PROJECT REPORT

Financial Ratio Analysis of Cherat Cement

SUBMITTED TO: Mr. Abdullah Hafeez

SUBMITTED BY:

Hashim Khattak

Junaid Raza

Mir Ehtesham Ul Haq

Muhammad Umair

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 Contents
Introduction .................................................................................................................................................. 5
Company Overview ................................................................................................................................... 5
Geographical Presence ............................................................................................................................. 5
Main Distribution ...................................................................................................................................... 5
Factors Affecting the External Environment and the Organization’s Response. .......................................... 6
POLITICAL .................................................................................................................................................. 6
ECONOMIC ................................................................................................................................................ 6
SOCIAL ....................................................................................................................................................... 6
TECHNOLOGICAL ....................................................................................................................................... 6
LEGAL ........................................................................................................................................................ 6
ENVIRONMENTAL ..................................................................................................................................... 6
Composition of Imported vs Local Inputs ..................................................................................................... 7
Liquidity Ratios .............................................................................................................................................. 7
Quick ratio ..................................................................................................................................................... 7
Significance ............................................................................................................................................... 7
Ratio analysis ............................................................................................................................................ 8
Causes ....................................................................................................................................................... 8
Recommendations .................................................................................................................................... 9
Current Ratio ................................................................................................................................................. 9
Ratio analysis: ........................................................................................................................................... 9
Causes ..................................................................................................................................................... 10
Recommendations .................................................................................................................................. 10
Fixed asset turnover.................................................................................................................................... 10
Significance ............................................................................................................................................. 10
Ratio analysis .......................................................................................................................................... 11
Causes ..................................................................................................................................................... 12
Recommendations .................................................................................................................................. 12
Days Sales Outstanding (Receivables Turnover in Days) ............................................................................ 12
Ratio Significance .................................................................................................................................... 13
Ratio Analysis .......................................................................................................................................... 13
Causes ..................................................................................................................................................... 13

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 Suggestions/Recommendations: ............................................................................................................ 13
Inventory Turnover in Days......................................................................................................................... 14
Ratio Significance .................................................................................................................................... 15
Ratio Analysis .......................................................................................................................................... 15
Causes: .................................................................................................................................................... 15
Suggestions/Recommendations: ............................................................................................................ 16
Total Asset Turnover ................................................................................................................................... 17
Ratio Significance: ................................................................................................................................... 17
Ratio Analysis: ......................................................................................................................................... 17
Causes: .................................................................................................................................................... 18
Suggestions/Recommendations: ............................................................................................................ 18
Interest Coverage Ratio (TIE) ...................................................................................................................... 18
Ratio Significance: ................................................................................................................................... 19
Ratio Analysis: ......................................................................................................................................... 19
Causes: .................................................................................................................................................... 19
Suggestions/Recommendations: ............................................................................................................ 20
Profitability ratios ....................................................................................................................................... 20
Net Profit Margin on Sales .......................................................................................................................... 21
Ratio Significance: ................................................................................................................................... 22
Ratio Analysis: ......................................................................................................................................... 22
Causes: .................................................................................................................................................... 22
Suggestions/Recommendations: ............................................................................................................ 22
Gross Profit Margin ..................................................................................................................................... 23
Ratio Significance: ................................................................................................................................... 24
Ratio Analysis: ......................................................................................................................................... 24
Causes: .................................................................................................................................................... 24
Suggestions/Recommendations: ............................................................................................................ 25
Return on Equity (ROE) ............................................................................................................................... 26
Ratio Significance: ................................................................................................................................... 26
Ratio Analysis: ......................................................................................................................................... 27
Causes: .................................................................................................................................................... 27
Suggestions/Recommendations: ............................................................................................................ 27

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Du Pont Analysis ......................................................................................................................................... 28
Significance ............................................................................................................................................. 28
Analysis/Causes....................................................................................................................................... 29
Solutions/Recommendations.................................................................................................................. 29
Debt to Equity Ratio .................................................................................................................................... 30
Ratio Significance: ................................................................................................................................... 30
Ratio Analysis: ......................................................................................................................................... 31
Causes: .................................................................................................................................................... 31
Suggestions/Recommendations: ............................................................................................................ 31
Earnings per Share (EPS) ............................................................................................................................. 32
Ratio Significance: ................................................................................................................................... 33
Ratio Analysis: ......................................................................................................................................... 33
Causes: .................................................................................................................................................... 33
Suggestions/Recommendations: ............................................................................................................ 34
Price Earnings Ratio (P/E)............................................................................................................................ 35
Ratio Significance: ................................................................................................................................... 35
Ratio Analysis: ......................................................................................................................................... 36
Causes: .................................................................................................................................................... 36
Suggestions/Recommendations: ............................................................................................................ 36
Appendix ..................................................................................................................................................... 37
Balance Sheet.......................................................................................................................................... 37
Income Statement .................................................................................................................................. 38
Financial Highlights ................................................................................................................................. 39

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 Introduction
Company Overview
Since 1981, Cherat Cement has been committed to the people and communities
which support its business.
It is our continuous endeavour to contribute to the economic development and
improvement in the quality of life of the people of this country.
Like humans the elephants are also a close knit community; as we launch our Line-
III, we are now a force to be reckoned with, while cementing relationships and
building communities.

