FINANCIAL STATEMENT ANALYSIS PRESENTATION

Financial Accounting — MBA 2022

The requirements for Financial Accounting course include a Presentation.

INSTRUCTIONS:
1) You must select a publicly listed company for analysis. Merchandisers and manufacturers are probably
better for analysis given the orientation of this course. You should avoid banks, utilities, and insurance
companies since their accounting is specialized and is not the focus of our course. One company is analyzed
per group, along with two competitors. You need to notify me by email of your company selected as soon as
possible (if you desire a specific company then select quickly since companies can be chosen only once).

2) Once you select a company you immediately must begin collecting data, performing analysis, and drawing
inferences. One of the first items you should obtain is the company’s financial statements and its SECP filing.

3) Once you gather, analyze, and interpret the available information on your company, it is time to prepare
your presentation. The following “guidelines” can help you in the preparation of your presentation:

COMPANY ANALYSIS PRESENTATION

Your presentation must include analyses of both past performance and current financial condition along with
prospects for future performance. Your presentation should be 20 minutes long (15 min for presentation and 5
minutes for question/answers). Since part of your grade is based on presentation format, you are strongly
encouraged to prepare your presentation using Power point or similar package and thoroughly review it for
typos, spelling, and grammar. Mistakes in grammar and errors of fact compromise the credibility of your
analysis.

The presentation should include a cover page followed by a table of contents to help listeners focus on those
areas pertinent for their business decisions. Note that only relevant material should be included. For example,
decades-old details of the beginnings of a company and discussion of miscues of analysis are irrelevant. Also,
ambiguities and qualifications to avoid responsibility should be eliminated. The contents of your presentation
should consist of the following parts, including supporting materials (Note: When information is required from
outside the annual report, suggested sources are identified in brackets.):

I. Executive Summary
The analysis should begin with an Executive Summary section. This executive summary is brief, and it should
summarize the important results and conclusions. Remember that importance is determined by the user perspective
selected by you (e.g., investor, creditor, and environmentalist).

II. Company Facts

A. Identify the complete company name and its home office location
B. Identify names of the Chief Executive Officer (CEO) and Chairman of the Board
C. Indicate the end dates of recent fiscal years
D. Describe the main products and/or services provided
E. Identify main geographic areas and major segments of business activity
F. Report the number of employees
G. Identify the independent auditor and interpret the audit report
H. Indicate its stock ticker symbol, its exchange listing, and its recent price including the date [Web]

III. Accounting Analysis

A. Identify and briefly describe the company’s major accounting policies [usually Note 1 in annual report],
including that for:
1. Revenue (including recognition policies) 2. Major Expenses (including recognition policies)
 3. Investments 4. Inventories (if applicable)
5. Property and Equipment (including depreciation) 6. Goodwill and Intangibles (including amortization)
Assess whether any of these policies appear too aggressive or conservative
B. Specify (list) the heading of each Note to the financial statements in a separate Appendix

IV. Financial Analysis

A. Compute and interpret the following ratios for each of the past three years:
1. Liquidity and Efficiency Ratios
a. Current ratio b. Acid-test ratio
c. Accounts receivable turnover d. Inventory turnover
e. Days’ sales uncollected f. Days’ sales in inventory
g. Total assets turnover
2. Solvency Ratios
a. Debt ratio
b. Equity ratio
c. Times interest earned
3. Profitability Ratios
a. Return on total assets b. Return on common stockholders’ equity
c. Profit margin ratio d. Gross margin ratio
e. Book value per common share f. Basic earnings per share
g. Cash flow on total assets
4. Market Ratios
a. Price-Earnings ratio
b. Dividend yield

B. Prepare and interpret comparative income statements and balance sheets for the past 3-4 years
C. Prepare and interpret common-size comparative income statements and balance sheets for the past 3-4
years

Investments

Stronger market price of Cherat Cement Company Limited provided unrealized capital gain of approximately Rs.
314 million in current year

while cumulative unrealized gain reached approximately Rs. 264 million

D. Compute and interpret trend percents for all individual income statement and balance sheet accounts for
the past 3-4 years

V. Prospective Analysis
Once the analysis and interpretation for parts II through IV are complete, you must prepare a prospective
analysis. This prospective analysis is your assessment/prediction of the future performance of your company
(this can include predictions of key financials such as sales, income, assets, and so forth). Support all
inferences with reference to your prior analyses.

