Running Head: BANNU WOOLLEN MILLS LTD

Bannu Woollen Mills lmtd

Akasha Khan
12u00074
Section H

Miss Sumaira Hamid

7/4/2015
Lahore School of Economics

BANNU WOOLLEN MILLS LTD

This report is submitted as partial requirement for Financial Statement Analysis of Pakistani
Companies to Ms. Sumaira Hamid

BANNU WOOLLEN MILLS LTD

Contents
Comparative Analysis..................................................................................................................................3
Year to year Change Analysis..................................................................................................................3
Trend Analysis.........................................................................................................................................4
Common size Analysis................................................................................................................................5
(i)Balance sheet:......................................................................................................................................5
ii) Income Statement:.............................................................................................................................10
Cash flow analysis:....................................................................................................................................11
Ratio analysis............................................................................................................................................12
Liquidity ratios:.....................................................................................................................................12
Profitability ratios:.................................................................................................................................13
Solvency ratios:.....................................................................................................................................15
Asset utilization and efficiency:.............................................................................................................16
Market Value Ratios:.............................................................................................................................17
Du Pont Analysis:......................................................................................................................................18
Return on invested capital analysis:...........................................................................................................19
Financial Disclosure and Distortion...........................................................................................................20
Recommendations:....................................................................................................................................20
Conclusion.................................................................................................................................................21
Creditors perspective:...........................................................................................................................21
Investors Perspective:...........................................................................................................................22
Appendix...................................................................................................................................................23

BANNU WOOLLEN MILLS LTD

Comparative Analysis

Year to year Change Analysis:

Year changes have been shown in figure 1 present in appendix.
This measure identifies the extent to which a variable gains or losses value. As my analysis is of
the past five years i.e. from 2010 to 2014, the base year in my calculations is 2010. In 2010 the
total assets of the firm were worth Rs .914562 which have now grown to Rs. 1918192 in 2014
which represents a change of 109.74% over the five years. This is a positive sign for the
company because this indicates that the company has grown over time. The change in total assets
over time can be majorly attributed to the increase in the property, plant and equipment of the
company which have grown from where they were in 2010 by 85.74% to the level they are at
now in 2014. This shows that the company is doing well and has been expanding over time.
Trade debts of the company have grown from Rs. 40981 in 2010 to Rs. 204214 in 2014 which is
a 398.31% increase in the trade debts level from where they were in 2010. This can be partly
attributed to increasing sales over time, because higher sales would mean more credit sales,
which were Rs. 415,428 in 2010 and have since then grown to Rs. 788,882 in 2014. This is an
89.9% increase in sales from where they were in 2010 to where they are now in 2014. The other
reason for growing receivables over time is the management of the company not being able to
recover funds from its receivables on time. The stock-in-trade of the company has grown by
56.73% over the five years. With the increase in sales over the time the company would require
more stock at hand to sell so the increase in stock is to account for the increased sales level of the
company.
Total liabilities of the company increased from Rs. 260940 in 2010 to Rs. 453055 in 2014
showing an increase of 73.62% in 2014 compared to 2010. This increase can be majorly
attributed to the long-term loan taken in 2014 by the company and sudden increase in the staff
retirement benefits. This is further supported when we see that the short term borrowings of the
company have only increased by 2.55% over the five year period which shows the increase in

BANNU WOOLLEN MILLS LTD

liabilities in majorly coming from the recently took loan and the staff retirement benefits paid by
the company.
Equity of the company has increase from Rs. 653622 in 2010 to Rs. 1465137 in 2014 which
represents a change of about 124.16% over the five years. The number of shares issued during
the five year period has been the same so the main increase over the years is because of the
surplus on the revaluation of fixed assets account and because of the increase in the levels of the
reserve due to retention of profits.
The increase in sales has also seen an increase in the cost of goods sold when we compare 2010
with 2014. Cost of goods sold has gone up by 86.21% as compared to sales which went up by
89.9%. Total operating expenses have also gone up over the five years by 99.1%. This is partly
because the company has grown its operations over the years which have led to increase in costs
and partly because of the changing economic conditions in Pakistan which have led to increase
in prices of almost everything. Net income of the company has however has seen an increase of
50% over this time period which is a 10% increase on average of the five years under discussion.
Keeping the law and order situation plus the non- availability of electricity and all the other
problems still Bannu wollen has managed to increase its net income by 50% as compared to
2010.

