Ratio analysis of Cherat Packaging Ltd.

Analized by Naeem Muzafar

MBA(B&F) 4TH Semester
Submeted to Sir Fahad Abdullah
03, Oct, 2013

Introduction to Cherat Packaging Ltd.

Cherat packaging Ltd. Is a pakistan based company. It is a part of part of Ghulam
Faruq Group. The principal activities of the company is the manufacturing,
marketing and sale of paper and polyprpylene bags. It produces and supplies a
variety of cement bags such as bags made from kraft paperand polypropylene
granules. This is the largest producer and supplier of paper sacks to the cement
industry in pakistan. Its factory is located in Disttrict Sawabi, KPK. The company
has an annual production capicity of 265 million paper bags and 65 million
polypropylene bags.
Addition of the polypropylene bags has made the CPL the sole company to produce and
supply both varieties of cement bags ( i.e paper bags and polypropylene bags) in pakistan.
The company is listed on all the major stock exchanges in the country.

Nature of the business

The nature of cherat packaging Ltd. Is seem to be oligopolistic because of its key competitors
in the market. Howevert after acquiring the polypropylene plant it has got a remarkable
position in the market and now cosidered as the sole business of providing excellent quality
of paper and polypropylene bags to the cement industry in pakistan.

Reason behind selection of Cherat Packaging Ltd.

In oreder to select a topic for my analysis, i searched alot on the internet and i also asked
different people to give me direction to select a business for my analysis. Finaly i came to
select Cherat Packaging Ltd. Due to its extra ordinary growth in the economy. And due to its
nature of innovation. The company has been operating in the market since 1991 and has
showen an excellent growth in its life time until now. Its the only company that had acquired
the polypropylene plant and thus has become the sole entity to provide the bags made of
granules.

Company overveiw
Demand for the cement has increased in the country so it had a positive empact on the sale of
bags. Comparitively sale and production of the bags have been increased during the year
under reveiw than the last year sals and production. Reason behind the rise in sale and
production is the pp plant which operated near its full capicity to produce high quality sals
volume to augment the sales volume. Higher volume had a positive impact on sales turnover
and overall profitability of the company.

Financial highlights of the current and the last year

Financial performance
There has been a rise of approximately Rs. 873 million in the sales volume of the company
showing an increase of 27% from the last year. This increased has been occured by the
addition of polyprpylene bag plant production of bags to the compan usual production.
Although rise in input cost and devaluation of pak rupee had an adverse affect on the
production cost but the company tackled this issue through high quality bags, aggressive
marketing of 2ply paper bags and effecient inventory management. Export of PP bags also
helped in exploring new markets for the company and contributed to its profitability. During
the year 2013 there was a slight rise in the finance cost over the last year due to high working
capital requirement owing to increase volume of operations and acquisition of long turn loan
for the polypropylene plant. Further company had markup subsidy available upto december
31 2011 announced by state bank of pakistan for companies operating in khyber pakhtoon
khwan. Taking all these things into account the ciomany made an impressive after tax profit
of Rs. 118.57 million.

Contribution to the Government

The company contributed over Rs. 1 billion to the government treasury in shape of taxes,
excise duty, income tax and sales tax.

Ratio analysis

2013

2012

Debt to Equity Ration

29.8%

33.7%

Acid test ratio

0.51

0.54

ROE

11.17%

8.00%

WORKING CAPITAL TURNOVER

11.14

1.13

INVENTORY TURNOVER/TIMES

3.80

3.60

No of time int covered

2.12

1.35

Interpretation of the raios

Debt to equity ratio: the ratio indicates the proportion of debt and equity used by the
company to finance its assets. In the year 2012 the company debt to equity ratio was 33.7%
which means that a total of 33.7% Assets were financed by debt and 66.3% were financed by
the business itself or equity. In 2013 the business has shown a decrease in the percentage of
aasets financed by debt, that is in 2013 a total of 29.8% assets is financed by debt and 70.2%
is financed by equity. This change may be attributed to the govt subsidy of markup.

Acid test ratio: this ratio is helpful in measuring a company s short term debts with its
most liquit assets. In the year 2012 the company acid test ratio calculated was 0.54 and in the
year 2013 its 0.51 it showing a decrease in most liquid assets. It might be due to the high
increase in sales as it leads to a decrease in inventory which would have resulted in a decrease
in most liquid assets. As the company has plantted the polypropylene plant due to which
demand for the bags was increased.

ROE: the return on equity estimates the profitability of the business by revealing the amount
of profit generated by a company with the money invested by the shareholders.
Return on Equity in last year was 8.00% and at current year it is 11.17% which indecates an
increase of 3.17% in the current year over the last year. Return on equity has been increased
due to the increase in profatibility as salses have been increased as compared to the last
year and new market have also been explored due to the production of the poplypropylene
plant which has been operated near to its full capicity in the year 2013.

Working capital turnover: this ratio is the financial measurment of the operating liquidity
available. In the year 2012 the company working capital turover was 1.13 and at the current
year 2013 its 1.13. the increase in ratio indecates that the company can pay off its short term
liebilities .the company also can expand its operations. This increase can be attributed to
increase in sales.

INVENTORY TURNOVER/TIMES: It is an activity ratio measuring the number of times

per period, a business sells and replaces its entire batch of inventory again.in the year 2012
this ratio was calculated as 3.60 and its 3.80 in the 2013 which shows a slight increase in the
ratio in the year 2013. This may indecate the high effeciency of inventory management. A
lower ratio of inventory turniver shows over-stocking and a very high ratio shows loss of sale
due to inventory shortage but in the year 2013 the ratio is quite balanced with a slight
increase whichindecates that inventory has been managed very effeciently in the year 2013.

No of time int covered: the interest coverage ratio is the ability of the company to meet its
interest payments. In the year 2012 the company interes coverage ratio was 1.35 and in the
year 2013 this ratio is calculated as 2.12. rise in the ratio indecates that the company has now
a strong effeciency to meet its interest payments. On the other hand this higher ratio may
suggest that the company is too safe and is neglecting opportunities to magnify earnings
through leverage.

Looking forward for cherat packaging Ltd

By going thriough the above 5 ratio analysis of the company one can predict the future
outlook of the company. The company has shown a fabulous growth in the last year. Due to
its innovative nature it can easily increase its market share and can increase its revenue by
entering into new and international markets. The demand for cement bags is increasing day
by day due to the increase in demand for cement in domestic construction and as wel as in
international countries like afghanistan.
The company mainly imports its technology from abroad countriese like europe as it has
recently imported the Polypropylene Plant for producing cement bags from European
supplier, BSW - Windmoller & Holscher, so by devaluating the local currency it may face an
increase in imports costs in future.
The company may lose demand from foreign countriese as rises the price of bags in the
internation countries. And it can also devaluate our local currency.