Research and Analysis Project

Oxford Brookes University

The Business and Financial Performance of

LOGO

XYZ MILLS LIMITED

for three years from 2007 to 2009

Prepared by

Muhammad Nouman Shahid

Mentor Words Submission Period

: : : 6477

Table of Contents
RESEARCH REPORT............................................................................................................................... 5 INTRODUCTION ........................................................................................................................................ 6 Project Topic ........................................................................................................................................... 6 Reasons for choosing the topic ........................................................................................................ 6 Selection of Organization ...................................................................................................................... 6 Reasons for choosing XYZ ............................................................................................................... 6 Aims and Objectives .............................................................................................................................. 6 Analytical Tools Used ................................................................................................................................ 7 Porters Five Forces Model ............................................................................................................... 7 PESTEL Framework .......................................................................................................................... 7 SWOT Analysis................................................................................................................................... 7 Risk Analysis ....................................................................................................................................... 7 Ratio Analysis ..................................................................................................................................... 7 Competitor Analysis ........................................................................................................................... 7 Altman Z-Score ................................................................................................................................... 7 INFORMATION GATHERING .................................................................................................................. 8 PRIMARY SOURCES ........................................................................................................................... 8 Drawbacks of Primary Sources ........................................................................................................ 8 SECONDARY SOURCES .................................................................................................................... 9 Drawbacks of Secondary Sources .................................................................................................. 9 ANALYSIS ................................................................................................................................................. 10 Textile Sector ........................................................................................................................................ 10 Company Profile ................................................................................................................................... 11 Business Analysis .................................................................................................................................... 12 Porters Five Force Analysis ............................................................................................................... 12 Bargaining power of suppliers ........................................................................................................ 12 Bargaining power of customers...................................................................................................... 12 Threat from substitutes .................................................................................................................... 12 Rivalry among competitors ............................................................................................................. 12

Analysis of the Business and Financial Performance of XYZ

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Threat from new entrants ................................................................................................................ 12 PESTEL Analysis ................................................................................................................................. 13 Political factors .................................................................................................................................. 13 Economic factors .............................................................................................................................. 13 Social factors..................................................................................................................................... 13 Technological factors ....................................................................................................................... 13 Environmental factors ...................................................................................................................... 14 Legal factors...................................................................................................................................... 14 SWOT Analysis..................................................................................................................................... 15 Strengths ........................................................................................................................................... 15 Weaknesses...................................................................................................................................... 15 Opportunities ..................................................................................................................................... 15 Threats ............................................................................................................................................... 15 Risk Analysis ......................................................................................................................................... 16 NON-FINANCIAL RISKS ................................................................................................................ 16 FINANCIAL RISKS........................................................................................................................... 17 Financial Analysis..................................................................................................................................... 18 Ratio Analysis ....................................................................................................................................... 18 Profitability ......................................................................................................................................... 18 Liquidity Ratios ................................................................................................................................. 24 Solvency Ratios ................................................................................................................................ 25 Investor Ratios .................................................................................................................................. 26 Efficiency Ratios ............................................................................................................................... 28 Competitor Analysis ............................................................................................................................. 30 Profitability ......................................................................................................................................... 30 Liquidity .............................................................................................................................................. 30 Solvency ............................................................................................................................................ 31 Investor Ratios .................................................................................................................................. 31 Altmans Z-Score .................................................................................................................................. 32 Conclusion ................................................................................................................................................. 33 Porters Five Force Analysis ................................................................................................................ 33 PESTEL Analysis ................................................................................................................................. 33 Analysis of the Business and Financial Performance of XYZ Page 3

SWOT Analysis..................................................................................................................................... 33 Risk Analysis ......................................................................................................................................... 33 Ratio Analysis ....................................................................................................................................... 33 Competitor Analysis ............................................................................................................................. 34 Z-Score .................................................................................................................................................. 35 Recommendations ............................................................................................................................... 35 APPENDIX 1 ............................................................................................................................................. 36 APPENDIX 2 ............................................................................................................................................. 38 APPENDIX 3 ............................................................................................................................................. 39 APPENDIX 4 ............................................................................................................................................. 40 APPENDIX 5 ............................................................................................................................................. 41 SKILLS AND LEARNING STATEMENT .................................................. Error! Bookmark not defined. Meetings with the Mentor: ...................................................................... Error! Bookmark not defined. Answers to Research Questions: ......................................................... Error! Bookmark not defined. Interpersonal and Communication Skills: ............................................ Error! Bookmark not defined. Assistance from RAP in my Accountancy Studies: ............................ Error! Bookmark not defined. APPENDIX 6 ................................................................................................ Error! Bookmark not defined.

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RESEARCH REPORT

Analysis of the Business and Financial Performance of XYZ

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INTRODUCTION

Project Topic:
After consulting the list of topics given in RAP Guidelines, I decided to prepare a research and analysis report on: The business and financial performance of an organization over a three year period

Reasons for choosing the topic: Business Analysis has always been an area of interest for me. The project provided me with the opportunity to cherish this interest. Financial analysis has been involved throughout my ACCA studies and I wanted to practically apply the knowledge that I have acquired. Recent depression in the world-wide economy made me curious for analyzing its impact on business organizations.

Selection of Organization:
My selected organization for RAP is XYZ MILLS LIMITED from the Textile Sector of Pakistan.

Reasons for choosing XYZ: Textile sector is the back-bone of Pakistans economy. XYZ is among the major players in the sector with turnover of Rs.7.6 billion. The company is listed on all three stock exchanges of Pakistan.

Aims and Objectives:

1. 2. 3. 4. 5. 6. 7. 8. Analyze business and financial performance of XYZ for three financial years. Analyze market situation in textile sector with the help of Porters Five Forces Model. Assess Strengths, Weaknesses, Opportunities and Threats of XYZ. Assess the risks faced by XYZ using Risk Analysis. Assess business environment of XYZ by undertaking PESTEL Analysis. Compare XYZs performance with other companies in the industry. Assess companys going concern status using Z-Score model. Conclude companys current status and its future prospects.

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Analytical Tools Used

Porters Five Forces Model: Michael Porter's famous Five Forces of Competitive Position model provides a simple perspective for assessing and analyzing the competitive strength and position of a corporation or business organization. (www.businessballs.com) PESTEL Framework: The PESTLE (political, economic, social, technical, legal and environmental) analysis is an analytical tool for assessing the impact of external contexts on a project or a major operation and also the impact of a project on its external contexts. (Ron Basu, 2004) SWOT Analysis: A situation analysis tool that help managers identify internal strengths and weaknesses, external opportunities and threats, and the potential impacts of these factors on organizational performance. (Courtland L. Bovee et al., 1993) Risk Analysis: A procedure to identify threats & vulnerabilities, analyze them to ascertain the exposures, and highlight how the impact can be eliminated or reduced. (17799.denialinfo.com) Ratio Analysis: It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. (Khan, Jain, 2001) Competitor Analysis: It is the practice of comparing a firm's results to those of similar companies or competitors. (en.wikipedia.org) Altman Z-Score: A predictive model created by Edward Altman in the 1960s. This model combines five different financial ratios to determine the likelihood of bankruptcy amongst companies. (www.investopedia.com) Analysis of the Business and Financial Performance of XYZ Page 7

INFORMATION GATHERING
Having established a framework for research the next step is to gather relevant information to assist in reaching the objectives of RAP. Information can be defined as raw data that: has been verified to be accurate and timely: is specific and organized for a purpose; is presented with in a context that gives it meaning and relevance; leads to increase in understanding and decrease in uncertainty. (www.businessdictionary.com)

There are two broad sources from which information can be gathered:

PRIMARY SOURCES:
Primary sources of information are those that provide first-hand accounts of the events, practices, or conditions you are researching. (www.library.illinois.edu) Following people were contacted to obtain the respective primary information from them. Sohail Chaudhry (Marketing Manager): Information obtained concerned XYZs: Major competitors; Export markets; Sales policies; Raw material suppliers; and Production machinery. Ali Zubair (Assistant Manager Finance): Information obtained concerned XYZs: Current financial position; Gearing and capital structure; Independent divisional performance; and Debt finance and relative interest rates.

