Virtual University of Pakistan

Evaluation Sheet for Project Fall 2011

FIN619: Final Project (Finance) Credit Hours:3 Evaluation Criteria Proposal Students Name: Result Valid Pass Pass

Muhammad Sohail Ahmad

Students ID:

MC100206352

Final Project Written Work Status Presentation & Viva Voce Final Result

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Pass
Dear student, Some deficiencies have been highlighted in your Project , but keeping in view of your over all work, you are declared PASS in your written work. Review the evaluated report and improve your work for presentation. Start preparing for presentation & viva voce and improve your work according to the given instructions and guidelines. Also read lesson # 7 of this course and DOWNLOAD section at VULMS of your course. Your concepts regarding your Project work and ratio analysis should be very strong for delivering an effective presentation. For any further guidance about your presentation and viva, ask your queries via MDB or email at fin619@vu.edu.pk

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Final Project
Liquidity & Leverage Ratio Analyses of Lucky Cement Limited, D.G. Khan Cement Company Limited and Kohat Cement Company Limited in Cement Sector for FY 2009-2011
A REPORT SUBMITTED TO THE DEPARTMENT OF MANAGEMENT SCIENCES, VIRTUAL UNIVERSITY OF PAKISTAN IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTERS IN BUSINESS ADMINISTRATION

Submitted By mc100206352 Muhammad Sohail Ahmad

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Department of Management Sciences, Virtual University of Pakistan

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Dedication
I dedicate my work to my father and my late mother who supported me morally, financially and brought me to the path of gaining the knowledge. Then, I dedicate to my wife who suffered a lot during my MBA study but always motivated me.

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Acknowledgement
I acknowledge my work on this project to Mr. Asad Ahmad Khan, The Director Finance & Accounts of Lahore Medical & Dental College. Mr. Khan guided me generously during my work. Then, I would like to acknowledge my work to my senior, Mr. Umair Khalid, The Manager Accounts at Lahore Medical & Dental College who helped me in this project.

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Executive Summary
This project emphasizes comparing three manufacturing companies in Cement Sector of Pakistan. These companies are Lucky Cement Company, D.G. Khan Cement & Kohat Cement Company. The period of the study is year 2009 to year 2011. In this study, the financials of each company for the recent three years have been evaluated and analyses made for the Liquidity & Leverage position of all three companies. The study is of much valuable for all the stakeholders of the companies especially the lenders and investors. The study is done to apply the knowledge of Financial Statement Analysis. However, only one segment of Analysis i.e. Liquidity & Leverage Ratio Analyses is made. The position of liquidity and leverage of three big cement manufacturers of Pakistan has been analyzed. It is found during the analysis, despite of some problematic areas, the overall liquidity & leverage position of D.G. Khan Cement Company is sound and comparatively much better than other two companies. This is a good sign that attracts investors and lenders. Further, it is found during the analysis, the overall Leverage health of company is sound but its overall liquidity position is less than satisfactory. However, the liquidity and leverage position of Kohat Cement Company was found much poor. The company meets its operational needs with short term financing. Capital of the company is unnecessarily high leveraged. As, high leveraging requires greater financing costs. So, it is difficult for the company to keep aside funds as working capital from its earnings. This is a very critical scenario for shareholders, investors and lenders of the company. The management should take steps to make better the Liquidity & Leverage position of the company.

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Table of Contents
Page No. 1. Chapter 1: Introduction ____________________________________________ 1-12 1.1 Introduction of the Project _______________________________________ 7-10 1.2 Financial Period Under Consideration ______________________________ 11 1.3 Objectives______________________________________________________ 11 1.4 Significance ____________________________________________________ 12 2. Chapter 2: Data Processing & Analysis ________________________________ 13 2.1 Sources of Data Collection 13 2.2 Data Processing & Analysis 13 3. Chapter 3: Data Analysis __________________________________________ 14-46 Liquidity Ratios 3.1 Current Ratio ________________________________________________ 14-16 3.2 Acid Test Ratio _______________________________________________ 16-19 3.3 Working Capital ______________________________________________ 19-22 3.4 Sales to Working Capital _______________________________________ 22-25 Leverage Ratios 25-25 3.5 Times Interest Earned _________________________________________ 26-28 3.6 Fixed Charge Coverage ________________________________________ 28-31 3.7 Debt Ratio ___________________________________________________ 31-33 3.8 Debt / Equuity Ratio ___________________________________________ 33-35 3.9 Debt to Tangible Net Worth Ratio _______________________________ 35-38 3.10 Current Worth / Net Worth Ratio ______________________________ 38-41 3.11 Total Capitalizatio Ratio ______________________________________ 41-44 3.12 Long term Assets Vs. Long Term Debt ___________________________ 44-46 4. Chapter 4: Conclusion & Recommendations ____________________________ 47 4.1 Conclusion _____________________________________________________ 47 4.2 Recommendations _______________________________________________ 48

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CHAPTER NO. 1 INTRODUCTION 1.1 --Introduction of the Project

In the most general sense of the word, cement is a binder, a substance that sets and hardens independently, and can bind other materials together. It is the basic and very much important component of construction material. Cement industry is indeed a highly important segment of industrial sector that plays a pivotal role in the socio-economic development of Pakistan. Since cement is a specialized product, requiring sophisticated infrastructure and production location. Most of the cement industries in Pakistan are located near/within mountainous regions that are rich in clay, iron and mineral capacity. Cement industries in Pakistan are currently operating at their maximum capacity due to the boom in commercial and industrial construction within Pakistan.

In 1947, Pakistan had inherited four cement plants with a total capacity of 0.5 million tons. Some expansion took place in 195666 but could not keep pace with the economic development and the country had to resort to imports of cement in 1976-77 and continued to do so till 1994-95. The cement sector consisting of 27 plants is contributing above Rs 30 billion to the national exchequer in the form of taxes. [2] The industry has been earning about $600 million per annum foreign exchange for Pakistan by exporting 10 million tons of cement per annum for last three years.[3] Keeping in view the above statistics, I figured out the importance of cement industry for economy of Pakistan and selected three giant companies listed with Karachi Stock Exchange of Pakistan. Lucky Cement Limited D.G. Khan Cement Company Limited Kohat Cement Company Limited

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Now, I would present a brief introduction of these companies and their business activities.

Lucky Cement Limited Lucky Cement Limited is sponsored by well known Yunus Brothers Group one of the largest export houses of Pakistan, Lucky Cement Limited currently has the capacity of producing 25,000 tons per day of dry process Cement.

Lucky Cement came into existence in 1996 with a daily production capacity of 4,200 tons per day, currently is an omnipotent cement plant of Pakistan, and rated amongst the few best plants in Asia.

With production facilities in Pezu (Production capacity: 13,000 Tons per day) as well as in Karachi (Production capacity: 12,000 tons per day), it has the tendency to become the hub of cement production in Asia.

D.G. Khan Cement Company Limited D.G. Khan Cement Company Limited (DGKCC), a unit of Nishat group, is the largest cement-manufacturing unit in Pakistan with a production capacity of 5,500 tons clinker per day. It has a countrywide distribution network and its products are preferred on projects of national repute both locally and internationally due to the unparallel and consistent quality. It is list on all the Stock Exchanges of Pakistan.

DGKCC was established under the management control of State Cement Corporation of Pakistan Limited (SCCP) in 1978. DGKCC started its commercial production in April 1986 with 2000 tons per day (TPD) clinker based on dry process technology. Plant & Machinery was supplied by UBE Industries of Japan.

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Nishat Group acquired DGKCC in 1992 under the privatization initiative of the government. Starting from the privatization, the focus of the management has been on increasing capacity as well as utilization level of the plant.