Geographical Presence

Main Distribution
Pakistan and Afghanistan.
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Factors Affecting the External Environment and the Organization’s Response.

POLITICAL
Political turmoil generally impacts Organizations negatively.

ECONOMIC
 Increasing labour cost
 High interest costs
 High inflation
 Low economic growth
 Exchange rates

SOCIAL

 CSR responsibilities
 Increasing attention in health care
 Charity and donation
 Providing education facility
 Safe and healthy environment

TECHNOLOGICAL

 Risk of technical obsolescence

 Introduction of new technology by competitors

LEGAL

 Companies Act 2017

 Income Tax Ordinance
 Sales Tax Act
 Stock Exchange (PSX) Rule Book
 SECP Acts, Rules, Regulations, Directives etc.

ENVIRONMENTAL
 Adverse weather condition
 Growing attention to environmental protection

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  Climate changes
 Natural disasters

Composition of Imported vs Local Inputs

Liquidity Ratios

Quick ratio

Significance
In finance, the quick ratio, also known as the acid-test ratio is a type of liquidity
ratio which measures the ability of a company to use its near cash or quick assets
to extinguish or retire its current liabilities immediately. It is defined as the ratio
between quickly available or liquid assets and current liabilities. Quick assets are
current assets that can presumably be quickly converted to cash at close to their
book values.

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Ratio analysis

Acid Test Ratio (2019) Acid Test Ratio (2018)

= (Current Asset–Inventory)/Current = (Current Asset–Inventory)/Current

Liabilities Liabilities

= (8093339– 1579682)/6196128 = 6281822-941910/3652506

= 1.05 = 1.46

As we can see that there is a decrease in 2019 which is around 0.4 which indicates
that cherat cement ability to payoff their current liabilities has decreased. But still
the ratio is more then 1 which is favorable.

Causes
Cherat cement current assets has increased in 2018 from 6281822 to 8093339 in
2019. But its inventory has also increased from 941910 to 1579682 and current
liabilities has also increased from 3652506 to 6196128 due to which the current
ratio has decreased by 0.4.

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Recommendations
 Cherat cement can do certain things due to which it can improve its quick
ratio. Cherat cement should focus on increasing its current assets and
develop proper inventorying system. Cherat cement should also focus on
decreasing its current liabilities.

Current Ratio
The current ratio is a liquidity ratio which shows the relationship of the firm’s
current assets to its current liabilities. Or it determines the ability of the firm to pay
back its current liabilities through its current assets.

Ratio analysis:

Current Ratio (2019) Current Ratio (2018)

= Current Assets/Current Liabilities = Current Assets/Current Liabilities

= 8093339/6196128 = 6281822/3652506

= 1.05 = 1.13

2019: 1.306193

2018: 1.719866305

The current ratio of cherat cement has decreased from 1.719866305 to 1.306193
between 2018 and 2019 which indicates that cherat cement’s abilty to payback its
current liabilities through its current assets decreased.

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Causes

The decrease in this ratio is due to the cherat cement’s increase in current liabilities
from 3652506 to 6196128 between 2019 and 2018. Which means that cherat
cement owes more money in 2019 then it did in 2018 they have taken more loans
as compared to their asset increasing.

Recommendations

 Cherat cement should develop a proper debt management system due to

which they can payback their debts. They should also focus on increasing
their assets without increasing their liabilities. They should also try to
increase their retained earnings. They should also sell off their unproductive
assets in order to payback their debts quickly.

Fixed asset turnover

Significance
Fixed-asset turnover is the ratio of sales (on the profit and loss account) to the
value of fixed assets (on the balance sheet). It indicates how well the business is
using its fixed assets to generate sales.

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Ratio analysis

Fixed Asset Turnover (2019) Fixed Asset Turnover (2018)

= Annual Sales/Total Fixed Assets = Annual Sales/Total Fixed Assets

= 15862647/27186488 = 14388349/24237739

= 0.58
= 0.59

2019: 0.5834754

2018: 0.593634126

Cherat cement turnover ratio has slightly decreased from 0.5834754 to

0.593634126 between 2019 to 2018 which means that the firm is using its assets
less effectively to generate revenue.

