BATA PAKISTAN LIMITED

1. Auditor’s Report

Audit of financial statements; balance sheet, statement of profit and loss account, statement
of comprehensive income, cash flow statement and statement of change in equity of BATA
PAKISTAN LIMITED has been done on the year ended 31 December 2016. It is stated that
we got all the information and every relevant detail that is mandatory for the purpose of audit.
It is the obligation of company’s management to maintain internal control and prepare all the
financial statements according to the accounting standards and requirements of the repealed
companies ordinance, 1984. It is the auditor’s responsibility to give fair opinion on these
statements.

Auditors report stated that audit has been conducted according to the auditing standards as
applicable in Pakistan. These standards entail that audit is performed to get the rational
affirmation about whether these all statements are free from every kind of material
misstatement. An audit consists of examining, assessing accounting policies and important
estimates made by management and evaluating overall presentation of statements. Auditor
report that:

a) As per the requirement of repealed companies ordinance 1984 proper books of

account has been maintained by the company.
b) In our opinion:
i. Both balance sheet and profit and loss account with the notes have been
prepared in accordance with the repealed companies ordinance,1984, and
supporting with the books of account and further continually accounting
policies are applied;
ii. For the purpose of company’s business expenditures are incurred during the
year; and
iii. All the investments made, business managed and expenditures incurred
throughout the year were according to the objectives of the company;
c) According to the information and explanation given to us, all the financial statements
together with the notes are complied with the approved accounting standards as
applicable in Pakistan, and provide information required by the repealed companies
ordinance, 1984, give the true and fair picture of the state of the company’s affairs as
at year ended 30 june 2017 and
d) Company deducted its Zakat deductible at source under the Zakat and Usher
ordinance, 1980(XVIII of 1980) and deposited in the central Zakat fund established
under section 7 of that ordinance.
 2. Accounting Policies
IAS 2016 Remarks
Property, Plants and equipment (IAS 16) Valuation Fair value Continuous
Approach

Dep. Method reducing Continuous

balance method Approach
Investment Property (IAS 40) Investment active market Continuous
Property price Approach

Employee Benefits (IAS 19) Scheme unfunded Continuous

gratuity scheme Approach
Employees 8 to 10% of Continuous
compensated basic salary Approach
absences

Inventories (IAS 2) stoke in trade avg.cost method Continuous

Approach
Stores, spare Avg. cost Continuous
parts and other method Approach
consumable
Presentation of financial statements (IAS 1) Share Capital Face Value Continuous
Approach
Financial instruments (IAS 39) Cash and cash Face Value Continuous
equivalents Approach

Financial instruments (IAS 39) Trade and other Invoice value Continuous
receivables (effective Approach
interest method)
Impairment of assets (IAS 36) Good will Cost-acc. dep Continuous
Approach

Financial instruments (IAS 39) Trade and other Fair value Continuous
payables Approach

Borrowing Costs (IAS 23) Borrowing amortized cost Continuous

(effective Approach
interest method)
Revenue (IAS 18) Revenue Accrual basis Continuous
recognition Approach
Financial instruments (IAS 39) Financial assets Fair value Continuous
and liabilities Approach
Foreign currency transaction (IAS 21) Foreign currency Exchange rate at Continuous
transaction the date of Approach
transaction
Investments in associates & joint venture (IAS 28) Investments in commercial term Continuous
associates Approach
 3. Investor’s Ratio
These ratios define the value of the company to the investor. These values are a source for a
person to invest or not in the company.

EPS basic- diluted

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
EPS
Basic 82.87 54.89 51.25 42.92 26.35 29.05 32.77 15.37 16.75 25.09 16.66 5.31 13.32
It is the more, the better. EPS shows that how much earnings have been generated on a single
share. EPS of the company is gradually increasing every year and it is highest in 2016 because net
profit is at maximum. It is also continuously fluctuating in recent quarters.