Kohat Cement Company Limited Kohat Cement Company Limited (incorporated in 1980) is an ISO 9001-2008 certified company, listed on Stock Exchanges of Pakistan and engaged in manufacturing of Grey and White Cements. They say: Quality of our products is better than approved British and Pakistan Standards. The plant is located in Kohat about 60 kilometers from Peshawar. The annual capacity installed at plant is 2.805 million tons per annum. In this project, an analytical and comparative study of Liquidity & Leverage ratios of three listed cement manufacturing companies: Lucky Cement Limited, D.G. Khan Cement Company Limited and Kohat Cement Company Limited would be done. These companies are the leading contributors to cement Sector in Pakistan. As well, these companies are earning the foreign exchange for Pakistan by exporting cement products.

The project is aimed to facilitate the managers, owners, investors, bankers, debtors and creditors to review the Liquidity & Leverage Position of all three companies. A comparative analysis of these ratios for FY 2009, 2010, 2011 of these companies would be made.

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1.2

-- Financial Period Under-Consideration for Analysis:

Financial period for ratio analysis is Financial Year 2009 to Financial Year 2011. Objectives

1.3

The proposed project is all about to compare the liquidity and leverage ratios of three selected companies. The objectives of the study are to know: a. Which of the selected companies is able to pay its short term obligations effectively? b. The composition of capital structure of all three companies. c. Which of the selected companies is able to provide protection of long-term funds for suppliers? d. Which of the selected companies is in better position to meet the interest payments on its debt? e. Which of the selected companies is able to pay off its long term liabilities on time? f. How much of the companies assets are financed through external and internal debt?

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1.3

Significance

The project is of much interest and valuable for: a. Investors: As the investors would be able to know which of the three companies is efficiently managing its working capital solvency. They are concerned to the liquidity and solvency position of the company to make their investment safe. b. Creditors: The creditors would be able to know the health of the companies. As they are always concerned to the liquidity and solvency position of the company. c. Management: Management needs to know the Liquidity & Leverage ratio information because management is directly responsible for driving the company to the route where company can become financially sound and stable.

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CHAPTER NO. 2 Data Processing & Analysis

2.1 -- Sources of Data Collection The data for the project is collected totally from secondary sources. The internet, websites of the selected companies and annual reports of the companies have been used in order to collect data. The financial reports of the companies have been taken from following online websites of the companies: 1. http://www.lucky-cement.com/financialreports.htm 2. http://www.dgcement.com/financial.html 3. http://www.kohatcement.com/financials.html

2.1 -- Data Processing and Analysis The collected data has been analyzed and processed according to the format provided in the project template. Following computing tools have been used for the purpose of compilation of data and to analyze and transform it into information:

Microsoft Word Microsoft Excel Internet

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Chapter 3) Data Analysis LIQUIDITY & LEVERAGE RATIO ANALYSES of Lucky Cement Limited, D.G. Khan Cement Company Limited and Kohat Cement Company Limited in cement sector for Financial Year 2009 to 2011:

LIQUIDITY RATIOS: Liquidity Ratios indicate short term financial position of the company and its ability to meet the short term financial obligations and liabilities.

Liquidity Ratios include:

Current Ratio Acid Test Ratio Working Capital Sales to working capital
CURRENT RATIO: Current Ratio indicates that how efficiently an organization can meet its current liabilities by utilizing its current assets. FORMULA: Current Ratio = Current Assets / Current Liabilities Year 2009 Lucky Cement 7,857,942,000/ 9,098,678,000= 0.864 Times D.G. Khan Cement 13,287,592,000/ 15,834,799,000= 0.839 Times Kohat Cement 1,645,675,393/ 2,946,392,234= 0.559 Times Year 2010 6,871,464,000/ 9,641,691,000= 0.713 Times 16,417,492,000/ 13,786,189,000= 1.191 Times 1,407,168,642/ 3,242,472,939= 0.434 Times Year 2011 9,444,466,000/ 10,696,789,000= 0.883 Times 18,295,030,000/ 12,657,194,000= 1.445 Times 1,953,618,476/ 2,810,539,470= 0.695 Times

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Working: As, the figures of current assets and current liabilities of all three companies for all three years is clearly mentioned and categorized in the Annual financial repots of the companies. So that, I didnt show the working for the figures of current assets and current liabilities.

Graphical Presentation of Current Ratios:

1.6 1.4 1.2
Current Ratio

1 0.8 0.6 0.4 0.2 0 Year 2009 Year 2010 Year 2011 Lucky Cement D.G. Khan Cement Kohat Cement

Interpretation: In Current ratio, we compare the volume of current assets to current liabilities in order to assess the short term liquidity position of the company. For example, the current ratio of Lucky cement for year 2009 is 0.864 Times. It means in the year 2009 the current assets of Lucky Cement are 86.4 % of its current liabilities.

Lucky Cement: Trend line in the graph shows that Current ratio of the company for year 2009 was 0.864 times i.e. 86.4%. In year 2010, it falls to 0.713 times due to decrease in volume of current assets during the year. This decrease was due to (move over) investment of current assets into capital assets during the year. However, in year 2011 the

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ratio again moves to the level of 88.3%. This is the peak point of ratio during the period 2009-2011.The performance of the company is near to satisfactory from the perspective of short term lenders. D.G. Khan Cement: Trend line in the graph shows that Current ratio of the company for year 2009 was 0.839 times i.e. 83.9%. In year 2010, it shows an increasing trend and moves to 1.191 times mainly because of increase in fair value of investments of Rs. 3.6 billion and a decrease of Rs. 2.05 billion in current liabilities during the year. In year 2011, due to further increase of Rs. 1.39 billion in fair value of investments and decrease of Rs. 1.13 billions in volume of current liabilities the ratio moves up to 1.445. The performance of the company is very good from the perspective of short term lenders. Kohat Cement: The trend in the graph indicates that first in the year 2010 the liquidity of the company falls 43.4% as compared to 55.9% of year 2009. It is because of excessive borrowing and decrease in current assets. In the year 2011it moves upward to 69.5% i.e. the liquidity position of the company is improving. However, the performance of the company is unsatisfactory from the perspective of short term lenders. It is because of the current assets are much lesser in volume as compared to current liabilities.

The graph shows that the short term liquidity position of D.G. Khan is better of all. While, keeping Lucky cement in mid position the short term liquidity position of Kohat Cement Company is lower of all.

ACID TEST RATIO: Acid Test Ratio is also named Quick Ratio. It measures the Liquidity of the assets of company to pay off its short term obligations & liabilities. When working out quick ratio, we take current assets exclusive of inventory and prepaid expenses and divide the outcome by Current Liabilities. As, inventory and prepaid expenses are unable to convert easily into cash or cash equivalents. So, the Quick ratio states comparatively better liquidity position of the company.

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FORMULA: Acid Test Ratio = Quick Assets / Current Liabilities Year 2009 Lucky Cement 3,246,699,000/ 9,098,678,000= 0.357 Times 9,451,696,000/ 15,834,799,000= 0.597 Times 663,423,796/ 2,946,392,234= 0.225 Times Year 2010 2,214,776,000/ 9,641,691,000= 0.230 Times 12,362,874,000/ 13,786,189,000= 0.897 Times 476,402,765/ 3,242,472,939= 0.147 Times Year 2011 1,856,113,000/ 10,696,789,000= 0.174 Times 13,889,855,000/ 12,657,194,000= 1.097 Times 594,988,590/ 2,810,539,470= 0.212 Times

D.G. Khan Cement

Kohat Cement

Working for Quick Assets: Quick Assets = Current Assets Inventory Prepaid Expenses Year 2009 (Amount in Rs.) Lucky Cement 7,857,942,0004,608,157,0003,086,000= 3,246,699,000 13,287,592,0003,835,716,000180,000= 9,451,696,000 1,645,675,393981,138,0051,113,592 = 663,423,796 Year 2010 (Amount in Rs.) 6,871,464,0004,617,101,00039,587,000= 2,214,776,000 16,417,492,0004,054,618,0000= 12,362,874,000 1,407,168,642928,433,4842,332,393 = 476,402,765 Year 2011 (Amount in Rs.) 9,444,466,0007,562,122,00026,231,000= 1,856,113,000 18,295,030,0004,405,175,0000= 13,889,855,000 1,953,618,4761,358,098,531531,355 = 594,988,590

