Final Project of Accounting II

FINAL PROJECT OF ACCOUNTING II Financial Analysis of two Selected companies

By Jaweria Abbasi (BB-081011)
Usman iftikhar (BB-081005)

Submitted to Mr. Sohail Amjad Dated: 26 December 2009

Final Project of Accounting II

TABLE OF CONTENTS DEDICATION..........................................................................3 ACKNOWLEDGEMENT.......................................................4 EXECUTIVE SUMMARY......................................................5 INTRODUCTION TO THE TOPIC......................................6 AIMS AND OBJECTIVES......................................................6 FINANCIAL ANALYSIS........................................................7 COMPARATIVE INFORMATION FOR BOTH COMPANIES............................................................................7 HORIZONTAL ANALYSIS...................................................8 VERTICAL ANALYSIS........................................................10 RATIO ANALYSIS................................................................13 CONCLUSION.......................................................................16 REFERENCES.......................................................................17

Final Project of Accounting II

DEDICATION
We are really thankful to our parents who are really kind to us and without them we are Nothing. They helped and supported us in every situation. This is all because of there blessing And love where we stand today. Then we dedicate this project to our respectable sir .Sohail Amjad who is very kind and helpful To us and taught us all the realities of life.

Final Project of Accounting II

ACKNOWLEDGEMENT

First and foremost, we would like to very humbly submit out sincere and profound gratitude to Allah. The almighty, for providing us the strength, capacity and guidance on completing the Project. We sincerely pray and hope that this modest effort will contribute towards a better Understanding of accounting. We are really thankful to our respected teacher who gave us the chance to understand the Financial position of two companies. In this regard we got to know about annual reports in Detail.

Final Project of Accounting II

EXECUTIVE SUMMARY
In this report we are going to interpret the Maple Leaf Cement Factory Limited and Pioneer Cement Company Limited which are involved in production of the cement. The sales of the companies comprise of local sales and export sales. We collected the financial information profit and loss account & balance sheet of both companies for five years 2005-2009. On the basis of the information so collected we did the financial analysis of these companies. The financial analysis consisted of the following: Horizontal analysis Vertical analysis Ratio analysis

The ratio analysis is conducted on the available information of the year 2009 to give the latest financial performance of both the companies. On the basis of the above mentioned financial analysis, we concluded this report in the conclusion section.

Final Project of Accounting II

INTRODUCTION TO THE TOPIC The topic of this Research Project is to make a financial analysis of two selected companies in a particular industry in Pakistan. We have selected the Cement Industry for this research project due to the unpredictable and rapid changes in this industry. The companies working in this industry and which are the subject matter of this project are: Maple Leaf Cement Factory Limited (MLCFL) Pioneer Cement Limited (PCL) INTRODUCTION OF THE COMPANIES Maple Leaf Cement Factory Limited Maple Leaf Cement Factory Limited (MLCFL) was incorporated in Pakistan on 13 April 1960 under the Companies Act, 1913 (now the Companies Ordinance, 1984) as a public company limited by shares and was listed on stock exchanges, including Karachi stock exchange, in Pakistan on 17 August 1994. Pioneer Cement Limited Pioneer Cement Limited (PCL) was incorporated in Pakistan as a public company limited by shares on 9 February 1986. Its shares are quoted on all stock exchanges, including Karachi stock exchange, in Pakistan. The registered office of the company is situated at 1st Floor, Al Falah Building, Shahrah-e-Quaid-e-Azam, and Lahore.

The registered office of the company is situated at 42 Lawrence Road, Lahore, The principal activity of the company is Pakistan. manufacturing and sale of cement. The company is a subsidiary of Kohinoor Textile Mills Limited and is engaged in production and sale of cement.

AIMS AND OBJECTIVES This analysis of a company is of paramount importance for user groups interested in the business and financial position of the company. Following are the main user groups: Management Existing and potential shareholders Agents of shareholders, such as investment analysts Lenders, such as banks etc.

