Five companies, which are in the default counter of KSE, were also included in the analysis (due to the availability of audited annual reports of the current year and consecutive previous years). Annual reports of thirty four companies (mostly on default counter of KSE) were not available at the time of the analysis therefore, to present a comparable and consolidated picture the last available data in respect of these companies have been repeated. The sum of Assets and Liabilities of a company may exhibit minor differences due to rounding off separate items.
Ratios and percentages have been worked out after rounding off the figures in thousands, which may, therefore, slightly differ from ratios obtained from actual amount of balance sheet. The symbol ‘ – ‘ appearing in the analytical tables stand for Not applicable or Not available. The publication is based on the two sets of analysis: (a) Overall summary: This gives the consolidated financial analysis of companies listed at KSE. (b) Company-wise analysis: This provides financial analysis of the individual companies. II. Methodology A. Capital Structure 1. Ordinary Share Capital
Balance Sheet Essay Example
This represents the total paid-up capital against issue of ordinary shares. These are amounts of capital actually paid by the shareholders to the institution for acquiring its shares. It includes shares paid in cash (subscribed/right issued), issued as bonus shares and shares issued for considerations other than cash (eg. for settlement of receivables/debts or debts redeemable into stock etc. ). 2. Reserves It is evaluated by aggregating all kinds of reserves except depreciation reserve and reserve for bad and doubtful debts plus the balance of profit and loss account and subtracting there from intangible or fictitious assets (e.g. , goodwill, preliminary expenses, exploration accounts, patents, trade mark) and adverse balance of profit and loss figures.
The reserves entering into the calculation are: (i) General (ii) Capital (iii) Development (iv) Dividend equalization (v) Proposed issue of bonus shares (vi) Profit on re-issue of forfeited shares (vii) Premium on shares (viii) Capital profit arising from the sale of fixed assets (ix) Special reserves under relevant provision of Income Tax Act (x) Raw material price equalization (xi) Tax equalization (xii) Contingency (xiii) Leave passage (xiv) Workmen? s compensation fund Gratuity, pension or provident fund (xvi) Investment depreciation but not including provision for actual shortfall of market value as compared with book value (xvii) Publicity (xviii) Employees? housing and welfare fund (xix) Charities (xx) Deferred liabilities (xxi) Taxation reserves including deferred taxation reserves, but not including provision for tax assessed or estimated on actual or part of profits. 3. Shareholders’ Equity This item purports to represent the total stake of the shareholders in the business and has been obtained by adding the ordinary share capital to the surplus. 4.
Preference Shares As the name indicates these are ordinary shares of a company and pays a fixed dividend (whether the company is earning profit or making loss during operation), but its shareholders have no voting privilege. In case of liquidation of the company its status is normally considered prior to the status of ordinary shareholders. The difference between ordinary shares and preference shares is as follows: ii a) Ordinary shareholder will receive dividend, which varies according to the prosperity of the company but preference shareholder will receive a fixed amount dividend every year.
Ordinary shareholder has a right of voting in the company? s annual general meeting while the preference shareholder has no voting right. c) Ordinary shareholders have to claim on the net assets of the company in case of liquidation, while the claim of the preference shareholders is paid earlier. 5. Debentures / TFC’s These are bonds/certificates issued by a company to raise funds for long-term period (generally more than one year) for a specific purpose, sometimes convertible into stock. At present, debentures have been replaced by TFC?
Other Fixed Liabilities The liabilities, which are required to be discharge after a period of more than one year from the date of balance sheet, are termed as other fixed liabilities or loan capital. They may consist of the following items: (i) Loans from financial institutions. (ii) Loans from non bank financial institutions. (iii) Loans from specialized financial institutions (iv) Foreign loans (v) Vendors? account 7. Total Fixed Liabilities It is the sum of the preference shares, debentures and other fixed liabilities.
Total Capital Employed It is the sum of shareholders? equity and total fixed liabilities. B. Liquidity 1. Current Assets An asset is to be a current asset, which can be readily convertible into cash or equivalent without any significant loss in value. The current assets comprise of liquid assets, inventories and other current assets. a) Liquid Assets Broadly speaking, liquid assets comprise of all assets like cash, bank balance, marketable security, etc. , which are easily realisable almost at book value.