Trend Analysis:
Trend Analysis has been shown in figure 2 present in appendix.
Horizontal analysis (also known as trend analysis) is a financial statement analysis technique
that shows changes in the amounts of corresponding financial statement items over a period of
time. It is a useful tool to evaluate the trend situations. The statements for two or more periods
are used in horizontal analysis. The earliest period is usually used as the base period and the
items on the statements for all later periods are compared with items on the statements of the
base period. The changes are generally shown both in dollars and percentage. The base year in
this trend analysis is 2010.
Analyzing the total assets of the firm we see an increasing trend over the years as we move
onwards from 2010. The total assets were increasing in absolute terms too. These were 62%
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more in 2012, this increasing trend continued till 2014 when the company had 109.74% more
assets than what they had in 2010. This shows that the company has grown over the years.
This increase in total assets can be traced from the increasing trend of trade debts, stock-in trade
and property, plant and equipment. The trade debts have increased over the years, which is
because the sales of the company have also been increasing showing that the company has grown
over the years from where it was in 2010. Trade debts grew by 137.59% as a percentage of the
base year and kept on growing to 594.30% in 2013 before dropping to 498.31% in 2014. When
coming to stock in trade similar increases are seen which can be attributed to increased sales
level because for the increased sales the company would need more stock on hand. Property,
plant and equipment has also seen an increasing trends over the years. It increased from 173% to
185% mainly due to the surplus on revaluation account and because some new property, plant
and equipment were purchased as well. The total liabilities of the company increased in 2011 but
then they decreased in 2012 whereon the liabilities have increased over the years until 2014. The
increase in liabilities in 2014 is caused by a long-term loan undertaken by the company during
2014. The short-term borrowing increased in 2011 to 107.84% but then most of the short-term
borrowings were repaid in 2012 by the company and the short term borrowing decreased to
19.54% of the base year value of total liabilities. Thereon, the short-term borrowings increased to
159.05% in 2013 and were 102% in 2014 of the base year value. Total equity has also been
increasing throughout the five years period because of the increases in reserves and when more
shares were issued in 2014 on a premium which increased the total equity figure.
Sales have increased as a percentage of base year until 2013 after which the growing trend
discontinued and the increase as a percentage of base year was lesser than the previous year. This
can be attributed to growth in operations of the company and increased level of total assets. CGS
have increased just in the pattern of the sales and same is the case with the total operating
expenses. Net income experienced an up and down trend throughout the five years as a result of
the differing levels of CGS and total operating expenses.

Common size Analysis:

(i)Balance sheet:

BANNU WOOLLEN MILLS LTD

Common size analysis of balance sheet has been shown in figure 3a present in appendix. The
common size analysis of the balance sheet is done by firstly dividing the balance sheet into two
main parts. The first part analyzing the capital structure of the company wherein the equity and
liabilities sections are discussed and analyzed in detail, and the second part analyzing the
investing structure of the company and uses of the companys funds are discussed.
In the most recent year of analysis, that is 2014, the company has 76.38% financing from equity
and 23.62% from liabilities. This shows that the company relies more on equity financing than
on debt financing, which indicates that Bannu Wollen has a very little chance of going bankrupt.
The company has been relying heavily on equity financing which shows that low operating
leverage is being used. Low operating leverage means that lesser is being financed from debt
financing which has its drawbacks because if there is higher operating leverage it will magnify
the shareholders profits but will do the same for losses too. This technique of capital structure is
a conservative technique where management is trying to minimize chances of the company going
bankrupt. Last year that is 2013 the capital structure was more or less the same as they financed
76.34% assets through equity financing and the rest from liabilities. In 2012 and 2011 equity
financing was 83.52% and 79.54% which is a very high ratio of debt to equity financing.
Whereas the level of equity financing was the least in 2011 where 71.47% equity was used and
the rest was debt financing. So the percentage of equity to debt financing increased from 2010
onwards until 2012 where it was the highest thereafter it has decreased and stabilized at around
76% in 2013 as well as 2014. Looking at the data we can see that throughout the five year period
the management of Bannu Wollen has been adopting a safe approach when it comes to the capital
structure of the company where more is being financed through equity rather than debts. It has its
advantages too, that the company does not have to worry about solvency issues.
Of the 76.38% equity in 2014, common stock of the company comprised of 4.96%. The number
of common shares issued during 2014 has increased from that of the previous which shows more
shares have been issued to raise funds. New shares were only issued in 2014 and when we look
back on 2013, 2012, 2011 and 2010 no shares were issued during these years. In 2013 the
common shares comprised of 4.24% of the 76.34% of total equity. As we move back the
percentage of common shares in the total equity increases and is highest in 2011. This is because
the total equity figure was lesser in the previous years which caused the percentage to go up even
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though no stocks were issued during the time period. Higher dependence on equity financing is a
good sign for the company because it means the company has a lower solvency risk. The major
chunk of the 76.38% total equity portion of 2014 came from reserves of the company which
comprised of about 36.78%. A decreasing percentage of reserves can be seen observed as we
move backwards and the least is observed in 2010 where the reserves are 15.02% of the 71.41%
of total equity portion. These reserves comprise of the general reserve and the share premium
reserve. The reserves have observed an increasing trend when we move 2010 onwards because
of the increase of the general reserve whereas in 2014 the reserves increased because more
shares were issued on a premium which increased the share premium reserve as well as the Total
reserves. The management of the company revalued its fixed assets, which they had purchased
over the years, from independent revaluation authorities which resulted in a revaluation surplus
account. It amounted for a significant portion of the 76.38% of total equity in 2014 which was
29.36%. The highest percentage of total equity of this account can be observed in 2011 where it
comprised of 40.35% of the total equity percentage of 79.54%. The amount of the surplus
account is the highest in 2012 where it comprised of 39.91% of the total equity percentage of
83.52%. If we look at the core equity of the firm that is the equity portion without the revaluation
reserve it shows that core equity increased as a percentage of total assets in 2011 from where it
was in 2010. After that the core equity kept on decreasing as a percentage of total assets. In
absolute amounts the core equity has increased over the years moving on from 2010 because of
the increase in the reserves. Share capital only increases in 2014 when new shares were issued.
Coming to the liabilities section, we see that non-current liabilities have decreased and increased
over the 5 year period and there is no set pattern. Non-current liabilities consisted of 12.25% of
the 23.62% of the total liabilities percentage in 2014. This was the highest level of non-current
liabilities throughout the five years which was caused by a long term loan undertaken by the
company and also because of the new staff benefit scheme adopted by the company. The
interesting thing here is that the company had no long term loan before 2014. This loan was
undertaken for import of two woollen condenser cards of Chinese origin. The finance facility
carries mark-up at 6-months KIBOR + 2.50% per annum; the effective mark-up rate charged by
NBP during the year was12.17% per annum. The finance facility is repayable in 30 equal
monthly installments commenced from April, 2014. The loan however has little effect on the
solvency risk of the company which is still under control as when we look towards the total
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liabilities of 2014 they are still comprising of 23.62% of the total assets indicating that more than
70% assets are being financed using equity financing. Moving back we see that non-current
liabilities mostly comprise of the staff retirement benefit fund and the deferred tax liability. The
non-current liabilities have however increased over the time in absolute terms but as a percentage
of the total assets there is no fixed trend.
In 2014 the current liabilities comprised of 11.37% of the percentage of total liabilities. The
major component of the current liabilities was the short-term borrowings. Short term finance
facilities available from National Bank of Pakistan (NBP) under mark-up arrangements
aggregate Rs.270 million (2013: Rs.270 million). NBP, during the year, charged mark-up on
these finance facilities at the rates ranging from 11.04% to 12.18% (2013: 11.09% to 14.06 %)
per annum; mark-up is payable on quarterly basis. The aggregate facilities are secured against
pledge of stocks, first charge on current and fixed assets of the Company for Rs.193.333 million
and Rs.280.333 million respectively and lien on import documents. The same kind of agreements
have existed in the previous years too. The short term finances decreased in dramatically in 2012
when they were paid off by the management of the company which lead to the lowest level of
current liabilities during the five year analysis period. Moreover, current liabilities decreased
2010 onwards until 2012 and then increased thereon till 2014 .
Summing it all up the companys dependence on liabilities has decreased when we move from
2011 onwards to 2012 then it increased and stabilized around 23%. The company is more
dependent on equity to finance the assets rather than the liabilities. Therefore it is safe to say that
there is little risk of solvency for the company. Although the total liabilities have been increasing
in absolute terms but the increase in equity is far more greater than the increase the liabilities
which is a good sign for the company.
Common size analysis of asset side of balance sheet has been shown in figure 3a present in
appendix. Looking at the assets side of the balance sheet of the company, the first thing to notice
is the makeup of the non-current assets of the company. The non-current assets at their absolute
value are at the highest in 2014 among the five years considered in the financial analysis, but due
to other assets increasing the total of the assets, their percentage of total assets is only 64.036%,
whereas it was a higher percentage in 2011, but the absolute value was lower compared to 2014.

BANNU WOOLLEN MILLS LTD

Of the 60.36% of non-current assets in 2014, the property plant and equipment comprises of
45.95%. This is the layout of a typical manufacturing business which relies heavily on its plant
equipment for manufacturing purposes. The property plant and equipment as a percentage is
lower than each of the previous years but in absolute terms its value is highest in 2014. The value
of the property plant and equipment has been increasing over the years because the company has
revalued its property plant and equipment which created a surplus in revaluation account.
Moreover company has also purchased new property plant and equipment over the years too.
The companys investment in associated companies has been increasing in absolute terms over
the years too. The investment balance is highest in 2014 and lowest in 2010. As a percentage the
same trend is observed where the percentage of investment in associated companies as a
percentage of total assets was highest in 2014 and lowest in 2010.
Moreover, moving towards the current assets we see that the current assets are 36% of the total
assets in 2014 whereas they were 38% of total assets in 2013. In absolute terms the current assets
are the highest in 2014 and have increased 2010 onwards. Current assets mainly comprised of the
stock in trade and trade debts. Stock in trade was highest in 2010 which was 29.04% of the total
assets and were lowest in 2013 when they 19.74% of the total assets. Whereas the trade debts
were lowest in 2010 and have increased as a percentage of total assets over the years and are
highest in 2013 when they were about 13.56%. Then these decreased to 10.65% in 2014. In
absolute terms the number of stock in trade has gone up since 2010 but because the total assets
have been increasing along with a higher rate so the percentage of stock in trade in decreasing
over time. The increase in stock in trade can be partly attributed to the growing sales level and
partly because of the inefficiency of the management. The trade debts have grown from 2010 to
2013 and in 2013 the increase is an abrupt one. The increase in trade debts can be attributed to
increasing sales levels and also the inefficiency of the management to collect the receivables. To
manage exposure to credit risk in respect of trade debts, management performs credit reviews
taking into account the customer's financial position, past experience and other relevant factors.
Where considered necessary, advance payments are obtained from certain parties. The
management has set a maximum credit period of 120 days to reduce the credit risk. Based on
past experience, the Company's management believes that no impairment loss allowance is
necessary in respect of trade debts because more than 50% has been realised and for other trade