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Causes
The reason behind the decrease in this ratio is due to the increase in fixed assets.
Sales have increased in less proportion as compared to the assets. The firm is also
not using its assets effectively in order to generate more sales.

Recommendations
 In order to improve this ratio Cherat cement must sell off their inefficient
and useless assets. They should also use innovative techniques to increase
their sales. They should dispose off old machinery. They should use certain
marketing techniques to improve their sales.

Days Sales Outstanding (Receivables Turnover in Days)

Days Sales Outstanding = (Receivables x days in year)/Annual Sales

Days Sales Outstanding (2019) Days Sales Outstanding (2018)

= (Receivables x days in year)/Annual = (Receivables x days in year)/Annual

Sales Sales

= (1010916x 365)/12979533 = (798729 x 365)/11249153

= 28.42816764 Days = 25.91626987 Days

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Ratio Significance

This ratios interpretation is that now the company is making its collections a few
days before which is beneficial in terms of liquidity and they have more cash in hand,
thus increasing cash inflows. Money available at the present time is worth more than
the identical sum in the future due to its potential earning capacity. By quickly
turning sales into cash, or receiving the collections, the company has a chance to put
the cash to use again more quickly.

Ratio Analysis

As per the company’s days sales outstanding ratio of 2019 the number of days
increased from 28.42 to 25.91, which shows an obvious incline. The higher the ratio
of day’s sales outstanding the less beneficial it is for the company, as now they have
their payments in a longer period of time. Thus, this is unfavorable ratio for cherat
cement, which it should improve.

Causes

The leading cause of the decline in the day’s sales outstanding ratio is the fact that
annual sales have decreased between 2018 and 2019. This showed that, while
account receivables also decreased since 2018, Cherat Cement was unable to more
effectively collect its account receivables which it earned from the sale of its
products, and converts it into cash in 2019 than in 2018. In other words, cherat
cement has worse its collection department’s efficiency in order to ensure that its
debtors paid the company back on a timelier basis.

Suggestions/Recommendations:

 Cherat Cement can implement actions, decisions, and policies in order to

boost consumer demand, and thus generate sales revenue. This can be done
through various methods, such as effective promotional tactics. Sales
promotions and deals, such as “Psychological discounting”.

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  Cherat Cement may be able to revise its credit policies by giving slightly
smaller credit periods, in order to ensure that the company is paid back on a
timelier basis. Cherat Cement can also develop and improve the efficiency of
its collection department, in order to keep track of its debtors, monitor the
time period of credit, and ensure that Cherat Cement is able to collect cash
from its account receivables in a timely manner.

 Cherat Cement can provide incentives to its account receivables in order to

encourage prompt payment, for example by providing small discounts for
prompt payment, etc… Such measures can further encourage quicker
payment, thereby reducing account receivables and converting it into cash.
This will therefore improve Cherat Cement’s receivable activities ratio. All of
these actions will surely help Cherat Cement improve and maintain this ratio.

Inventory Turnover in Days

Inventory Turnover in Days = (Inventory x Days in a year)/CGS

Inventory Turnover in Times (2019) Inventory Turnover in Times (2018)

= (Inventory x 365)cgs = (Inventory x 365)/CGS

= (1010916 x 365)/12979533 = (798729 x 365)/11249153

= 12.83937835 times = 14.08381691 times

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Ratio Significance
The inventory turnover ratio is an efficiency ratio that shows how effectively
inventory is managed by comparing cost of goods sold with average inventory for a
period. A lower turnover ratio implies weak sales, thus excess inventory; A high
turnover implies either strong sales or large discounts.

Ratio Analysis
As per the company’s inventory turnover ratio of 2019 the days have decreased
12.83 from 14.08 (in 2018) which is favorable for the company. Lower number of
days in an inventory turnover indicates that the company’s sales were high due to
which they ran out of inventory.

Causes:
The main cause for the improvement in Cherat Cement’s inventory turnover in days
is the fact that Cherat Cement in 2019 has managed to control its inventory in spite
of growing sales and production. While inventory has increased since 2018, and so
has CGS, the extent to which inventory increased is more controlled. This means
that Cherat Cement was able to manage its inventory more effectively than in
previous years. This has caused the improvement in Cherat Cement’s inventory
turnover ratio.