Last three user groups are external to the organization and have access to audited financial statements of the organization. Such user groups can undertake financial analysis on these 6

Final Project of Accounting II publicly available statements to reveal the strengths and weakness of the organization. The analysis also reveals the success of the company in achieving its strategic objectives. The management of the company is not only concerned with the financial performance of the company but with new business developments as well. Introduction of the new products, promotional activities and attracting the customers.

FINANCIAL ANALYSIS Following are major types of Financial Analysis Horizontal analysis Vertical analysis Ratio analysis

In Horizontal analysis financial statements of one year are compared with another to note and rationalize any significant changes. The vertical analysis focuses on working out the relationship of various figures of financial statements of a year with other figures of the same year. This sophisticated technique for analyzing financial statement may also be called ratio analysis. However we normally include ratio analysis as a separate tool from vertical analysis.

COMPARATIVE INFORMATION FOR BOTH COMPANIES

Maple Leaf Cement Factory Limited Profit & Loss Account
For The Year Ended 30 June: Sales Cost of sales Gross profit Administrative and other exepnses Other operating income Finance cost (Loss)/profit before taxation Taxation (Current & Deferred) (Loss)/profit after taxation 2009 15,251,374 (10,296,865) 4,954,509 (2,533,668) 61,749 (3,400,241) (917,651) (65,319) (982,970) 2008 7,815,829 (6,491,999) 1,323,830 (980,923) 105,656 (1,812,807) (1,364,244) 688,109 (676,135) 2007 3,711,081 (3,401,188) 309,893 (154,683) 43,224 (338,453) (140,019) 182,066 42,047 2006 5,709,792 (3,561,212) 2,148,580 (199,459) 26,671 (340,978) 1,634,814 (575,038) 1,059,776 2005 4,290,734 (2,962,802) 1,327,932 (58,902) 18,097 (259,749) 1,027,378 (299,928) 727,450

Balance Sheet
As of 30 June: Equity and Liabilities Equity Non-current liabilities Current liabilities Total equity and liabilities Assets Non-current assets current assets Total assets 2009 6,717,801 8,980,153 9,962,884 25,660,838 2008 8,360,889 10,408,208 7,382,464 26,151,561 2007 8,993,037 10,687,450 3,756,487 23,436,974 2006 7,555,704 8,939,675 2,649,519 19,144,898 2005 6,280,896 2,543,012 1,595,499 10,419,407

20,445,961 5,214,877 25,660,838

20,156,665 5,994,896 26,151,561

19,385,017 16,480,436 8,479,348 4,051,957 2,664,462 1,940,059 23,436,974 19,144,898 10,419,407 (All amounts are in PKR '000)

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Pioneer Cement Limited Profit & Loss Account
For The Year Ended 30 June: Sales Cost of sales Gross profit Administrative and other exepnses Other operating income Finance cost (Loss)/profit before taxation Taxation (Current & Deferred) (Loss)/profit after taxation 2009 5,000,235 (3,667,343) 1,332,892 (735,168) 28,047 (451,465) 174,306 (138,129) 36,177 2008 4,853,764 (4,340,151) 513,613 (705,054) 30,630 (413,203) (574,014) 394,043 (179,971) 2007 3,131,487 (2,813,309) 318,178 (148,458) 11,687 (365,848) (184,441) 90,947 (93,494) 2006 3,075,922 (1,845,284) 1,230,638 (171,781) 71,163 (196,949) 933,071 (257,089) 675,982 2005 2,045,127 (1,372,012) 673,115 (133,692) 27,193 (172,697) 393,919 (61,830) 332,089

Balance Sheet
As of 30 June: Equity and Liabilities Equity Revaluation reserve Non-current liabilities Current liabilities Total equity and liabilities Assets Non-current assets current assets Total assets 2009 2,400,541 2,180,889 2,277,173 3,489,131 10,347,734 2008 2,305,460 2,239,856 2,957,973 2,969,300 10,472,589 2007 2,096,224 574,203 3,940,220 1,999,850 8,610,497 2006 2,322,063 604,342 4,080,287 1,398,702 8,405,394 2005 1,621,109 629,314 3,647,953 989,539 6,887,915