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debts there are reasonable grounds to believe that the amounts will be realised in short course of
time.
ii) Income Statement:

Common size analysis has been shown in figure 4 present in appendix.

Now coming to the income statement, cost of sales were about 71% of sales in 2014 but the
highest percentage was seen in 2010 which was about 73% of sales. Even though the raw
materials cost less in 2010 as compared to 2014 but the percentage is greater because as the costs
increased in number over the years this caused the sales of the company to grow too and the cost
increased in a lesser quantity than the increase in the sales value of the company. The prices of
raw materials went up because of the floods in the past years which had destroyed the cotton
crop leading to increase in prices of raw materials. Cost were the lowest as a percentage of sales
in 2010 because the sales grew significantly as a consequent highest gross profit is seen in 2011.
Total operating costs were 16% of sales in 2010 where on they decreased to 14% of sales in 2011
and 2012. Then again these costs increased in 2013 and 2014 to16% and 17% respectively. In
absolute terms the operating cost have increased over time but the percentage show that the costs
are lesser in 2011 and 2012 because the increase in sales was greater than the increase in the
costs of the company during this time. Finance cost as a percentage of sales was highest in 2010
when it was 3% of sales thereon it decreased and was 2% of sales in 2011 and 2012 and 1% in
2013 and 2014. The finance cost was lowest in terms of absolute value in 2011 was the highest in
2012. The net income of the company was highest in 2011 which shows that the company
performed best in 2011 even though there were floods which destroyed the cotton crop leading to
higher cost of raw materials. This shows that the company performed the best during 2011 when
it earned 25% of sales net income while in 2010 and 2012 the net income was 21% of sales. The
percentage of net income to sales was the least in 2014 due to increasing costs. Most significant
of these costs were the cost of operations which was more than any of the previous years
showing the inefficiency of the management of the company.

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Cash flow analysis:

The cash flow statements of Bannu wollen show the highest number of cash generated through
operating activities in 2012 which was Rs. 138,872 and the least generated in 2013 which was
Rs-62174. The second highest number of cash flow generated through the operating activities
was in 2014 which was about Rs 119922. The most significant difference which caused the
negative balance in 2013 was the increase in the trade debts of the company which increased in
an expected manner and caused an outflow of about Rs.191,992 resulting in the negative
balance of cash generated from cash flows. Whereas in 2014 the receivables decreased which
lead to an inflow of Rs.39335 which was the main driving force in the increase in the cash
generated from operating activities. However there was a large outflow of cash with respect to
stock in trade which was more than the previous year. The cash flow from operating activities is
greater than all of the years because there were very few outflows during this year compared to a
large number of inflows. However the cash flow generated from operations remained low in
2011 and 2010 because of high outflow of cash because of the increase in stock in trade and
receivables.
Moreover, when we look into the cash flow from the investing activities we see that in 2014 the
net cash flow from investing activities was Rs.-81779 which is the lowest of all and it was
highest in 2011 when it was Rs.-2945. The major outflow which caused the negative balance of
the cash flow of investing activities throughout the five year analysis period was the fixed capital
expenditures undertaken by the company.
Moving on when we analyze the net cash flow from the financing activities we see that the net
cash flow from financing in 2014 was Rs.-38209 which is the second lowest cash flow amongst
the five years. The highest cash flow from the financing was observed in 2013 which was Rs.
94354. The repayment of the short term financing was the main cause for the cash generated in
financing activities to become a big negative value even though the company undertook a loan of
Rs.22500. However the inflow from the short term finances was the main reason that there was a
positive balance of Rs. 94354 in 2013. The lowest cash flow from financing was recorded in
2012 when there was a net cash flow balance of Rs.-132413 which was caused because there
were no inflows in financing portion that year and there were repayments of short term debts
leading to a large negative net cash flow figure for the year 2012. In 2011& 2010 the figures of
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net cash flow from financing were negative. The most significant balance here was the dividend
paid. Although the short term finances were received but dividend paid coupled with finance cost
and lease repayment caused the negative balance in the cash flow of financing. Whereas in 2010
there were no inflows in the financing section leading to a negative balance, the most significant
one being the repayment of short term borrowings.