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Suggestions/Recommendations:
 Cherat Cement may attempt to increase the inventory turnover ratio by
lowering, driving input costs lower and sales higher. Cost management lowers
the cost of goods sold, which in return drives the profitability higher.
 Furthermore, Cherat Cement may attempt to keep inventory levels low by
adopting lean production techniques, which reduce wastage and ensure that
the company is not over holding excessive inventory at a given time. Through
lean production techniques, Cherat Cement will be able to avoid having large
inventory quantities at a time, which will also reduce holding costs. This
would decrease the cost of goods sold (CGS), lowering the denominator thus
increasing the ratio.
 Another action which Cherat Cement can take in order to improve this ratio
is by planning short production runs which also mean they would not need to
keep excess inventory.
 Reducing supplier lead times can also increase turnover ratio. More effective
inventory management systems will allow Cherat Cement to order more
stocks when required and will allow it to have fewer requirements to old large
amounts of inventory at a time. This will also elp reduce the inventory
turnover level.
 In 2019, Cherat Cement had a major goal to improve its supply chain, which
it has been somewhat successful in doing. By improving its supply chain,
Cherat Cement will be able to develop stronger, more trusting relations with
its suppliers. This means that Cherat Cement will be able to rely on its
suppliers to deliver inventory stocks in fewer quantities more frequently,
which would lead to overall less inventory held by Cherat Cement at a given
time. This will further help maintain the inventory turnover ratio.

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Total Asset Turnover
Total Asset Turnover = Annual Sales/Total Assets

Total Asset Turnover (2019) Total Asset Turnover (2018)

= Annual Sales/Total Assets = Annual Sales/Total Assets

= 15125498/32899694 = 12016874/24663155.5

= 0.4597458566 = 0.4872399235

Ratio Significance:
Total asset turnover is a type of asset management ratio which measures how
effectively a firm is managing its assets. In total asset ratio, the firm can assess how
effectively it is using its plant, equipment, fixed assets, as well as its current assets,
such as stock, cash, account receivables, etc,,, in order to help generate sales.

Ratio Analysis:
Cherat Cement’s total asset turnover has decreased, albeit by a very small amount,
from 0.4872 in 2018, to 0.459 in 2019.This is unfavorable for the business as it
shows that Cherat Cement is not generating sales as efficiently in proportion to its
total assets as it was in the previous year.
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Causes:
While total sales have increased from 2018, the value of total assets has increased to
a greater extent. In particular, property, plant & equipment, goodwill and trade debts
& other receivables have caused a significant increase in total assets of Cherat
Cement in 2019. This is due to the increase in machinery and plants according to
Cherat Cement’s expansion plans in 2019.

Suggestions/Recommendations:
 In order to improve this ratio, Cherat Cement should consider disposing of its
older, outdated, and inefficient assets. This will increase the overall efficiency
of fixed assets and can help improve the ratio. Moreover, updating,
maintaining, and refurbishing older machines/equipment which are still in use
for the business will help improve its efficiency and can help increase
production, thereby improving the total asset turnover.
 Another way for Cherat Cement to increase its total asset turnover is by
increasing sales.
 Furthermore, Cherat Cement should considering employing skilled labour, or
provide training to labour for operating the new machinery. This will improve
Cherat Cement’s production efficiency and can help generate sales. Such an
action would inevitably help improve the total asset ratio.

Interest Coverage Ratio (TIE)

Interest Coverage Ratio (TIE) = EBIT/Interest Charges

Interest Coverage Ratio (2019) Interest Coverage Ratio (2018)

= EBIT/Interest Charges = EBIT/Interest Charges

=2190327/1142559 =2503952/356585

=1.917036232 = 7.022034017

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Ratio Significance:
Interest coverage ratio is a type of coverage ratio which relates the financial charges
of a firm to its ability to service or cover them. This ratio measures the firm’s ability
to meet its interest payment and thus avoid bankruptcy.
Ratio Analysis:
In 2018, the interest coverage ratio of Cherat Cement was 7.022, while in 2019 it
decreased to 1.917. This is because while there has been an increase in earnings
before interest and tax (EBIT), from Rs. 2190327 to Rs. 2503952, the increase in
interest charges has been to a greater extent, from Rs 356585 to Rs.1142559 . This
has led to an overall decrease in the interest coverage ratio of Cherat Cement.

Causes:
Cherat Cement has managed to lower its interest coverage ratio in 2019 due to its
increase in interest charges. This is caused by the fact that in 2019, Cherat Cement
borrowed more money from creditors in the form of long term loans in order to
finance its production expansion objective. This increase in long term liabilities
subsequently led to an increase in interest charges, which reduced Cherat Cement’s
interest coverage ratio.

