Financial Statements Analysis

Of Gul Ahmed

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Assignment Question:
Select a company from the following sectors corresponding to your group and class. Analyze the
performance of the company including the following information
i) Company Brief
ii) Results of Operations
a. Revenues
b. Income Before Tax
c. Income After Tax
d. Earning Per Share (EPS)
e. Selling and Administrating Expenses
iii) Vertical Analysis of Income Statement
iv) Three year comparison of Balance Sheet
a. Short Term Debt Paying Ability
i. Day’s Sales in Receivables
ii. Account Receivable Turnover
iii. Day’s Sales in Inventory
iv. Working Capital
v. Current Ratio
vi. Summary
b. Long-term Debt Paying Ability
i. Debt Ratio
ii. Debt Equity Ratio
iii. Summary
c. Profitability Analysis
i. NPM
ii. Total Asset Turnover
iii. Return on Assets
iv. Return on Equity
v. Summary
d. Investor Analysis
i. EPS
ii. Price Earning Ratio
iii. Summary
v) Ratios comparison with Industry
vi) Conclusion

Objective:
The basic Objective of this assignment is to understand the trends in financial performance of
Gul Ahmed Textile Mills Ltd and analyze the ratios mainly use in financial analysis and give
conclusion drawn through the analysis.

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Table of Contents:
OBJECTIVE:........................................................................................................2
COMPANY BRIEF................................................................................................3
INTRODUCTION:..........................................................................................................................3
MISSION..................................................................................................................................4
HISTORY:.................................................................................................................................4
BUSINESS ACTIVITIES...................................................................................................................4
TEXTILES.................................................................................................................................4
MANAGEMENT............................................................................................................................5
OPERATIONS.............................................................................................................................5
RESULTS OF OPERATIONS:..................................................................................5
INTERPRETATION:........................................................................................................................6
COMMON SIZE ANALYSIS:...................................................................................6
VERTICAL ANALYSIS::...................................................................................................................6
INTERPRETATION:........................................................................................................................6
HORIZONTAL ANALYSIS.................................................................................................................7
INTERPRETATION:........................................................................................................................7
THREE YEAR COMPARISON OF BALANCE SHEET:...................................................8
SHORT TERM DEBT PAYING ABILITY:..................................................................................................8
SUMMARY AND RATIO COMPARISON WITH INDUSTRY AVERAGES:.....................................................................9
LONG-TERM DEBT PAYING ABILITY:...................................................................................................9
SUMMARY AND RATIO COMPARISON WITH INDUSTRY AVERAGES:...................................................................10
PROFITABILITY ANALYSIS:.............................................................................................................10
SUMMARY AND RATIO COMPARISON WITH INDUSTRY AVERAGES:...................................................................10
INVESTOR ANALYSIS:..................................................................................................................11
SUMMARY AND RATIO COMPARISON WITH INDUSTRY AVERAGES:...................................................................11
CONCLUSION:...................................................................................................12
REFERENCE:.....................................................................................................13

Company Brief
Introduction:
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Gul Ahmed Textile Mills is Pakistan’s leading exporter of home textiles, including bed linen,
curtains, and fabric. It also manufactures lawn fabric for the domestic market. Recently, it has
begun to produce value-added materials such as apparel and accessories for both men and
women under the label Ideas.

Vision

Setting trends globally in the textile industry, responsibly delivering products and services to its
partners.

Mission

• To deliver value to its partners through innovation technology and teamwork.

• Fulfilling its social and environmental responsibilities

History:
The Gul Ahmed Group began trading in textiles in the early 1900s. In 1953, the group decided
to enter the field of manufacturing under the name Gul Ahmed Textile Mills Limited, and was
incorporated as a privately limited company on April 1, 1958. In 1972, it was listed on the
Karachi Stock Exchange. Since then, the company has made rapid progress and is currently one
of the leading composite textile houses in the world. The mill is presently a composite unit with
an installed capacity of 130,296 spindles, 223 wide width air jet looms, and a state of the art
processing and finishing unit.