Ratio analysis

All of the below mentioned ratios are shown in fig 5 present in appendix.

Liquidity ratios:

Starting off with the current ratio, a ratio between 1 and 2 is considered ideal as it means that the
company has enough current assets to cover its current liabilities. Looking at the five year
average of the current ratio for the company we see that the company has as higher current ratio
than the industry average. The industry average is 1.18 whereas Bannu wollens current ratio is
3.185 which is a bit higher than what would be ideal for them. Anyhow the current ratio suggests
that the company is in a good position to meet its short term financial obligations from its current
assets. For a better analysis we need to look at the quick ratio of the company. For calculating
quick ratio we eliminate the least liquid asset i.e. inventory. This ratio should also at least be
higher than 1. Quick ratio suggests the ability of a company to pay off its short term financial
obligations with the most liquid asset at hand. Bannu Wollens average quick ratio for the 5-year
period was 1.056 which is better than the industry average which was 0.62. This shows that the
company is doing better with regards to the industry and is in a better position to pay off current
liabilities using its most liquid assets. The Third measure is inventory turnover i.e. the number of
times inventory is sold or used in a period of time. The higher the inventory turnover is the better
it is for a company. The companys five-year average is 1.3 whereas the industrys five-year
average is 5.45. Bannu wollens five year average is poor compared to the industry average; this
poor ratio reflects the inability of the management to convert stock into sales but there is another
reason too that the company is maintaining high levels of inventory for increasing sales level as
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the company has been expanding. The fourth measure is days sales in inventory. This measures
the days taken to convert inventory into sales. The lesser the number of days to convert the
inventory in sales the better it is for the company. Bannu Wollens DSI is 285 days whereas
industrys DSI is 70.11 which indicates that the company takes more days to sell its inventory
than the industry. This is partly due to inefficiency of the company and partly because they have
kept high levels of inventory on purpose to increase sales levels as theyre increasing their
operations. The fifth measure is receivables turnover. This measures how many times a company
can turn its account receivable into cash during a period of time. The greater the receivable
turnover is the better it is for a company. Bannu wollens receivables turnover five year average
is 8.62 times whereas the industry average is about 30.62 times. If we look at the industry
average then its evident that Bannu wollen is lagging behind from the industry in recovering its
funds from receivables. On its own the turnover of bannu wollen is not too bad. The company
needs to review its credit policy and tighten the credit period given to its debtors for even better
results. The last measure is Days sales in receivables which measures the days in which the
company collects payment for its credit sales. The lesser days it takes for a company to recover
the funds the better it is for that particular company. Bannu wollens five year average DSO is 53
days however the industrys five year average is 186 days. This shows that the company is doing
better than the industry in recovering funds from the receivables. Overall the liquidity ratio show
that the companys liquidity position is good and there are no major concerns. The company has
a fairly high DSI than the industry average which is the only worrying thing for them in the
liquidity ratios and the management needs to sell their stock quicker to the customers but the
high levels are also there because they are maintaining high levels on purpose to acoount for
increasing sales.

Profitability ratios:

The first measure is return on sales which measures how much profit does a company make on
sales. The percentage for the company has been decreasing as in 2014 it was 16.7% as compared
to 17.9% in 2013 and 21% in 2010. This shows that the company has not been able to manage
its expenses well over the years which has lead to decreases in profitability although sales have
risen. However When we look at the five year average for Banuu Wollen we see that it is better
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than the average of the industry. Bannu wollens five year average was 20.3% whereas industry
stands at 4.07% showing that even though the profits have been falling the company still is doing
better than the industry. The second measure is gross profit margin which calculates a companys
gross profit as percentage of its sales. The percentage has varied over the years from 27.3% in
2010 to 29% in 2012 to 28.7% in 2014. Cost of sales have increased throughout the five year
period showing that management has not been able to control its expenses the GP however has
risen because of the increasing sales levels. The five year average was 28.9% which is much
higher than the industry average of 7.3% but this does not show the complete picture. The
company needs to control its cost of sales to maximize its gross profit. The third measure is
operating profit margin which measure operating profit of a company as percentage of its sales.
It shows how much of a companys profit is left after paying of its operating and other expenses.
Here the percentage has increased and decreased with no set pattern over the years. In 2014 the
percentage was 19.3% decreasing from 21.6% in 2013 showing that the operating expenses have
increased with varying rates over the years. Where the growth in sales was greater than the
growth in operating expenses we observe that the percentage is greater in those years. This
indicates that the management has been unsuccessful to sustain the growth of costs to be lower
than the growth of its sales. The five year average for the company is 21.90% whereas the
average for the industry is only 4.76%. This shows that the company has been doing well than
the industry and just needs to sustain the growth of costs at a lower level than the growth in sales.
The fourth measure is EBITDA to Sales which measures a companys operating profit before the
deduction of depreciation, amortization, interest and taxes. The percentage for the company has
increased over the first 2 years as in 2010 it was 15.9% as compared to 17.9% in 2012 whereas
in 2014 it decreased to 16.7%. The percentage has more or less been near to 16% over the years
except for exceptional performance in 2011 when the percentage was 20.1%. Administration
expenses have been the major reason for the fluctuation in 2011. The five year average for the
company is very good at 17.4% as compared to the industry average of only 4.18%. This shows
that the company has been doing very well, however the management should sustain the admin
expenses. The fifth measure is Return on Assets which provides an idea to the management at
how efficient the company is using its assets to generate net income. The percentage was highest
in 2011 when it was 12.5% thereon we can observe a decreasing trend and can see that the
percentage in 2014 was 7.1%. The reason for the decrease is the increase in total assets being
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greater than the increase in net income in years following 2011. The management needs to make
use of the idle resources to stop the decrease in return and increase revenues. The five year
average for the company was 9.5% whereas the industry average is 3.28%. This shows that
Bannu wollen has been utilizing its assets better than the industry and they only need to make
use of idle resources better to keep up the good work. The sixth measure is Return on Equity
which measures a corporation's profitability by revealing how much profit a company generates
with the money shareholders have invested. The percentage was highest in 2011 when it was
16.3% thereon we can observe a decreasing trend and can see that the percentage in 2014 was
9.3%. These variations create uncertainty in the minds of potential investors as well as the
shareholders as they cant invest in a company whose income has varied a lot over the years. The
decrease in ROE can be attributed to increased reliance on equity financing and also the issuance
of new common stock in 2014 which further diluted the earnings. The five year average for the
company was 12.3% whereas the industry average is at 12.12%. Bannu wollens ROE is almost
the same as the ROE of the industry however the decreasing trend in the ROE of the company is
an alarming situation for attracting potential investors therefore the company needs to increase
leverage to magnify stockholder returns. The last measure is return on net operating assets which
focuses on only those assets used to generate revenue. The percentage was highest in 2011 when
it was 5.9% thereon we can observe a decreasing trend and can see that the percentage in 2014
was 4.1%. The companys five year average was 4.7% whereas the industry average was higher
than the companys average at 10.1%. This shows that Bannu wollen has not been utilizing its
operating assets efficiently which is why the ratio has decreased over the years to 4.1%.
As a whole the profitability condition of the company is better than the industry average but the
major concern here is that the profitability has been decreasing over the years because the asset
utilization has gotten worse.

Solvency ratios:
The first ratio in this category is liabilities to equity ratio which calculates the financial leverage
of a company. The companys ratios have decreased over the first 2 years from 0.3992 in 2010 to
0.1973 in 2012 and then increased to 0.309 in 2014. The ratio indicates that the company has
been heavily dependent on equity to finance its assets meaning that the risk of going bankrupt is
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very low for Bannu Wollen. The five year average if the company is 0.29 whereas the five year
u=industry average is 36.48 %. The ratio has been favorable for the company in regard to the
industry as its solvency position has been better than the industry. Research has shown that a
high financial leverage magnifies stockholders return so this strategy might not be too attractive
for attracting investors because low leverage means lower returns for the shareholders. The
second measure is total leverage which measures a company's ability to pay off its incurred debt.
A low ratio is favorable for company as it provides assurance to lenders that the debt can be paid
back. The ratio for the company has varied between 3.94 in 2010 to 2.06 in 2012 which shows
the companys position improved in 2012 to pay back its debts then a slight increase is seen and
the company ratio increases to 3.43 in 2013 mainly because of a long-term loan undertaken in
2014. The five year average for the company is 3.03 which is acceptable and is way lower than
the industry average of 19.64 showing that the solvency position of Bannu wollen is way better
than the industry. The last ratio is times interest earned ratio. It indicates how many times a
company can cover its interest charges on a pretax basis. The more the ratio is the better it is for
any company. The ratio for the company increased over the years from 4.80 in 2010 to 13.168 in
2014. The five year average for the company is 8.8 which is acceptable however the industrys
average is greater than the company five year average but Bannu wollens ratio is acceptable too.
It can be said that on average the company can spare 8.8 rupees of its profits to cover for 1 rupee
of its interest expense thus it can be said that there is little risk for the company going banktupt.