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Suggestions/Recommendations:
 In order to improve its interest coverage ratio, Cherat Cement should either
try to take actions in order to increase its earnings before interest and taxes
(EBIT), or take actions in order to reduce its interest charges.
 Cherat Cement can increase its EBIT in several ways. Cherat Cement can
potentially increase its EBIT by increasing total sales. Total sales can be
increased by creating more demand for the firm’s products, through effective
promotion techniques, advertising and after sales services that can encourage
consumers to purchase Cherat Cements products. If Cherat Cement
continues to successfully promote its products in this manner, EBIT can be
further increased, thereby improving the interest coverage ratio.
 Cherat Cement should also do more analysis and research to find the most
efficient balance of liabilities and equity in order to minimize its interest and
taxes cost. Cherat Cement can consider switching from liability based
financing to equity based financing, i.e. converting its long term loan creditors
to shareholders instead. This will be a more permanent form of financing for
the company and will also decrease the level of long term debt, thereby
reducing its interest costs.
 Moreover,by finding the right balance of equity financing and debt (liability)
financing, Cherat Cement will be able to increase its total equity, while paying
the lowest total financing costs (interest) and taxes. This will also improve the
interest coverage ratio of Cherat Cement.

Profitability ratios

Profitability ratios of the Company are declining due to the economic conditions of
the country. Devaluation of PKR, higher inflation resulted in increased fuel, energy
and raw material costs resulting in lower GP margins. On the other hand, rising
interest rate and capitalization of Line III caused the finance cost to surge which
results in lower net profit margins and returns on equity and capital employed.
However, the impact of all the negative factors was mitigated by efficient utilization
of captive power generation and tax credits.

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Furthermore, the unnecessary revenue expenditure should be minimized and sinking
fund may be created out of net profit to meet unforeseen future crisis. Moreover,
surplus staff should be reduced, and unnecessary expenditure be avoided on
publicity. General expenditure on various heads including hefty bonuses should be
rationalized.

Net Profit Margin on Sales

Net Profit Margin on Sales = Net Income/Annual Sales

Net Profit Margin (2019) Net Profit Margin (2018)

= Net Income/Annual Sales = Net Income/Annual Sales

= 1,762,763/ 15,862,647 x 100 = 2,132,119/ 14,388,349 x 100

= 11.11% = 14.81%

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Ratio Significance:
Net profit margin on sales is a profitability ratio that relates profits to sales and
investment. Profitability is the net result of a number of policies and decisions. So,
net profit margin on sales is a ratio that measures the profitability of sales after taking
into account all the expenses and income taxes. In other words, net profit margin on
sales gives the profit per dollar of sales.

Ratio Analysis:
Net Profit margin has decreased by three digits, from 14.81% in 2018 to11.11% in
2019, which can be considered unfavorable as it shows that the company is making
a smaller percentage of profit from its sales revenue.

Causes:
Net profit and sales both increased in 2019. But there was also an increase in CGS,
distribution costs, finance costs, and taxes all increased, which led to net profit being
a smaller proportion of total sales. This led to a fall in net profit margin.

Suggestions/Recommendations:
 In order to improve this ratio, Cherat cement should try to increase net profit.
This can be done by reducing its operating expenses (e.g. distribution costs,
administration costs, etc…). Furthermore, Cherat cement can try to minimize
its cost of goods sold (CGS), in order to increase net profits. Cherat cement
can decrease its CGS by employing more skilled labour, or provide training
to labour for operating the new machinery. This will improve cherat cement
production efficiency and will reduce the amount of wastage in the company.
Hence, CGS will fall and net income will increase, thereby improving the net
profit margin ratio.
 Introducing automation at larger scale will also decrease CGS as efficient
machinery will produce a greater quantity of quality products in a shorter
amount of time than if labor-intensive production methods are used, to
wastage will be reduced and so will CGS. Cherat Cement is already embracing
automation and capital-intensive production methods; in 2019 it purchased a
large number of new, modern machinery and equipment, and has plans to
continue improving its production capacity in the same manner. This will

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 surely help Cherat Cement decrease its CGS, increase net profit, and hence
improve its net profit margin on sales ratio.
 Moreover, a major goal of Cherat cement in 2019 was to expand local market
through line iii project Nowshera, KPK and its supply chain, which it has
been somewhat successful in doing. If it continues to take actions in order to
increase the efficiency of its supply chain, then wastage will be further
decreased, and so will CGS. Cherat cement company will benefit from this in
the form of increased net profits, which will improve the net profit on sales
ratio.
 Furthermore, Cherat cement company can potentially increase its net profit by
increasing total sales. Total sales can be increased by creating more demand
for the firm’s products, through effective promotion techniques, advertising
and after sales services that can encourage consumers to purchase National
Foods products.
 Cherat cement should also do more analysis and research to find the most
efficient balance of liabilities and equity in order to minimize its interest and
taxes cost. By finding the right balance of equity financing and debt (liability)
financing, Cherat Cement will be able to increase its total equity, while paying
the lowest total financing costs (interest) and taxes. This will also improve the
net profit margin ratio of the company.