Business Activities
Textiles

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In the textile field, activities start from the spinning of cotton as well as man made fibers and
extend to weaving, processing and finishing of all types of cotton and blended fabrics, bed linen,
home furnishings, garment manufacturing, etc.

Management
Management of the group is professionally qualified and broadly experienced. The directors
have held top positions in various textile bodies, export committees and have also assisted the
Government of Pakistan in some of the major trade talks with EC and USA authorities.

Operations
Gul Ahmed is a network of composite mills which manufacture goods from yarn to finished
products. In order to achieve and maintain high quality control and to retain strict focus on
specialization, the production units have been decentralized into the following units:

• Spinning

• Weaving

• Pretreatment, Printing, Dyeing, Finishing

• Design & Style

• Hemming – House Hold Textile

• Quality Control

Results of Operations:
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According to Annual report of Gul Ahmed Textile Mills Ltd for the year 2008, the result of
operations is as follows:

Accounts 2008 (Rs. 000) 2007 (Rs. 000)

Revenues: 11,650,143 9,798,338

Income Before Tax 201,838 262,191

Income After Tax: 102,838 164,400

Earning Per Share (EPS): 1.86 3.11

Selling and
781,553 693,742
Administrating Expenses:

Interpretation:
From the results of operations it can be seen that the revenues increased from 2007 to 2008,
along with that the expenses increased as well which affected the income of the company, as
income decreased by 3%. The earnings per share also decreased from 3.11 in 2007 to 1.86 in
2008 this may be sue to the changes in the economy.

Common size Analysis:

Vertical Analysis::
Items\Year 2006 2007 2008
Sales 100% 100% 100%
Gross Profit 14.37% 14.55% 14.58%
Expenses 7.68% 7.08% 6.70%
Operating Profit 6.66% 7.47% 7.87%
Other Operating
0.09% 0.06% 0.14%
Income
Finance Cost 6.61% 4.86% 6.28%
Profit Before Tax 0.14% 2.6% 1.73%
Profit/ (loss) After
(0.43%) 1.67% 0.88%
Tax

Interpretation:

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In the vertical analysis, we have compared each item on the income statement with the sales
figure of that particular year. It means each item is stated as a percentage of sales. First of all,
looking at the gross profit margin we can observe that a slowly increasingly trend is seen,
meaning the cost of sales have been decreased over time. However the expenses have been
decreased through the years showing an increasing trend in the operating profit margin. These
expenses include administrative, distribution and other operating expenses which have been
decreased by effectively applying certain strategies in order to reduce the overall expense. The
finance cost showing the markup on long term and short term borrowings and other bank charges
have been quiet much decreased in 2007 as compared to 2006, but increased again in 2008 as the
company has relied more on these borrowings for production and other operations which in turn
increased the markups being paid by the company reducing the overall net income. The net profit
percentages show that the company was in a much better position in 2007 as compared to 2006.
But due to global recession and heavy government taxations there was decrease in the net profit
in 2008.

Horizontal Analysis
Items\Year 2006 2007 2008
Sales 100% 120.93% 143.79%
Gross Profit 100% 122.40% 145.83%
Expenses 100% 111.43% 125.53%
Operating Profit 100% 135.30% 169.68%
Other Operating
100% 83.65% 223.87%
Income
Finance Cost 100% 88.80% 136.57%
Profit Before Tax 100% 2183.3% 1683.33%
Profit/ (loss) After
100% 468.57% 294.28%
Tax

Interpretation:
In the horizontal analysis, we have compared the years 2007 and 2008 to the base year 2006.
Considering the gross profit margin of the company, it has increased in 2007 and further
increased in 2008 showing that the cost of sales has been decreased in 2007 and 2008 as
compared to 2006. The expenses have also been decreased because of which the operating

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income have shown an increase in 2007 and 2008 as compared to 2006. Other operating income
has been decreased in 2007 as compared to 2006, whereas it has shown quiet an increase in
2008. The finance cost have also been decreased in the year 2007 as compared to 2006 because
of which there has been an increase in the profit before tax in 2007, whereas the finance cost has
shown an increase in 2008 as compared to 2006, but the profit before tax as compared to 2006
has also shown an increase in 2008. The net profit in 2007 has shown a 468.5% increase as
compared to 2007 whereas in 2008 the net profit shows an increase of only 294.2% due to heavy
taxations and other factors.