D.G. Khan Cement

Kohat Cement

Note: (a) Here the figure of Inventory is calculated as under: Inventory = Stores, Spares & Loose tools + Stock in Trade Year 2009 (Amount in Rs.) Lucky Cement 3,411,549,000+ 1,196,608,000= 4,608,157,000 Year 2010 (Amount in Rs.) 4,008,288,000+ 608,813,000= 4,617,101,000 Year 2011 (Amount in Rs.) 6,313,584,000+ 1,248,538,000= 7,562,122,000

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D.G. Khan Cement

Kohat Cement

2,935,880,000+ 899,836,000= 3,835,716,000 841,844,312+ 139,293,693= 981,138,005

3,017,742,000+ 1,036,876,000= 4,054,618,000 638,000,427+ 290,433,057= 928,433,484

3,543,034,000+ 862,141,000= 4,405,175,000 850,571,198 + 507,527,333= 1,358,098,531

* For the calculation of Inventory; Stores & Spares is also included along with stock in trade because it is also difficult to liquidate easily. (b) Prepaid Expenses are also called prepayments. The figure of prepayments is taken from Notes to the Financial Statements available in the Annual Financial Reports of all three companies (related to Sub group of Current Asset group Advances, Deposits, Prepayments & Other Receivables).

Graphical Presentation:
1.2 1

0.8
Quick Ratio

Lucky Cement 0.6 0.4 D.G. Khan Cement Kohat Cement

0.2 0 Year 2009 Year 2010 Year 2011

Interpretation: In Acid test ratio we compare the volume of quick assets (cash & cash equivalents, marketable securities & accounts receivable) with the volume of current liabilities in order to assess if the company has availability of sufficient quick assets to meet the short term obligations. As, quick ratio of D.G. Khan Cement for year 2011 is 1.097 times Page 20 of 53

means D.G. Khan cement has quick assets 1.097 times as compared to current liabilities 1.0 times.

Lucky Cement: The quick ratio of company shows a continuously declining trend. In the year 2010 it falls from 0.357 times to 0.230 times. In the year 2011 it further falls to 0.174 times. The reason for this downfall is continuous increase in excessive stocks and gradual increase in current liabilities during the analysis period. This is a very crucial position and bad indicator for company from perspective of short term liquidity.

D.G. Khan Cement: The quick ratio of company shows a continuously improving trend. In the year 2010 it rises to 0.897 times as compared to ratio of year 2009 0.597 times. In the year 2011 it further rises to 1.097 times. The reason for continuous improvement is gradual decrease in current liabilities and increase in current assets due to increase in fair value of investments over the period under analysis.

Kohat Cement: The quick ratio of the company first shows a declining trend in year 2010 as it declines to 0.147 times as compared to 0.225 times of year 2009. And in the year 2011 it shows an improving trend i.e. improves to 0.212 times. The reason for decline in year 2010 was excessive short term borrowings and decrease in quick assets. Results indicate a very poor liquidity position of the company from perspective of short term lenders.

The graph shows that short term liquidity position of D.G. Khan Cement is better of all. While, the Liquidity position of Lucky cement was better than that of Kohat Cement in years 2009 and 2010. But, in year 2011 the liquidity position of Lucky cement is lower than that of Kohat Cement.

WORKING CAPITAL: Working Capital is the amount of current assets which is in excess to current liabilities. It is figured out by subtracting the amount of current liabilities from current assets. The working capital of the company should neither be too high nor be too low. The greater

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amount of working capital shows more liquidity but the opportunity for profit from investment is lost. The negative amount of working capital shows the illiquid position of the company which, if uncontrolled, may tend towards insolvency. Hence, there should be a balance position of current assets and current liabilities. FORMULA: Working Capital = Current Assets Current Liabilities Year 2009 (Amount in Rs.) Lucky Cement 7,857,942,0009,098,678,000= Rs -1,240,736,000 D.G. Khan Cement 13,287,592,00015,834,799,000= Kohat Cement Rs. -2,547,207,000 1,645,675,3932,946,392,234= Rs. -1,300,716,841 Graphical Presentation:
7,000,000,000 6,000,000,000
Working Capital "Rupees"

Year 2010 (Amount in Rs.) 6,871,464,0009,641,691,000= Rs. -2,770,227,000 16,417,492,00013,786,189,000= Rs. 2,631,303,000 1,407,168,6423,242,472,939= Rs. -1,835,304,297

Year 2011 (Amount in Rs.) 9,444,466,00010,696,789,000= Rs. -1,252,323,000 18,295,030,00012,657,194,000= Rs. 5,637,836,000 1,953,618,4762,810,539,470= Rs. -856,920,994

5,000,000,000 4,000,000,000 3,000,000,000 2,000,000,000 1,000,000,000 0 -1,000,000,000 -2,000,000,000 -3,000,000,000 -4,000,000,000 Year 2009 Year 2010 Year 2011 Lucky Cement D.G. Khan Cement Kohat Cement

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Interpretation: Working Capital is a measure of companys efficiency and its short term financial health. We derive its figure by subtracting the amount of current assets from current liabilities. A positive amount of working capital shows that a company can pay off its current liabilities out of its current assets. A negative amount of working capital shows that company is unable to pay off its short term liabilities out of its current assets.

Lucky Cement: The trend shows that in year 2009 working capital of the company was negative (1.241) billion Rupees. In year 2010, it further declines and reaches to negative (2.770) billion Rupees. In year 2011, the trend shows an upward movement and reaches to a negative (1.252) billion Rupees. The reason for downfall in year 2010 was a decrease of 987 millions Rupees in current assets as compared to year 2009. The reason for a continuous deficit working capital is the company is heavily financed with running finances and short term borrowings. Short term financial health of the company remains poor from the perspective of short term lenders.

D.G. Khan Cement: The trend shows that in year 2009 working capital of the company was negative (2.547) billion Rupees. In year 2010, it improves and reaches to 2.631 billion Rupees. In year 2011, it improves further and reaches to 5.638 billions. The reason for continuous improvement is gradual decrease in current liabilities and increase in current assets due to increase in fair value of investments over the period under analysis. Short term financial health of company remains very good in year 2010 & year 2011.

Kohat Cement: Working capital of the company shows first a declining and then an improving trend. In year 2009, it was a negative (1.3) billion Rupees. In year 2010, it declines to a negative (1.86) billion Rupees. But, in year 2011, it improves and becomes a negative (857) million Rupees. The reason for decrease in 2010 was due to a decrease of 239 million Rupees in current assets and an increase of 296 million Rupees in trade payables and short term borrowings as compared to year 2009. The reason for continuous deficit in working capital is the same as in the case of Lucky Cement.

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Comparatively, the short term financial health of D.G. Khan Cement is better of all and is improving over the years. While, the financial health of Lucky Cement and Kohat Cement remains poor during the analysis period.

SALES TO WORKING CAPITAL: Sales to Working capital Ratio is used to measure the contribution of working capital for revenue generating. Companies have to pay the cost of using the working capital. So, this ratio shows if the revenue earned using the working capital is enough to cover the financing cost associated with working capital or not.