Gross Profit Margin

Gross Profit Margin = Gross profit / Annual sales

Gross Profit Margin (2019) Gross Profit Margin (2018)

= Gross Profit/Annual Sales = Gross Profit/Annual Sales

= 2,883,114/15,862,647 x 100 = 3,139,196/14,388,349x 100

= 18.17% = 21.817%

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Ratio Significance:
Gross profit margin is a financial matrix used to assess a company's financial health
and business model by revealing the proportion of money left over from revenues
after accounting for the cost of goods sold. Gross profit, the first level of profitability,
tells analysts how good a company is at creating a product or providing a service
compared to its competitors.
Ratio Analysis:
The ratio in 2018 is greater than 2019 which makes this ratio unfavorable for the
Cherat cement to be decreased in the current year.

Causes:
The main causes which usually have an effect upon the ratio are generally; Decrease
in the selling price of goods, without any decrease in the cost of goods sold.. Cost
structure of the organization; incompetence in purchasing equipment’s, marketing
expenses and their production and distribution. Cost of production; There can be
many costs included in the production for Cherat that are buying raw materials,
utility bills and labour. Market demand, it mainly depends upon it because Cherat
needs to identify what a market is in need and what they are asking for in a greater
proportion.

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Suggestions/Recommendations:

 As there is decrease in the ratio for 2019, Cherat cement can tackle it by
manufacturing high quality products with simple methods which can attract
customers.
 They can also increase their ratio by reducing the cost of the materials by
buying them in bulk and also should have proper supply chain management
and should choose suppliers wisely and have good relations with the suppliers
to have maximum discount and maintaining supplies on time.
 Pricing strategies of the cherat cement should be minimum as in comparison
to the competitors or have different offers or deals with the products so that
sales increase.
 Inventory management should be made by the Cherat cement company so that
they should not have excessive inventory which cost them to have more ware
houses and no use of spare material.

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Return on Equity (ROE)

Return on Equity (ROE) = Net income/Shareholder’s Equity

Return on Equity (2019) Return on Equity (2018)

= Net income/Shareholder’s Equity = Net income/Shareholder’s Equity

= 1,762,763 / 11,756,169 X 100 = 2,132,119 / 11,173,748 X 100

= 14.993% = 19.081%

Ratio Significance:
The return on equity ratio or ROE is a profitability ratio that measures the ability of
a firm to generate profits from its shareholders investments in the company. In other
words, the return on equity ratio shows how much profit each dollar of common
stockholders’ equity generates. This is an important measurement for potential
investors because they want to see how efficiently a company will use their money
to generate net income.

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Ratio Analysis:
There is a decrease in the Return On Equity Ratio in year 2019 shows that the ratio
for the Cherat cement company is not favorable because there is an massive drop
on their return on equity than in 2018.

Causes:
The main cause is less control over the cost of production, poor financial leverage,
less profit margin and taxes which in return created a reduction in profit margin
which decreased the return on equity. Another main factor that brought change in
the ratio is less effectiveness and efficiency that how inefficiently and inefficiently
cherat cement used their assets to generate turnovers.. Debt is another major factor
that affected the ratio, because company borrowed money from investors for the
line iii project any the company is returning the money to the investors.

Suggestions/Recommendations:
 Cherat cement company can improve their ratio by maintaining operating
expenses; it can be done by maintaining good relations with suppliers which
in return provide you goods in lower cost and higher revenue can be generated.
So, the return on equity will be improved.
 By increasing profits margins, the company can improve their ratio which will
be done by reducing operating expenses and increase prices or create
discounts on the products which will increase sales. Distributing idle cash to
shareholders is effectively a way to leverage a company and boost its return
on equity.

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Du Pont Analysis

Significance
DuPont Analysis is an extended examination of Return on Equity (ROE) of a
company which analyses Net Profit Margin, Asset Turnover, and Financial
Leverage.

DuPont Analysis gives a broader view of the Return on Equity of the company. It
highlights the company’s strengths and pinpoints the area where there is a scope
for improvement. Say if the shareholders are dissatisfied with lower ROE, the
company with the help of DuPont Analysis formula can assess whether the lower
ROE is due to low-profit margin, low asset turnover or poor leverage.