Three year comparison of Balance Sheet:

Short term Debt paying Ability:

Formula 2006 2007 2008

Ratios
Account Annual credit sales /
Receivable average accounts 4.30 4.89 5.01
Turnover receivable
Day’s Sales in
365/Rec. turnover 84.8days 74.6days 73days
Receivables
Inventory
CGS/Avg. Inv. 2.85times 3.51 times 3.85 times
Turnover
Day’s Sales in
Inventory 365/Inv. Turnover 128.0days 103.9days 94.81days

Working Current Assets –

16,104 -278,210 -686,800
Capital Current Liabilities
Current Ratio = Current Assets
1.002 0.95 times 0.90 times
Current Liabilities
= Current assets –
Quick Ratio Inventories 0.54 times 0.54 times 0.49times
Current Liabilities

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Summary and ratio comparison with industry averages:
The Working Capital was positive in 2006 which shows the solvent position of the firm and the
current ratio of more than 1, but it was negative in 2007 and 2008 which indicates insolvency of
the firm. In both years the liquidity position of a company is not satisfactory specially current
ratio compared to 2007 industry average which is 1.08 and in 2006 it is 1.06 and shows favorable
condition of industry. The current ratio is less than 1 in 2008 & 2007 which suggests that the
company would be unable to pay off its obligations if they came due at that point.

Similarly Inventory turnover for the company is seems to be low which means that inventory is
kept for a lesser time and sales had been satisfactory; the company is efficient in turning its fixed

Ratios Formula 2006 2007 2008

Longterm Liabilities
Gearing Ratio 0.49 0.41 0.47
Shareholder’s equity
Debt Ratio Total liabilities
76.9% 73.6% 77.7%
Total Assets
Total Liabilities
Debt/Equity
Shareholder’s 3.33 2.79 3.48
Ratio
Equity
goods to revenue. Though in 2008 (3.85 times) it is slightly higher from 2007 (3.51 times) and
2006 (2.85times). And the Day’s Sales in Inventory kept for greater time period in all three
years. Account receivable turnover is satisfactorily in 2008 as compared to 2006 and 2007 as it
increased and showed a better position of receivables but the days for which receivables kept
uncovered in 2006 were 84days, 74days in 2007 and 73days in 2008 comparison shows decrease
per year which is a good sign.

Long-term Debt Paying Ability:

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Summary and ratio comparison with industry averages:
The gearing ratio must not be higher; in 2007 it is 0.41 which is higher as compared to the
industry average of 0.34 and 0.37 in 2006 which shows poor performance of company. Also in
2008 this ratio has increased which is not a good sign. It shows that company is more financed
by creditors instead of owner’s equity. Talking about debt ratio creditors prefer low debt ratios
because the lower the ratio the greater the cushion against creditor’s losses. In case of this
company the ratio in 2007 is 73.6% and in 2008 its 77.7% in 2007 it was low and it was better
then in 2008, from creditor’s point of view. But as both years ratio are less than one, they reveal
better position of a firm that it does not depend on debt to finance its assets and same is the case
for 2006. The debt to equity ratio in 2007 is 2.79 while industry average in 2007 is 1.86 and in
2006 it is 3.33 with industry average of 1.85 which is lower and shows better condition of
industry as compared to Gul Ahmed. In 2008 it has increased which shows that company is more
dependent on debt for financing its growth. For investors with increasing debt/equity ratio must
not invest in this company also considering the economic situation.

