Business Finance-I

Ratio Analysis of Fauji Fertilizer Company Limited

Submitted by

Sharoon Rasheed

MBA-Evening

Reg No. BD-39/2011

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 Ratio Analysis of Fauji Fertilizer Company Limited

Ratios 2009 2010 2011

Current Ratio 0.84 0.84 1.07
Acid Test Ratio (Quick Ratio) 0.83 0.83 1.04
Debt Equity Ratio 0.35 0.25 0.12
Debt Ratio 0.66 0.48 0.47
Inventory Turnover Ratio 142.38 119.55 32.77
Receivable Turnover ratio 49.26 72.65 61.93
Avg Collection period 7.35 4.96 5.81
Fixed Assets Turnover 2.32 2.56 2.97
Total Asset Turnover 0.94 1.04 0.99
Net Profit Margin 0.24 0.25 0.41

ROE 0.67 0.71 0.97

ROA 0.23 0.26 0.41

EPS 13.00 16.25 26.52

Current Ratio

The current ratio shows the proportion of current assets to current liabilities. The current ratio is used as an
indicator of a company’s liquidity. In other words, a large amount of current assets in relationship to a small
amount of current liabilities provides some assurance that the obligations coming due will be paid. Analysis
of FFCL shows that the company over the period of three years has current ration of less than 1. It may
indicate that FFCL may have difficulty meeting current obligations. Low values, however, do not indicate a critical
problem. If an organization has good long-term prospects, it may be able to borrow against those prospects to meet
current obligations. Some types of businesses usually operate with a current ratio less than one. For example, if
inventory turns over much more rapidly than the accounts payable become due, then the current ratio will be less
than one. This can allow a firm to operate with a low current ratio.

Acid Test (Quick) Ratio

Acid-test or quick ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire
its current liabilities immediately. Quick assets include those current assets that presumably can be quickly converted

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to cash and it excluded inventory. Analysis of FFCL shows that quick ratio also less than 1 in all three years. A
company with a Quick Ratio of less than 1 cannot currently pay back its current liabilities.

Debt Ratio

The debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the
amount of leverage being used by a company. Debt ratio of FFCL was 0.66 in 2009—indicating that 66% of
company’s assets were financed by debt. However, in last two years it has reduced below 50% showing that FFCL is
using its equity more to finance its assets. A low percentage means that the company is less dependent on leverage,
i.e., money borrowed from and/or owed to others. The lower the percentage, the less leverage a company is using
and the stronger its equity position.

Debt to Equity Ratio

The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders'
equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the
company versus what the shareholders have committed. FFCL’s debt to equity ratio for three years under
consideration highlights that the company is using less leverage and has a stronger equity position. Debt-equity ratio
is important to determine the ability of an organization to generate new funds from the capital market. An
organization with considerable debt is often thought to have little new-financing capacity. Of course, the overall
financing capacity of an organization probably has as much to do with the quality of the new product the organization
wishes to pursue as with its financial structure.

Inventory Turnover Ratio

Inventory turnover ratio is used to measure the inventory management efficiency of a business. Analysis of FFCL’s
financials shows that the inventory turnover ratio was significantly higher in 2009 (142 times) as compared to 2011
(32 times). A higher value indicates better performance and lower value means inefficiency in controlling inventory
levels. A lower inventory turnover ratio of FFCL may be an indication of overstocking which may pose risk of
obsolescence and increased inventory holding costs.

Receivable Turnover ratio

This ratio measures the number of times, on average, receivables (e.g. Accounts Receivable) are collected during
the period. A high ratio of FFCL in 2010 & 2011 as compared to 2009 implies that either FFCL operates on cash
basis or that its extension of credit and collection of accounts receivable is efficient. A slightly lower ratio in 2009 may
be because of credit policies were too relaxed. It also shows that FFCL management had re-assessed its credit
policies in order to ensure timely collection of its receivables.

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Average Collection period

The average collection period is the average number of days between 1) the date that a credit sale is made, and 2)
the date that the money is received from the customer. The average collection period is also referred to as the days’
sales in accounts receivable. The average collection period of FFCL is low for all three years. As the ratio is derived
from Receivable turnover ratio, it can be seen that receivable are collected in relatively less days. In 2010, the
receivable collection period was 5 days as compared to 7 days in 2009. It shows that credit policies of FFCL are
efficient and receivables are collected in timely manner.