FORMULA: Sales to Working Capital Ratio = Net Sales / Working Capital Year 2009 Lucky Cement 26,330,404,000/ -1,240,736,000= -21.222 Times D.G. Khan Cement 18,038,209,000/ -2,547,207,000= -7.082 Times Kohat Cement 3,395,580,759/ -1,300,716,841= -2.611 Times Year 2010 24,508,793,000/ -2,770,227,000= -8.847 Times 16,275,354,000/ 2,631,303,000= 6.185 Times 3,692,038,418/ -1,835,304,297= -2.012 Times Year 2011 26,017,519,000/ -1,252,323,000= -20.775 Times 18,577,198,000/ 5,637,836,000= 3.295 Times 6,085,434,517/ -856,920,994= -7.102 Times

Working: * The figure of Net Sales is clearly mentioned in P&L Accounts of all companies related to the study period 2009 to 2011. * The figure of Working Capital is calculated as under: Working Capital = Current Assets Current Liabilities Year 2009 (Amount in Rs.) Lucky Cement 7,857,942,000Year 2010 (Amount in Rs.) 6,871,464,000Year 2011 (Amount in Rs.) 9,444,466,000-

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9,098,678,000= Rs -1,240,736,000 D.G. Khan Cement 13,287,592,00015,834,799,000= Kohat Cement Rs. -2,547,207,000 1,645,675,3932,946,392,234= Rs. -1,300,716,841 Graphical Presentation:
10.00 5.00 0.00 Year 2009 -5.00 -10.00 -15.00 -20.00 -25.00

9,641,691,000= Rs. -2,770,227,000 16,417,492,00013,786,189,000= Rs. 2,631,303,000 1,407,168,6423,242,472,939= Rs. -1,835,304,297

10,696,789,000= Rs. -1,252,323,000 18,295,030,00012,657,194,000= Rs. 5,637,836,000 1,953,618,4762,810,539,470= Rs. -856,920,994

Sales to Working Capital Ratio

Year 2010

Year 2011 Lucky Cement D.G. Khan Cement Kohat Cement

Interpretation: Working Capital turnover ratio measures the use of working capital for generation of sales over the period of analysis. It shows the information regarding how effectively the company is using its working capital to generate the sales. A positive ratio shows that company has surplus working capital to finance its operations. A negative ratio shows that company has deficit working capital i.e. financed with short term finances to meet its operations and to generate the sales.

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Lucky Cement: Trend states that company doesnt have enough working capital to meet the operations and to generate the sales over the analysis period. Further, the negative sign with the ratios shows that company doesnt have sufficient current assets and acquires running finances and short term loans to meet its operational needs. In the year 2009 ratio was -21.22 times states that company utilized short term loan of 1 Rupee to generate the sales of every 21.22 Rupees. In year 2010, it declines to -8.847 times. But, in year 2011 it again rises to -20.755. In year 2010, the ratio result is very critical as company utilizes short term finances of 2.77 billion Rupees to generate the sales of 24.508 billion Rupees i.e. short term finance of 1 Rupee is being used to generate the sales of every 8.847 Rupees only. The figure of Net Sales in the year 2010 remains almost the same but the working capital deficit reaches to double as compared to year 2009 & year 2011. Results of the ratio states that short term financial health of company is poor as it depends heavily on short term loans to meet its working capital / operational needs. D.G. Khan Cement: Ratios trend of company states that in the year 2010 it increases to 6.185 as compared to -7.082 of year 2009. But, in year 2011 it declines to 3.295. In year 2009 company uses short term finance of Rupee 1 to generate every sale of Rupees 7.082 because of deficit in working capital. In year 2010, company has sufficient working capital i.e. Rupee 1 is available to use in operations for generating revenue of every 6.185 Rupees. In year 2011, company invests Rupee 1 of working capital to generate every sale of Rupees 3.295. Trend shows that over all short term financial health of company is very good as it efficiently uses its working capital for operational needs to generate revenue. Kohat Cement: Trend states that company doesnt have enough working capital to meet the operations and to generate the sales over the analysis period. In the year 2009 ratio was -2.611 times states that company utilized short term loan of 1 Rupee to generate the sales of every 2.611 Rupees. In year 2010, it declines to -2.012 times means company utilized trade finance of Rupee 1 to generate the sale of every 2.012 Rupees. But, in year 2011 it again rises to -7.102 shows that company generates sales of Rupees 7.102 by

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utilizing a single rupee of working capital. In year 2011, the ratio improves to more than double as compared to previous 2 years result because company generated heavy sales by utilizing lesser amount of running finance. Results of the ratio states that short term financial health of company is poor as it depends heavily on short term loans to meet its working capital / operational needs.

As compared to D.G. Khan Cement & Kohat Cement, Lucky cement utilized the working capital / running finance more efficiently to generate the bigger volume of sales. On the other hand, Kohat Cement utilized its working capital / running finance inefficiently as compared to other companies lesser volume of sales were generated using working capital.

LEVERAGE RATIOS: Leverage Ratios: In terms of financing, Leverage means the relationship between the amount of money that a company owes and the value of its shares in equity. Mainly, leverage ratios are used to analyze the relationship between two components of capital: Equity & Debt. These ratios measure the leverage position and long run solvency of the company. The Capital of the company should be composed of both equity & debt in a balanced order. It should neither be highly leveraged nor highly unleveraged.

Leverage Ratios include:

Times Interest Earned Fixed Charge Coverage Debt Ratio Debt / Equity Ratio Debt to Tangible Net worth Ratio Current Worth / Net Worth Ratio Total Capitalization Ratio Long term Assets versus Long term Debt

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TIMES INTEREST EARNED: Times Interest Earned ratio is also called Interest Coverage Ratio. It is used to measure the ability of company to meet its debt obligations. It indicates how many times a company can cover interest charges on its debt from its Earning before Interest & Taxes (EBIT). It is calculated by Dividing the Pre Interest and Pre taxes profits with Interest charges. FORMULA: Times Interest Earned = Earning before Interest & Taxes / Interest Charges Year 2009 Lucky Cement *6,413,972,000/ 1,236,971,000= 5.185 Times 3,383,258,000/ 2,606,358,000= 1.298 Times 693,901,047/ 549,902,638= 1.262 Times Year 2010 *3,986,698,000/ 569,184,000= 7.004 Times 2,261,163,000/ 1,902,760,000= 1.188 Times 276,352,096/ 658,589,707= 0.420 Times Year 2011 *4,838,309,000/ 517,788,000= 9.344 Times 2,652,870,000/ 2,051,678,000= 1.293 Times 841,027,713/ 715,246,906= 1.176 Times

D.G. Khan Cement

Kohat Cement

*In Profit/(Loss) Statement of Lucky Cement, a clear figure of EBIT is not shown. So, the EBIT amount is calculated using the reverse order, as shown, Working: Calculation of EBIT of Lucky Cement Year 2009 Profit Before Taxation + Finance Cost =5,177,001,000 + 1,236,971,000 Year 2010 =Rs. 6,413,972,000 Profit Before Taxation + Finance Cost =3,417,514,000 +569,184,000 =Rs. 3,986,698,000 Profit Before Taxation + Finance Cost =4,320,521,000+517,788,000 =Rs. 4,838,309,000

Year 2011

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Graphical Presentation:
10.00 9.00 8.00
Times Interest Earned

7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Year 2009 Year 2010 Year 2011 Lucky Cement D.G. Khan Cement Kohat Cement

Interpretation: In this ratio the pre interest and pre tax earning (EBIT) of company is compared with service /Interest charges of Debt. This is done to assess the ability of company to pay off interest charges out of its earning. A higher ratio indicates that company can easily pay off the charges of using the debt. However, a higher ratio also states that company has undesirably low level of leverage. A lower ratio states that company earned lesser income to meet the interest payments or the company is highly leveraged and has to pay bigger amount of interest for using the debt. A negative ratio shows the chances for company of being bankrupt.

Lucky Cement: Trend states that company is improving in terms of Times Interest Earned. As, in year 2009 the ratio was 5.185. In year 2010, ratio improves to 7.004 as compared to 5.185 of year 2009. In year 2011, the ratio further improves to 9.344. Trend shows that company is earning more than sufficient profit (EBIT) to meet the service charges of debt. However, about result of year 2011, it is found that company is at undesirably low leverage level and losing the opportunity to invest for better returns. The ratio of the company is very good from the perspective of lenders and investors.

