Accounting for Property, plant and equipment assets

Hello friends!!!!!!!

Have insights about the purchasing, recording and allocating the cost of property, plant and equipment previously known as fixed or plant asset in balance sheets.

Every business being a going concern requires long-lived assets which are vital for its operations of the firm without disruptions for a long time period; like Building for establishing office or developing a factory, Machinery for converting raw material into finished goods or Plant for processing products, these assets are known as property, plant and equipment also known as plant or fixed assets. They are long-term assets because they cannot be liquated easily; their life is more than one financial year.

Their purchasing is made through the process of capital budgeting, they are purchased or acquired for the purpose of utilizing them over their lifetime period rather reselling them for receiving a stream of services from them; for example a machine’s life could be 5 years so it can facilitate the business for 5 years and a office building can have a life of 20 years so it can give its services for 20 years.  

The term Property, plant and equipment is used to describe all types of plant assets including tangible, intangible assets and natural resources. Its recording is done in the books of acquiring companies as per the rules prescribed under International Accounting Standard (IAS)-16.

v  Tangible plant assets as name indicate, these assets have physical existence and able to give benefits for more than a fiscal year. Like building, land, machines and equipments. They are depreciated over a period of time except Land because Land does not depreciate usually.

• Land; land does not depreciate because it has unlimited life and its value continue to increase with time but the improvements made on Land like fences, Parking facility and fences are subject to depreciation.  

v  Intangible plant assets as the name suggest of these long-lived assets, they do not have any physical existence but they have value for the business and provide benefit to business for more than a fiscal year. That is Patents, goodwill, copyright, trademarks and franchise. They are amortizing over a period.  

v  Natural resources those resources acquired for finding a natural product like a site acquired for extracting natural gas or marbles. They are subject to depletion over the period.

ANALYSIS OF 2013 BALANCE SHEET OF LUCKY CEMENT LIMITED (Part-2)

continued from ANALYSIS OF 2013 BALANCE SHEET OF LUCKY CEMENT LIMITED

LIQUIDITY RATIOS

 Current Ratio

LCL had Rs.1.09 of assets for every Rs.1 of current liability in 2008, it decline to 0.86 in 2009 due to 5.96% decline in current assets and increase of 18.37% in current liabilities, current ratio further decline in 2010 to 0.71 this is because of a huge decline of 12.55% in current assets and 5.97% increase in current liabilities in 2010. In 2011 it increased a bit to 0.88 due to increase of 37.44% in current assets and a little increase of 10.94% in current liabilities. Current ratio shows a significant increase in 2012 of 2.64 it is mainly because of a huge decline of 66.12% in current liabilities then the ratio further increased to 3.38 in 2013 due a huge increase of36.20% in current assets and a little increase of 6.11% in 2013.   

  

Quick Ratio

LCL’s Quick ratio is revealing a slight downward trend from 0.46 in 2008 till 0.18 in 2011 this is mainly due to decline in quick assets and increase in current liabilities. In 2012 it increased to 0.8 which is mainly due to increase in cash and other receivables further it goes up to 1.66 in 2013 which is due to a huge increase in cash i.e. Rs.1,961,418,000 and LCL’s investment of Rs.110,062,000 in marketable securities.

Cash ratio is showing a mixed trend it declines in 2008 to 0.9 due to the shortage of cash then a small increase of 0.1 in 2009 it again shows decline in 2010and 2011 to 0.03 then cash increased significantly in 2012 to Rs.844,422,000 which increased the cash ratio to 0.23 in 2013 it further increased to 0.73 due to huge increase of Rs.1,961,418,000 in cash amount.  

 Cash Conversion Cycle

Cash conversion cycle is showing the LCL’s operating cycle that how many time it takes to convert its investment into cash. It is comprises of Inventory turnover days, receivable turnover days and payables turnover days.   

LCL has converted its investment into cash in 48.43 days in 2008 then this conversion period expands till 68 days in 2013 this due to increase in inventory turnover days then early repayment of current liabilities. 

SOLVENCY ANALYSIS

The following ratios show the solvency of LCL whether it is stable and have the ability to meet its long-term obligations.

DEBT RATIOS

 Debt to Asset Ratio

LCL Debt to Asset ratio is 0.46 in 2008 then it declines to 0.39 in 2009 it continuously declining to 0.18 in 2013 this declining trend is due to payment of long-term debt and continuous growth in assets.  