Dividend per Share

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Dividend
per share 5.06 8.12 0.84 3.76 3.69 2.16 0.00 2.99 0.42 1.64 2.34 1.52 3.62
It can be clearly observed that company is paying dividend every year with high amount which shows
the good financial health and it can be clearly seen through the net profits of the company as well.
Company paid maximum dividend in 2017. From quarterly data, it can be seen that the company is
paying dividends.

Dividend Payout Ratio

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Dividend
Payout 0.06 0.15 0.02 0.09 0.14 0.07 0.00 0.19 0.03 0.07 0.14 0.29 0.27
Ratio
Investors are more concerned about the sustainable trends of this ratio. From data, it can be clearly
seen the fluctuating trend of paying dividend and as above company paid maximum dividend in 2017.
This trend shows that company is earning profits. Quarterly data also shows that company is paying
dividend in each quarter; this shows healthy financial condition of company.

Retention Ratio
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Retention 94% 85% 98% 91% 86% 93% 100% 81% 97% 93% 86% 71% 73%
Ratio
Retention ratio is something that how much you have held the money with you as compared to given.
For example, if a company has given 40% dividend, so that means it has held 60% with itself. For
BPL, the company is paying dividends in all years. Retention ratio is less than 100% which is a good
sign. Retention ratio and dividend payout ratio is almost in equal percentage.

Growth Rate
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Growth
Rate 0.34 0.30 0.48 0.21 0.15 0.09 0.12 0.06 0.08 0.13 0.11 0.03 0.08
The company has retained some earnings and used it in the equity, so that will be shown in the growth
of the company. But if the company retained earnings and is unable to grow then that is not a good
sign for investing point of view. The company’s growth is decreasing by every year. Hence this
company is unable to grow.
 4. Profitability Ratios
It normally measures the firm’s ability to generate profitable sales from its resources i.e
assets. The following ratios help understand the profitability of the company.

Net Profit Margin

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Net Profit
Margin 0.32 0.28 0.29 0.27 0.21 0.37 0.39 0.25 0.32 0.38 0.32 0.13 0.28
Net profit margin is the %age of profit to sales.Now the table here is showing that the profit
margin is low and constant every year. Either company is not efficient in its operations or
sales are reduced and not getting profits.

Operating Profit Margin

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Operating
Profit 0.42 0.33 0.43 0.35 0.35 0.49 0.58 0.33 0.44 0.55 0.37 0.22 0.40
Margin
The higher the value of the operating margin the more efficient the company is, because if the
operating profit margin is increasing, then the company is expected to earn more per sales. From the
table, it clearly shows that company’s operating profit margin is constant.

Pre-Tax Margin
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Pre-Tax
Margin 0.40 0.30 0.34 0.29 0.30 0.46 0.55 0.30 0.41 0.52 0.30 0.14 0.32
The higher the value of the pretax margin the positive is the sign that the company can maintain its
operations at cost low, whereas increasing its profitability. From the table, it can be clearly seen that
the company has constant pre- tax margins.

Operating ROA
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Operating
ROA 0.13 0.12 0.13 0.09 0.12 0.04 0.05 0.03 0.04 0.06 0.03 0.02 0.04
Operating ROA refers to the return on assets on the operations of the company. By
operations, it is meant the sales, CGS, selling and distribution and the administration
expenses. So, it can be concluded that the company has high operating ROA, which means that the
income generated by the company is fairly high compared to the per rupee investment in the
company’s total assets. Company’s ROA ratio is decreasing with the slightest difference.

Return on Assets
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Return on
Assets 0.10 0.10 0.09 0.07 0.07 0.03 0.03 0.02 0.03 0.04 0.03 0.01 0.03
ROA shows the effectiveness of the company to convert the money used to buy assets into the net
profit. From the table, it can be seen that the return on assets of the company is decreasing. But
operating ROA is greater than ROA. This is due to the fact that other expenses are greater than the
other operating income.