While there can not be two opinions regarding the status of cash, current accounts and government securities in this context, the treatment of savings and fixed deposits and of shares of joint stock companies not quoted on stock exchange leaves the analyst in doubt. The classification of borderline cases had therefore, to be made partly in keeping with the iii objective of the analysis and partly on one? s own subjective judgment. For this study, liquid assets that are also sometimes referred to as liquid capital have been bifurcated as cash and investments and comprise of the following items.
Cash in transit (iii) Current deposits (iv) Saving deposits (v) Call deposits (vi) Fixed deposits (vii) Deposits held abroad (viii) Government and corporate securities (ix) Savings and Unit Trust Certificates (x) Debentures stock of local or foreign companies b) Inventories It comprises of stocks of raw material in hand, work in progress and finished goods at the closing date c) Other Current Assets The following items are taken as other current assets: (i) Book debts including bad and doubtful debts (ii) Stores (iii) Work in progress(current) (iv) Advances, prepayments, etc. 9. Current Liabilities
All liabilities, which are required to be discharge within one year, are termed as current liabilities. Alternatively, these cover those obligations whose liquidation is expected to be made out of current assets. They are usually incurred in the normal course of business and are required to be paid at fairly definite dates. The current liability consists of the following items. (a) Sundry Creditors (i) (ii) (iii) (iv) (v) Income tax payable For expenses For other finance Bills payable Advances from customers against orders (b) Payment become due but outstanding (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Income tax payable
Proposed, unpaid and unclaimed dividends Estimated liabilities in respect of outstanding claims whether due or intimated Gratuities becoming payable Provident Fund becoming payable Current installment and interest payable on fixed liabilities Provision for taxation estimated on current profits Workers profit participation fund iv (c) Loans, Deposits and Advances (i) (ii) (iii) (iv) (v) (vi) (vii) Loans secured by stock or other current assets Bank overdrafts and other unsecured loans Short term loans acquired against the security of fixed assets Unsecured loan from directors, parent company, and subordinate loan Due to managing agents
In contra distinction to current assets, fixed assets consist of items, which are not readily convertible into cash during the course of normal operations of an enterprise. These items are not subject to periodical exchange through sales and purchases. Fixed assets are of permanent nature and are not normally liquidated or intended to be turns into cash except in the form of depreciation, which is added to the cost of goods sold. The following balance sheet items are included in the category of fixed assets: (a)Real Estate (i) (ii) (iii) (iv) Freehold and leasehold land Factory and office buildings Residential buildings
Advertising, fixtures and fittings. 2. Fixed Assets After Deducting Accumulated Depreciation Deducting the accumulated depreciation from the fixed assets of the company gives this item. 3. Depreciation for the year It includes all the depreciation charges to the profit and loss account during the year. Owing to the absence of uniform accounting standards, depreciation is a subjective item and very from company to company. It is important for the analyst to know what effect such variation could have on the net profit. 4. Total Assets This item is sum of fixed assets at cost after deducting accumulated depreciation, and current assets.
Operations 1. Gross Sales This item represents the sale proceeds of the company. Sales revenue is classified as local sales and export sales. 2. Gross Profit Subtracting cost of sales from sales revenue arrives at gross profit. 3. Overhead and Other Expenses These are total expenses that are incurred on the operational activities of a company except financial expenses and include: (i) Cost of sales (ii) Administrative and general expenses (iii) Selling and distribution expenses (iv) Other expenses 5. Operating Profit Subtracting overhead and other expenses from gross sales and adding thereto-non-operating income gives operating profit.
The difference in value of total capital employed (i. e. , share capital, surplus, preference capital, debentures and other fixed liabilities) at the beginning of the year and the corresponding figures at the end of the year and shown as increase (+)/ decrease (-). 2. Retention in Business This item is obtained by deducting the provision for the tax and the total dividend distributed or proposed to be distributed from the net profit for the year. 3. Finance from outside the company The difference between the increase in the capital employed and the retention in the business is the finance from out side the company.
It is possible for this item to be negative. Indeed in some circumstances it is also possible for the increase in the capital employed as well as the retention in business to be negative, for instance where dividends are distributed not out of the current earnings but out of the reserves. vii F. Cash Flow Data 1. Depreciation for the year plus Retention in Business The total funds that corporation generates internally for investment in the modernization and expansion of plant and equipment. 2. Depreciation for the year plus changes in Capital Employed Depreciation for the year is added in the difference of two successive years?