Drawbacks of Primary Sources: This information was gathered from officials via telephone calls and hence lacks proper evidencing.

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SECONDARY SOURCES:
Any document that draws on one or more primary sources and interprets or analyses them (www.allwords.com) Following sources were used to gather secondary information: 1- Audited financial statements of companies obtained from Stock Exchange. 2- Reference Books including ACCA study notes from BPP and KAPLAN and other books relating to finance and business field. 3- World Wide Web and Search Engines like Google, Bing and Yahoo which provided me with majority of the required information. 4- Newspapers, Magazines and Journals like Business Recorder, Daily Times, Dawn and The News, provided me with information on most recent developments in textile sector and the overall economic conditions. Articles in ACCA Student Accountant magazines also assisted me in undertaking a focused research and analysis.

Drawbacks of Secondary Sources: The information obtained is focused on other contexts and hence requires careful readjustments before inclusion in the analysis project. The available information is usually out-dated and hence extensive research is required to obtain the most up-to-date facts and figures. The data collection method used by the source and the accuracy of information obtained is not known.

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ANALYSIS
Textile Sector:
Textile is the back-bone of Pakistans economy, contributing approximately 8.5% to overall GDP and 53.7% to Pakistans total exports. It also creates employment for about 40% of countrys total workforce. (Economic Survey of Pakistan, 2008-09) Currently Pakistan is 4th largest cotton producer and 3rd largest cotton consumer in world. There were only three textile mills when Pakistan came into existence. The industry flourished since then and now around 190 companies are listed under spinning, weaving and composite sectors on KSE. Among the dominant players are Nishat, Gul Ahmed, XYZ and Sapphire. Global economic crisis posed a host of problems on local businesses in 2008-09. Domestic interest rates increased consistently and currently stood at 12.5%p.a. (Dawn, 2010) Inflation peaked to 25% in 2008-09, the highest in three decades. (Daily Times, 2010) Minimum wage rate increased from Rs.4600 to Rs.6000 in 2008. (Labour Unity, 2008) Raw material prices also increased by 80% to 90%.

Under these conditions, textile sector suffered negative growth of 0.73% which was much lower than 7.7% negative growth in overall manufacturing sector. Import of textile machinery has declined since 2004 with a similar 46% decrease in FY09, showing lack of investment in this sector. Apart from raw cotton which is obtained domestically, major raw materials like PTA, MEG, Acrylonitrile and dyeing material are mainly imported from China and India. Recent price trends are shown below: June 2009 (US$ per ton) 1060 1200 1200 2040 2100 June 2008 (US$ per ton) 790 830 620 650 1180 1240 Source: www.aptma.org.pk

Polyester PTA Polyester MEG Acrylonitrile

Overall, despite poor economic situation and increased competition from international competitors like China and Bangladesh, Pakistans textile industry worked hard to maintain its global repute. However, detailed consideration at government level is necessary to improve future prospects of this industry which has the tendency to improve and cater the overall economy and image of country while fulfilling needs of local and international consumers. Analysis of the Business and Financial Performance of XYZ Page 10

Company Profile:
XYZ is a long established textile company of Pakistan. It progressed since its incorporation in 1987 as a small weaving mill to emerge as one of the most reputable textile organization. It has five main divisions, located near the major industrial are of Sundar, namely: Weaving; Dyeing; Hosiery; Genertek; and Apparel.

XYZ employs around 3000 employees producing a turnover of over Rs.7billion. Its current portfolio ranging from yarn to processed fabric matches that of major textile players. XYZ offers numerous products including greige & processed fabric, stitched garments, world-class athletic socks and home furnishing articles. XYZ is export-focused with customers located primarily in USA, Australia and South Africa. However, efforts have been made recently to increase local sales by opening a series of retail outlets throughout the country.

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Business Analysis
Porters Five Force Analysis:
Bargaining power of suppliers: Fiber and polyester are generally obtained from international suppliers, whose large customer-base gives them bargaining edge over customers. Raw cotton is obtained from local farmers, who formed trade unions to set similar price for crops, allowing little bargain from purchasers signifying strong influence by suppliers. Bargaining power of customers: Nowadays customers seeking best value for their money switch at minimal cost with existence of hefty number of global competitors. Corporate clients, however, bear some switching costs due to long-term contracts. In effect customers still exercise strong influence. Threat from substitutes: Textiles constitute as necessity of life, ranging from apparel to home-textile products like curtains and towels. A limited number of substitutes are available for some of these products, reflecting low influence from substitutes. Rivalry among competitors: Around 190 textile companies operate in Pakistan, competing aggressively mainly in international markets. Their recent distress sales strategy to increase sale volumes reflects a strong competitive rivalry. Threat from new entrants: Few big players like DEF and XYZ dominate Pakistan's textile sector with their history of committed staff and customers. They focus on aggressive innovation to cope with dynamism of industry, leaving little room for new entrants to progress, resulting in low influence of this force.

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PESTEL Analysis
Political factors: Countrys political instability has been detrimental to overall business activity. Criticism against the implementation of first ever textile policy reflects lack of governments commitment. (The National, 2010) Good trade relations exist with countries including China, Turkey and Saudi Arabia.

Economic factors: GDP growth has declined by 2.6% over 2009. (Index mundi, 2008) PKR depreciated by 26% over 2009, resulting in exchange losses for exporting companies. Increasing fuel prices which stood at $69.85/barrel as of January 2010, add further to business costs. Inflation rate declined to 13% by January 2010, from 20%-25% in 2008-09, providing some relief for businesses. (Trading Economics, 2010) Massive electricity and gas load shedding lead to poor operating conditions. (Business Recorder, 2010)

Social factors: Increased emphasis on CSR adds to business costs. Research costs increased to innovate and cater customer demands. Urbanization resulted in more brand and fashion consciousness among customers. Higher disposable income of customers allows spending on expensive products. Local unemployment rate declined to 5.2%. However XYZ reduced its workforce by 40% showing diversion from industry trends. (SBP, 2009)

Technological factors: Staying ahead of changing technology is crucial for competitive edge. This requires high expenditure but eventually produces greater returns and cost saving. Similarly, XYZ replaced Tsudakoma looms with narrow-width looms increasing production capacity of its divisions. Use of technology in administration and HR leads to better information flow within organization. XYZ also has ERP software ensuring efficiency of its database. E-marketing eases access for customers resulting in on-line stores on many companys websites. XYZ still lags behind in this context. Page 13

Analysis of the Business and Financial Performance of XYZ

Environmental factors: XYZs Genertek division produces electricity mainly from gas adding sustainable development concerns as Pakistan currently faces gas crisis. Nowadays, customers are more willing to buy from environment friendly manufacturers. XYZ focusing on clean, safe and pollution free environment attracts such customers, projecting better image in community with additional costs pressurizing profits. Pakistans devastating earthquake in 2005 drastically impacted on business activity. Recurrence of any such events adds to further business risks.

