Hunting the Quest of Capital Budgeting

Hello finance students, future finance managers and entrepreneurs!!!

The life of any business is its growth and expansion, its survival and growth depends on its ability to improve its products, produce new and better products, expand its operations and remain competitive, all these tasks can be achieved after taking capital budgeting decisions.

    

Suppose you are a finance manager and you have to purchase new machinery for your company. Now what would you do? How would you decide which one machine to purchase …………. that fits best, in the budget and gives the better future returns to your company? This all issue is resolved through utilizing the concept of Capital Budgeting.

For understanding capital budgeting we need to understand capital expenditure….. So what is a capital expenditure? Capital means operating assets used in production and expenditure mean amount spent in getting operating assets. So they are the expenses incurred for acquiring (purchasing) or improving long-term operating assets which generates revenues for a long time period. It could be a purchase or improvement of machines, equipments, land and building or undertaking a running business entity. For incurring capital expenditure a manger has to make capital budgeting decisions.

Now you understand the meaning of capital let’s move on to budget. Budget means a plan that shows the details of the after effects of purchasing fixed asset (long-term assets)… so making the decision for purchasing long-term assets involves capital budgeting. But only acquiring long-term assets not the alone task of capital budgeting it can be done for the replacement of old assets for business maintenance or cost reduction purpose, expansion of existing products and markets, entering in new products or markets, long-term contracts, projects and research and development projects and so on.     

It is the most important and difficult task faced by the finance professionals “it involves the evaluation and analysis of an expected investment in long-term assets whether financial or other or considering a project”. In a real sense Capital Budgeting is the process which involves analysis of the cost and future cash-flows of purchasing assets or starting projects and then the decision is made whether buy asset or not and accept or reject the project.

The results of capital budgeting remains for many years i.e. till the life of that acquired asset that is the reason mangers have to be very careful in making these decisions, a wrong decision can costs huge losses like high depreciation or obsolesce of machine and software, so it requires accurate sales forecasting, right timing and funds lined up for purchase. To make accurate decisions managers use these techniques:

1.      Payback period

2.      Discounted payback period

3.      Net present value (NPV)

4.      Internal rate of return (IRR)

5.      Modified internal rate of return (MIRR)

6.      Profitability index (PI)

Payback period calculate the number of years required to recover the original investment. It facilitates us to know that how long the funds will be tide up in the project, it indicates the riskiness of the project. For more details and examples click here

Discounted Payback period is same as the payback period but its cash flows are discounted on the cost of capital and gives the period required to recover the investment from discounted cash flows, in the project. But payback period methods have deficiencies.

Net present value (NPV) net present value is the value comes from deducting the present value of outflow from the present value of inflows coming from the project, it could be positive, negative or zero. For more details and examples click here.

Hope you have find this helpful, if so please comment about your experience and queries regarding this. 

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.

A Billionaire's Story

He was born in a wealthy family of Chiniot in +lahore, +Pakistan. He enjoyed an early business education in a top university of London. His father died when he was just 22. All the responsibilities of family and business came to him then 1969 he negotiated with his uncles for his father’s business. He chosen +Nishat Textile Mills in Faisalabad and surrender his financial stake in factories situated in East Pakistan. On this decision making he was perceived as a weak person who could not for his rights.

Only after a year or some days more in 1971 +Islamic Republic Of Pakistan اسلامي جمہوريہ پاکستان  has been divided and East Pakistan has become a country named as +Bangladesh today. All of his uncles lost their properties when East Pakistan became Bangladesh and all those criticized him were shocked over his farsightedness.

This young boy became the CEO of Nishat Textile Mill which is now the largest textile mill of Pakistan and this single factory has become a most diverse business group of the South East Asia with assets of over 300 million and ranked among the top five business houses of Pakistan. The group has a stiff existence in textile, cement and financial services businesses which are the main businesses of the region. It’s also holds a sensible market stake in the fields of insurance, power generation, paper products and aviation.  

The name of this ambitious and visionary industrialist is Mian Muhammad Mansha, in 1970 he was claimed as 15^th wealthiest person and 6^th wealthiest in 1990 in Pakistan, today he is in the top. In 2010 he is listed by +Forbes in the world’s main Billionaires. He is the first Pakistani who appeared as 937^th wealthiest person in the world.

He adopted an autocratic leadership style. He has taken all the strategic decisions personally. He keeps an eye on every company of +Nishat Group by having a meeting of few minutes with 20-30 managers of each company every day. He never let any opportunity go in vain he took of advantage of privatization process by government  and purchased many organizations included +Muslim Commercial Bank, +DG Khan Cement. 

He acclaimed as the greatest exporter of Pakistan. He is the model for Pakistani companies to move on the world stage. He is very confident about future of Pakistan and believes creating more jobs for the young people is the best way to resolve economic as well as terrorism issues. In June 2010 he discussed about how +US can contribution in Pakistan’s infrastructure and development with the high profile US delegation lead by senior economic advisor of President Obama, David Lipton.  He is awarded Sitara-e-Imtiaz in 2004 for his remarkable accomplishments in business industry and his commitments to Pakistani economy. He has expanded his business from agriculture to power generation.  