ROE= (Net Income/ Sales) * (Net Sales/Total Assets) * (Total Assets/Total

Equity) OR

Profit Margin * Total Asset Turnover * Equity Multiplier

2019

Equity Multiplier= Total assets/Total equity= 35279827/ 11756169=3.00

2018

Equity Multiplier= Total assets/Total equity= 30519561/ 11173748=2.73

ROE (2019) ROE (2018)

= Profit Margin * TotalAsset Turnover = Profit Margin * TotalAsset Turnover

* Equity Multiplier * Equity Multiplier

= 11.11*0.44*3.00=14.99 = 14.81*0.47*2.73=19.08

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Analysis/Causes

 Profit Margin is decreased from 14.81 to 11.11. Equity multiplier is

increased from 2.73 to 3.00. Total Asset turnover is decreased from 0.47 to
0.44.
 Finance Cost is increased due to increase in costs of long-term loans and short-
term borrowings for expansion purpose which lead to decrease in net profits.
 Prior Tax and deferred Tax has also Increased Resulting a Low Net Income.
 Cost of sales Is Increased Due to Inflation which caused Low Gross Profit as
compared to 2018.

Solutions/Recommendations
 Company Needs To Improve their Profit Margin and Total Asset Turnover.
 Minimize the cost of raw material and packaging material by economies of
scale.
 Contacting to more suppliers and Supplier Relations should be effective.
 Supply chain of raw materials Should be on time with effective
Transportation cost.
 Unused Assets should be Utilized or Disposed Off.
 Borrowings Should be taken on suitable interest Rates.

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Debt to Equity Ratio

Debt to Equity Ratio = Total debt / Shareholders Equity

Debt to Equity Ratio (2019) Debt to Equity Ratio (2018)

= Total debt / Shareholders equity = Total debt / Shareholders equity

= 16900000/16900000+11756169 * = 14700000/14700000+11173748 *100

100
= 56.81434325
= 58.975085%

Ratio Significance:
The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion
of shareholders equity and debt used to finance a company's assets.

The ratio is used to evaluate a company's financial leverage The D/E ratio is an
important metric used in corporate finance. It is a measure of the degree to which a
company is financing its operations through debt versus wholly-owned funds. More
specifically, it reflects the ability of shareholder equity to cover all outstanding debts
in the event of a business downturn.

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Ratio Analysis:
In 2019, the debt to equity ratio equated to 58.97%, which indicates that
approximately 59 percent of Cherat Cement’s total shareholder equity was financed
by debt, or liabilities and reaming 21 percent by owner equity. However, this ratio
when calculated in 2018 was 56.81 approx. 57 percent financed by liabilities and
23 percent by owners equity.

Causes:
The Company’s current debt to equity ratio is increased mainly due to the
expansion work on Cement line III. This led Cherat Cement to a greater financing
requirement, and thus the value of Cherat Cement’s loans increased, as debt
financing was used to raise finance for the expansion plans.The Board of Directors
and the management are confident that the capital structure of the company will
improve considerably and a more balanced debt to equity ratio will be
maintainable once the capacity utilization increases.

Suggestions/Recommendations:
 Too much debt can be dangerous for a company and its investors. However,
if a company's operations can generate a higher rate of return than the
interest rate on its loan than the debt is helping to fuel growth in profits.
Nonetheless, uncontrolled debt levels can lead to credit downgrades or
worse.
 On the other hand, too few debts can also raise questions. A reluctance
or inability to borrow may be a sign that operating margins are simply too
tight.The management of the Company keeps a strong watch on its leverage
and consistent efforts have been made for its curtailment. Due to
commissioning of Line III, leverage has increasedbut loans are acquired at
very attractive markup rates.
 Cherat Cement can increase their equity by increasing their Paid in Capital by
generating revenue through sale of shares of stock. Taking on more debt is not
financially viable; a company can raise capital by selling additional shares.
These can be either common shares or preferred shares.
 They can also increase equity by increasing their Retained Earnings by factors
that may cause the equity account to increase including certain transactions
related to the repurchase of company stock, the declaration of shareholder
dividends and the income or loss from operations.
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  Cherat Cement has to decrease their liabilities in order to gain profitability by
selling unnecessary assets, using investments to pay off loan and convert
necessary assets to pay off liabilities.
 Higher production capacities of an entity help in bringing down the cost per
unit of the item manufactured. In our company fixed cost per unit went down
after commencement of production activities of line III. Production units
inversely proportion to the fixed cost per unit, higher production means low
per unit cost or vice versa. The Company is keen to bring its fixed cost per
unit down in order to enhance its profitability.
 The Company maintains its capital structure to the optimum level by financing
value projects through a blend of equity and long-term debts. During the year,
the Company successfully installed Line III, Waste Heat Recovery Plant for
Line III and Captive Power Plant. All these capital expenditures were financed
through economical long-term financings, which lead to higher financial
leverage. However, economical financing rates of the debts kept the financing
cost to the minimum level.