 Debt to Equity Ratio

Debt to equity ratio is also showing continuous downward trend due to increase in equity and decrease in liabilities. It was 84% in 2008 then it declines to 65%, 53%, 48%, 22% in 2009, 2010, 2011, 2012 , now LCL has 22% debt as compared to 84% debt in 2008. LCL has managed to reduce its financial risk and moved toward equity based financing.  

COVERAGE RATIOS

 Interest Coverage Ratio

Interest coverage ratio has a mixed trend it was 19.20 in 2008 then it declines to 5.19 in 2009 due to huge increase of 875.97% in finance costs as the result of 18.37% increase in current liabilities and increased interest rates. In 2012 it climbed to 33.87 due to increase in earnings and decline in finance costs as a result of 52.5% and 52.8% decline in long-term liabilities and current liabilities respectively. 

In 2013 it reaches the all time high 132.09 times LCL can cover its interest obligations due to 34% increase in EBIT and 64.75% decrease in finance costs due to low interests on liabilities.

VALUATION RATIOS

EPS

LCL earned 9.84 times per share in 2008 it increased to 14.21 in 2009 due to 71.66% increase in net income which is Rs.1,918,878,000 then it falls to 9.7 in 2010 because of 31.74% decline in net income that is Rs.1,459,091,000 then recover and increased to 12.28 times in 2011, 20.97 times in 2012 and the highest ever EPS of 30.04 times in 2013 this is due to continuous increase in net income which increased upto 43.22% i.e. Rs. 2,931,532,000 in 2013 while outstanding shares remain same.    

PRICE EARNING RATIO

LCL Price Earning ratio was 9.96 times in 2008 then it declines to 4.12, 6.4, 5.77, 5.5 and 6.98 times in 2009, 2010, 2011, 2012 and 2013 this is due to fluctuations in market price of shares.   

DIVIDEND PAYOUT RATIO

LCL has a tight dividend policy it has not paid dividend in 2008 then its dividend payout ratio increased to 28.15% in 2009 it grows further to 41.23% due to dividend payment per share increased to Rs.4 in2010 it declines to 32.58% in 2011 28.61% and 26.63% (Rs.8 dividend on each share) in 2013 due to increase in shares outstanding.

Here the analysis of the Lucky Cement limited has been completed it's performance have been measured through comparing it's performance from its past year performance now you can see the more market based comparison and its better position in the market.  

INTERCOMPANY ANALYSIS

+Lucky Cement  is an industry giant that is why i am comparing it with the companies which have strong presence in the Cement market of Pakistan so its major competitors are +DG Khan Cement company, +Attock Cement Comapny and +Fauji Cement Company. Here is the intercompany analysis.

1.     +DG KHAN CEMENT COMPANY

+D.G. Khan Cement Company Limited, (DGKCC) is amongst largest cement manufacturers of Pakistan with a production capacity of 14,000 tons per day (4.200 million tons/annum). DGKCC has three cement plants, two plants located at Dera Ghazi Khan and one at Khairpur Distt. Chakwal. All the plants are based on latest Dry Process Technology. The Company operates through a countrywide distribution network managed by different Regional Sales offices. The Company's products are preferred on projects of national repute both locally and internationally due to the un-parallel and consistent quality. The Company is listed on all the Stock Exchanges of Pakistan.

2.     +ATTOCK CEMENT COMPANY

ACPL is a member of Pharaon Group of Companies operating in Pakistan. ACPL's projects was conceived in 1981. The projects is a Pak-Saudi venture and has involved an initial capital outlay of around Rs. 1.5 billion with a foreign exchange component of around US$ 45 million. ACPL's manufacturing  plant is located in Tehsil Hub, District Lasbela, Baluchistan, at a distance of about 45 kilometers north west of Karachi. ACPL has attained ISO 9001:2000 and ISO 14000 certifications from Lloyds Register Quality Assurance (LRQA) in 2002 and 2006.ACPL is making substantial contribution to the country's economy and deposited over Rs.2,600 Million (US$ 30 Million) to the national and provincial exchequer in the form of Excise Duty, Sales Tax, Special Excise Duty, Royalty and Income Tax during the year 2010 - 2011.