   

  

Business Leader: +Seema Aziz

Business leaders move the economic development of a nation with innovative thinking, information providing ability and methods to realize visions which improves life style of the nation. Here I am giving tribute to one of +Islamic Republic Of Pakistan اسلامي جمہوريہ پاکستان’s great business leaders, the initiator of high quality textile products for Pakistani market +Seema Aziz who is an industrialist, educationist and a social worker. She started off her business venture in 1985 with her brother to demonstrate that Pakistan can produce world's best fabrics. 25 years on the job when Forbes published an article about the life and accomplishments of this Amazing Pakistanis, she proved substantially more about the country.

Her company, +Sefam today thought to be one of best Pakistani textile brands to be both in the domestic market and in international markets. She went even further and started an NGO by the name of +CARE FOUNDATION today dealing with 190 schools, educating over 135,000 children and giving higher studies scholarships to more than 800 students.

Seema Aziz is a graduate from +Harvard Business School. She did her LLB from the +University of Punjab in 1989. She is founder and chairperson of CARE (Cooperation for Advancement, Rehabilitation and Education) Foundation, Pakistan, established in 1988. Besides CARE, Seema Aziz is partner and Executive Director of Sefam Private Limited, Lahore, Pakistan and Sehas LLC, Dubai, UAE. She is also partner and Managing Director of Serena Industries and Embroidery Mills Private Limited. She holds a position on the Board of Governors, Divisional Public School and Government Post Graduate Islamia College. She is Member Syndicate of University of Education. She shares Board of Directors of Pakistan Fashion Design Council. She also holds a position in the governing body of TEVTA. She is also Director of Punjab Board of Investment & Trade, Mobilink Foundation and Punjab Education Foundation.

She does not started business to make money or help children she was motivated to produce high quality fabrics for domestic market that no Pakistani have done before. Seema aziz and her brother wanted to prove that Pakistan can produce high quality fabrics as fine as in any Europe. She said “we built a reputation as a shop that sells imported fabrics and calls it Pakistani”. She created Sefam in 1985 with the establishment of its first brand +Bareeze. Bareezé's particular mission, and at time Sefam's was to make excellent, alluring fabrics equivalent to the best on the world, yet made in Pakistan. Preceding Bareezé's passage into the business sector, amazingly, the idea of a locally made quality design item did not exist. All the good markets were selling foreign products.

Opening the first store in shadman market, +lahore in 1985, Bareezé looked to change this perception. The primary collection sold out in few days and soon the store had accumulated the picture of being a store which offers quality foreign fabric guaranteeing it to be local. Before long, another Bareezé store was opened and after that an alternate and an alternate. As of now, Bareezé offers from and works 57 stores across the country and another 10 all around. Bareezé has the qualification of being the first Pakistani chain store and also the first Pakistani brand to travel to another country (Dubai in 1995). Sefam has since widened its vision from quality, desirable fabrics to quality desirable dress for all classes of shopper. Right now sefam works 5 brands +Bareeze, +Leisure Club, +Minnie Minors, +Chinyere, Home Expressions, Kayseria) and an aggregate of 321 point of sale 107 locations in this country, sefam's brands likewise offer only at another 10 stores in areas around the world. 

She established +CARE Foundation in 1988 as a charitable organization with a goal of providing quality marketable education to every Pakistani child. The idea of CARE foundation comes after the devastating flood in the district of Punjab Sheikuhpura, a group of citizens come to help in rebuilding homes for the flood victims. During this process it was felt that children were ignored in that flood area as there were no schools. This acknowledgment incited the conception of CARE Foundation and its first school giving free training to poor people. Taking after this, a CARE High School was inherent the town of Iqbal Town, Sheikhupura, with liberal gifts from concerned natives. Incredibly more than 250 kids enlisted on the first day of the recently fabricated CARE school. From that point forward CARE has developed to give free quality education to more than 150,000 kids in 225 schools crosswise over Pakistan. CARE has possessed the capacity to make this jump with overpowering backing of the group, private people, companies and government associations striving to take out absence of education and neediness in Pakistan.

CARE is working on a program called +Care Craft that gives work to ladies and men adding to a wide collection of hand-made quality specialties with flawless ability and artfulness. The project furnishes incompetent specialists with a consistent wage. The income created via CARE from the offer of these items backings CARE schools. At the point when CARE Foundation formed its first school in Sheikhupura, it additionally set up a modern home to create pay open doors for ladies. What began with simply a couple of ladies working in the task in 1990 has now formed into an undeniable Enterprise Development Program. This system gives work to ladies and men building up a wide variety of hand-made quality crafts with perfect expertise and artfulness. The program furnishes unskilled workers with a consistent pay. All returns from the offer of CARE Crafts go towards our schools and for furnishing kids with books, outfits and shoes.    

