1. introduction to the report

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

A summary of Financial Ratios calculated from the Financial Statements of PTC is as follows:

Table 6.3

No	Ratio	2004	2003	2002
11	LIQUIDITY RATIOS
1.1	Current Ratio	1.08	1.00	1.01
1.2	Acid Test Ratio	0.11	0.16	0.11
1.3	Super Quick /Cash Ratio	0.012	0.013	0.009
2	FINANCIAL LEVERAGE / DEBT RATIOS
2.1	Total Debt to Equity Ratio	0.31	0.50	0.54
2.2	Debt to Total Assets	0.14	0.21	0.22
3	COVERAGE RATIOS
3.1	Financial Charges Coverage Ratio	29.90	7.69	4.73
4	TURNOVER RATIOS
4.1	Asset Turnover Ratio	3.55	3.23	3.06
4.2	Fixed Asset Turnover Ratio	7.19	6.92	6.9
4.3	Inventory Turnover Ratio	6.97	6.11	5.52
4.4	Inventory Turnover in Days	51.65	58.92	65.23
4.5	Payable Turnover Ratio	1.68	1.66	1.75
4.6	Payable Turnover in Days	214.28	216.87	205.71
4.7	Receivable Turnover Ratio	321.71	189.02	289.93
4.8	Receivable Turnover in Days	1.12	1.90	1.24
4.9	Cash Cycle (Days)	-161.51	-156.05	-139.24
4.10	Operating Cycle (Days)	52.77	60.82	66.47
5	PROFITABILITY RATIOS
5.1	Gross Profit Margin	13.68	12.72	12.19
5.2	Net Profit Margin	2.61	1.42	2.04
5.3	Price to Earnings Ratio	17.69	21.43	14.42
5.4	Return on Investment	9.29%	4.60%	6.26%
5.5	Return on Equity	20.88%	11.14%	15.69%
5.6	Return on Capital Employed	17.11%	9.23%	13.52%
5.7	Earnings Per Share	2.60	1.26	1.65
5.8	Dividend Per Share(Rs)	2.00	1.00	0.79

INTERPRETATION OF THE RATIOS:

A detailed analysis of the financial condition and performance of Pakistan Tobacco Company, in light of these ratios is as follows:

6.3 LIQUIDITY CONDITION:



6.3.1 CURRENT RATIO:

Formula

Current Assets

Current Liabilities

Significance:

The current ratio is one of the most general and frequently used ratios for measuring the liquidity condition of a company. It is also called “Working Capital Ratio” or “Bankers Ratio”.

• 
  It tells us about how much of current assets are available with the company from which it is to pay off its current liabilities.
  
• 
  It also tells us about the creditworthiness of the firm for short term financing.
  
• 
  The higher the ratio, the higher the liquidity and the better it is.
  

R

	2004	2003		2002
CURRENT RATIO	1.08	1.00		1.01
PERCENTAGE RISE/FALL IN 2004	Over 2003		Over 2002
	8%		7%

esults: Table 6.4


Graph 6.1 Current Ratio

Inference

• 
  The company’s current ratio is 1.08 in 2004, which shows that for every Re 1 of its current liabilities it has Re 1.08 of current assets.
  
• 
  In 2004 the ratio has increased by 6.3% over 2002’s figure and by 8 % over 2003’s figures.
  
• 
  This means that the company’s liquidity has increased over the three years and thus has become more creditworthy for short term finances.
  

The current ratio is however, not a good measure of the firm’s original liquidity. There may be a possibility of over investment by the company in inventories that is not a true liquid asset. That’s why it is useful to calculate a ratio that excludes the inventories portion from the current assets. This ratio is called quick ratio and is given as follows.

6.3.2 THE ACID TEST RATIO

Formula:
Current Assets - Stock (of inventories)

Current liabilities

Significance:

The acid test ratio removes the weakness of current ratio by excluding the inventories from current assets and taking only the quick current assets (i.e. cash, receivables and marketable securities) in the calculation of ratio.

• 
  It tells us about how much the company have in quick assets (i.e. current assets less inventories) to meet its current liabilities.
  
• 
  Like the current ratio it also tells something about the creditworthiness of the company for short term finances in terms of how quickly the company can meet its current liabilities.
  
• 
  The higher the ratio the higher the quick liquidity of the company and the better it is.
  

R

	2004	2003		2002
ACID TEST RATIO	0.11	0.16		0.11
PERCENTAGE RISE/FALL IN 2004	Over 2003		Over 2002
	(31.25%)		0%

esults: Table 6.5


Graph 6.2 Acid Test Ratio

Inference:

• 
  For every Re 1 of current liabilities the company has Re 0.11 of quick assets to offset which is not a much better sign.
  