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D.G. Khan Cement: Ratios and trend states that in year 2009 the tie ratio was 1.298 times. In 2010 it falls slightly and reaches to 1.188 and in 2011 it improves again to 1.293 times. In year 2009, the ratio is greater than that of year 2010 & 2011. The reason of lowest ratio in year 2010 was company earned the lowest volume of EBIT as compared to year 2009 & year 2011. The times interest earned ratios of company states that company is earning sufficient to meet service charges of debt. Moreover the debt capacity of company is satisfactory from perspective of lenders and investors.

Kohat Cement: In year 2009, the times interest earned ratio of company was 1.262. In 2010 it falls badly to 0.420 and in year 2011 it again rises to 1.176 times. Company has greatest ratio i.e. 1.262 in year 2009 as compared to year 2010 & 2011. In year 2010 company has critically lowest ratio as compared to year 2009 & 2011 because the company earned insufficient EBIT and was unable to meet the debt service charges out of pre tax earnings. In year 2009 & 2011 the debt capacity of company is satisfactory but in year 2010 its debt capacity is unsatisfactory from perspective of lenders and investors.

Comparatively, the debt capacity of Lucky Cement is better of all. D.G. Khan Cement Company can be categorized on 2nd position in terms of debt capacity and Kohat Cement stands on 3rd position.

FIXED CHARGE COVERAGE: This ratio is an important leverage ratio. It indicates the ability of company to pay its Fixed Charge. Fixed Charge is the financial cost of finance lease liabilities, bonds and fixed term loans acquired. This ratio indicates how many times a company can cover Fixed Charge out of its Profits. FORMULA: Fixed Charge Coverage =(EBIT + Fixed Charge or lease payment (Before Tax)) /(Fixed Charge or lease payment (Before Tax) + Interest Charges) Fixed Charge = Markup on Long Term Finance + Finance Charges on Lease Liabilities

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Year 2009 Lucky Cement (6,413,972,000+ 788,431,000)/ (788,431,000+ 1,236,971,000)= 3.556 Times (3,383,258,000+ 1,210,340,000)/ (1,210,340,000+ 2,606,358,000)= 1.204 Times (693,901,047+ 400,997,535)/ (400,997,535+ 549,902,638)= 1.151 Times

Year 2010 (3,986,698,000+ 21,280,000)/ (21,280,000+ 569,184,000)= 6.788 Times (2,261,163,000+ 731,659,000)/ (731,659,000+ 1,902,760,000)= 1.136 Times (276,352,096+ 527,181,492)/ (527,181,492+ 658,589,707)= 0.678 Times

Year 2011 (4,838,309,000+ 45,984,000)/( 45,984,000+ 517,788,000)= 8.664 Times (2,652,870,000+ 778,035,000)/ (778,035,000+ 2,051,678,000)= 1.212 Times (841,027,713+ 536,572,374)/ (536,572,374+ 715,246,906)= 1.100 Times

D.G. Khan Cement

Kohat Cement

Working (Calculation of Fixed Charge): Fixed Charge = Markup on Long Term Finance + Finance Charges of Lease Liabilities Lucky Cement Year 2009 Year 2010 Year 2011 = 788,431,000+0 = Rs.788,431,000 = 21,280,000+0 = Rs.21,280,000 = 45,984,000+0 = Rs.45,984,000

D.G. Khan Cement Year 2009 Year 2010 Year 2011 = 1,210,330,000+10,000 = Rs.1,210,340,000 =731,659,000+0 = Rs.731,659,000 =778,035,000+0 = Rs.778,035,000

Kohat Cement Year 2009 Year 2010 Year 2011 =40,021,0783 + 786,752 = Rs.400,997,535 =526,747,221 + 434,271 = Rs.527,181,492 = 536,417,971 + 154,403 = Rs.536,572,374

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Graphical Presentation:
10.00 9.00
Fixed Charge Coverage Ratio

8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Year 2009 Year 2010 Year 2011 Lucky Cement D.G. Khan Cement Kohat Cement

Interpretation: The fixed charge coverage ratio of a company shows that how many times company can cover fixed charges or lease payments out of its income before fixed charge. The higher the ratio the better is the debt position of company and vice versa.

Lucky Cement: In year 2009, company was able to meet its fixed charge 3.556 times. It improves to 6.788 times in year 2010 and further improves to 8.664 times in year 2011. The trend states that the debt position of the company is improving each year. It is a good indicator from perspective of lenders and financial institutions.

D.G. Khan Cement: In year 2009, company had 1.204 times capacity to meet its fixed charge. In year 2010, it reaches to 1.136 times after a slight fall. In year 2011, it again improves to 1.212 times. Trend states that the debt position of company is satisfactory from the perspective of providers of long term debt and financial lease.

Kohat Cement: In year 2009, company had 1.151 times capacity to cover its fixed charge out of Income before fixed charge. The ratio declines to 0.678 times in year 2010

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and in year 2011 it improves again to 1.100 times. Trend states that debt position of company remains satisfactory during year 2009 & year 2011. While in the year 2010 it is unsatisfactory because company suffered a big decline in its income during the year.

Comparatively, the debt position of Lucky Cement is better of all. D.G. Khan Cement Company can be categorized on 2nd position in terms of debt capacity and Kohat Cement stands on 3rd position.

DEBT RATIO: This is an important ratio of Leverage Ratios group. It measures total debt of the company relative to the assets of the company. The greater debt ratio shows company has acquired debt more than the equity to finance its assets. The lower Debt Ratio shows company has equity more than debt to finance the assets. So, this ratio can help potential investors to know the level of risk associated with the company. FORMULA: Debt Ratio = Total Debt / Total Assets Here, Total Debt = Total Liabilities Year 2009 Lucky Cement 15,140,390,000/ 38,392,362,000= 0.394 Times 21,804,599,000/ 42,723,041,000= 0.510 Times 6,353,347,077 / 8,624,894,242 = 0.737 Times Year 2010 13,214,315,000 / 38,310,244,000= 0.345 Times 20,526,823,000/ 47,046,043,000= 0.436 Times 6,712,409,935 / 8,673,379,806 = 0.774 Times Year 2011 13,437,026,000/ 41,209,855,000 = 0.326 Times 19,455,765,000/ 49,673,050,000= 0.392 Times 7,021,584,704 / 9,124,400,841 = 0.770 Times

D.G. Khan Cement

Kohat Cement

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Graphical Presentation:
0.90 0.80 0.70 0.60
Debt Ratio

0.50 0.40 0.30 0.20 0.10 0.00 Year 2009 Year 2010 Year 2011

Lucky Cement D.G. Khan Cement Kohat Cement

Interpretation: Debt Ratio compares total debt of the company with its total assets in order to assess whether the assets are financed through equity or debt. A lower Debt ratio shows the major part of assets is financed through equity. A greater debt ratio states the assets are financed more by debt.

Lucky Cement: The ratio of the company was 0.394 in year 2009. In year 2010, it falls to 0.345 times and again in year 2011 it falls to 0.326 times. Trend states that the company is gradually decreasing its debt as compared to equity and increasing the use of equity for financing the assets. We find that company has much potential for leverage and this position is very good from perspective of lenders and investors.

D.G. Khan Cement: The debt ratio of the company was 0.510 times in 2009. In 2010, it falls to 0.436 times and in year 2011 it again falls and reaches to 0.392 times. Trend states that the company is gradually decreasing its debt as compared to equity and increasing the use of equity for financing the assets. We find that company has much

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potential for leverage and this position is very good from perspective of lenders and investors.