Asset utilization and efficiency:

The first ratio in this category is sales to asset ratio. The Asset Turnover ratio is an indicator of
the efficiency with which a company is deploying its assets. The ratio for the company has been
stable over the years. In 2010 the ratio was 0.4542 and in 2014 the ratio was 0.4133 showing that
the ratio has been stable. Although the ratio has been stable but the ratio has been very unfavorable throughout the five year period and shows that the assets have been underutilized to
generate sales. The average for five years for bannu wollen is .29 which is very low than the
industry average which is about 7.88. The greater the ratio the better it is for the company so the
management need to improve on utilizing the assets to increase the sales but the thing to notice
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here is that the value of FA contains a large amount of surplus on revaluation account which
couldve increased the total assets value by a lot leading to a low total asset turnover. The second
measure is sales to average NWC and it indicates a companys effectiveness in using its working
capital to generate sales. The higher the turnover is the better it is. Bannu wollens turnover has
decreased over the years and is lowest in 2014 when it was 1.77 times which is very low. A low
ratio indicates that a business is investing in too many accounts receivable and inventory assets
to support its sales, which could eventually lead to an excessive amount of bad debts and
obsolete inventory. The industry average is 236.4 times which is much higher than the
companys five year average which is 2.08 but this is because the company is maintaining high
levels of inventory with them to make more sales but receivables have grown which is a concern.
The third measure in this category is sales to fixed assets turnover. It allows analysts to
understand if a company requires a large investment in property, plant, and equipment in order to
generate revenues. The company has an unfavorable ratio which has increased slightly over the
years from 0.895 in 2010 to 0.915 in 2014. The fixed assets are being underutilized by the
management in generating sales showing management is inefficient and it can increase sales by a
big number if they use the resources efficiently. The five year average for the company was 0.86
and the industry five year average was 18.65 so looking at this we have to say that the utilization
of fixed assets is ineffective and more could be gained from the same level of Fixed assets
because more the turnover is the better it is for any particular company.

Market Value Ratios:

The first ratio is price earnings ratio. It measures a company's current share price compared to its
per-share earnings. A higher price earnings ratio means that the company is expected to do well
in the future and so the investors will be willing to invest. Over the years the p/e ratio has
increased. In 2010 it was 1.37 as compared 3.19 in 2012 whereas in 2014 it was 3.91. The
average for the five years was 2.84 though this average cannot help in providing any indication
of where the company is heading as in one year it does great and in the next its performance
starts deteriorating. The second measure is dividend yield which shows how much a company
pays out in dividends each year relative to its share price. The dividend yield has decreased over
the years as we move from 2010 onwards. No dividends were given in 2013 and 2014 meaning
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that the company is retaining funds in the business because there might be shortage of funds
which is not a good sign for attracting investors. The five year average is 7.85%. The last
measure is market to book value. It measures the market value of a company relative to its book
or accounting value. The market to book value has increased steadily over the years suggesting
that the company is doing good and investors are attracted.

Du Pont Analysis:

Du Pont analysis has been shown in figure 6 present in appendix.

DuPont analysis is an extended analysis of a company's return on equity. It concludes that a
company can earn a high return on equity if:
1.

It earns a high net profit margin;

2.

It uses its assets effectively to generate more sales; and/or

3.

It has a high financial leverage

Bannu wollens ROE has decreased over time as we move from 2010 onwards to 2014. This is
mainly attributable to falling profit margin of the firm. The profit margin has been reducing over
time continuously which has resulted in the decline of ROE. The operating performance of the
company has fallen over the years, although sales have increased over the years so have the
expenses with larger percentage leading to decline in profit margin. Moreover, the firm is under
utilizing its assets and is unable to generate large number of sales using these assets which has
lead to a low and decreasing total asset turnover ratio over the years which has also contributed
to low ROE. Lastly, the companys leverage has been decreasing from 2010 onwards until 2012
from thereon it increased but the increase is very little. Even after the increase the leverage is
only 1.31 in 2014 which is very low. Bannu wollen needs to improve on all three areas of the du
pont equation. They need to increase the profit margin by curbing their expenses, then the
management has to make use of assets more efficiently to generate more sales and lastly they
need to have a higher leverage in their system. At the moment the leverage is very low which
means that most of the assets are being financed using equity which is a safer approach to avoid
solvency risk. By incorporating more debt in the capital structure the company can enhance its

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ROE. Incorporating more debt will mean more risk and with risk comes reward. The
management will have to take a bold step here.

Return on invested capital analysis:

Return on equity has been shown in figure 7 present in appendix.

In this section we will review the proportion of operating assets to non-operating assets, and
operating liabilities to the non-operating liabilities of the company. We will also discuss and
analyze the indicators showing the return on invested capital using ratios such as RNOA, ROCE,
leverage, spread, NFR and NFE.
The return on net operating assets (RNOA) measures the success of a manufacturing firm in its
core operating activities. For Bannu wollen the RNOA was 4.14% in 2010, rose to 5.86% in
2011 and thereon the RNOA decreased over the years and was 4.01% in 2014. This shows that
the company has not been successful in conducting its core operations because the return from
core activities is decreasing from 2011 onwards. Therefore, the management needs to work
harder to improve the core business so that increasing returns can be earned.
The ROCE, or ROE computed, shows RNOA plus the impact of the financial leverage multiplied
by spread which the return on non-operating activities. In this case the ROCE was 3.63% in 2010
which is very low after which it rose to 5.64% in 2011 showing improvement in the return on
invested capital but then dropped in 2012 to 3.75%. It again picked up the pace in 2013 to finish
at 4.47% and from there it fell again in 2014 to 4.01%. The return has been up and down over the
years showing that return on investment for the company is very volatile. This situation is tricky
to attract potential investors because investors favor sustained growth and they dont wish to
invest in a company whose return is volatile because volatility means that the income stream for
the investor will be volatile and they dont want that. RNOA of the firm is higher from its ROCE
in all of the five years under discussion. It shows that Bannu wollen is, on average, able to invest
borrowed funds with a return lower than its borrowing rate which obviously is not a good sign.
This means that the borrowed funds are not being utilized efficiently so that they could earn a
return greater than what Bannu Wollen is paying. The management therefore has to rethink their