• 
  In 2004 the company’s quick ratio has shown no change over 2002’s figures while it has decreased by 31% over 2003’s figures.
  
• 
  The company’s liquidity in terms of quick assets is not much better. Similarly on the other hand the current ratio is showing a high figure this suggests that the company has invested much in stocks
  
• 
  The difference between the company’s current and quick ratio is 0.97, 0.84 and 0.90 respectively in 2004, 2003 and 2002.This means that out of the liquidities shown by current ratios in these three years, inventories represent a portion of 90% in 2002, 84% in 2003 and 97% in 2004.
  
• 
  Thus this shows that the highest investment in current inventories is in 2004 and this is not a good sign. However, inventories may be regarded as liquid enough if their turnover is high. Thus for a true picture of inventories’ liquidity this information is to be combined with the inventory turnover ratio figures.
  

6.3.3 THE CASH/SUPER QUICK RATIO

Formula:

Cash + bank + securities

Current liabilities

Significance:

This ratio takes into consideration only the most current /quick asset i.e. cash, bank and securities.

• 
  The basic aim is to know what is the extent to which the company can meet its current liabilities at a short notice.
  
• 
  This ratio also tells us about the cash position of the company.
  

R

	2004	2003		2002
CASH RATIO	0.012	0.013		0.009
Percentage Rise/Fall In 2004	Over 2003		Over 2002
	(7.69%)		33.33%

esults: Table 6.6


Graph 6.3 Cash Ratio

Inference:

• 
  The ratio shows a value of 0.012 in 2004, which means that fro every Re1 of current liabilities the company has Re 0.012 of most liquid current assets (cash bank and securities).
  
• 
  The ratio has decreased by 8% in 2004 over 2003 while increased by 33% over 2002.
  
• 
  The current ratio and the super quick ratio show a difference of 0.001, 0.987 and 1.068 in 2002, 2003 & 2004 respectively. This shows that 0.1% in 2002, 98% in 2003 and 107% in 2004 was contributed by cash out of the liquidities shown by current ratios.
  
• 
  This suggests that the company’s cash position has improved over the three years; however it is not good enough as regards its super liquidity.
  

6.4 FINANCIAL LEVERAGE /DEBT CONDITION
6.4.1 TOTAL DEBT-TO-EQUITY RATIO

Formula

Total debt ­

Shareholder’s equity

Significance:

• 
  It is used to measure the relationship of the equities of the stock holders & the creditors in the business’ assets.
  
• 
  The lower the ratio, the better it is because:
  
• 
  From a creditor’s point of view: the lower the ratio the higher the level of company’s financing from the shareholder’s side, and the larger the creditor’s cushion of safety (or margin of protection)
  
• 
  From a shareholder’s point of view: such an increase in the shareholders’ financing makes the organization less vulnerable to a decline in business & possible inability to meet obligations, and also serves to minimize the cost of carrying the debt.
  
• 
  In short it tells us about the creditworthiness of the company. The lower the ratio the higher the protection for creditors and the more the company’s creditworthiness.
  

R

	2004	2003		2002
DEBT TO EQUITY RATIO	0.31	0.50		0.54
PERCENTAGE RISE/FALL IN 2004	Over 2003		Over 2002
	(38%)		(42.53%)

esults: Table 6.7



Graph 6.4 Debt-to-Equity Ratio

Inference:

• 
  The result for 2004 shows that the company’s shareholders are contributing 31% of the equity, while its creditors are contributing 69% & that is a good sign.
  
• 
  This also shows some protection for the creditors in case of any out right losses or shrinking of asset values by the company.
  
• 
  The ratio has fallen in 2004 by 42.5% & 38% respectively over 2002 and 2003. This means that the company has improved its debt to equity position and its creditworthiness.
  
• 
  However, the percentage of equity contributed by the creditors is very high. The difference between shareholder’s and creditor’s equities is not too high. Thus it means that the creditors are not affording a good margin of safety.
  

6.4.2 DEBT TO TOTAL ASSETS RATIO

Formula:

Total debt

Total assets

Significance:

• 
  This ratio shows that how much portion of the total assets is financed by debt.
  
• 
  Like the debt to equity ratio, this ratio also highlights the relative importance of debt financing to the company by showing the %age of the company’s assets that is supported by debt financing.
  
• 
  The higher the company’s Debt to Equity Ratio, the greater the financial risk for the creditors; the lower the ratio the lower the financial risk (greater margin of safety) for the creditors.
  

Results: Table 6.8

	2004	2003		2002
DEBT TO ASSETS RATIO	0.14	0.21		0.22
PERCENTAGE RISE/FALL IN 2004	Over 2003		Over 2002
	(33.33%)		(36.36%)