Kohat Cement: The debt ratio of company was 0.737 in year 2009. It increases to 0.774 times in year 2010 and declines to 0.770 in year 2011 after a slight fall. Trend states that the company depends more on debt for financing the assets. It shows that company is highly leveraged and it has less or no more potential for taking the debt. The companys situation is not attractive from perspective of lenders and investors.

Comparatively, the debt position of Lucky Cement is healthier of all in terms of Long run solvency position as a very low level of risk is associated from perspective of investors and lenders. On the other hand, Kohat Cement is highly leveraged. The current position of Kohat Cement is not a good sign for potential investors because a higher level of risk is associated with the company from investors perspective.

DEBT / EQUITY RATIO: Debt / Equity Ratio measure the leverage position of the company. It indicates how much proportion of the capital of company is financed with equity and how much is debt financed. It is calculated by dividing the Total Liabilities by Total Equity. FORMULA: Debt / Equity Ratio = Total Debt / Total Equity Here, Total Debt = Total Liabilities Year 2009 Lucky Cement 15,140,390,000/ 23,251,972,000 = 0.651 Times 21,804,599,000/ 20,918,442,000= 1.042 Times 6,353,347,077/ 2,271,547,165= 2.797 Times Year 2010 13,214,315,000 / 25,095,929,000= 0.527 Times 20,526,823,000/ 26,519,220,000= 0.774 Times 6,712,409,935/ 1,960,969,871= 3.423 Times Year 2011 13,437,026,000/ 27,772,829,000= 0.484 Times 19,455,765,000/ 30,217,285,000= 0.644 Times 7,021,584,704/ 2,102,816,137= 3.339 Times

D.G. Khan Cement

Kohat Cement

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Graphical Presentation:
4.00 3.50 3.00
Debt/Equity Ratio

2.50 2.00 1.50 1.00 0.50 0.00 Year 2009 Year 2010 Year 2011 Lucky Cement D.G. Khan Cement Kohat Cement

Interpretation: The total capital of a company consists of two parts. They are debt and equity. In this ratio we compare the contribution of debt and equity to the capital of company. The greater ratio shows that company is financed heavily from borrowing and the lower ratio shows that major volume of companys capital is composed of equity.

Lucky Cement: The ratio of the company was 0.651 in year 2009. It declines to 0.527 times in 2010 and again a declining trend reaches it to 0.484 times. Trend shows that in major contribution to the capital of company comes from equity sources. The company has much potential for leverage. This is a good indicator for investors and financial institutions.

D.G. Khan Cement: The ratio of company was 1.042 in year 2009. In 2010 it falls to 0.774 times and in 2011 again declines to 0.644 times. Trend states that long term solvency of the company improve over the period. In year 2009, the capital of the company was majorly contributed by debt. However, in year 2010 & 2011, the major contribution of capital is equity. As compared to standard of 1.5:1 the company has a Page 36 of 53

great potential for leverage and long term financial health of company attractive for investors and lenders.

Kohat Cement: The ratio of company was 2.797 in year 2009. In 2010 it increase to 3.423 times and in year 2011 it reaches to 3.339 after a slight fall compared to previous year. The trend of ratios indicates that company is highly leveraged and about 75% of capital is contributed by debt. This is a very critical situation because the company would have to pay a major part of its earnings to meet the interest charges of debt. The company is unable to attract more investors and lenders due to this bad position of solvency.

Trend shows, during the analysis period, the solvency position of Lucky Cement remains better of all and it has ability to induct more debt for its long run financing needs. The solvency position of D.G. Cement is also good and it has more potential for leverage. The solvency position of Kohat Cement is poor of all. If uncontrolled, company may have to suffer the situation of bankruptcy and break down of business process.

DEBT TO TANGIBLE NET WORTH RATIO: It is a measure of physical worth of company. In a debt to tangible net worth ratio the value of intangible assets like patent and copyrights are excluded from Net Worth of company. Then debt is compared with Tangible Net Worth. It is more comprehensive measure of solvency than Debt/Equity Ratio. FORMULA: Debt to Tangible Net worth Ratio = Total Debt / Tangible Net Worth Tangible Net Worth = Total Assets Total Liabilities Intangible Assets Year 2009 Lucky Cement 15,140,390,000/ 23,251,972,000 = 0.651 Times 21,804,599,000/ 20,918,442,000= 1.042 Times 6,353,347,077/ 2,268,857,253= 2.800 Times Year 2010 13,214,315,000/ 25,092,952,000= 0.527 Times 20,526,823,000/ 26,519,220,000= 0.774 Times 6,712,409,935/ 1,958,382,218= 3.428 Times Year 2011 13,437,026,000/ 27,771,144,000= 0.484 Times 19,455,765,000/ 30,217,285,000= 0.644 Times 7,021,584,704/ 2,100,460,174= 3.343 Times Page 37 of 53

D.G. Khan Cement

Kohat Cement

Working (Calculation of Tangible Net Worth): Tangible Net Worth = Total Assets Total Liabilities Intangible Assets Lucky Cement Year 2009 Year 2010 Year 2011 =38,392,362,000-15,140,390,000-0 =Rs.23,251,972,000 =38,310,244,000-13,214,315,000-2,977,000 =Rs.25,092,952,000 =41,209,855,000-13,437,026,000-1,685,000 =Rs.27,771,144,000

D.G. Khan Cement Year 2009 Year 2010 Year 2011 =42,723,041,000 -21,804,599,000 -0 =Rs.20,918,442,000 =47,046,043,000- 20,526,823,000-0 =Rs.26,519,220,000 =49,673,050,000 -19,455,765,000 -0 =Rs.30,217,285,000

Kohat Cement Year 2009 Year 2010 Year 2011 =8,624,894,242 -6,353,347,077 - 2,689,912 =Rs.2,268,857,253 =8,673,379,806 -6,712,409,935-2,587,653 =Rs.1,958,382,218 =9,124,400,841 -7,021,584,704-2,355,963 =Rs.2,100,460,174

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Graphical Presentation:
4.00
Debt to Tangible Net worth Ratio

3.50 3.00 2.50 Lucky Cement 2.00 1.50 1.00 0.50 0.00 Year 2009 Year 2010 Year 2011 D.G. Khan Cement Kohat Cement

Interpretation: The Debt to Tangible Net Worth ratio shows a more precise picture of debt & equity proportion of capital as compared to Debt/Equity Ratio. As, it is difficult to realize and to value the Intangible Assets. So, in order to get a fairer picture of capital composition, value of Intangible Assets is excluded from value of capital.

Lucky Cement: The ratio of the company was 0.651 in year 2009. It declines to 0.527 times in 2010 and again a declining trend reaches it to 0.484 times. Trend shows that major contribution to the capital of company comes from equity sources. The company has much potential for leverage. This is a good indicator for investors and financial institutions.

D.G. Khan Cement: The ratio of company was 1.042 in year 2009. In 2010 it falls to 0.774 times and in 2011 again declines to 0.644 times. Trend states that long term solvency of the company improve over the period. In year 2009, the capital of the company was majorly contributed by debt. However, in year 2010 & 2011, the major contribution of capital is equity. As compared to standard of 1.5:1 the company has a

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great potential for leverage and long term financial health of company attractive for investors and lenders.

Kohat Cement: The ratio of company was 2.800 in year 2009. In 2010 it increase to 3.428 times and in year 2011 it reaches to 3.343 after a slight fall compared to previous year. The trend of ratios indicates that company is highly leveraged and more than 75% of capital is contributed by debt. This is a very critical situation because the company would have to pay a major part of its earnings to meet the interest charges of debt. The company is unable to attract more investors and lenders due to this bad position of solvency.

Trend shows, during the analysis period, the solvency position of Lucky Cement remains better of all and it has ability to induct more debt for its long run financing needs. The solvency position of D.G. Cement is also good and it has more potential for leverage. The solvency position of Kohat Cement is poor of all. If uncontrolled the situation, Kohat Cement Company may have to suffer the situation of insolvency / bankruptcy.

