D.G.

Khan Cement Company Limited

Financial statement analysis

Miss Sumbal Waqas

By: Shahzaib Mubahsar

Draft 2

Section D

16U03025
Liquidity Position of DG Khan Cement

 Liquidity Position:

Liquidity Position 2017 2016 2015 2014 2013

Current Ratio 1.54 2.60 1.65 1.37 1.21

Acid Test Ratio 1.22 2.33 1.44 0.96 0.64

Cash Ratio 1.18 2.31 1.43 0.94 0.62

2.5

2 current ratio

1.5 acid test ratio

1 cash ratio

0.5

0
2017 2016 2015 2014 2013

The liquidity position of DG Khan Cement Company deteriorated during the first nine

months of FY'18. This was due to a 40% decrease in current assets and a 14% increase in

current liabilities if the company. The current liabilities of the company increased due to

14% rise in trade payables, 61% increase in accrued markup and around 7% increase in short

term borrowing by the company.

On the other hand, current assets of the company declined due to decrease in investments

from Rs 15 billion at the end of FY17 to Rs 7 billion at the end of March FY18. Also the cash

and bank balance of the company decreased by 22%. Thus, decrease in current assets and a
corresponding increase in current liabilities resulted in a less favourable liquidity position as

compared to that in FY17.

DG khan liquidity stance had been strengthening since FY13 and in FY16 its liquidity position

was the most favourable. The increase in current assets had brought about this change.

There was a 98% increase in short term investments. Furthermore, the cash and bank

balances had also risen considerably.

In FY17 the current assets of the company declined slightly but a 63% rise in current

liabilities caused a decrease in the liquidity of the company. Investments constitute nearly

79% of the company's total current assets and they declined by 11% in FY17. The

investments decreased further from Rs 15 billion at year-end FY17 to Rs 10.9 billion by end

of first quarter of 2018.

Operating Activity Analysis of Liquidity

Activity Ratios 2017 2016 2015 2014 2013

Days Sales in 13.57 8.20 4.95

3.40 days 5.27 days
Receivables days days days

Account
41.02 58.78 105.79 81.94 73.78
Receivables
times times times times times
Turnover

Account
6.20 4.94
Receivables 8.89 days 3.45 days 4.45 days
days days
Turnover in Days
Activity
2017 2016 2015 2014 2013
Ratio

Inventory

Turnover 27.66 days 21.69 days 14.96 days 21.89 days 43.63 days

in days

Inventory 13.19 16.83 24.40 16.67

8.36 times
Turnover times times times times

Days Sales

in 45.08 days 24.55 days 20.68 days 11.07 days 43.63 days

Inventory
Operating Cycle

Activity
2017 2016 2015 2014 2013
Ratio

Operating
36.55days 27.89 days 18.41 days 26.34 days 48.58 days
Cycle

60

50

40

30 operating cycle

20

10

0
2017 2016 2015 2014 2013

 Debt Ratios ( Solvency analysis)

Debt Ratios 2017 2016 2015 2014 2013

Debt to Tangible net

77 52 78 93 85
worth

Debt To Equity Ratio 76 53 78 93 85

Debt Ratio 43 34 44 48 46
 250

200 debt to tangible networth

150 debt/equity ratio

debt ratio
100

50

0
2017 2016 2015 2014 2013

The debt management ratios of DGKC showed a positive trend during FY16. The debt to

asset and equity ratios as well as the long-term debt ratio all receded during the period and

this reflected a reduction in the company's dependence on debt financing. However, during

FY17 the debt ratios of the company rose because the total debt increased in FY17 mainly

due to a 63% increase in the current liabilities which form 55% of the total debt.

Long term debt however decreased. The long term debt to equity increased because of a

decline in the equity base due to fall in reserves. The TIE ratio continued to fall in FY017

against a positive trend that prevailed before FY16. The reason is substantial rise in finance

charges due to high interest rates in the economy.