9,327,157 1,020,577 10,347,734

9,687,587 785,002 10,472,589

7,644,205 7,785,964 6,425,232 966,292 619,430 462,683 8,610,497 8,405,394 6,887,915 (All amounts are in PKR '000)

HORIZONTAL ANALYSIS Horizontal analysis is a procedure in which an analyst compares line items in a company's financial statements over a certain period of time. In our analysis we have taken 2005 as base year for both the companies and have analysed the performance of the company over the rest of four years till 2009. The analysis over profit and loss account and balance for both companies is given in the following tabular forms:

Final Project of Accounting II

Maple Leaf Cement Factory Limited Horizontal Analysis of Profit & Loss Account
For The Year Ended 30 June: Sales Cost of sales Gross profit Administrative and other exepnses Other operating income Finance cost (Loss)/profit before taxation Taxation (Current & Deferred) (Loss)/profit after taxation 2009 355.45 347.54 373.10 4,301.50 341.21 1,309.05 (89.32) 21.78 (135.13) 2008 182.16 219.12 99.69 1,665.35 583.83 697.91 (132.79) (229.42) (92.95) 2007 86.49 114.80 23.34 262.61 238.85 130.30 (13.63) (60.70) 5.78 2006 133.07 120.20 161.80 338.63 147.38 131.27 159.12 191.73 145.68 2005 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Horizontal Analysis of Balance Sheet

As of 30 June: Equity and Liabilities Equity Non-current liabilities Current liabilities Total equity and liabilities Assets Non-current assets current assets Total assets 2009 106.96 353.13 624.44 246.28 2008 133.12 409.29 462.71 250.99 2007 143.18 420.27 235.44 224.94 2006 120.30 351.54 166.06 183.74 2005 100.00 100.00 100.00 100.00

241.13 268.80 246.28

237.71 309.01 250.99

228.61 208.86 224.94

194.36 137.34 183.74

100.00 100.00 100.00

Pioneer Cement Limited Horizontal Analysis of Profit & Loss Account

For The Year Ended 30 June: Sales Cost of sales Gross profit Administrative and other exepnses Other operating income Finance cost (Loss)/profit before taxation Taxation (Current & Deferred) (Loss)/profit after taxation 2009 244.50 267.30 198.02 549.90 103.14 261.42 44.25 223.40 10.89 2008 237.33 316.33 76.30 527.37 112.64 239.26 (145.72) (637.30) (54.19) 2007 153.12 205.05 47.27 111.04 42.98 211.84 (46.82) (147.09) (28.15) 2006 150.40 134.49 182.83 128.49 261.70 114.04 236.87 415.80 203.55 2005 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Horizontal Analysis of Balance Sheet

As of 30 June: Equity and Liabilities Equity Revaluation reserve Non-current liabilities Current liabilities Total equity and liabilities Assets Non-current assets current assets Total assets 2009 148.08 346.55 62.42 352.60 150.23 2008 142.21 355.92 81.09 300.07 152.04 2007 129.31 91.24 108.01 202.10 125.01 2006 143.24 96.03 111.85 141.35 122.03 2005 100.00 100.00 100.00 100.00 100.00

121.18 133.88 122.03

121.18 133.88 122.03

121.18 133.88 122.03

121.18 133.88 122.03

100.00 100.00 100.00

Final Project of Accounting II

M aple Leaf C ement Factory Limited Sales Gross profit (Loss)/profit after taxation

P ioneer C ement Limited Sales

6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1 ,000,000

Gross profit

(Loss)/profit after taxation

20,000,000 15,000,000 10,000,000 5,000,000 (5,000,000) 2009 2008 2007 2006 2005

(1 ,000,000) 2009 2008 2007 2006 2005

The above tabular and graphic representation shows clearly that both the companies since 2005 have shown a significant increase in terms of there revenues, though on the basis of volumes MLCFL has shown better numbers. However if we see the bottom line for both the companies, profits have come down significantly and MLCFL has shown a net loss after tax in 2008 and 2009, whereas PCL has shown loss in 2008 only.