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investments in non-operating assets and retrieve funds and invest them in some other investment
opportunities which would generate them higher returns from their borrowing cost.
Above table shows the division of operating and non-operating assets and liabilities of Bannu
Wollen for the five years of analysis, and also provides their percentage of the total for each year.
The proportion of operating assets to non-operating as a percentage of total for each of the five
years of Bannu wollen is very high as the operating assets comprise of above 99% for all five
years. This shows that the company has a focus on generating its revenues from its core activities
and does not need to consider other sources of revenues such as long term investments.
The proportion of operating liabilities to non-operating liabilities has been changing over the
years. A trend that can be seen here is that Bannu Wollen is reducing its non-operating liabilities
and increasing its operating liabilities, as each year percentage of operating liabilities has gone
up until 2013 reaching a maximum of 91.36% from 63.99% in 2010 thereon the non-operating
liabilities increased in 2014 to 35.09% and thereon it started to decrease again in 2014 when it
fell to 26.11%, whereas the non- operating liabilities have fallen to a minimum of 8.64% in 2012
from 36.01% in 2010. Bannu wollen is reducing its debt obligations which improves its financial
position and reduces its exposure to solvency risk. However, keeping such low non-operating
liabilities would mean lower leverage which means lesser risk which comes with lesser rewards
and seeing the falling ROCE its high time for the company to take some risk.

Financial Disclosure and Distortion

The name of Due from associated companies account in the financial report of 2010 was
changed to accrued mark-up receivable in the financial report of 2011. All the other aspects were
correct.

Recommendations:

The company needs to change the management and bring in fresh talented people who
can take the company in the right direction

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The company needs to make use of its assets more efficiently to generate sales because

the sales have fallen in the last year.

The operating costs have gone up over the last year and the company needs to sustain the
growth in cost and keep it lower than the growth in sales. Only then the company can

generate more income

The company needs to change its safe approach towards the capital structure and
introduce more debt which can enhance its earnings. Although debt has risk but with risks

come rewards.
Moreover the company needs to divest its current non-operating assets which earn them
lesser return than what they are paying on the borrowed funds invested in them and then
need to invest them somewhere else that will earn them greater returns.

Conclusion
Creditors perspective:

The Mills manufactures a variety of woollen products which include tweed, blazer, velour,
superior/donigal/honey shirting, byla & byma for light winter wear, blankets, shawls, services
dress cloth, upholstery and curtain cloth etc. in attractive shades and designs. Bannu wollen
wishes to become the market leader in wollen products by targeting to achieve technological
advancements to inculcate the most efficient, ethical and time tested business practices business
practices in our management. The company plans to innovate and introduce alternative uses of
products to broaden our customer base to help strengthen the physical infrastructure of the
company.
The company has recently taken a loan from national bank because it was struggling to generate
cash internally which shows that they might need cash in the future too.
The primary sources of paying interest and principal is the core business activities whereas the
company has made investments in associated companies which generate income too which can
also help repay interest and principal amounts of loan.

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The cash flow generation of the company has been varying across the five year period which is a
worrying sign however the earning have seen an increasing trend in the past three years.
The companys solvency risk is very low as it has a capital structure that is dominated by the
equity financing. The Cash flows and net income of the company has been volatile throughout
the five years. The company did best in 2011 even though that was the year when Pakistan was
hit by floods and it caused destruction to cotton crop which is the main raw material of these
products so yes the company does. So, if I were a loan officer I would have given the loan
because the solvency risk is lesser for this company.

Investors Perspective:

No dividend has been given to the investors in the past two years however dividend were given
in 2012, 2011 and 2010. This is an alarming situation for the company which mean that the
company is retaining funds in the business because it is not doing to well and it wants to keep the
money to invest in the business to make it more profitable. When we look into the earning per
share same is happening with the earning per share of the company, it has been decreasing 2010
onwards showing that the performance of the company has been declining over the years, so as a
potential investor I might not be attracted to a declining company.

References
Annual reports of bannu woolen

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Financial statement analysis textbook

Kse.com

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Appendix
Fig 1

Fig 2

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Fig 3a

Fig 3b

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Fig 4

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Fig 5

Fig 6

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Fig 7

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