1. introduction to the report

6. FINANCIAL STATEMENTS ANALYSIS
The financial statements give vital information concerning the position of the business and the results of its operations .this information is important to the many groups that are interested in the business, including:-

• 
  The owners
  
• 
  The management
  
• 
  The creditors
  
• 
  Government---- including regulatory, taxing and statistical units
  
• 
  Prospective owners and prospective creditors
  
• 
  Stock exchanges, investment bankers and stock brokers
  
• 
  Trade associations
  
• 
  Employees of the business and trade unions
  
• 
  The general public-----including students and researchers.
  

Analysis of the data reported on the financial statements is necessary in reaching conclusions regarding the business and its activities. And the nature of the analysis depends upon the questions that are raised. Normally almost all the analyses are directed toward reaching answers to three broad questions with respect to a business:-

1. 
   Its Solvency
   
2. 
   Its Stability
   
3. 
   Its Profitability
   

The Solvency of a business is measured by its ability to meet its liabilities as they mature. Such analysis includes studies of the relationship of current assets to current liabilities. The size and nature of the various creditor and ownership equities, the protection afforded the equity groups through the soundness of asset values and the amounts and trends of the periodic earnings.

The Stability of a business is measured by the ability of a business to meet interest and principal payment requirements on outstanding debt and also its ability to pay dividends to its stock holders regularly. In judging stability therefore data concerning the operations and financial position require study e.g. the turn over of current assets and plant and equipment items and the way of employment of all, the business resources.

The Profitability of a business is measured by the success of a business in maintaining and increasing the owners’ equity. The nature and the amount of earnings as well as their regularity and trend are all significant in this appraisal.

In order to conduct all these inquiries the following main analytical procedures are used

• 
  Comparative Statements Analysis
  

• 
  Horizontal Analysis
  
• 
  Vertical Analysis
  
• 
  Index Analysis
  

• 
  Ratios Analysis
  

• 
  Liquidity Ratios Analysis
  
• 
  Financial Leverage (Debt) Ratios Analysis
  
• 
  Coverage Ratios Analysis
  
• 
  Activity/Turnover Ratios Analysis
  
• 
  Profitability Ratios Analysis
  

• 
  Break Even Point Analysis
  

• 
  Cash Flows & Funds Flows Analysis
  

However the most powerful tool of all of these is considered to be the ratio analysis. That’s why in this project I have chosen to analyze Pakistan tobacco company’s financial statements through using the various types of ratios.

Table 6.1

COMMON SIZE HORIZONTAL ANALYSIS OF BALANCE SHEET

As at December 31, 2004

	2004		2003
		Rs (000s)
PROPERTY, PLANT AND EQUIPMENT	3,592,715		3,438,576
LONG TERM LOANS	16,324		16,481
LONG TERM DEPOSITS AND PREPAYMENTS	4,433		6,934
CURRENT ASSETS
Stocks	3,074,052		3,227,503
Stores and spares	121,464		127,381
Trade debts	12,486		145,749
Loans and advances	32,273		62,826
Prepayments and other receivables	131,844		221,210
Income tax refundable	--		4,050
Cash and bank balances	39,201		48,073
	3,411,320		3,836,792
LESS: CURRENT LIABILITIES
Creditors, accrued and other liabilities	2,061,366		2,284,028
Short term finances	996,579		1,335,539
Current portion of long term loans	--		200,000
Income tax payable	79,549		--
	3,137,494		3,819,567
Net Current Assets	273,826		17,225
NET ASSETS	3,887,298		3,479,216
FINANCED BY:
SHARE CAPITAL
Authorized Capital
3000,000,000 Ordinary Shares of Rs 10 each	3,000,000		3,000,000
Issued, Subscribed and Paid-up Capital	2,554,938		2,554,938
UNAPPROPRIATED PROFIT	707,885		553,646
SHAREHOLDERS’ EQUITY	3,262,823		3,108,584
DEFERRED TAXATION	624,475		370,632
COMMITMENTS AND CONTINGENCIES	--		--
NET FINANCING	3,887,298		3,479,216

(Source: PTC, (2004). Annual Report. Islamabad)

Table 6.2

COMMON SIZE HORIZONTAL ANALYSIS OF BALANCE SHEET

For the year ended December 31, 2004

	2004		2003
		Rs(000s)
TURNOVER	25,452,634		22,572,247
Cost of Sales	21,970,013		19,700,706
GROSS PROFIT	3,482,621		2,871,541
Marketing Expenses	1,442,356		1,466,095
Administration Expenses	595,637		395,178
	2,037,993		1,861,273
OPERATING PROFIT	1,444,628		1,010,268
Other Income	14,590		6,717
Other Expenses	366,637		310,335
	1,092,581		706,650
Financial Charges	36,542		91,955
PROFIT BEFORE TAXATION	1,056,039		614,695
Provision for Taxation	390,812		293,614
PROFIT AFTER TAXATION	665,227		321,081
Earnings Per Share (Rupees)	2.60		1.26