3.     +FAUJI CEMENT COMPANY

A longtime leader in the cement manufacturing industry, +Fauji Cement Company, headquartered in Rawalpindi, operates a cement plant at Jhang Bahtar, Tehsil Fateh Jang, District Attock in the province of Punjab. The Company has a strong and longstanding tradition of service, reliability, and quality that reaches back more than 15 years. Sponsored by Fauji Foundation, the Company was incorporated in Rawalpindi in 1992.

Lucky cement has the highest gross profit margin of 44.22% as compared to its competitors this is because of its cost controlling initiatives use of alternative fuel while DG khan has highest operating profit ratio of 32.47%, Lucky is the second one in this which is 31.18%. Here again Lucky has the highest net profit ratio of 25.69% due to decreased finance costs. Attock cement has more return on assets as compared to others i.e. 33.86% then Lucky has 21.26%, 26.88% is the highest Return on equity provided by Attock cement, Lucky is in the next one with 26.15%. 

Lucky cement inventory turnover is 47.9 days which is quite low as compared to other competitors while Attock cement has the good inventory turnover which is 25.87 days. Fauji cement has the best receivable recovery period which is 2.9 days, DG khan follows FCL by 4.33 days then Attock cement comes with 11.08 days and Lucky cement has very late recovery of receivables, fixed assets turnover is fine with 1.22 times. This is revealing that Lucky cement does not manage its cash efficiently.

     

 +Lucky cement has good current ratio of 3.38 as compared to 2.79, 2.77 and 1,61 of DG khan, Attock cement and Fauji cement respectively, this is due to huge increase in cash and bank balances of LCL while cash ratio is showing the same trend. Lucky cement’s liquidity is quite good it has good ability to meet its short-term obligations.

+Lucky cement has the lowest financial risk as compared to industry competitors its Debt to asset ratio is lowest which is 0.18 while DG Khan has 0.24 debt to Asset Ratio, Attock cement has 0.26 and Fauji cement has 0.29 so as debt to equity ratio 0.22 of Lucky cement, 0.32 of DG Khan, 0.35 of Attock cement and 0.50 of FCL which is showing FCL has more financial risk as compared to others while Attock cement has the highest interest coverage ratio of 180.68 then LCL has 132.09. LCL has strong solvency due to low debt.

CONCLUSION

+Lucky cement has outperformed in the year under review with high profit margins of 25.69% due to increased prices coupled with lower fuel costs providing high returns on assets and equity but it has low inventory and receivable turnovers showing its less efficiency in cash management while it is stable having good liquidity and solvency position.   

ANALYSIS OF 2013 BALANCE SHEET OF LUCKY CEMENT LIMITED

In the financial analysis of any organization whether its a sole proprietorship,partnership or corporation Balance Sheet is one of the most important statement, it summarizes the company's assets, liabilities and owners equity on a specific time, it gives an overview of organization's financial position; what it owes and what it owns also the amount invested by creditors and investors to its users like investors, creditors and managers, it says much more than just amounts it shows the liquidity, solvency and riskiness of any organization hence, it is the snapshot of  an organization's financial condition.   

Here i am presenting the analysis of Pakistan's Cement giant +Lucky Cement Limited's 2013th balance sheet, its horizontal and vertical analysis as well as liquidity, solvency analysis and capital structure of this company. Horizontal analysis of Balance Sheet taking 2008 as base year.

  

Vertical analysis of Balance Sheet.

ASSETS

LCL’s assets are showing a trend of continuous increase in assets from 2008 till 2013 i.e. 12% in 2009, 11.89% in 2010, 20.36% in 2011,18.67% in 2012 and 46.6% in 2013 this is due to capital expenditures on alternative energy, WHR and ventometic packing. There is a significant increase in assets in 2013 which is 47% that is Rs. 15,957,101,000 increase as compared to 2008 which is because of significant increase in Non-current assets due to huge investment in ICI Pakistan through Lucky Holdings Limited that is Rs.5,619,000,000 (75% holdings in ICI).

While common size analysis reveals that non-current and current assets contribution in total assets have mixed trend of up and down. These fluctuations are due to capital expenditures as discussed above and short-term investment in securities, increase in other receivables (receivable from HESCO and rebates) and increase in cash and bank balances.   