Operating Financial & Investment Ratios 1. Gearing Ratio This item shows the proportion that the fixed loan capital bears to the total capital employed. Where there is preference capital, there is an item of Gearing i. e. , the fixed loan capital plus the preference capital as the ratio of the total capital employed. The justification for taking the preference capital together with the fixed liabilities is that, from the ordinary shareholders? point of view, both items represent a fixed charge on the profits. Total capital employed is shareholders equity plus total fixed liabilities.
Gearing becomes inapplicable when the shareholders? equity becomes zero or negative. 2. Current Ratio This item tells a lender about the liquidity of the assets and as a result its ability to pay the short – term debts. 3. Acid Tests or Quick Ratio The acid test or quick ratio is used to determine how quickly a company would be able to pay off its current liabilities if it needs to convert its “quick” assets into cash. 4. Debt Equity Ratio In debt equity ratio, the total debt is compared with the shareholder’s equity; the lower the ratio the better the company’s solvency, the higher ratio is a risk to a present or future creditor.
This ratio is considered a measure of how effectively assets are used to generate a return. 6. Self -Financing Ratio The ratio expresses the amounts retained in business as percentage of increase/ decrease in the capital employed. viii 7. Cash Flow Ratio This ratio has a purpose somewhat similar to the self-financing ratio. The only difference being that it takes into account the amount of depreciation. 8. Shareholders’ Equity as % of Ordinary Share Capital It is the shareholder’s equity to the ordinary share capital, which means the stake of ordinary shareholders in the total equity of the company. 9.
Overhead and Other Expenses as % of Gross Sales It shows the ratio of overhead and other expenses to the gross sales. This is an important ratio, which indicates the contribution of operating expenses in the operating revenue through sales of the company. Lowering the percentage, the company is more viable and efficient. 10. Financial Expenses as % of Operating Profit This shows the ratio of financial expenses to operating profit. It identifies how much weight the company will bear from its operating profit before reaching to the net profit before tax. Smaller ratio is a good for a company. 10. Financial Expenses as % of Gross Sales
It shows the ratio of financial expenses to gross sales. Lowering the ratio indicates the financial discipline of the company and the increasing ratio indicates that the company is facing financial expense burden out of its gross sales revenue 11. Financial Expenses as % of Contractual Liabilities It shows cost incurred (interest/mark up paid) on contractual liabilities. 13. Tax Provision as % of Net Pre-tax Profit It shows the portion of net profit set aside for tax provisions. 14. Sundry Debtors as % of Gross Sales It is the ratio of outstanding credit (all sales receivables) to the total sale proceeds of the company.
Higher the percentage, the company is increasing its debtors and credit risk and reducing its liquidity position. 15. Net Profit as % of Shareholders’ Equity It is worked out by dividing the net profit before tax by the shareholder’s equity, expressing the result in percentage. ix H. Key Performance Indicators 1. Dividend Cover Ratio The ratio of net profit after tax to total amount of dividend. 2. Dividend Ratio to Equity This item has been worked out by dividing the total amount of dividend by the shareholder’s equity, expressing the result in percentage. 3. Net Profit Margin.
This ratio shows how much profit comes from every rupee of sales. 4. Earning per Share It has been arrived by dividing the net profit (before/after tax) by the number of ordinary shares. 5. Average annual % Depreciation on Written Down Fixed Assets This item is simple depreciation rate and is intended to give some idea of the company? s practice with regard to depreciation. Since there are so many items in the fixed assets schedule, it is not practicable to calculate depreciation rate for all the items individually. Therefore, an aggregate depreciation rate for all the item taken together has been worked out.
The method is to take total depreciation provided during the financial year and dividing it by the written down value of the total fixed assets at the beginning of the financial year. The result is expressed in percentage. 6. Sales as % of Total Assets This item indicates how efficiently the business of a company generates sales on each rupee of assets. 7. Sales Growth (Current Year’s Sales – Last Year’s Sales) Sales growth is the percentage increase or decrease in sales between two time periods. 8. Break-up Value of Ordinary Shares It is obtained by dividing the sum of ordinary share capital and the surplus by the number of ordinary shares.