Legal factors: Minimum wage rate increased by 25% in May 2008. Pakistans constitution contains a range of provisions with regards to labor rights found in Part II: Fundamental Rights and Principles of Policy. Manufacturing companies have to comply with these regulations and other health & safety laws set by government. (Labour Unity, 2010) Compliance with stock exchange requirement is mandatory for listed companies. Adherence to fair trade policy is also essential.

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SWOT Analysis

Strengths Owns gas-powered electricity plants. Alternative husk-powered electricity plants to tackle gas load-shedding issues. A product portfolio ranging from yarn to stitched fabrics. Sale of electricity to WAPDA provides consistent earning. Holder of SA 8000:2001 and WRAP certifications. Listed on all three stock exchanges in Pakistan. Latest air jet power looms have been installed. Comprehensive in-house training programs for employees. ERP software for efficient communication and data management.

Weaknesses No division operates at full capacity. Over-reliance on export market. Huge foreign exchange losses reflect inefficient hedging. Realignment of operations in the apparel division has caused a burden on capital resources in recent years resulting in depleting performance of all divisions. Insufficient advertising and marketing expenditures. Despite huge expenditure on gas powered generators XYZ didnt account for gas load shedding in its plans. Subsequently, husk-powered boilers had to be purchased which constrained capital resources further.

Opportunities

Threats Expected future gas load shedding and increments in gas rates. Political instability and law & order situation of Pakistan. Global economic down-turn. Distress sales from competitors reducing profit margins. Devaluation of PKR. Declining demand for greige fabric. Expected higher inflation rates. Expected increase in petroleum prices. Delayed and expensive access to latest machinery due to lack of local suppliers.

Open further retail stores throughout Pakistan. Increasing Genertek divisions capacity to make further electricity sale to WAPDA. Can avail lower interest rate loans and duty drawbacks on value added products under Pakistans first ever textile policy. Can utilize spare capacity to cater new local and international markets.

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Risk Analysis

NON-FINANCIAL RISKS:

RISKS Risk of change in Governments and their policies: Government policies control financial performance by imposing trade barriers, charging excise duties and implementing export quotas. Recently, government imposed ban on yarn export and capped its price below $3.5/kg to restrict companies from exporting yarn. However, this focused on nurturing value-added textile productions. (Fiber2Fashion, 2010) Risk of technological obsolescence: Obtaining international competitive edge requires investment in latest machinery and technology, leading to extensive cash outflows. XYZ, in this context, invested Rs.513million on new machinery in 2009. Risk of changing trends and fashion: Immense competitive rivalry and dynamism of textile industry asks for rapid innovation. This results in obsolescence of finished goods stock as trends change after short intervals.

MITIGANTS

Balance local and export sales. Diversify exports to multiple markets.

Design optimal asset replacement plans. Get updates from suppliers on available upgrades. Undertake market research. Design intuitive marketing mixes. JIT manufacturing.

Risk of failure in strategic plans: XYZ recently acquired Q Mart to retail stores throughout Pakistan with potential risk of failure if demand is below expectations. In 2008, XYZs Home Tex division vertically integrated to Apparel division which is only able to operate at 30% capacity currently, reflecting inefficient planning.

Conduct feasibility studies. Cost & benefit analysis.

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FINANCIAL RISKS:

RISKS Foreign Exchange Risks: Export sales exposes XYZ to foreign currency risks as exchange losses increased by 42% in FY09. Interest rate risk: KIBOR increased by 5%, increasing interest rate risk for XYZ as major borrowings are at floating rates. Risk of bad debts: An increase in creditor days from 43days in FY07 to 75days in FY09 reflects increasing bad debt risk. Risk of inflation: Increasing inflation rate has exposed XYZ to unprecedented high costs.

MITIGANTS

Hedge foreign currency transactions. Invoice customers in PKR. Obtain a cap on interest rates. Match floating rate assets with liabilities with existing ratio at 01:09 providing large gap. Customers screening. Factoring of long-standing debtors.

Discounts on bulk purchases. Maintenance of sufficient level to ensure smooth production process.

Liquidity risk: Deteriorating current ratio of 0.55 and quick ratio of 0.30 identifies the cash problems, corroborated by, reduction in working capital cycle from 91 to 30days.

Strike a balance between current assets and current liabilities by reducing debtor period and increasing creditor period.

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Financial Analysis
Ratio Analysis

Profitability

Gross Profit:

2008-09

8.70%

2007-08

13.07%

2006-07

14.77%

2005-06 0% 2006-07 2% 4% 6% 8% 10%

12.44% 12% 14% 16%

GP increased by 41.4% due to 19% increase in revenues with only 16% increase in COGS. Revenues increased as despite exchange losses worth Rs.12.38million, export sales increased by 18% due to better marketing, together with 24% increase in local sales. All five divisions recorded growth in sales and capacity utilization. Apparel division, however, faced stiff competition from China and India, operating below 70% capacity. Average raw cotton price decreased by 2.6% while, fiber prices increased continuously. This along with increased production resulted in 4.3% increase in raw material costs. Oil prices averaged $60.21/barrel in FY07 ($57/barrel: FY06) and inflation increased by 4% increasing fuel, power and other manufacturing expenses. Over 1500 new employees were recruited, causing 33.7% increase in salary expenses. Increased production efficiency following investment in new machinery led to lower maintenance and insurance costs.

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2007-08 GP declined by 23.4% as revenues decreased by 20% with only 18.6% reduction in COGS. Despite exchange gains of Rs.14.465million, export sales decreased by 32.9% due to countrys political instability and worsening law and order situation that forced foreign customers to switch to competitors like China and India. XYZ acquired Q Mart with plans to establish retail stores all over the country. Three stores started working this year leading to 11.5% increase in local sales. A 36% increase in raw cotton prices and 21% increase in closing stock led to 5.4% increase in raw material costs. Salary expenses decreased by 6.4% as XYZ employed lesser workforce. Cloth processing charges decreased by 67% as 98 high-speed looms were installed. Power charges decreased by 76% as gas-powered engines became fully operational. Despite record $147/barrel oil price and the stumbling domestic load shedding, XYZ fulfilled its electricity needs with alternative HFO-powered engines reducing its costs.

2008-09 GP reduced by 16.9% due to 31% increase in COGS even though revenues increased by 25%. Despite exchange losses of Rs.14.185million, export sales flourished by 36.7% as lower prices were charged to maintain market shares. Sales volume increased but at the expense of profit margins. Local sales increased by 2% as two new local retail outlets started functioning. A 10.2% increase in raw cotton prices and 47% decrease in closing stock led to 18% increase in raw material costs. Although XYZ employed 1300 fewer staff, increased minimum wage rate led to 24% higher salary expense. Power expenses increased by 63% as oil prices were still quite high in the first quarter when XYZ made most of its purchases.

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Net Profit:

4% 2% Net Profit Margin 0% -0.83% -2% -4% -6% -8% -10% -12% 2005-06 2006-07 2007-08 2008-09 -9.53% -5.19% 1.50%

2006-07 NP increased by 281% following improved GP margin. Distribution expenses increased by 12.6% as salaries, insurance, freight and clearance charges were 23% higher to support higher sale volumes. Administration expenses increased by 27.5%, as wages and travelling expenses increased by 28% and 21% respectively, despite the 46% decrease in utility charges. An 818% increase in R&D expenditure, substantially financed by Ministry of Textile, used to improve operational efficiency, corroborated increased revenues. Other operating expenses increased by 189% following introduction of workers profit participation and welfare funds. Other operating income increased by 16% primarily due to gain on sale of investment improving profits. Finance cost swelled by 20% with increase in interest rates despite 19% decrease in borrowings. Provision for taxation decreased by 1% as XYZ had tax credits available from previous years.