Return on Equity
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Return on
Equity 0.36 0.36 0.49 0.23 0.18 0.10 0.12 0.07 0.09 0.14 0.12 0.04 0.11
It gives a better understanding of the company’s profitability compared to the ROA. The only
difference between these two is financial leverage. The value of ROE must be greater than ROA.
From the table above, it can be seen that the company has higher value compare to ROA hence
company is able to perform better using its equity, other than debt. That means BPL is
driving better returns from its equity.

Administrative Expenses to PBT

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Admin
Exp to - - - - - - - - - - - - -
PBT
The administrative expenses to PBT ratio explains about the portion of administrative expenses as that
of earnings before tax. The decreasing values are showing that the administrative expenses are
becoming less with the passing years. It is the majorly because the sales are decreasing.

R0CE
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
ROCE
0.32 0.29 0.32 0.24 0.22 0.10 0.13 0.07 0.08 0.15 0.07 0.03 0.08
It is the return on capital employed ratio. Capital employed is long term debt and equity. This ratio is
used to determine what we earned from this. That’s why EBIT is used in its calculation. From the
table, it can be clearly seen that the value of return of capital employed is gradually decreasing which
means that company is not earning profits.

Operating Expense Ratio

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Operating
Exp Ratio 0.58 0.68 0.58 0.66 0.66 0.52 0.43 0.67 0.56 0.45 0.63 0.78 0.61
This ratio basically tells about the operational efficiency of the management. If the value is lower,
than it means that the management is managing operations efficiently and vise-versa. From the table,
it shows that the value of operating expenses ratio is high which means that company is inefficiently
managing its operations.

5. Liquidity Ratios
The liquidity ratio tells about the ability of a company to pay its debt obligations. All liquidity ratios
measure the same thing that ability of company to pay short term liabilities. But there is a significant
difference among all which is explained below.

Acid-Test Ratio
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Acid-Test
Ratio 1.14 0.87 1.02 1.06 1.29 1.19 1.17 1.11 1.07 0.95 1.06 1.02 1.00
If the company wants to pay its short term obligation within operating cycle then calculate acid test
ratio. From the graphs below, we can clearly see that the value of acid-test ratio is greater than one. It
means that the company does have enough liquid assets to pay its current liability.

Cash Ratio
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
 Cash
Ratio 0.12 0.02 0.15 0.16 0.43 0.18 0.18 0.12 0.10 0.03 0.08 0.07 0.06
If the company wants to pay its short term obligation immediately then calculate cash ratio. From the
graphs below, it can be clearly observed that the value of cash ratio is less than 1. This means that the
company has more liabilities than cash and cash equivalent. In other words, we can say that the
company is having financial difficulty.

Current Ratio
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
CurrentRatio
1.16 0.93 1.06 1.08 1.34 1.20 1.19 1.16 1.12 1.01 1.12 1.08 1.06
If the company wants to pay its short term obligation immediately then calculate current ratio. This
ratio tells about the liquidity of the company for one year. From the table, we can clearly see that the
current ratio is greater than 1. So it means that the company will be able to fulfill its short term
liabilities when it will be due at any point in time.

Net Working Capital

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8

Net
working 8,903,010 (2,289,867) 2,469,449 3,035,239 5,197,967 14,749,411 12,397,545 7,760,660 4,723,821 250,931 3,867,203 2,442,812 1,861,083
capital
Net working capital is the amount that a company spends on daily basis in order to run its business
operations. From the table, it can be observed that the value is positive all the five years and quarters
throughout except in 2016. It means that the company has more current assets compared to current
liabilities. The company will be able to pay its short term obligations if it will get due at any point in
time.

6. Activity Ratios
These ratios measure the ability of the company to convert different accounts in the balance sheet into
either sales or cash. It basically measures the efficiency of the company on the basis of using assets,
other balance sheet items, and leverages.

Receivable Turnover Ratio

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Receivabl
e turnover 0.52 0.81 0.60 0.48 0.99 0.12 0.15 0.15 0.16 0.25 0.21 0.19 0.21
Ratio
Receivables turnover ratio is the number of times a business can convert its receivables into
cash. Here, this turnover actually tells us the efficiency of MPL to collect its receivables. Its
value is continually changing means that receiving period is fluctuating and increasing that
shows that the firm is not maintaining its account receivables/ trade debts and sales
effectively.

