 4.7%; insurance companies with 4.5%; and
microfinance institutions (MFIs) with 0.4%.
Services provided by NBFIs include:
 Asset Management Services
 Investment Advisory Services
 Private Equity & Venture Capital Fund Management Services
 Leasing
 Investment finance services
 Housing Finance Services
 Pension Funds
 REIT Management Services

4. NBFI Sector in Pakistan comprises of 28 listed companies with total market capitalization of Rs 50 Billion which is
less than 1% of total market capitalization of Pakistan Stock Exchange.
Top three companies in the sector holds more than 70% of total market capitalization.

7. Over the last three years, the NBFI sector has shown growth of approx. 52%. Comparing the sector growth with KSE
100 index reveals that the sector is less volatile. However it is evident that NBFI sector in PSX is not enriched as
much as other sectors

8. Growth in NBFI sector is concentrated and relatively slow. Table below summarizes the change in total asset base of
financial sector.

9.  The non-bank sector has managed to grow alongside the growing banking sector; their main competitor.
 The major share of the NBFIs sector is concentrated in few large institutions, while other small institutions are
facing solvency issues.
 The NBFIs, generally, have limited avenues for contingency liquidity support in times of stress.
 NBFI sector entities are also exposed to funding constraints.
 In the absence of any emergency liquidity assistance facility, liquidity risk can become severe

10.  Jahangir Siddiqui & Co. Ltd. (JSCL) is primarily an investment company in financial services and also
makes long term investments in growing companies in Pakistan.
 JSCL was incorporated under the Companies Ordinance, 1984 on May 04, 1991 in Pakistan as
successor to the equity and fixed income securities and corporate finance business established by
Mr. Jahangir Siddiqui.
 Rated AA (Long term) and A1+(Short term)
 These ratings denote a very low expectation of credit risk, a strong capacity for timely payment of
financial commitments and strong risk absorption capacity.(PACRA)

11.  Arif Habib Limited (AHL) is a premier brokerage and financial services firm engaged
 Equity Trading,
 Investment Banking,
 Money Market and Forex,
 Commodities Trading and Securities Research.
 Market leaders in Broking and Investment Banking services for over 40 years.
 Listed at Pakistan Stock Exchange. (PSX) with 69% ownership by Arif Habib Corporation Limited
 Rated AA- (Long term) and A-1 (Short term) with a ‘Stable’ outlook by JCR – VIS Credit Rating Company.

12. The capital structure is how a firm finances its overall operations and growth by using different sources of
funds.
Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common
stock, preferred stock or retained earnings.
Vital ratios which can be utilized to analyze company’s capital structure include:
1) Debt to Equity Raito
2) Debt to Total Raito
3) Financial Leverage Raito

13.  The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’
equity.
 Debt to equity ratio of JSCL is very low which depicts that their capital structure is mainly based on equity.
 Slight increase in the ratio is observed over last three years.
 On the contrary AHL is near 50% on D/E ratio and it increased top 70% during year 2016.
 Higher ratio makes the firm more levered and increase interest expenses also.

14.  AHL has very high Debt to Total ratio as compare to JSCL.
 This indicates that AHL has higher degree of leverage.
 It is also evident change in the ratio of JSCL is much less while that of AHL changes abruptly.

15.  The financial leverage ratio is a measure of how much assets a company holds relative to its equity.
 Financial Leverage ratio of AHL reveals that most of it asset is financed through debt and is increasing. This makes the
firm’s capital structure more risky and have negative impact on income statement due to increased interest expense.
 Financial leverage ratio of JSCL is less than 0.5 which is good sign as it shows that the company is relying more on
equity.

16.  The primary purpose of working capital management is to make sure the company always maintains sufficient cash
flow to meet its short-term operating costs and short-term debt obligations.
 Working capital management refers to a company's managerial accounting strategy designed to monitor and utilize
the two components of working capital, current assets and current liabilities, to ensure the most financially efficient
operation of the company
1) Current Raito
2) Absolute Cash Raito
3) Working Capital Turnover Raito

17.  Comparison of current ratio of both companies shows that JSCL has much better standing regarding current assets
 The current assets of JSCL are 4 to 6 times more than current liabilities.
 However it is alarming that the ratio decreased during year 2017.
 On the other hand the position of AHL is weaker as the current asset is around only 2 time of current liabilities.

18.  The relationship between the absolute liquid assets and current liabilities is established by this ratio.
 Cash situation of JSCL is stable however it faced declined during year 2016 but then recovered.
 Comparatively the cash position of AHL is less than 1 which shows that current liabilities are more than the available
cash

19.  The working capital turnover ratio is also referred to as net sales to working capital.
 The graph shows that both companies had working capital turnover efficiency of approx90% during year 2015.
 The efficiency decreased due to decreased sales during year 2016 but then recovered.
 It is also evident that JSCL suffered more loss in efficiency.

20.  Total assets of a company by its sales
 AHL has much lower assets as compare to JSCL.
 The ratio depicts that JSCL has deployed higher assets while the sales is not comparatively high.
 Asset turnover ratio of AHL is around 2 to 3, how ever it shot up to 6 during year 2016 due to low sales.
 As the sector under review is not capital intensive, AHL standing is much better than JSCL

21.  AHL relies heavily on debt. The firm should go for equity financing so as to reduce its interest expense. Also
improvement in the Debt to equity ratio will strengthen the firm’s capital structure.
 Working capital management of JSCL is better however the trend is highly fluctuating. On the contrary AHL needs to
improve the efficiency of working capital as currently the firm’s current liabilities are very close to available funds. In
order to avoid solvency issues in future, AHL should improve working capital turnover by improving sales.
 JSCL has very high asset intensity which makes the firm less efficient. Also it is evident that the trend is increasing. In
order to improve the asset intensity ratio, the firm has enhance effective utilization of available assets and avoid
increase in asset in near future.

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