Profitability Analysis:
Ratios Formula 2006 2007 2008
Net Profit
Net income x 100
Margin 0.15% 2.67% 1.73%
Sales
Total Asset Net Sales
0.82 times 0.97 times 1.03times
Turnover Average Total Assets
Net income
Return on Assets
Total Assets 0.12 % 2.6 % 1.6 %

Net Income x 100

Return on Equity
Equity 0.53% 9.8 % 7.3 %

Summary and ratio comparison with industry averages:

It shows the return from the sales; In 2006 industry average was 3.3 and company reveal 0.15%
which was not favorable but in 2007 company has net profit margin of 2.67% which is greater as

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compared to 1.73% of 2008 this shows that company has not performed well in 2008 and return
on sales was low. But as compared to 2007 industry average of 2.8 the company’s performance
in term of net income was slightly favorable. This low rate shows that actual profit from the sales
after deduction of certain expenses is not very encouraging and company has to give attention to
this rate. The asset turnover ratio in 2007 and 2006 the ratio is less then in 2008 (1.03), this ratio
must be higher in this case the company is generating less revenue using its assets. It is required
to give more attention to generate revenues through better utilization of its assets. Return on
Assets measures the total return on the assets, in 2006 it was very low and comparing with 2006
the increase in 2007 and 2008 was encouraging but in 2007 it was 1.63times per year as
compared to 2007 industry average which is 2.1 the return is not favorable and it decreased to
0.83times per year which shows that company was unable to secure return in 2008 from assets as
compared to 2007. This also indicates that income generated through the usage of total assets is
not very favorable especially the trend is decreasing.

Return on Equity ratios indicates that the company has not generated enough income from the
equity invested by shareholders. 6.18 % is the ROE in 2007 and was highly favorable as
compared to industry average of 5.9 and in 2008 it has decrease to 3.72 % which does not shows
a better position of company’s accounting. The difference may be due to the economic
conditions and the increasing inflation in the country. The decreasing gap between two years is
large and not favorable for the investors even though increase from 2006 results.

Investor Analysis:
Ratios Formula 2006 2007 2008
Net Income – Dividends
EPS on preferred Stock
(0.77) 3.11 1.86
Average Outstanding
Shares
Price
Market Value per Share
Earning
Earnings per share (41.3) 11.73 20.11
Ratio

Summary and ratio comparison with industry averages:

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Earnings per share in 2006 was negative which shows share quotes of company decline this may
be due to negative income in 2006 but in 2007 is 3.11 as compared to industry average of 1.1 it
was positive and favorable because it yield high earnings for investors as compared to the
industry but in 2008 it again decreased to 1.86 and the decline is higher, it shows that earnings
for outstanding shares is less and offer less return to the investors in 2008. Price/Earnings ratio,
in 2008 it increases from 11.73 to 20.11 but was negative in 2006. But this simple ratio does not
answer the earnings for the shareholders it is important to compare it with the competitors. But
keeping in view the future trends in prices it shows positive changes if other factors remain
same.

Conclusion:
Overall company’s financial position keeping in view these ratios is somewhere depict good
results but from investors point of view the results are not very encouraging moreover the
company’s performance is effected due to inflationary trends and other economic changes.
Especially from 2006 there has been a trend of growth in 2007 but again companies position in
2008 was not very favorable. But this actual result can not be depicted through these simple
ratios more analysis is needed to reach proper results.

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Reference:
• Financial ratio template.

• SBP publications of Balance Sheet analysis of Joint stock Companies

• Annual Report 2008 and 2006 of Gul Ahmed textile Mills Ltd.
• http://www.bized.co.uk

• http://financial-dictionary.thefreedictionary.com
• http://businessweek.com
• http://www.investorwords.com

• http://ventureline.com
• http://www.tuition.com.hk/dictionary/d.htm

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