Average Collection Period

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Avg
Collection 705.06 451.99 609.50 764.59 368.13 751.32 612.22 596.01 554.60 364.71 434.66 484.52 434.26
Period
Average collection period is the amount of days or time that the company takes in order to receive
cash or payments from the accounts receivables. The lower the value, the better it is. It is showing
 from the table that average collection period is very high it means is not able to collect its cash/
receivables as soon as possible

Inventory Turnover Ratio

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Inv
Turnove 3.53 1.27 1.47 2.30 1.87 1.16 1.33 0.40 0.35 0.43 0.37 0.30 0.38
r Ratio
This ratio tells about the frequency of inventory sold by the company and how much it has been
replaced over a specific period of time. The inventory turnover ratio is very low for the company. It
means that the management is incapable in converting its inventory into sales. It also means that the
company has excess of inventory and couldn’t replace it.

Days Sales in Inventory

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Days 103.38 287.65 248.93 158.58 195.60 77.78 67.63 222.92 257.14 206.95 241.46 299.11 237.88
Sales in
Inventory
It measures the exact time a company takes in order to convert its inventory into sales. This table
shows that the company takes too much days in order to convert inventory into sales. It means that too
much capital is tied up in inventory and could mean that the inventory is obsolete.

Account Payment TO
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Account
Paymen 0.06 0.08 0.07 0.05 0.11 0.02 0.02 0.02 0.02 0.03 0.03 0.02 0.02
t TO
It measures the frequency of payments made by the company to its suppliers. Greater the value more
it is preferable. From the table it shows that company make payment very few times on average to its
suppliers. Values of this ratio are very low. This may because of company does not have enough
financial resources to pay its debts or they are using advance payments in order to run their
operations.

Average Payment Days

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Account
Payment 5,621.50 4,601.39 5,311.41 6,869.94 3,305.24 5,959.08 4,963.14 4,803.56 4,891.06 3,475.40 3,529.29 4,195.97 3,721.27
Days
It suggests that the time taken by a company to make payments to the supplier. From the table it is
shown that these days are very high. In result suppliers left out to make delivery.

Operating Cycle
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Operating
Cycle 808.45 739.64 858.43 923.16 563.73 829.10 679.84 818.93 811.74 571.66 676.11 783.62 672.14
These graphs show that that the average operating cycle of the company is 800 days. It means that on
average the company takes 800 days in producing inventories, making sales, recovering payments
from the accounts receivables. In this time period company doesn’t have finance from its own
resources. And this operating cycle is very high compare to normal 90 days of cycle.

Cash Conversion Cycle

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Cash
Conversion (4,813.06) (3,861.75) (4,452.98) (5,946.77) (2,741.51) (5,129.98) (4,283.30) (3,984.63) (4,079.32) (2,903.74) (2,853.18) (3,412.35) (3,049.13)
Cycle
Cash conversion cycle refers to how much a company need to generate money when
receivables are not yet received and company has to pay cash to its lenders i.e Suppliers.In
the case of MPL, company has been able to generate a negative cash conversion cycle
meaning that the company is not paying its lenders money for a longer period of time in
accordance with the accounts receivable in days.

Asset Turnover Ratio

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Asset
Turnove 0.30 0.37 0.30 0.26 0.35 0.08 0.09 0.08 0.08 0.12 0.09 0.08 0.09
r Ratio
Asset turnover ratio is high that mean company is able to utilize its assets to generate sales.
This table depicts that the company is able utilize its assets in the longer run.

Interest Coverage Ratio

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Interest
Coverag 14.97 12.43 4.66 5.97 6.57 13.67 18.20 10.18 12.32 20.21 5.13 2.63 4.83
e Ratio
This ratio determines that how easily a company can pay interest on the debt which is outstanding.
From the graph below of annual data, it can be seen that the value is high and positive hence company
can easily pay its debt outstanding.