Earnings per Share (EPS)

Earnings per Share (EPS) = Net Income/Number of Common Shares Outstanding

Earnings per Share (2019) Earnings per Share (2018)

= Net Income/C.st. Outstanding = Net Income/C.st. Outstanding

= 1762763000/176631853 = 2132119000/176631853

= 9.97 = 12.07

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Ratio Significance:
EPS is one of the most widely used measures of profitability, and when it is
compared with EPS of other companies it shows where the company’s earning
power is in relation to other companies. As it is calculated over the years, it shows
whether the company’s earning power is decreasing or increasing. Investors prefer
companies who have a steady growth in EPS over time. In short, it shows how much
a company is making for its shareholders.

Ratio Analysis:
In 2018, Cherat Cement’s EPS was 12.07. In 2019, it was 9.97. This shows a
decrease of 2.1.

This is not a good sign for investor that company EPS has fallen instead of growing.
This is due to a decrease in net income during current year 2019. company was able
to increase their EPS due to an increase in their net income through an increase in
sales due to effective promotional strategies (marketing, administrations etc.)

Causes:
EPS decreased as net income has decreased while common stock outstanding has
remained constant.

Fuel and Power cost component is a substantial part of the overall cost of
production of the Company.

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Suppliers increase the cost of products supplied in view of international economic
conditions including rising costs of international fuel prices.

Adverse impact on Company’s earnings due to changes in Government policies

with respect to taxation measures, Power tariff, Axle load and Regulatory matters.

Suggestions/Recommendations:
 To improve EPS, Cherat Cement could try increasing its net income through
more efficient and effective management, and use of resources. Better
marketing and administration could also improve the efficiency of Cherat
Cement, reduce wastage, and lower expenses, which will hence increase net
income.
 Another action Cherat Cement could take is to reduce its number of
outstanding shares. A company can do this through a back buying process. A
back buying process is when a company re-buys its shares that have been
issued. The repurchase of these shares reduces the number of outstanding
shares, and since outstanding shares are inversely proportional to EPS, EPS
increases.
 They could also try increasing their Net Profit after tax (NPAT) through a
better capital structure, focusing a little more on equity, and reducing their
liabilities which would result in them having to pay fewer taxes.
 The Company analyses Coal prices of various suppliers on a regular basis to
compare and control its purchasing cost. Moreover, it has strategic
relationships with key suppliers which benefit the company in price
negotiation and prompt material delivery.
 Rate of return fluctuation affecting value of interest-bearing assets.

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Price Earnings Ratio (P/E)

P/E Ratio = Market Price per Share/EPS

P/E Ratio (2019) P/E Ratio (2018)

= Market Price per Share/EPS = Market Price per Share/EPS

= 30.96/9.97 = 97.23/712.07

= 3.10 = 8.05

Ratio Significance:
Price Earnings Ratio shows how much investors are willing to pay per dollar of
reported profits. It is an important ratio which gives investors a better sense of the
value of the company, and it is important for the investors to know how profitable a
company is, and how profitable it will be in the future. P/E ratios are compared with
other industry competitors and previous years’ P/E ratios to evaluate where the
company stands, and where it should be.

A high PE shows positive future performance, and that the company is a growth
stock. It also shows that investors have high future earnings expectations and are
willing to pay more in order to reap those rewards. Companies that have low P/E are
35
considered to be value stocks or are considered to be undervalued; however, it could
also mean it is doing exceptionally well compared to past trends.

Ratio Analysis:

The value has decreased from 8.05 to 3.10 this year. Earnings per share have
decreased. The company has not progressed and shareholders have not benefited
more as the market price as decreased as well.

Causes:
P/E ratio has decreased due to a fall in it's market price per share as well as fall in
EPS. But Market Price has fallen significantly as compared to EPS.

Distribution cost Admin Costs have also increased

Cherat Cement faced a challenging year due to its quickly growing business n
Expansion on Line 3 and extremely competitive market. Such factors may have
made investors pessimistic in the short run, which led to the fall in market price per
share.

Suggestions/Recommendations:
 If a company’s earnings have been decreasing over time, investors may be
discouraged from paying a certain price and may want to pay less as they lose
a little faith in the company. This would decrease the companies P/E ratio.
P/E ratio could also decrease if companies report losses or lower than expected
earnings as a decrease in investor demand would drive down the stock prices
and vice versa.
 Secondly, companies that show high growth expectations often have high P/E
ratio as investors have faith that the company will grow and often invest more.
Not only that, the high growth rate also encourages new investors to invest
into the business. Companies that come up with innovative ideas or new trends
often have a higher P/E ratio as investors are willing to pay a premium for
potentially high growth earnings. As Cherat Cement has high growth
expectations, according to its growth objectives and measures its taken in
2019 to improve its operations, it will likely to able to increase its market price
per share and thus improve its P/E ratio.

36
Appendix

Balance Sheet

37
Income Statement

38
Financial Highlights

39