Also the operating income in FY17 decreased, thus reducing the extent to which operating

income can decline before the firm is rendered unable to meet its interest costs. Due to the

losses that DGKC experienced in FY08 and the decrease in profitability during July-March

FY18, its Earning per Share (EPS) and Price to Earning (P/E) Ratio have been negative. During

July-May 2018 the share price averaged around Rs 31.1.

This shows that the dismal profits of the company have started reflecting in the low investor

confidence and falling share price. The average share price of DGKC had hovered around Rs
100/share except during the fourth quarter of FY17 when share price fell well below the

average. The management did not recommend any dividend for FY17 due to the dismal

profitability situation in the period.

Profitability Ratios

Profitability Ratios 2017 2016 2015 2014 2013

Gross Profit Margin 15 32 49 37 36

Operating Profit Margin 12 34 49 46 35

Net Profit Margin 7.84 25 31 31 20

140
120
gross profit margin
100
80 operating income
60 magin

40 net profit margin

20
0
2017 2016 2015 2014 2013

After experiencing declining profitability during FY17, the cement sector came back strongly

to post a growth of 167% in earnings during first quarter (Jan-September) of fiscal year

2018. The cement sector posted profit after taxation of Rs 1.3 billion in first quarter of FY09

as compared to Rs 500 million in the corresponding period of a year earlier.

This growth was mainly due to higher local retention prices and depreciation of the rupee

against the dollar that resulted in an increase of rupee-based export sales. The net sales of

the cement sector in the period July-March FY18 was 58% higher than the net sales

generated during the corresponding period of FY17. It is believed that the profits of cement
companies increased due to an arrangement among them to keep prices high in the local

market.owever, higher sales revenue could not be translated into an increase in profits

during the period. Increased costs of sales, operating expenses and finance expenses caused

the profitability of DGKC to remain low during July-March FY18. The cost of sales of the

company increased by 30% during the period and resulted in a gross profit of Rs 3,733

million.

The furnace oil/coal costs for the period July-March FY18 was Rs 5,258.6 million as

compared to Rs 3,095.7 million during the corresponding period of FY08. The electricity and

gas costs were lower, however, the cost of raw material and packing material consumed

increased by 12%. The administration expenses increased by 31% while the selling &

distribution expenses increased drastically by 456% (from Rs 246 million in July-March FY17

to Rs 1,370 million in July-March FY18).

Selling expenses may have increased due to higher transportation costs involved with

exports and higher fuel costs. Also, the finance costs increased substantially by 77% as

interest rates rose owing to tight monetary policy and liquidity crunch in the market.

These rising costs greatly hampered the profitability of the company and resulted in a profit

after taxation of Rs 321 million in the period July-March FY18, which is 34% lower than the

profit (Rs 487 million) during July-March FY17. Therefore, the earning per share (EPS) of the

company declined from Rs 1.92 in July-March FY17 to Rs 1.27.

Assets Utilization
Asset Utilization 2017 2016 2015 2014 2013

Sales to Fixed Assets 54 43 108 80 62

Return on Operating
24 33 10 13 11
Assets

Operating Asset turnover 20 9.6 20 28 33

Return on Assets 18.5 3.8 23 11 6.60

25

20

15 Return on
investment
10

0
2017 2016 2015 2014 2013

The performance of DGKC in terms of asset management was weak during FY16. During the

year, the inventory turnover (days) of the company more than doubled compared to FY15

when the management of inventory seemed most efficient (evident from the lowest

inventory turnover in days). This could be traced back to lower sales revenue for the period,

coupled with a higher stock of inventory.

At the same time, the average time taken by the company to recover cash from sales also

increased. The increase in inventory turnover in days and Days sales outstanding (DSO)

prolonged the operating cycle of the company in FY16.

However, in FY17 the asset management of DGKC improved as the inventory turnover rate

increased because the company earned sales revenue more in proportion to the increase in

inventory. Thus the days to convert inventory into sales became less (from approx. 100 days

in FY16 to 79 days in FY17).