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2007-08 NP decreased by 446% following degrading GP. Distribution cost increased by 3% as salaries, insurance, freight and conveyance expenses increased collectively by 16%. A 457% increase in promotional expenses didnt pay off as sales reduced. Administrative expenses increased by 36% as utility and traveling expenses increased due to inefficient controls. R&D expenses increased by 105% as government reduced its support by 47%. Exchange losses increased by 2,235% as PKR devalued, leading to 214% increase in other operating expenses. This restricted XYZ from making donations or providing welfare funds to workers. Other operating income increased by 65% following 50% increased dividends from SGICL and 94% higher scrap sales. Despite 46% decrease in long-term borrowings, finance costs increased by 2% as mark-up on short-term borrowings was 19% higher. Tax provision decreased following lower revenues. 2008-09 NP decreased by 84% again following GP trends. Distribution costs increased by 46% as salaries, commissions, freight and conveyance charges increased collectively by 66% due to higher sales volumes and inflation. Promotional expenses were 31% lower as last year increase didnt pay off. Despite 60% decrease in maintenance expenses, administrative costs inflated by 11% as travelling and vehicles running costs increased when oil prices hit record $147/barrel. Increasing inflation is reflected by 1,376% rise in utility expenses. There was no R&D expense as government didnt provide any funds. A 42% increase in exchange losses and Rs.60.75million loss on partial sale of investment increased other operating expenses by 100%. Other operating income increased by 298% as dividends and scrap sales increased by 25% and 105% respectively. Finance cost featured 43% incline due to higher interest rates while higher exports resulted in 27% increment in tax provision.

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40% 20% 0% -20% -40% -60% -80% -100% 2005-06 Return on Capital Employed: 2006-07 ROCE increased by 38% as PBIT increased by 60% with only 17% increase in capital employed. PBIT increased due to better GP as discussed above. NCAs decreased by 2% following Rs.10.5million diminution in value of investment in K 2 Hosiery. Working capital increased by 57%. This was due to 20% increase in current assets from large revaluation of investment in SGICL. Tax provision and payables reduced current liability by 4%, even after 10% increase in short-term borrowings. 2007-08 ROCE decreased drastically by 63% as PBIT and capital employed decreased by 66% and 8% respectively. Reduction in PBIT was due to lower sales as discussed earlier. NCAs increased by 7% as Q Mart was acquired for Rs.247million, even though investment in K-2 Hosiery fully impaired. Working capital decreased by 119% reflecting lower sales. Although current assets increased by 7%, decrease in working capital was due to 17% increase in current liabilities, resulting from 21% increase in short-term borrowings and 48% higher creditors. 2008-09 ROCE decreased further by 77% as PBIT reduced by 80% with only 13% reduction in capital employed. Lower margins contributed mainly to lower PBIT as discussed above. Despite 33% increase in fixed assets, from revaluation surplus on lands and buildings, a 195% decrease in working capital, due to 26% increase in current liabilities and 29% decrease in current assets, resulted in lower capital employed. Current assets decreased as investment in SGICL and MLFCL experienced huge devaluation of 84%. Current liabilities increased following greater creditors and advances from customers. Analysis of the Business and Financial Performance of XYZ Page 22 2006-07 2007-08 2008-09 ROCE ROE

Return on Equity:

2006-07 PAT increased by 315% as discussed earlier. Equity funds increased by 47% due to bonus issue, revaluation surpluses and increased accumulated profits. Consequently, ROE increased by 247%. 2007-08 ROE decreased massively by 407% as XYZ went into loss as discussed earlier. Despite right issue worth Rs.145million, equity funds reduced by 10% following negative revaluations of investments and the net accumulated loss. 2008-09 ROE deteriorated further by 480% as net loss increased by 130%, as discussed above. Equity funds decreased by 60% with no further equity injection, negative revaluation of investments and net accumulated losses reducing reserves.

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Liquidity Ratios 0.91 0.79 0.84

2005-06
2006-07 2007-08 2008-09

0.8 0.6 0.4 0.2 0 Current Ratio

0.55

0.61 0.45 0.49 0.3

Quick Ratio

2006-07 Current asset increased by20% due to 289% gain on investment even though stocks-intrade decreased by 13% from lower NRV of finished goods and raw material inventories. Although short-term borrowings inclined by 10% to support XYZs finance requirements, a 25% decrease in payables due to lower sales commissions and early payments to suppliers reduced current liabilities by 4%. Thus, current ratio improved by 15% while quick ratio improved by 36% as after excluding impact of stock reduction, other current assets increased by 42%. 2007-08 Although short-term investments suffered 10% devaluation, current assets still increased by 7% as stocks-in-trade improved by 36% due to higher inventory levels and improved NRV for finished goods following increased selling prices. Current liabilities increased by 17% with 21% increase in short-term borrowings and 43% increase in payables as lower revenues required lengthening of creditor period to balance XYZs working capital needs. Consequently current ratio reduced by 8% while quick ratio suffered 20% decline as stocks-in-trade improved while other current assets decreased by 6%. 2008-09 Current assets reduced by 29% due to 84% devaluation of short-term investments. A 47% reduction in raw material stocks and lower NRV of finished goods following reduced selling prices resulted in 25% lower stocks-in-trade. Current liabilities increased by 26% as short-term borrowings increased by 8% due to XYZs continued reliance on them for finance. Increased sales volumes resulted in higher commission and greater credit purchases leading to 26% increase in payables. Thus, current ratio decreased by 53% when quick ratio declined only by 39% stocks contributed mainly to the lower current assets value. Analysis of the Business and Financial Performance of XYZ Page 24

Solvency Ratios

2006-07

2007-08 34% 66%

2008-09

32% 68%

47%

53%

Debt 2006-07

Equity

Gearing improved from 46% to 32% in 2006-07. Long-term liabilities decreased by 18% due to 33% reduction in debt finance arising from repayment installments of TFCs and other loans, even though two new loans worth Rs.94million were raised and deferred tax provision of Rs.253million arise on 55% increase in revaluation surplus on SGICL investments. This along with 3.3million bonus issues and accumulated profits increased equity by 47%. Thus financial leverage and debt-equity ratio improved as financial leverage increased to 68% and debt-equity ratio declined to 0.47. 2007-08 Despite 2.5% increase in long-term finance, Long-term liabilities decreased by 2% as TFCs were moved to current liabilities with only one installment payable at year-end. Negative revaluation of SGICL investment resulted in 21% lower revaluation reserves together with a reduction in deferred tax provision. This coupled with accumulated loss decreased equity by 10% even though XYZ made a right issue worth Rs.145million to finance Q Marts acquisition. Thus, gearing increased to 34% as debt-equity ratio inclined to 0.52 with financial leverage decreasing to 66%. 2008-09 Financial gearing reached 53%, showing a large increase from 2007-08. Long-term liabilities increased by 12% as long-term finance increased by 5% with XYZ borrowing further Rs.100million from UBL, even though there were few return installment of loans and deferred tax provision reduced by 73% as investment in SGICL devalued further. This together with accumulated loss and no equity injection led to 60% reduction in equity creating an imbalance between debt and equity. Simultaneously, financial leverage declined to 47% while debt-equity ratio increased to 1.13. Analysis of the Business and Financial Performance of XYZ Page 25

Investor Ratios Ratios EPS (Rs.) P/E Ratio Earning yield (%) Dividend yield (%) Interest cover (times) 2005-06 (1.61) (16.48) (6.1) 0 1.01 2006-07 3.15 9.37 10.6 4.23 1.35 2007-08 (6.34) (3.44) (29) 0 0.46 2008-09 (14.19) (0.34) (294) 0 0.06

EPS and P/E Ratio:

2006-07 Despite 9% increase in number of shares EPS improved by 296% as share prices increased by 11% and XYZ made a healthy profit, as discussed earlier. Hence, investors were willing to pay more leading to 157% improvement in P/E ratio. 2007-08 EPS declined by 301% following 39% increase in issued shares and 376% decline in XYZs net income as discussed earlier. Share price also went down by 26% leading to 137% reduction in P/E ratio. 2008-09 A 130% increase in net loss, with no change in shareholdings reduced EPS further by 124%. Share price declined further by 78% as company continued its degrading performance, leading to a P/E ratio of -0.34.