Hint for completion: This presentation is best completed gradually over the course of the term. Parts II and III
can be started and completed immediately. Parts IV and V can be started immediately, but their completion is best
achieved in a gradual process as one proceeds through the course. To expedite the presentation preparation, one
should be encouraged to read Financial Statement Analysis reading about mid-way through the course.
 Comparative Statement of Financial Position
  2020 2019 2018
Assets (Rupees in ‘000) (Rupees in ‘000) (Rupees in ‘000)
Non-Current Assets 5,580,510 5,328,751 5,273,537
Fixed assets      
Property, plant and equipment 5,096,317 5,156,510 4,782,451
Intangible assets 5,635 6,321 5,940
Long-term investments 469,080 154,567 475,518
Long-term loan 100 175 250
Long-term security deposits 9,378 11,178 9,378
       
Current Assets 5,580,221 6,022,692 4,095,137
Stores, spare parts and loose tools 322,853 306,095 172,085
Stock-in-trade 2,622,464 3,128,554 2,009,317
Trade debts 1,966,580 1,569,135 1,054,285
Loans and advances 776 1,769 19,888
Trade deposits and short-term 40,334 43,333 24,905
prepayments
Other receivables 277,050 587,387 570,036
Taxation – net 335,142 373,280 235,983
Cash and Bank Balance 15,022 13,139 8,638
       
Total Assets 11,160,731 11,351,443 9,368,674
       
Equity And Liabilities      
Share Capital and Reserves 4,774,404 4,466,238 4,516,005
Share capital 425,069 386,426 336,022
Reserves 4,349,335 4,079,812 4,179,983
       
Non-Current Liabilities 2,875,037 3,033,486 2,997,929
Long-term financing 2,638,802 2,695,000 2,735,000
Deferred taxation 226,669 338,486 262,929
Government grant 9,566    
       
Current Liabilities 3,511,290 3,851,719 1,854,740
Trade and other payables 534,434 506,202 752,240
Accrued mark-up 178,365 195,889 72,715
Short-term borrowings 2,630,780 2,950,345 936,625
Current maturity of long-term financing 154,600 190,000 85,000
Current portion of Government grant 3,189    
Unclaimed dividend 9,922 9,283 8,160
Total Liabilities 6,386,327 6,885,205 4,852,669
Total Equity and Liabilities 11,160,731 11,351,443 9,368,674
 Comparative Income Statement
  2020 2019 2018
  (Rupees in ‘000) (Rupees in ‘000) (Rupees in ‘000)
       
Net Sales 9,436,193 8,093,107 7,091,653
Cost of sales -8,262,464 -6,692,758 -5,993,321
Gross profit 1,173,729 1,400,349 1,098,332
       
Distribution costs -164,781 -129,294 -98,022
Administrative expenses -95,009 -93,958 -75,475
Other expenses -53,389 -40,741 -60,661
Total Expense -313,179 -263,993 -234,158
       
Other income 21,631 29,978 28,971
       
Operating profit 882,181 1,166,334 893,145
Finance costs -783,503 -506,554 -128,262
Profit before taxation 98,678 659,780 764,883
Current -141,498 -24,624 0
Prior 1,238 2,974 5,040
Deferred 111,817 -75,557 -58,844
Taxation -28,443 -97,207 -53,804
       
Net profit for the year 70,235 562,573 711,079

Horizontal Analysis: Statement of Financial Position

  2020 2019 2018
Assets      
Non-Current Assets 106% 101% 100%
Fixed assets      
Property, plant and equipment 107% 108% 100%
Intangible assets 95% 106% 100%
Long-term investments 99% 33% 100%
Long-term loan 40% 70% 100%
Long-term security deposits 100% 119% 100%
       
Current Assets 136% 147% 100%
Stores, spare parts and loose tools 188% 178% 100%
Stock-in-trade 131% 156% 100%
Trade debts 187% 149% 100%
Loans and advances 4% 9% 100%
Trade deposits and short-term 162% 174% 100%
prepayments
Other receivables 49% 103% 100%
Taxation – net 142% 158% 100%
Cash and Bank Balance 174% 152% 100%
       
Total Assets 119% 121% 100%
       
Equity And Liabilities      
Share Capital and Reserves 106% 99% 100%
Share capital 127% 115% 100%
Reserves 104% 98% 100%
       