VERTICAL ANALYSIS Vertical analysis is a method of financial analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account and each entry in profit and loss account is represented as a proportion of sales. The main advantages of analyzing a balance sheet and profit and loss account in this manner is that the balance sheets/profit and loss accounts of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes in one business. The analysis over profit and loss account and balance for both companies is given in the following tabular forms:

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Final Project of Accounting II

Maple Leaf Cement Factory Limited Vertical Analysis of Profit & Loss Account
For The Year Ended 30 June: Sales Cost of sales Gross profit Administrative and other exepnses Other operating income Finance cost (Loss)/profit before taxation Taxation (Current & Deferred) (Loss)/profit after taxation 2009 100.00 (67.51) 32.49 (16.61) 0.40 (22.29) (6.02) (0.43) (6.45) 2008 100.00 (83.06) 16.94 (12.55) 1.35 (23.19) (17.45) 8.80 (8.65) 2007 100.00 (91.65) 8.35 (4.17) 1.16 (9.12) (3.77) 4.91 1.13 2006 100.00 (62.37) 37.63 (3.49) 0.47 (5.97) 28.63 (10.07) 18.56 2005 100.00 (69.05) 30.95 (1.37) 0.42 (6.05) 23.94 (6.99) 16.95

Vertical Analysis of Balance Sheet

As of 30 June: Equity and Liabilities Equity Non-current liabilities Current liabilities Total equity and liabilities Assets Non-current assets current assets Total assets 2009 26.18 35.00 38.83 100.00 2008 31.97 39.80 28.23 100.00 2007 38.37 45.60 16.03 100.00 2006 39.47 46.69 13.84 100.00 2005 60.28 24.41 15.31 100.00

79.68 20.32 100.00

77.08 22.92 100.00

82.71 17.29 100.00

86.08 13.92 100.00

81.38 18.62 100.00

Pioneer Cement Limited Vertical Analysis of Profit & Loss Account

For The Year Ended 30 June: Sales Cost of sales Gross profit Administrative and other exepnses Other operating income Finance cost (Loss)/profit before taxation Taxation (Current & Deferred) (Loss)/profit after taxation 2009 100.00 (73.34) 26.66 (14.70) 0.56 (9.03) 3.49 (2.76) 0.72 2008 100.00 (89.42) 10.58 (14.53) 0.63 (8.51) (11.83) 8.12 (3.71) 2007 100.00 (89.84) 10.16 (4.74) 0.37 (11.68) (5.89) 2.90 (2.99) 2006 100.00 (59.99) 40.01 (5.58) 2.31 (6.40) 30.33 (8.36) 21.98 2005 100.00 (67.09) 32.91 (6.54) 1.33 (8.44) 19.26 (3.02) 16.24

Vertical Analysis of Balance Sheet

As of 30 June: Equity and Liabilities Equity Revaluation reserve Non-current liabilities Current liabilities Total equity and liabilities Assets Non-current assets current assets Total assets 2009 23.20 21.08 22.01 33.72 100.00 2008 22.01 21.39 28.24 28.35 100.00 2007 24.34 6.67 45.76 23.23 100.00 2006 27.63 7.19 48.54 16.64 100.00 2005 23.54 9.14 52.96 14.37 100.00

90.14 9.86 100.00

92.50 7.50 100.00

88.78 11.22 100.00

92.63 7.37 100.00

93.28 6.72 100.00

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Final Project of Accounting II

Comparison of items in terms of percentage of sales for the year 2009

MLCFL - 2009

Finance cost, -22.3 Other operating income, 0.4

Taxation, -0.4

Administrative and other exepnses, 16.6

Cost of sales, -67.5

PCL - 2009

Finance cost 9% Other operating income 1% Administrative and other exepnses 15% Taxation 3%