She is also working for women empowerment in Pakistan as women constitutes 51% of Pakistan’s population she said they must be educated and engaged in economic development if we want Pakistan to advance definitively. I don't purchase the contention that individuals keep their little girls off to schools. This is a wrong idea. Our people are tolerant and receptive. They want to send their kids to schools. They need to teach their youngsters for a superior future. Ladies of Pakistan are gifted and they have massive potential to exceed expectations in every field of life. We have to give an even level playing field to each gender.

She has proven to being an astounding business person, whose work and responsibility to Pakistan is an impulse for this nation, especially young generation. She proved that this country holds boundless opportunities for individuals who want to explore them. Her business keeps on extending and her social enterprise continues to help others in realizing their dreams in life.

TAX IS A TOOL OF ECONOMIC DEVELOPMENT

Tax is a charge against income of any person. It is the amount of money demanded by the government to support or to provide facilities or to provide specific services, levied on income, property, sales, and so is the collection of taxes by the government, which is used to enhance the lifestyle of its inhabitants, for economic growth and the inhibition of some tributaries of certain income enabled. It also has a positive relationship with good governance practices. People pay taxes to support the government in economic development. It's actually government revenues, and more than half of the government`s revenue comes from the collection of taxes.

Collected taxes play an important role in the financing of public sector activities. These activities are carried out in order to provide the benefit of the general public and to improve their lifestyle. Such as the government is responsible to provide justice and security, employment, education, health, and more importantly the government has to make sure that the basic necessities of life are accessible to every citizen. To manage all of these things the government on the development of institutions that require a large amount of the operation and utilization at full capacity.

No one likes to pay taxes. Usually, people do not like to pay them. Governments do not want to impose. But taxes are necessary both to finance the required public spending in a non-inflationary and also to ensure that the burden of paying for such spending is distributed to some extent. While necessary, taxes impose real costs on society. And seek good tax policy to reduce those costs. (Richard Baird, 2003). Each country earns revenue in different ways. Choosing a country on how to structure its tax system depends on many factors, such as level of development, the need and desire to improve public services, and the ability to collect taxes effectively. Tax policy choices also depend on the preferences of a country in terms of this kind of public policy goals such as achieving a desired distribution of income and wealth and increased growth rate (and perhaps regional) of the national economy.

Tool for national economic growth

Taxation is central to development and economic growth. It supports the basic functions of an effective state and sets the framework for economic growth. Prosecutor may also catalyze the state building and improving accountability between citizens and the state. While fiscal reform program has so far focused mainly on increasing domestic resources, has paid little attention to the broader role of taxation in building state-citizen relations effective.

Income to head the government

The government is an organization that has its costs to run it. Human resources, furniture and accessories, construction and vehicles, etc. must be financed and paid as an organization. Government makes programs and policies, which implies that, execute and manage taxes needed to keep them running.

• Utilities and services

Justice, security, better infrastructure; roads, markets, logistics, postal services, railways, airports, water, energy, electricity, employment, education and health centers, etc. government demand. How the government can give us all these facilities? Government requires income and tax collections are most of their income. We blame the government when it does not pay all this, but do not understand the fact that we do not pay taxes properly. Especially in developing countries this is the main problem is that people do not pay taxes, tax revenues are lower than expected.

• Free Education and Medicare

The poor in the society of a country that cannot afford to send their children in schools or universities, so that their children cannot get education and cannot become a responsible and civilized citizen but would become a liability in society and the economy. Even poor people cannot afford to be sick because doctors’ charges are greater than their annual income. That's why the government offers free, capitalization and health-care education.

• National security

External threats and conspiracies are dangerous to liberty country, to prevent these national defense forces and intelligence agencies are mandatory and have huge structure that requires lots of handling and taxes are the resources to fund them.

• Protect domestic industry

Foreign companies that target markets worldwide and its products hit domestic products that reduce the incomes of these companies source and threaten their survival. Government protects domestic industry from foreign industry through taxes; by imposing heavy taxes on imports increases results in less import prices of such products.

• Taxation and Governance

Another role of taxation which is often overlooked – it act as a catalyst for more responsive and accountable governments, and to expand the capacity of the state.

What are the links between fiscal and governance?

Taxation can improve governance in three ways:

1. The development of a shared interest in economic growth: governments that depend on taxes have greater incentives to promote economic growth.

2. Develop the state apparatus: Tax collection requires a functioning administration. Its development can stimulate improvements in state capacity elsewhere.

Taxation can improve the responsiveness and accountability through incentives for citizens and government to enter into a "fiscal contract". Through this process, citizens accept and comply with the tax return for the provision of effective services of government, the rule of law and accountability. Tax bargains are mutually beneficial, as citizens are better government, while the government receives predictable revenues and easily collected large.

Finally, the tax contributes in generating resources for the government so that it can provide services to all citizens. The government uses the proceeds to support public health care, social security, national defense, public housing, free primary education and many other social services. Which consequently creates jobs and increases circulation of money leaving the country; therefore, a better way of life and civilized nations is achieved. The taxes we pay fuel our society.

Oliver Wendell Holmes once said: 'I like paying taxes. With them I buy civilization'.

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)