Although the days to convert sales into cash (DSO) increased slightly, the substantial

decrease in ITO (days) led to the shortening of the operating cycle in FY17. The days sales

outstanding was higher because the trade debt increased substantially (by 153%) during

FY17 as against sales.

Besides this the sales to equity and total asset turnover of the company which had a

declining trend till FY16 increased in FY17. The sales to equity ratio had been decreasing

because of an increase in the paid up capital. But the trend was reversed in FY17 because

the paid up capital remained same while the reserves fell, causing a decrease in the equity

base of the company.

Also higher growth in sales increased the sales/equity ratio. Total asset turnover also

improved because the management of the company's assets was effective in generating

higher sales revenue. The company's performance in the area has improved as full-scale

production from the newly inaugurated Khairpur plant has augmented the sales.

 Return on total equity (Return on Investment)

Return 2017 2016 2015 2014 2013

Ratios

Return on
2.92 5.34 12.58 15.47 10.07
Investment

Return on
0.30 0.37 17 22 13
Total Equity

25

20

15 Return on investment
Return on total equity
10

0
2017 2016 2015 2014 2013

One of the most important profitability metrics is return on equity .Return on equity reveals

how much profit a company earned in comparison to the total amount of shareholder

equity found on the balance sheet. As we know that shareholder equity is equal to total

assets minus total liabilities. It's what the shareholders own. Shareholder equity is a creation

of accounting that represents the assets created by the retained earnings of the business

and the paid-in capital of the owners. The return on Equity has decreased drastically and

there is quite a hell of decrement in ROE, which is not very much encouraging for the

investors in shares.

 Investment Ratios ( capital structure)

 Degree of financial leverage

  Earning per common shares

 Price earning ratio

Investment ratios
2017 2016 2015 2014 2013

Degree of financial

leverage 15.48 1.27 1.13 1.14 1.20

Earning per common

shares 0.017 0.60 0.10 0.76 0.35

Price earning ratio 258.08 4.81 3.38 3.96 8.19

100%
90%
80% Price earning ratio
70%
60%
Earning per
50% common shares
40%
30% Degree of financial
20% leverage
10%
0%
2017 2016 2015 2014 2013

A leverage ratio summarizing the affect a particular amount of financial leverage has on a

company's earnings per share (EPS). Financial leverage involves using fixed costs to finance

the firm, and will include higher expenses before interest and taxes (EBIT). The higher the
degree of financial leverage, the more volatile EPS will be, all other things remaining the

same. Most likely, the firm under evaluation will be trying to optimize EPS, and this ratio can

be used to help determine the most appropriate level of financial leverage to use to achieve

that goal. The company’s ratio has increased dramatically in the year 2017 by 15 times. So

there is quite a margin for company to get leveraged.

The portion of a company's profit allocated to each outstanding share of common

stock. Earnings per share serve as an indicator of a company's profitability.

Earnings per share are generally considered to be the single most important variable in

determining a share's price. It is also a major component used to calculate the price-to-

earnings valuation ratio. The EPS of company is fluctuating but in current year it has decreed

drastically which is not a good sign for shareholders. An important aspect of EPS that's often

ignored is the capital that is required to generate the earnings (net income) in the

calculation. Two companies could generate the same EPS number, but one could do

so with less equity (investment) - that company would be more efficient at using its capital

to generate income and, all other things being equal would be a "better" company.

Investors also need to be aware of earnings manipulation that will affect the quality of the

earnings number. It is important not to rely on any one financial measure, but to use it in

conjunction with statement analysis and other measures.

A valuation ratio of a company's current share price compared to its per-share earnings is

Price Earning ratio. In general, a high P/E suggests that investors are expecting higher

earnings growth in the future compared to companies with a lower P/E. However, the P/E

ratio doesn't tell us the whole story by itself.