Cost of sales 72%

From the vertical analysis of five years for both companies, and graphic representation for the year 2009, it is quiet evident that main junk of sales is consumed under cost of sales. If we see the year 2009 only then 73% and 67% of sales is represented by cost of sales for MLCFL and PCL respectively in 2009. Since for both the companies the main expense is the cost of production it is evident that this is in line with the industry norm. Due to the difference in cost of sales proportions, the GP margins for MLCFL are better than those of PCL in all the five years. However MLCFL has shown losses more often as compared to PCL which is due to the heavy finance cost incurred by MLCFL against the long term loans obtained by them. When we compare balance sheets of the both the companies, it is apparently clear that both companies have invested in non-current assets. Almost 80% and 90% of total assets comprise of non-current assets of MLCFL and PCL respectively. This shows the dependency on heavy equipment to produce cement. 12

Final Project of Accounting II

RATIO ANALYSIS A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis. There are many ratios that can be calculated from the financial statements pertaining to a company's performance, activity, financing and liquidity. Some common ratios include the price-earnings ratio, debt-equity ratio, earnings per share, asset turnover and working capital. We have conducted the ratio analysis for both companies for the year 2009, so that we can evaluate both companies based on the latest information available for these companies. Liquidity Ratios: Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Current Ratio:
Form ula Current ratio = Calculation M LCFL Current ratio = = 5,214,877 9,962,884 0.523 Current ratio PCL = = 1,020,577 3,489,131 0.293 Current assets current liabilities

Interpretation: Current ratio of both the companies shows that the current liabilities exceed the current assets of the company. However, the ratio for MLCFL is better than as compared to PCL, since for every 1 liability 0.523 assets are available as compared to 0.293 in case of PCL. Investors will have more inclination towards MLCFL if they see only paying off current debts of the companies.

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Final Project of Accounting II Profitability Ratios: Profitability ratios are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Some examples of profitability ratios are gross profit margin, net profit margin and return on equity. It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios. Gross Profit Ratio:
Form ula G ross profit ratio = Calculation M LCFL G ross profit ratio = = 4,954,509 15,251,374 32.49% x100 G ross profit ratio PCL = = 1,332,892 5,000,235 26.66% x 100 G ross profit Sales x 100

Interpretation: In terms of gross profit margin, MLCFL has a better margin i.e. 32.49% as compared to 26.66% that of PCL. Hence it shows MLCFL has maintained a better margin on its cost of sales. Net Profit Ratio:
Formula Net profit ratio = Calculation MLCFL Net profit ratio = = (982,970) 15,251,374 -6.45% x 100 Net profit ratio PCL = = 36,177 5,000,235 0.72% x 100 Net profit Sales x 100

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Final Project of Accounting II

Interpretation: It is quite obvious that PCL has shown a profit as compared to the loss shown by MLCFL, hence PCL will attract investors as compared to MLCFL. Operating Ratio:
Formula Operating ratio = Operating expenses Sales x 100

Calculation MLCFL Operating ratio = = (2,533,668) 15,251,374 -16.61% x 100 Operating ratio PCL = = (735,168) 5,000,235 -14.70% x 100

Interpretation: Operating expenses of both the companies do not show much difference, however on a slight basis PCL stringent look over there operating expenses and they have lesser operating expenses as compared to MLCFL. Return on Equity:
Formula Return on Equity = Net income Equity x 100

Calculation MLCFL Return on Equity = = (982,970) 6,717,801 -14.63% x 100 Return on Equity PCL = = 36,177 2,400,541 1.51% x 100

Interpretation: Since MLCFL is in loss and the return on equity is below zero i.e. negative for the year 2009 as compared to the 1.51% return on equity in PCL. PCL has shown better return on equity during the year. 15

Final Project of Accounting II

CONCLUSION
On the basis of the above financial analysis of Maple Leaf Cement Factory Limited and Pioneer Cement Limited that PCL has better profitability as compared to MLCFL and it may have more attraction for the investors to have business with PCL instead of MLCFL. However, the current ratio of PCL is not that good and it is below that of MLCFL, which might not attract banks or other financial institutions to grant PCL short terms loans to meet their working capital requirements. Besides poor working capital management, PCL has maintained good profitability during 2009 as compared MLCFL which gives PCL better competitive advantage over MLCFL.

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Final Project of Accounting II

REFERENCES
http://www.investopedia.com http://www.kse.com.pk http://www.kmlg.com http://www.pioneercement.com

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