Dividend Yield:

XYZ was only in a position to pay dividends in 2006-07 when a dividend of Rs.1.25/share was approved which resulted in a dividend yield of 4.23% on the then market value of Rs.29.50/share. Apart from this, 2007-08 and 2008-09 were loss-making years and hence no dividends were paid.

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Interest Coverage Ratio:

2006-07 Despite 20% increase in finance costs, interest coverage improved by 34% as PBIT increased by 60%. Finance costs increased due to higher interest rates, even though there was 19% decrease in long-term borrowings. Short-term borrowing increased leading to higher interest costs even though they attracted lower interest rates ranging from 6.5%-12.5% (FY06: 7%-13%). 2007-08 Interest coverage ratio deteriorated massively by 66% due to an equivalent decrease in PBIT as discussed earlier. Although short-term borrowings increased by 21% with corresponding interest rate reaching 10.59%-15.12%, finance costs showed a small increase of 2% as long-term borrowing decreased by 4% and SBP-refinance rate and KIBOR decreased. 2008-09 Interest cover decreased by 87% as PBIT decreased further by 80% as discussed earlier. Finance costs increased by 43% as long-term borrowings and KIBOR increased by 5% each. Short-term borrowings were 8% higher, with corresponding interest rates increasing to 11.25%-23.70%.

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Efficiency Ratios

120
103

111 91 77 62 66 47 70 67 47 63 42 30 75

100 80 Days 60 40 20 0

88

Stock Turnover Days Debtors Days

43

Creditors Days Working Capital Cycle

2005-06 2006-07:

2006-07

2007-08

2008-09

A 19% increase in sales reduced stocks by 13% as XYZ didnt replenish inventories by year-end. Consequently, stock turnover days decreased by 25%. XYZs strict credit policies and increasing cash sales reduced debtors by 27% leading to 39% decrease in debtor days. Suppliers were paid early following improved financial condition. Subsequently creditors reduced by 29% causing a 31% decrease in creditor days. These changes led to 46% decrease in working capital cycle, as less cash was tied up in these resources improving cash flows from operations by 1%. 2007-08: XYZ increased its stocks in anticipation of higher sales continuing from last year. However sales decreased by 20%. Consequently, stock turnover days increased by 68% as inventories increased by 36%. XYZ maintained its credit policy from 2006-07 resulting in no change in debtor days as both sales and debtors decreased by 20%. Creditors increased by 48% to provide XYZ with further short-term finance to cover its degrading financial performance, leading to 56% increase in creditor days. Subsequently working capital cycle increased by 30% as reflected by 25% decrease in cash generated from operations.

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2008-09: A 25% increase in sales caused equivalent reduction in stocks as XYZ followed an aggressive sales strategy, leading to 43% increase in stock turnover days. Discounted prices resulted in greater cash sales and quicker payments from customers causing only 13% increase in debtors when sales increased by 25%. As a result, debtor days decreased by 11%. Stringent cash position with increased demand resulted in 10% increase in credit purchases leading to 12% increase in creditor days. These changes decreased working capital cycle by 47% as indicated by massive 617% increase in cash generated from operations.

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Competitor Analysis
XYZ Mills Limited 8.70% (9.53)% 1.51% 0.55 : 1 0.30 : 1 53% 1.13 : 1 (14.19) 0.06 times 0.00 times DEF limited 18.23% 5.31% 13.73% 0.86 : 1 0.38 : 1 12% 0.14 : 1 5.23 2.08 times 5.00 times ABC Limited 14.74% 1.53% 2.19% 1.19 : 1 0.63 : 1 20% 0.25 : 1 8.95 1.32 times 5.97 times

Gross Profit Net Profit ROCE Current Ratio Quick Ratio Gearing Ratio Debt to Equity Ratio Earnings per share Interest Cover Ratio Dividend Cover Ratio

DEF and ABC operate on similar lines and produce similar products as XYZ. DEF and XYZ both have power plants but DEFs generation capacity is much higher due to its large size. Profitability: Poor trading environment lowered profits of all companies with XYZ suffering the most. DEF achieved higher GP with easy access to cheap raw material, while balanced local and export sales secured ABC from lower margins, whereas XYZ with its export focus suffered lower GP margin. There was a large difference between XYZs GP and NP margins due to higher administrative and mark-up costs leading to net loss. DEF and ABC in comparison had lower finance costs and hence operated at profit. They also had better capacity utilization in their divisions when XYZs divisions like Apparel had capacity utilization below 30%. This constituted lower ROCE compared to DEF and ABC. Thus, DEF with its established brand-name, committed human resource and large asset base dominated the sector. Liquidity: Although sufficient on its own, XYZs liquidity position is degrading, compared to DEF and ABC. Both competitors maintained high current ratio with significant short-term investments and inventories, whereas XYZs investments suffered large devaluations which together with lower stocks decreased its current assets. There was a small difference between XYZs current and quick ratios whereas the relative difference for DEF and ABC was almost double. ABC enjoyed the highest quick ratio with its high level of investment in current assets and small amount of payables among peers, while XYZ had the lowest quick ratio.

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Solvency: XYZs gearing inclined to 53% showing a relatively insolvent position as accumulated losses reduced XYZs equity. DEF and ABC had comparatively more predictable gearing with continued profits. Debt-equity ratio reflects high long-term finance in XYZs capital structure while competitors rely more on shareholders funds. With low gearing, DEF and ABC are able to make sufficient PAT and pay dividends to their shareholders. Investor Ratios: XYZs negative EPS didnt allow any dividends while DEF proposed a 20% dividend on earnings which was much higher than ABCs payout ratio. This although consistent with DEFs historic trends resulted in lesser dividend cover compared to ABC. Debt providers received full interest payments from all companies. However, interest cover of only 0.06times indicated XYZs higher risk while DEF had highest interest cover due to lower finance costs resulting from lower gearing.

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Altmans Z-Score
Z score of XYZ using the financial information of 2008-09 is calculated as follows: Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 0.99X5 Where, X1 = working capital / total assets X2 = retained earnings / total assets X3 = earnings before interest & tax / total assets X4 = market value of equity / book value of debt X5 = sales / total assets (2,730,789,846) / 9,051,232,152 = (0.30170) 135,280,691 / 9,051,232,152 = 0.01495 44,538,443 / 9,051,232,152 = 0.00492 247,427,514 / 1,016,954,647 = 0.24330 7,578,457,178 / 9,051,232,152 = 0.83728

Z = 1.2*(0.3017) + 1.4*0.01495 + 3.3*0.00492 + 0.6*0.24330 + 0.99*0.83728 Z = 0.65 The calculated Z-score is analyzed as follows: Z- Score less than 1.8 Greater than 1.8 but less than 2.99 Greater than 3.00 Probability of failure Very high Not sure Unlikely

A Z-score of 0.65 indicates high probability of failure. However, this score is based on historic data where XYZ was suffering from worsening local and global economic conditions and hence cannot be fully associated to lack of potential in XYZ. XYZ needs to improve its working capital position by reducing reliance on short-term finance. More equity should be injected to improve the current gearing position. Efforts should be made on increasing profit margins so that XYZ realizes benefits of increasing sales volumes. Local market should be fully tapped by opening more retail stores. Divisions should be independently appraised for concentrated efforts on bringing the best out of each. Improving economic conditions, law & order situation and political stability in Pakistan provide a platform for revival. Apparel division is likely to improve now with better business conditions. Similarly, interest rates are likely to go down under the first-ever textile policy announced by government bringing further support for export trade. Hence, XYZ still has the potential for progress in coming years, although the current Z-score of 0.65 clearly deters this, this is mainly due to the limitations in calculation. Analysis of the Business and Financial Performance of XYZ Page 32

Conclusion
Porters Five Force Analysis:
Being involved in export trade and producing in a competitive environment leaves textile companies open to strong influences of customers, suppliers and competitive rivalry. Established players have already captured major markets, increasing pressure on new entrants and substitutes.