7. Capital/Leverage Ratios
A company rely on the mixture of debt and equity in order to run its operations. The capital/leverage
ratios are as follows:

Capital Ratio
2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Capital
Ratio 0.27 0.28 0.18 0.28 0.40 0.27 0.27 0.27 0.30 0.31 0.24 0.23 0.22
Capital ratio basically tells how many assets are financed through equity. From the table, it can be
clearly seen that assets are not equity financed (i.e. ratio is less than 50%).

Debt to Capital Ratio

2017 2016 2015 2014 2013 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Debt to
capital 0.73 0.72 0.82 0.72 0.60 0.73 0.73 0.73 0.70 0.69 0.76 0.77 0.78
Ratio
This table clearly shows that the portion for debt is high that shows company’s short
borrowing is increased every year.

Investor’s Point of View

Ratios 2017 2016 2015 2014 2013
Asset Turnover Ratio 0.30 0.37 0.30 0.26 0.35
Inventory Turnover Ratio 3.53 1.27 1.47 2.30 1.87

Net Profit Margin 0.32 0.28 0.29 0.27 0.21

 Return on Equity 0.10 0.10 0.09 0.07 0.07
Dividend Payout Ratio 0.06 0.15 0.02 0.09 0.14
Growth Rate 0.34 0.30 0.48 0.21 0.15

The asset turnover ratio is greater than 1 so it is good sign from the investor’s perspective as the
company is generating sales by effectively utilizing the assets. However, the inventory turnover ratio
is quite low, which shows the inefficiency of the company and also shows that the company has
excess of inventory. The net profit margins of the company are declining and is also negative from
year 2015 to 2017. This means that the company is spending more compared to what it is actually
earning. The downward trend of return on equity is also a big question mark on the performance of
the company and the way funds are being utilized by the management. Dividend payout ratio suggests
that the company is not paying dividends for the past 2 years. This is also a bad sign for an investor,
as the investor will not be able to enjoy high returns on his or her investment. More importantly, the
growth rate is on a decline as well. Giving a perfect clue to the investor that investing will be a bad
idea.

From the above stated reasons, I will suggest that the investor should not invest in this company
because of the losses in the last couple of years. Even though, the asset turnover ratio is fairly good.
But other ratios, such as dividend payout ratio, ROE, net profit margin, and inventory turnover ratio
suggest the inefficiency of the management. To conclude, the performance of the company is
deteriorating due to the incompetency of the company.

Creditor’s Point of View

Ratios 2017 2016 2015 2014 2013
Interest Coverage Ratio 14.97 12.43 4.66 5.97 6.57
Debt to Asset Ratio 0.73 0.72 0.82 0.72 0.60

Current Ratio 1.16 0.93 1.06 1.08 1.34

Debt to Capital 0.73 0.72 0.82 0.72 0.60
Cash Conversion Cycle (4,813.06) (3,861.75) (4,452.98) (5,946.77) (2,741.51)

From the creditor’s perspective, the interest coverage ratio is declining. Which means that the
company won’t be able to pay or will have difficulty in paying interest on its outstanding debt. The
debt to assets and debt to capital ratio suggests that the company is little debt financed. So company
has the ability to pay off its debts through its assets and still leaving something behind for the
investors. The current ratio suggest that the company has enough resources to pay off its short term
obligations when it will get due at any point in time. The cash conversion cycle suggests that the
company takes more than a month (on average) to covert cash into inventory and then converting that
inventory back into cash. The cash conversion cycle of textile industry is roughly 25 days on average
in Pakistan. So company is closer to it.

From the above stated arguments, in my opinion the lenders should give loans to the company. As the
company has the potential to pay short term debt as well as the long term debt, which we can see
through current ratio and debt to asset ratio. The cash conversion cycle and operating cycles are bit
questionable, but it is relatively close to the industry average. So, that is not a big deal for the
company.