CURRENT WORTH / NET WORTH RATIO: The Current Worth is the amount of current Assets that is left excess if all the current liabilities are paid off. The Net Worth is the Balance amount of Total Assets left after paying all the Liabilities. This ratio used to compute the proportion of Current Worth and Net Worth. FORMULA: Current Worth / Net worth Ratio = Current Worth / Net Worth Current Worth = Total Current Assets Total Current Liabilities Net Worth = Total Assets Total Liabilities Year 2009 Lucky Cement -1,240,736,000/ 23,251,972,000= -0.053? -2,547,207,000/ 20,918,442,000= -0.122? Year 2010 -2,770,227,000/ 25,095,929,000= -0.110? 2,631,303,000/ 26,519,220,000= 0.099? Year 2011 -1,252,323,000/ 27,772,829,000= -0.045? 5,637,836,000/ 30,217,285,000= 0.187? Page 40 of 53

D.G. Khan Cement

-1,300,716,841/ -1,835,304,297/ 2,271,547,165= 1,960,969,871= -0.573? -0.936? Working (Calculation of Current & Net Worth): Kohat Cement

-856,920,994/ 2,102,816,137= -0.408?

(A) Current Worth = Total Current Assets Total Current Liabilities Lucky Cement Year 2009 Year 2010 Year 2011 = 7,857,942,000-9,098,678,000 = Rs.-1,240,736,000 = 6,871,464,000-9,641,691,000 = Rs.-2,770,227,000 = 9,444,466,000-10,696,789,000 = Rs.-1,252,323,000

D.G. Khan Cement Year 2009 Year 2010 Year 2011 = 13,287,592,000-15,834,799,000 = Rs.-2,547,207,000 = 16,417,492,000-13,786,189,000 = Rs.2,631,303,000 = 18,295,030,000-12,657,194,000 = Rs.5,637,836,000

Kohat Cement Year 2009 Year 2010 Year 2011 = 1,645,675,393-2,946,392,234 = Rs.-1,300,716,841 = 1,407,168,642-3,242,472,939 = Rs.-1,835,304,297 = 1,953,618,476-2,810,539,470 = Rs.-856,920,994

(B) Net Worth = Total Assets Total Liabilities Lucky Cement Year 2009 Year 2010 Year 2011 = 38,392,362,000-15,140,390,000 = Rs.23,251,972,000 = 38,310,244,000-13,214,315,000 = Rs.25,095,929,000 = 41,209,855,000-13,437,026,000 = Rs.27,772,829,000

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D.G. Khan Cement Year 2009 Year 2010 Year 2011 = 42,723,041,000-21,804,599,000 = Rs.20,918,442,000 = 47,046,043,000-20,526,823,000 = Rs.26,519,220,000 = 49,673,050,000-19,455,765,000 = Rs.30,217,285,000

Kohat Cement Year 2009 Year 2010 Year 2011 = 8,624,894,242-6,353,347,077 = Rs.2,271,547,165 = 8,673,379,806-6,712,409,935 = Rs.1,960,969,871 = 9,124,400,841-7,021,584,704 = Rs.2,102,816,137

Graphical Presentation:
0.40 0.20
Current Worth/Net Worth Ratio

0.00 Year 2009 -0.20 -0.40 -0.60 -0.80 -1.00 Year 2010 Year 2011 Lucky Cement D.G. Khan Cement Kohat Cement

Interpretation: In this ratio working capital of the company is compared with its permanent capital (equity). The purpose of this analysis is to indicate the percentage of net worth that is invested in company to meet its operational / working needs.

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Lucky Cement: The ratio in year 2009 was -0.053 times. In year 2010, it reaches to -0.110 & in year 2011 it reaches to -0.045. The negative sign with the ratios shows that company has to acquire running finance to meet its short term financing needs. Further, the equity portion of the company is not being used efficiently to meet the operational needs.

D.G. Khan Cement: The ratio in year 2009 was -0.122 times. In year 2010, it improves to 0.099 & in year 2011 it again improves to 0.187. The negative sign with the ratio in year 2009 shows that company used short term loan to meet its working capital requirements. The increasing trend in year 2010 & 2011 shows that the net assets of company are being employed and used efficiently to meet of working capital requirements.

Kohat Cement: The ratio in year 2009 was -0.573 times. In year 2010, it falls and reaches to -0.936 & in year 2011 it reaches to -0.408. The negative sign with the ratios shows that company has to acquire running finance to meet its short term financing needs. Further, the equity portion of the company is not being used efficiently or is unavailable to meet the operational (working capital) needs.

Comparatively, current worth/net worth position of D.G. Khan Cement is better of all.

TOTAL CAPITALIZATION RATIO: Total Capitalization Ratio measures the debt part of Capital of the company i.e. It shows how much proportion of permanent capital is financed by long term debt. A company is considered financially fit if its capital structure shows a low level of debt and a high level of equity. So, this ratio can help investors to find an opportunity to invest in a financially sound company.

FORMULA: Total Capitalization Ratio = Long Term Debt / (Long Term Debt + Total Equity) Here, Long Term Debt = Long Term Liabilities

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Year 2009 Lucky Cement 6,041,712,000/ (6,041,712,000+ 23,251,972,000)= 0.206 Times 5,969,800,000/ (5,969,800,000+ 20,918,442,000 )= 0.222 Times 3,406,954,843/ (3,406,954,843+ 2,271,547,165)= 0.600 Times

Year 2010 3,572,624,000/ (3,572,624,000+ 25,095,929,000)= 0.125 Times 6,740,634,000/ (6,740,634,000+ 26,519,220,000 )= 0.203 Times 3,469,936,996/ (3,469,936,996+ 1,960,969,871)= 0.639 Times

Year 2011 2,740,237,000/ (2,740,237,000+ 27,772,829,000)= 0.090 Times 6,798,571,000/ (6,798,571,000+ 30,217,285,000 )= 0.184 Times 4,211,045,234/ (4,211,045,234+ 2,102,816,137)= 0.667 Times

D.G. Khan Cement

Kohat Cement

Working: I picked the figures of long term debt & total equity from annual financial statements of companies for the period under consideration. So that, I didnt show calculations of long term debt & total equity.

Graphical Presentation:
0.80 0.70
Total Capitalization Ratio

0.60 0.50 0.40 0.30 0.20 0.10 0.00 Year 2009 Year 2010 Year 2011 Lucky Cement D.G. Khan Cement Kohat Cement

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Interpretation: In Total capitalization ratio the long term debt is compared with permanent capital of company. The analysis is done in order to assess what proportion of permanent capital is financed by long term debt.

Lucky Cement: The total capitalization ratio of company was 0.206 in year 2009. In 2010 it decrease to 0.125 times and reaches to lowest in year 2011 i.e. 0.090 times. It means in year 2009 the proportion of long term debt to make permanent capital was only 20.6%. In year 2010 it was only 12.5% and in year 2011 it was only 9% of permanent capital. The decreasing trend of ratios of company is a good indicator that shows the financial strength of company is increasing over the years. Moreover, the company has a greater potential for leverage. The position of the company is attractive for investors from angle of Total Capitalization Ratio.

D.G. Khan Cement: The ratios trend shows that in year 2010 the ratio of the company declines slightly and reaches to 0.203 times as compared to 0.222 times in year 2009. In 2011, it again declines to 0.184 times. It means in year 2009 the proportion of long term debt to make permanent capital was only 22.2%. In year 2010 it was only 20.3% and in year 2011 it was only 18.4% of permanent capital. The decreasing trend of ratios of company is a good indicator that shows the financial strength of company is increasing over the years. Moreover, the company has a greater potential for leverage. The position of the company is attractive for investors from angle of Total Capitalization Ratio.