PESTEL Analysis:
Governments policies to promote textile sector improved its outlook, while increasing oil prices, massive gas and electricity load shedding together with devaluation of PKR left no competitive edge globally. XYZ didnt pay any donation in FY09 as prevailing losses in a dynamically changing technologic environment increased pressure on profits. Maintaining social responsibility and complying with laws, regulations and export policies leads to further financial and opportunity costs adding to the constraints faced by companies.

SWOT Analysis:
Being in textiles since 1987, XYZ developed numerous strengths like its committed workforce and efficient Genertek Division. However, its focus on export sales and lack of marketing results in lower revenue which is one major weakness of XYZ. The companys strengths open it to wide range of opportunities to be availed. Threats faced by XYZ are quite significant and arise mainly from the risky business environment it operates in.

Risk Analysis:
XYZ faces various financial and non-financial risks. Foreign exchange and changing government policies are XYZs major risks. An appropriate risk assessment process should be developed to manage these risks and mitigate them to acceptable level. This will improve operations as most risks relate to XYZs everyday business and economic environment.

Ratio Analysis:
Calculated ratios indicate worsening situation for XYZ over the years. Profitability: GP, NP and ROCE consistently declined over three years. GP was highest in FY07 when sales volumes increased and COGS to sales ratio decreased. In FY08, apparel divisions vertical integration and countrys political instability led to reduced export sales lowering GP. In FY09, global economic recession forced distress sales, leading to greater sales at the expense of GP margins. Analysis of the Business and Financial Performance of XYZ Page 33

Improved GP, gains from sale of shares and dividends from SGICL led to 1.5% NP margin in FY07. This however deteriorated in FY08 and FY09 as XYZ suffered foreign exchange losses and increments in salaries which increased its expenses. In FY07, maximum utilization of resources resulted in higher ROCE. In FY08, further capital was employed in apparel division, but returns from these investments have not yet materialized. Overall FY08 and FY09 were marked by reduced capacity utilization thereby degrading ROCE. Solvency: Gearing increased from FY07 to FY09, with only a minor increase between FY07 and FY08 as a right issue reduced the impacts of long-term borrowings on gearing. Huge losses in FY09 lowered equity funds resulting in high debt to equity ratio with debt contributing more than 50% in capital structure. Liquidity: After some improvement in FY07, liquidity declined over FY08 and FY09 due to higher current liabilities as short-term borrowings increased. XYZs stockholdings showed variable trends but impacted slightly on liquidity. Furthermore, decreased current asset valuation also led to poor liquidity position. Efficiency: Efficiency was variable with fluctuating stock turnover days reflecting no evident stockholding policy. Debtor days remained consistent, due to effective debtor management while creditor days showed little control and increased as cash-flows deteriorated. Overall, working capital cycle was uneven with movement towards over-trading when it reached as low as 30 days at the end of FY09. Investor Ratios: FY07 was most fruitful for investors as XYZ proposed dividend of Rs.1.25/share. No dividend was paid in FY08 and FY09 as XYZ suffered net losses. Share price depleted massively by 84% over three years. Interest coverage decreased as borrowings and their respective interest rates increased while earnings reduced. In FY09 XYZ just managed its interest obligations with an interest cover of only 0.06times.

Competitor Analysis:
The adverse political and economic condition impacted majorly on XYZs performance among the three competitors. ABC suffered as well making only minor profits whereas DEF, due to its large size enjoyed economies of scale and generated the best results. Increasing finance cost and depleting asset position of XYZ led to its poor financial performance, while DEF and ABC, with their better cost control strategies operated at profits showing a better year-end financial position. Analysis of the Business and Financial Performance of XYZ Page 34

Z-Score:
XYZs Z-Score of 0.65 indicates high probability of failure as depleting earnings reduced companys equity reserves. However, XYZs status in sector and likely improvement in economic environment provides some room for progress. Current results were suppressed by global economic recession and political instability in country; factors which the model doesnt considers. Exploiting spare capacity and focusing on local sales is likely to generate better results in coming years.

XYZ is currently faced with serious profitability concerns and degrading financial position in an unfriendly business environment. However, its long-standing position with portfolio of competencies like Genertek division and committed staff provide hope for revival. Historic trends show that after few loss-making years, XYZ revives by implementing appropriate control strategies. This is evidenced by XYZs revival from losses till FY05 to major profit in FY07. Thereafter, depleting economic situations impacted badly on results leading to the current situation.

Recommendations
Following steps can improve XYZs current situation: Balance local and export sales by opening more retail stores throughout Pakistan. Identify new markets to exploit the available spare capacity and make better profits. Spread foreign exchange risk by diversifying export sales to new destinations. Increase Genertek divisions capacity to avail potential electricity contracts with WAPDA. Increase inventories to improve both liquidity and companys ability to respond to unprecedented demands. Raise new equity finance to repay loans. This will improve gearing and lower finance costs leading to higher return for equity providers.

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APPENDIX 1
References
1- Business Recorder. (2010) Prolonged gas, electricity load shedding: people, businessmen, daily wagers suffer adversely, Business Recorder [Online]. 6 January. Retrieved from: http://www.brecorder.com/index.php?id=1003481&currPageNo=1&query=&search=&ter m=&supDate [Accessed 18 February 2010] 2- Courtland L. Bovee, John V. Thill, Marian Burk Wood, George P. Dovel. (1993) Management. International Edition. New York: McGraw-Hill Inc. p. 242. 3- Fiber2fashion News Desk - India. (2010) Contradictions in cap on yarn export policyAPTMA. Fiber2fashion [Online]. 20 March. Retrieved from: http://www.fibre2fashion.com/news/associationnews/aptma/newsdetails.aspx?news_id=83728 [Accessed 23 March 2010] 4- Finance Division. (2008-09) Pakistan Economic Survey 2008-2009 [Online].Islamabad: Government of Pakistan. Retrieved from: http://www.finance.gov.pk/admin/images/survey/chapters/03-Manufacturing09.pdf [Accessed 5 February 2010]. 5- http://17799.denialinfo.com/risk.htm 6- http://en.wikipedia.org/wiki/Peer_group_analysis 7- http://news.wateen.com/modules/news/article.php?storyid=7809 8- http://www.allwords.com/word-secondary+source.html 9- http://www.aptma.org.pk/ 10- http://www.aptma.org.pk/CP_2004.asp 11- http://www.businessballs.com/portersfiveforcesofcompetition.htm 12- http://www.businessdictionary.com/definition/information.html 13- http://www.investopedia.com/terms/a/altman.asp 14- http://www.ioga.com/Special/crudeoil_Hist.htm 15- http://www.labourunity.org/labourlaws.htm 16- http://www.labourunity.org/wages.htm 17- http://www.library.illinois.edu/village/primarysource/mod1/pg1.htm 18- Index Mundi (2008) Pakistan GDP real growth rate [Online]. Retrieved from: http://www.indexmundi.com/pakistan/gdp_real_growth_rate.html [Accessed 18 February 2010] 19- XYZ Mills Limited (2007) Annual Report 2007. Lahore: XYZ Mills Limited. 20- XYZ Mills Limited (2008) Annual Report 2008. Lahore: XYZ Mills Limited. 21- XYZ Mills Limited (2009) Annual Report 2009. Lahore: XYZ Mills Limited. 22- M Y Khan, P K Jain. (2001) Financial Management: Text and Problem. Third Edition. New Delhi: Tata McGraw-Hill Publishing Company Limited. p. 4.1. 23- Mian Iftikhar Ahmad. (2010) Absence of textile policy hindering exports. WATEEN: The National [Online]. 15 February, p. 2. Retrieved from: http://news.wateen.com/modules/news/article.php?storyid=7809 [Accessed 18 February 2010] 24- Nishat Mills Limited (2009) Annual Report 2009. Lahore: Nishat Mills Limited. Analysis of the Business and Financial Performance of XYZ Page 36