Non-Current Liabilities 96% 101% 100%
Long-term financing 96% 99% 100%
Deferred taxation 86% 129% 100%
Government grant      
       
Current Liabilities 189% 208% 100%
Trade and other payables 71% 67% 100%
Accrued mark-up 245% 269% 100%
Short-term borrowings 281% 315% 100%
Current maturity of long-term financing 182% 224% 100%
Current portion of Government grant      
Unclaimed dividend 122% 114% 100%
Total Liabilities 132% 142% 100%
Total Equity and Liabilities 119% 121% 100%

Horizontal Analysis: Statement of Profit or Loss

  2020 2019 2018
Net Sales 133% 114% 100%
Cost of sales 138% 112% 100%
Gross profit 107% 127% 100%
       
Distribution costs 168% 132% 100%
Administrative expenses 126% 124% 100%
Other expenses 88% 67% 100%
Total Expense 134% 113% 100%
       
Other income 75% 103% 100%
       
Operating profit 99% 131% 100%
Finance costs 611% 395% 100%
Profit before taxation 13% 86% 100%
Current   0% 100%
Prior 25% 59% 100%
 Deferred -190% 128% 100%
Taxation 53% 181% 100%
       
Net profit for the year 10% 79% 100%

Comparative Statements and Horizontal Analysis

Statement of Financial Position

From years through 2018- 2020, the financial position of Cherat Packaging has observed
significant changes owing to a number of factors.

On the asset side of the balance sheet, overall total assets have increased in terms of Rupees
and as a percentage in comparison to the base year 2018. An increase in fixed assets by 6%,
as reflective in the growth of PPE, is largely due to the increase in operations and expansion of
the business as the company established a new flexible packaging division in 2018 which was
operational in 2019. Additions to the ERP software in 2019, led to an increase in the balance of
Intangible Assets, whereas subsequent amortization resulted in a reduction in the following
year, 2020. However, a significant dip in long-term investments occurred in 2019 since capital
markets performed poorly in that year, resulting in a decline in share prices of Cherat Cement
Company limited to Rs155 million from Rs 476 million. A long-term loan given to a company
employee was also partially repaid in the years 2019 and 2020, leading to a decline in the
balance of long-term loan, under the head of Non-Current Assets.

Current Assets also increased in both 2019 and 2020 as compared to 2018. Increase in stock-
in-trade, stores and spare parts and loose tools is largely attributable to the expansion of the
business and PKR depreciation. For the same reasons trade debts have also risen over these
years. On the other hand, current portions of long-term loans and advances (suppliers and
letters of credit) have declined indicating partial settlement of these receivables.

Total balance on the Liabilities and Equity side of the balance also increased in cumulative
terms, when compared with outstanding balances in 2018. Rise in equity was mainly due to
issuance of bonus shares in 2019 and 2020. While non-current liabilities decreased overall as
loans taken to finance the flexible packaging division were repaid, current liabilities increased
significantly. The latter was mainly due to rising accrued mark-ups related to the import of raw
materials and short-term borrowings to finance the growing working capital requirements in the
face of expansion.

Taxes, as whole have increased overall the years because some of the imported machinery for
the flexible packaging division, brought in 2019 was not exempted from withhold tax on
important, unlike prior years.

Statement of Profit or Loss

Over the last three years, profitability of Cherat Packaging has seen a significant decline despite
a 33% cumulative increase in net sales from 2018 to 2020, due diversification of operations.
Firstly, gross profit in Rupees declined from 2019 to 2020, after increasing from 2018 to 2019,
due an increase in the cost of goods sold. Alongside, the rise in the prices of imported raw
materials, PKR depreciated against USD and Euro leading further increase in costs. An
increasing trend is also observed in the administrative and distribution expenses which seems
to be line with the expansion of the business.

While operating profits follow trends similar to the gross profit, taxation and finance charges
have contributed to a declining trend in the net profit. Rising finance charges are in line with
significant increase in short-term borrowings at floating rates (which have been rising).
Moreover, hike in discount rates further added to the finance charges. Taxes also increased
significantly in 2019, as the previously available tax credits on capital expenditures under 65 B
of Finance Act of 2019 were slashed, and since some equipment relating to the flexible
packaging division was imported in the same year, taxes rose by 81%.