Fixed Assets Turnover

The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments -
specifically property, plant and equipment. A higher fixed-asset turnover ratio shows that the company has been
more effective in using the investment in fixed assets to generate revenues. The fixed asset turnover of FFCL is
relatively uniform over the three years mentioned in this report. Analysis shows that FFCL generate twice sales by
employing its fixed assets. The ratio is slightly increasing over last two years which may be due to the fact that
company is doing an effective job of generating sales with a relatively small amount of fixed assets. A high ratio also
indicates the business has less money tied up in fixed assets for each unit of currency of sales revenue.

Total Asset Turnover

The total asset turnover ratio measures the ability of a company to use its assets to efficiently generate sales. This
ratio considers all assets, current and fixed. Those assets include fixed assets, like plant and equipment, as well as
inventory, accounts receivable, as well as any other current assets. The total asset turnover ratio could be interpreted
to mean that it is the amount of sales that each unit of assets generates. For FFCL, the total asset turnover was
equal to 1 in 2010 whereas it has been lower than 1 in 2009 and 2011. It shows that company is not generating
enough sales by employing its total assets. This may indicate a problem with one or more of the asset categories
composing total assets - inventory, receivables, or fixed assets.

Net Profit Margin

Net profit margin measures how much of each dollar earned by the company is translated into profits. A low profit
margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and result in a net loss.
For FFCL, 24% of sales in 2009 will result in after tax profit, whereas the ratio has increased to 41% in 2011. FFCL
earning has increased in 2011 compared to preceding two years and it shows that company has net income of Rs
0.4 for each rupee of sale. A higher profit margin also indicates that a company has better control over its costs in
2011 then previous two years.

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ROE

Return on equity measures a company’s profitability by revealing how much profit a company generates with the
money shareholders have invested. ROE shows how well a company uses investment funds to generate earnings
growth. ROEs between 15% and 20% are generally considered good. ROE for FFCL is higher which shows that
management is efficient in converting its investments into profits. In 2009, the company was earning 67% returns on
its equity whereas it has increased to 97% in 2011. The return on equity figure takes into account the retained
earnings from previous years, and tells investors how effectively their capital is being reinvested. Thus, it serves as a
far better gauge of management's fiscal adeptness than the annual earnings per share.

ROA

It is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how
efficient management is at using its assets to generate earnings. ROA tells you what earnings were generated
from invested capital (assets). ROA for FFCL has increased to 41% in 2011 as compared to 2009 and 2010. Analysis
shows that FFCL is earning 41% returns by employing its assets.

Earning Per share

Earnings per share (EPS) is the amount of earnings per each outstanding share of a company's stock. Over three
years, EPS for FFCL has increased to 26.52 in 2011 as compared to 13 in 2009. The increase in EPS is also an
indicator that the company profitability has increased over time which has yielded benefits for its shareholders as
well. In this case the earning per share has become twice in 2011 in comparison to 2009.

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 Beta Coefficient of FFCL for 2010-2012

Beta is the measure of volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Beta is used to calculate the expected return of an asset based on its beta and expected market returns.

By using the data of Market index and share prices of last three years (2010-2012), we calculate the Beta coefficient
of Fauji Fertilizer Company Limited to analyze the expected return of an asset.

Rm Rs
Date KSE FFC
Market Return Stock Return
4-Jan-10 9437.85 104.03
5-Jan-10 9657.38 104.65 0.0233 0.0060
6-Jan-10 9727.36 104.44 0.0072 -0.0020
7-Jan-10 9737.47 104.23 0.0010 -0.0020
8-Jan-10 9776.21 105.70 0.0040 0.0141

- - - - -
- - - - -
- - - - -
6-Nov-12 16051.14 114.97 -0.0065 -0.0044
7-Nov-12 16218.01 115.72 0.0104 0.0065
8-Nov-12 16243.27 115.97 0.0016 0.0022
12-Nov-12 16213.68 115.81 -0.0018 -0.0014
13-Nov-12 16129.72 115.87 -0.0052 0.0005

Note: Due to large table size, only few values have been copied in the document

Beta

Beta for FFCL is calculated using regression analysis. The regression equation for FFCL is:

Y = 0.9032x - 0.00029

From above equation it can be seen that the beta coefficient is 0.9032.

A positive beta for FFCL means that the stocks generally follow the market benchmark, in the sense that the stock
prices tends to move up when the benchmark moves up, and the stocks tends to move down when the benchmark
moves down. It shows that volatility of FFCLs stock in relation to the volatility of the benchmark is positively
correlated. However, a beta of less than 1 for FFCL implies that the stocks are less volatile than the market. A lower
volatility also means that a security’s value does not fluctuate dramatically, but changes at a steady pace.