Kohat Cement: The ratios trend shows that in year 2010 the ratio of the company increases slightly and reaches to 0.639 times as compared to 0.600 times in year 2009. In 2011, it again increases to 0.667 times. It means in year 2009 the proportion of long term debt to make permanent capital was 60%. In year 2010 it was 63.9% and in year 2011 it was 66.7% of permanent capital. The increasing trend of ratios of company is a bad indicator that shows the financial strength of company is decreasing over the years. Moreover, the company is undesirably high leveraged. The position of the company is unsatisfactory for investors from angle of Total Capitalization Ratio.

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After comparison, we find that Lucky Cement is more fit financially than other two companies. In terms of financial health and fitness the D.G. Khan cement stands on second rank and Kohat cement stands on third position. However, the financial health of Kohat Cement is weakest due to undesirably high leverage.

LONG TERM ASSETS VERSUS LONG TERM DEBT: This ratio indicates how much of a companys long term assets is financed from long term debt. It is computed by dividing the Long Term Assets by Long Term Debt. It is an indicator of long term solvency of the company.

FORMULA: Long Term Assets versus Long Term Debt = Long Term Assets / Long Term Debt Year 2009 Lucky Cement 30,534,420,000/ 6,041,712,000= 5.054 Times 29,435,449,000/ 5,969,800,000 = 4.931 Times 6,979,218,849/ 3,406,954,843= 2.049 Times Year 2010 31,438,780,000/ 3,572,624,000= 8.800 Times 30,628,551,000/ 6,740,634,000= 4.544 Times 7,266,211,164/ 3,469,936,996 = 2.094 Times Year 2011 31,765,389,000/ 2,740,237,000= 11.592 Times 31,378,020,000/ 6,798,571,000= 4.615 Times 7,170,782,365/ 4,211,045,234= 1.703 Times

D.G. Khan Cement

Kohat Cement

Working: I picked the figures of long term Assets & long term Debt from annual financial statements of companies for the period under consideration. So that, I didnt show calculations of long term Assets & long term Debt.

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Graphical Presentation:
14.00
Long Term Assets vs. Long Term Debt

12.00 10.00 8.00 6.00 4.00 2.00 0.00 Year 2009 Year 2010 Year 2011 Lucky Cement D.G. Khan Cement Kohat Cement

Interpretation : In this ratio long term assets are compared with long term debt in order to assess how much of long-term assets is financed from long term debt.

Lucky Cement: The ratio improves to 8.800 times in year 2010 as compared to 5.054 times in year 2009. In 2011 it further improves to 11.592 times. It means that in year 2009 only 19.79% of long term assets of company is being financed with long term debt. In year 2010 only 11.36% of long term assets of company is being financed with long term debt. And in year 2011 only 8.63% of long term assets of company is being financed with long term debt. It shows that long term solvency of company is very good.

D.G. Khan Cement: The ratio declines to 4.544 times in year 2010 as compared to 4.931 times in year 2009. In 2011 it improves to 4.615 times after a slight increase. It means that in year 2009 only 20.28% of long term assets of company is being financed with long term debt. In year 2010 only 22.01% of long term assets of company is being financed with long term debt. And in year 2011 only 21.67% of long term assets of company is being financed with long term debt. It shows that long term solvency of company is very good. Page 47 of 53

Kohat Cement: The ratio improves to 2.094 times in year 2010 as compared to 2.049 times in year 2009 after a very small increase. In 2011 it declines to 1.703 times. It means that in year 2009 48.82% of long term assets of company is being financed with long term debt. In year 2010 47.75% of long term assets of company is being financed with long term debt. And in year 2011 58.73% of long term assets of company is being financed with long term debt. It shows that long term solvency of company is critically low.

Comparatively, the long term solvency position of Lucky Cement is better of all. The D.G. Khan Cement stands second with a very good solvency position. But, the Kohat Cement stands third with a weakest long term solvency.

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Chapter No. 4 Conclusion & Recommendations

4.1 Conclusion:

D.G. Khan Cement Ltd. The overview of analysis states the general outlook of D.G. Khan Cement Company is very good. Its liquidity & solvency health are very good. However, a few observations have been made are listed as follows: The long term financing of the company have been gradually decreased by the management since year 2009. It shows a good impact on capital structure of company. In year 2010, the long term financing of the company reduced by 19.5% as compared with year 2009. It further decreases by 16.80% in year 2011 compared to year 2010. Trend shows that long term solvency position of company is being improved. This solvency position could be beneficial for company in terms of saving the costs of debt financing. But, the company is also bearing the opportunity loss i.e. the company was able to get leveraged and gain its advantage like; fixed payments of interest, unshared profits, fixed term of loan and interest charge paid is tax deductible.

The trend of working capital ratios shows a continuous improvement during the period. But, in fact it has been declining since year 2009. This trend of improving liquidity is result of financial redressing. As, the fair market value of investments have been increased by 1.7 billion Rupees in year 2010. Again, it has been increased by Rs. 3 billion Rupees in year 2010. If the investments would have been recorded at its actual, the ratios of the company would have showed a negative trend.

Lucky Cement Company: During the study, it is found that the Long term solvency health of company is very good but its short term solvency i.e. Liquidity position is unsatisfactory.

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The company is saving the interest charge by utilizing a greater portion of equity for long term financing needs. Again, like D.G. Khan Cement the company is bearing opportunity loss by foregoing the attractive benefits of Leverage. In the over all analysis we find Lucky Cement Company get stand at second position.

Kohat Cement Company: It is further concluded that the outlook of Kohat Cement Company in terms of Liquidity and solvency in not satisfactory. The company highly depends on short term and long term financing. The capital structure of company is undesirably high leveraged. Resultantly, company bears heavy service charges of debt financing.

4.2 Recommendations: Lucky Cement Company: The structure of capital should be made balanced by inducting more debt. Currently, the proportion of debt in the capital is much lesser as compared to industry standard of 1.5:1. In this way, company can gain the advantages of leveraging and can get an opportunity to invest a excessive part of equity in other business and for better returns.

D.G. Khan Cement Company: The structure of capital should be made balanced by inducting more debt. Currently, the proportion of debt in the capital is much lesser as compared to industry standard of 1.5:1. In this way, company can gain the advantages of leveraging and can get an opportunity to invest a excessive part of equity in other business and for better returns. The liquidity position should be stated at its actual. If the impact of window dressing for liquidity position are not removed. It would lead to problematic liquidity position in future.

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Kohat Cement Company: As, the outlook of Kohat Cement Company in terms of Liquidity and solvency in not satisfactory. The management should induct more equity to make balanced the capital structure of company. The more dependency on debt should be avoided in order to save heavy service charges of debt and for saving the working capital from earnings of the company.

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Section II

a) Introduction of the Student Last Degree Obtained : Bachelor of Commerce Organizations Name : Lahore Medical & Dental College Designation Experience (Years) : Senior Accountant : 4 Years

b) Appendix / Appendixes As, the financial statements of all three companies has been downloaded from website of the companies. The related web links of companies are as under: http://www.lucky-cement.com/financialreports.htm http://www.dgcement.com/financial.html http://www.kohatcement.com/financials.html

c) Bibliography REFERENCE & SOURCES USED Handouts on Financial Statements Analysis (FIN621), Virtual University of Pakistan Handouts on Research Methods (STA630), Virtual University of Pakistan Annual Reports of Lucky Cement Limited [On line] Web URL: http://www.lucky-cement.com/financialreports.htm Annual Reports of D.G. Cement Limited [On line] URL: http://www.dgcement.com/financial.html Annual Reports of Kohat Cement Limited [On line] URL: http://www.kohatcement.com/financials.html Financial Ratios [On line] URL: http://www.invest-2win.com URL: http://www.spireframe.com/docs/financial_statement_welcome.aspx

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URL: http://www.universalteacher4u.com/cbse/xii/acctheory/ch11/page2.htm URL: http://www.wikipedia.com URL: http://www.investopedia.com

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