25- Ron Basu. (2004) Implementing Quality: A Practical Guide to Tools and Techniques [Online]. Great Britain: Thomson Learning. Retrieved from: http://books.google.com.pk/books?id=JHdT8rF4GCwC&pg=PA96&dq=SWOT+definition &cd=2#v=onepage&q=SWOT%20definition&f=false [Accessed 7 February 2010] 26- Sajid Chaudhry. (2009) Inflation Outlook 2008-09: inflation to slide to 9.5% by Juneend. Daily Times [Online]. 17 January, p 5.2. Retrieved from: http://www.dailytimes.com.pk/default.asp?page=2009\01\17\story_17-1-2009_pg5_2 [Accessed 10 February 2010] 27- ABC Limited (2009) Annual Report 2008-09. Lahore: ABC Limited. 28- Shahid Iqbal. (2009) State Bank cuts interest rate to 12.5pc. Dawn News. 25 November, p. 11. 29- State Bank of Pakistan. (2008) MONETARY POLICY STATEMENT: January-June 2008 [Online]. p. 7, fig.2. Retrieved from: http://www.sbp.org.pk/m_policy/MPS-JAN-JUNEFY08-EN.pdf [Accessed 26 February 2010] 30- State Bank of Pakistan. (2008) MONETARY POLICY STATEMENT: January-march 2009 [Online]. p. 12, fig.4. Retrieved from: http://www.sbp.org.pk/m_policy/MPS-JanMar-09-Eng.pdf [Accessed 26 February 2010] 31- Trading Economics (2010). Pakistan Inflation Rates [Online]. Retrieved from: http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=PKR [Accessed 18 February 2010]

Bibliography
1- BPP. (2009) Paper P3: Business Analysis. Third Edition. London: BPP Learning Media Limited. 2- Dave Hall, Rob Jones, Carlo Raffo. (2004) Business Studies. Third Edition. Ormskirk: Causeway Press Limited. 3- Johnson, Shane. (2009) GRADE A RAP, Student Accountant [Online]. London: Certified Accountants Educational Trust. Retrieved from: http://www.accaglobal.com/students/student_accountant/archive/2009/96/3242552 [Accessed 20 January 2010]. 4- Kaplan. (2009) Paper P3: Business Analysis (BA). Kaplan Financial Limited. 5- Kaplan. (2009) Paper P4: Advanced Financial Management (AFM). Kaplan Financial Limited. 6- M Y Khan, P K Jain. (2001) Financial Management Text and Problem. Third Edition. New Delhi: Tata McGraw-Hill Publishing Company Limited.

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APPENDIX 2
ABBREVIATIONS AND ACRONYMS ACCA COGS CSR EBIT EPS ERP FY GDP GP GTML HFO HR JIT KIBOR XYZ KSE LIBOR MEG MLCFL NCA DEF NP NRV P/E Ratio PAT PBIT PBT PESTEL PKR PTA R&D RAP ROCE ROE Rs. SA SBP SGICL ABC SWOT TFC UBL USA USD WAPDA WRAP Association of Chartered Certified Accountants Cost of Goods Sold Corporate Social Responsibility Earnings before Interest and Tax Earnings per Share Enterprise Resource Planning Financial Year Gross Domestic Product Gross Profit Gul Ahmed Textile Mills Limited Heavy Fuel Oil Human Resource Just in Time Karachi Inter-Bank Offered Rate XYZ Mills Limited Karachi Stock Exchange London Inter-Bank Offered Rate MonoEthylene Glycol Maple Leaf Cement Factory Limited Non-Current Assets Nishat Mills Limited Net Profit Net Realizable Value Price to Earnings Ratio Profit after Tax Profit before Interest and Tax Profit before Tax Political, Economic, Social, Technological, Environmental and Legal Pakistani Rupee Purified Terephthalic Acid Research and Development Research and Analysis Project Return on Capital Employed Return on Equity Rupees Social Accountability State Bank of Pakistan Security General Insurance Company Limited ABC Limited Strengths, Weaknesses, Opportunities and Threats Term Finance Certificates United Bank Limited United States of America United States Dollar Water and Power Development Authority Worldwide Responsible Apparel Production

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APPENDIX 3
List of Formulas Creditor Days Current Ratio Debt to Equity Ratio Debtor Days Dividend per Share EPS Financial Gearing Ratio Financial Leverage Ratio Gross Profit Interest Cover Ratio Net Profit P/E Ratio Quick Ratio ROCE ROE Stock Turnover Days Working Capital Cycle (Creditors / Purchases) * 365 Current Assets / Current Liabilities Debt / Equity (Debtors / Sales) * 365 Dividend / Number of Shares PAT / Number of Shares Debt / (Debt + Equity) Equity / (Debt + Equity) Gross Profit / Sales PBT / Finance Cost Net Profit / Sales Price per Share / EPS (Current Assets Inventories) / Current Liabilities PBIT / Capital Employed PAT / Equity (Inventory / COGS) * 365 Stock Turnover Days + Debtor Days Creditor Days

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APPENDIX 4
QUESTIONNAIRE What are the main raw material sources of XYZ? Raw materials are mainly obtained locally but polyester and dyeing materials are imported. There has been an 80-90% increase in the raw material prices that has led to an increased cost of sales. What are the main export markets of XYZ? XYZ has a large number of products and their sales cover almost every major region throughout the globe. Specific sales markets are mainly USA, Middle East and Africa. Considering the prevailing financial results what are the future prospects of XYZ? Sales are improving but the increasing energy costs and the raw material prices are resulting in lower margins. Also there are long-term contracts with overseas brands and they have to be provided with a similar price. As a result any increase in COGS has to be borne by the company. Overall the company is performing well as we are able to increase our sales. Controls over expenses in the future periods will produce better results for XYZ in the coming years. What are the prospects of Q mart and local sales? Q Mart was acquired mainly to increase local sales. Many retail store have started operations and further are under construction to start operations in the near future. This will result in further improvement in the companys sales.

Home Textile division was reorganized to Apparel division. What are the future prospects of this new division? There was vertical integration in the Home textile division which reformed into Apparel division. Since capital investments take some time before they generate results it is likely that this new division will earn healthy revenue for XYZ in the coming years. Were there any technology up-gradations in recent years? XYZ stays ahead with the latest updates in technology. In this context machinery is imported from global suppliers. In 2008-09, Tsudakoma looms were replaced with Toyotas high speed looms. Who are the major competitors of XYZ? Among the major companies that XYZ compete with are DEFltd. and Saphhire textile mills ltd.