EQUITY

LCL’s equity is increasing from 2008 to 2013 as shown in the above table that is a increase of 24.64% in 2009, 34.52% in 2010, 48.87% in 2011, 78.30% in 2012 and 119.97% increase in 2013 which is showing LCL’s policy of equity based financing. This increase is due to the issue of new shares in London Stock Exchange through GDR and increase in the reserves over the period, the significant increase of 119.97% in 2013 is because of huge increase of Rs.7.8 million in reserves due increase in unappropriated profit. 

LIABILITIES

The above table is revealing that LCL’s non-current liabilities are declining since 2009 which is a decline of 23.49% that remains in the same direction in subsequent years as shown in the graph that is 54.76% in 2010 (decline of Rs.5.15 million) , 65.30% in 2012 and 32.70% in 2013. This is mainly due to repayment of long-term finance and decrease in deferred tax liability.

Current liabilities shown a mixed trend a gradual increase of 18.37% in 2009 then 25.43% increase in 2010, 39.16% increase in 2011, in 2012 it takes a declining trend that is 52.62% decline in 2012 and 49.97% decline in 2013 which is due to low short-term borrowings.

We can confirm LCL’s capital structure policies from the following common size analysis of its equity and liabilities, which is showing its equity based financing policy as said above.      

We can see the mix of equity and debt here which is demonstrating the increasing trend in equity and decline in long-term liabilities while current liabilities are also declining.

Share capital and reserves have increased from 54% of total financing in 2008 to 82% of total financing in 2013 simultaneously long-term liabilities are declined from 23% of total financing in 2008 to 11% of total financing in 2013, same is the case with current liabilities which are declined from 22% of total financing in 2008 to 8% of total financing in 2013.

LIQUIDITY ANALYSIS

ACTIVITY BASED RATIOS

•     Inventory Turnover Ratio LCL’s inventory turnover in 2008 is 3.34 times which is increasing showing a good trend in 2009 and 2010 that is 3.49 and 3.54 times respectively then a significant dip in 2011 has shown in inventory turnover which is 2.84 times. This is due to serious decline in sales and increased costs in 2010 and 2012, in 2012 it increased a bit to 2.89 times then a significant increase in 2013 to 3.18 times. 

Inventory turnover in days is also showing the same trend that is positively decrease in turnover days which is 109 days in 2008, 104 days in 2009 and 101.96 days in 2010 then inventory turnover days increased to 128.52 days in 2011, this is mainly due to decrease in sales and increase in fuel costs then it starts gradual recovery in 2012 with a small decrease in inventory turnover days to 126 days then 47 days in 2013 due to increase in dispatches.

    

•     Receivable Turnover Ratio LCL’s ability to recover receivables is also showing a mixed trend as shown in this table, it was collecting receivables in 28 times in 2008 then the receivable turnover decreased to 26.5 times and 23.95 times in 2009 and 2010 respectively, this decrease is due to decline in sales. In 2011 this turnover increased to 37.16 which shows LCL’s efforts to manage receivables, it further increase till 39.87 times in 2012 then it decline to 27.81 times in 2013 due to increase in sales. 

Receivables turnover in days is 12.88 days in 2008 but this collecting period expands to 13.77 days, 15.24 days in 2009 and 2010 respectively it shrinks to 9.82 days, 9.15 days in 2011 and 2012 then it increase to 13.77 days in 2013 due to increase in sales.   

•          Payable Turnover Ratio LCL’s payable turnover ratio is 4.95 times in 2008 then it increased to 5.31 and 5.78 times in 2009 and 2010 then it decrease to 4.88 times in 2011 then a increase to 5.58 times, 6.1 times in 2012 and 2013.  

LCL has delayed its Payable till 73.74 days in 2008 to hold its cash to utilize in opportunities, it shows a mixed trend 68.74 days, 63.15 days, 74.80 days and 59.84 days in 2009, 2010, 2011, 201, 2012 and 2013 respectively.   

•   Fixed Assets Turnover Ratio

LCL’s fixed asset turnover ratio has increased over the period due to increase in sales and increase in fixed assets which is 0.66 in 2008, 0.86 in 2010, 0.78 times has LCL generated revenue over its fixed assets in 2010 and 0.82, 1.07, 1.22 in 2011, 2012 and 2013 respectively that is showing LCL’s efficient utilization of assets. 

to be continued to........ ANALYSIS OF 2013 BALANCE SHEET OF LUCKY CEMENT LIMITED (Part-2)