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APPENDIX 5
EXTRACTS FROM FINANCIAL STATEMENTS

KOHINOOOR MILLS LIMITED

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30th JUNE

2009 Rupees SALES COST OF SALES GROSS PROFIT DISTRIBUTION COST ADMINISTRATIVE EXPENSES OTHER OPERATING EXPENSES 7,578,457,178 (6,919,319,192) 659,137,986 (499,728,559) (220,275,950) (202,438,502) (922,443,011) (263,305,025) 307,843,468 44,538,443 (706,299,453) (661,761,010) (60,790,553) (722,551,563)

2008 Rupees 6,071,270,854 (5,277,750,305) 793,520,549 (342,913,108) (198,807,499) (101,367,666) (643,088,273) 150,432,276 77,326,450 227,758,726 (494,863,830) (267,105,104) (47,697,099) (314,802,203)

2007 Rupees 7,611,236,705 (6,486,736,826) 1,124,499,879 (333,401,011) (146,318,259) (28,051,360) (507,770,630) 616,729,249 46,748,428 663,477,677 (490,423,744) 173,053,933 (58,612,814) 114,441,119

OTHER OPERATING INCOME PROFIT FROM OPERATIONS FINANCE COST PROFIT / (LOSS) BEFORE TAXATION PROVISION FOR TAXATION PROFIT / (LOSS) AFTER TAXATION

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BALANCE SHEET AS AT 30th JUNE

2009 Rupees EQUITY AND LIABILITIES Share capital and reserves Authorized share capital 1,100,000,000

2008 Rupees

2007 Rupees

1,100,000,000 509,110,110 1,729,746,578 2,238,856,688 0

1,100,000,000 363,650,080 2,134,333,365 2,497,983,445 0

Issued, subscribed and paid up share capital 509,110,110 Reserves 378,150,546 Total equity 887,260,656

Surplus on revaluation of operating fixed1,037,326,061 assets Non-current liabilities Redeemable capital - secured Long term financing - secured Deferred tax 0 948,092,066 68,862,581 1,016,954,647 Current liabilities Trade and other payables Accrued markup Short term borrowings - secured Current portion of long term liabiliites Provision for taxation 1,107,202,523 165,360,822 4,460,475,348 322,319,602 54,332,493 6,109,690,788 Total Liabilites Contingencies and commitments TOTAL EQUITY AND LIABILITIES 7,126,645,435 0 9,051,232,152

0 902,907,809 251,000,069 1,153,907,878

39,999,125 880,571,354 253,472,520 1,174,042,999

877,736,509 113,895,958 4,127,379,652 529,543,297 41,147,079 5,689,702,495 6,843,610,373 0 9,082,467,061

615,517,415 108,580,219 3,417,152,907 654,035,145 72,938,336 4,868,224,022 6,042,267,021 0 8,540,250,466

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2009 Rupees ASSETS Non-current assets Fixed assets Long term investments Long term security deposits 5,404,085,959 266,629,500 1,615,751 5,672,331,210

2008 Rupees

2007 Rupees

4,062,381,866 247,229,500 1,820,751 4,311,432,117

4,026,563,685 1,432,800 3,151,751 4,031,148,236

Current assets Stores, spares and loose tools Stock-in-trade Trade debts Loans and advances Trade deposits and short term prepayments Accrued interest Other receivables Sales tax recoverable Short term investments Cash and bank balances 368,032,690 1,195,946,684 872,369,399 239,474,981 3,208,579 0 158,649,122 89,247,515 172,525,740 279,446,232 383,642,759 1,598,730,680 775,013,196 564,476,629 2,349,040 0 192,858,559 114,863,679 1,085,586,948 53,513,454 4,771,034,944 0 9,082,467,061 304,342,590 1,175,108,847 988,152,762 264,345,513 6,475,758 65,740 237,226,629 132,442,694 1,207,790,600 131,689,499 4,447,640,632 61,461,598 8,540,250,466

3,378,900,942 Non-current assets classified as held for sale 0 TOTAL ASSETS 9,051,232,152

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EXTRACTS FROM COMPETITORS FINANCIAL STATEMENTS

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30th JUNE 2009

NISHAT TEXTILE MILLS LIMITED Rupees SALES COST OF SALES GROSS PROFIT DISTRIBUTION COST ADMINISTRATIVE EXPENSES OTHER OPERATING EXPENSES 23,870,379,000 (19,518,838,000) 4,351,541,000 (1,315,630,000) (435,012,000) (191,608,000) (1,942,250,000) 2,409,291,000 599,006,000 3,008,297,000 1,446,796,000

SAPPHIRE TEXTILES MILLS LIMITED Rupees 11,744,248,108 (10,012,847,520) 1,731,373,588 (573,602,972) (124,239,127) (63,267,384) (761,109,483) 970,264,105 151,534,290 1,121,798,395 (847,734,742)

OTHER OPERATING INCOME PROFIT FROM OPERATIONS FINANCE COST PROFIT / (LOSS) BEFORE TAXATION PROVISION FOR TAXATION PROFIT / (LOSS) AFTER TAXATION

1,561,501,000 (293,500,000)

274,063,653 (94,221,893)

1,268,001,000

179,841,760

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BALANCE SHEET AS AT 30th JUNE 2009

NISHAT TEXTILES MILLS LIMITED Rupees EQUITY AND LIABILITIES Share capital and reserves Issued, subscribed and paid up share capital Reserves Total equity Non-current liabilities Redeemable capital - secured Long term financing - secured Deferred tax 0 2,334,411,000 245,243,000 2,579,654,000 2,424,827,000 16,905,940,000 19,330,767,000

SAPPHIRE TEXTILE MILLS LIMITED Rupees

200,831,400 4,259,025,132 4,459,856,532

0 702,714,283 434,800,133 1,137,514,416

Current liabilities Trade and other payables Accrued markup Short term borrowings - secured Current portion of long term liabiliites Provision for taxation 1,309,658,000 202,777,000 7,342,600,000 433,313,000 313,917,000 9,602,265,000 12,181,919,000 0 31,512,686,000 398,727,296 155,845,558 3,732,160,433 228,566,450 76,854,672 4,592,154,409 5,729,668,825 0 10,189,154,409

Total Liabilites Contingencies and commitments TOTAL EQUITY AND LIABILITIES

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NISHAT TEXTILE MILLS LIMITED Rupees ASSETS Non-current assets Property, Plant and Equipment Capital Work in Progress Investment Properties Long term investments Long term loans Long term security deposits 11,199,635,000 41,049,000 11,952,949,000 12,367,000 11,848,000 23,217,848,000

SAPPHIRE TEXTILE MILLS LIMITED Rupees

3,777,650,771 168,831,043 138,710,299 595,827,696 18,609,945 4,714,402,015

Current assets Stores, spares and loose tools Stock-in-trade Trade debts Loans and advances Trade deposits and short term prepayments Other receivables Sales tax recoverable Short term investments Cash and bank balances 561,251,000 4,092,512,000 1,300,366,000 462,025,000 29,880,000 323,000,000 89,247,515 1,414,310,000 111,494,000 8,294,838,000 TOTAL ASSETS 31,512,686,000

3,278,652,891 1,129,634,217 61,803,031 7,173,454 78,562,147 96,288,064 2,821,493,005 66,874,980 7,540,481,789 1,234,265,106

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