fm - financial report - sugar mills
TRANSCRIPT
Institute of Business Management
Finance Report
Sugar Mills
Adeel A. Siddiqui (11262) Adnan Waqar (11828) Zeeshan Memon (12045)4/13/2011
Table of Contents
1. Introduction...............................................................................................................................1
2. Dewan Sugar Mills..................................................................................................................... 2
2.1 Balance sheet of Dewan Sugar Mills.....................................................................................3
2.2 Liquidity and Leverage Ratios of Dewan Sugar Mills............................................................4
2.3 Liquidity ratios......................................................................................................................6
2.3.1 Current ratio..................................................................................................................6
2.3.2 Quick ratio.....................................................................................................................6
2.4 Financial leverage (debt) ratios............................................................................................6
2.4.1 Debt-to-equity ratios.....................................................................................................6
2.4.2 Debt ratio.......................................................................................................................7
3. Al-Abbas Sugar Mills Limited..................................................................................................... 8
3.1 Credit Rating.........................................................................................................................9
3.2 Balance sheet of Al-Abbas Sugar Mills.................................................................................9
3.3 Liquidity and Leverage Ratios of Dewan Sugar Mills..........................................................11
3.4 Liquidity ratios....................................................................................................................12
3.4.1 Current ratio................................................................................................................12
3.4.2 Quick ratio................................................................................................................... 12
3.4.3 Debt-to-equity ratios...................................................................................................12
3.4.4 Debt ratio.....................................................................................................................13
4. Liquidity and Leverage Ratio’s Comparison with Industry Averages........................................14
4.1 Dewan Sugar...................................................................................................................... 14
4.2 Al-Abbas Sugar...................................................................................................................15
5. Conclusion............................................................................................................................... 16
Finance Report 2011
1. Introduction
Financial ratios are used to analyze the financial condition of a firm by comparing it with other
firms of same industry or industry average standards. We analyze different ratios to get
complete inside of a firm’s financial health. Liquidity ratios show firms ability to cover its
current liabilities with its current assets. Leverage ratio shows the extent to which firm is
financed by debt. Here we have calculated financial ratios of two sugar mills and we have
compared them with each other and industry standards.
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Finance Report 2011
2. Dewan Sugar Mills
Dewan Sugar Mills Limited is one of the largest sugar mills of Pakistan having a cane crushing
capacity of over 9,000 tons per day. It was established as a public limited company in 1982.
Through installation of most modern cane handling and processing systems, delivery times have
been shortened. Installation of modern computerized systems has greatly helped in improving
the cane procurement and management systems. As a result of these measures, Dewan Sugar
Mills Limited is regarded as a preferred customer by most farmers which results in a longer
crushing season for the mill. Dewan Sugar Mills Limited enjoys market leadership position in the
country and its product enjoys definite premium over its competitors. Dewan Sugar Mills
Limited has been awarded with ISO 9002 certificate that proves the company’s strength in
producing consistent and high quality product. Their aim is to benefit the customers, employees
and shareholders, and to fulfill their commitments to the society. Their hallmark is honesty,
initiative and teamwork of their people, and their ability to respond effectively to change on all
aspects of life including technology, culture and environment.
There was shortfall in sugar cane production in the season due to reduction in the sugar cane
plantation area and yield. As a result, sugar cane prices skyrocketed and the entire sugar
industry including your company paid very high cost of sugar cane. To meet this contingency,
sugar manufacturers imported raw sugar for processing locally which saved the industry to
some extent. However, subsequently Government allowed import of white refined sugar
resulting in lot of documented and undocumented imports, which created huge unsold stocks
of sugar with the mills. The carry over stocks from last year kept the sugar market depressed
and hence very little margins are left for the mills.
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Finance Report 2011
2.1 Balance sheet of Dewan Sugar Mills
Balance Sheet as at sep 30 2008 2007 2006
Assets
Non –current assets
Property, plant and equipment 2,264,422 1,527,982 1,472,955
Long-term investment 37,751 10,263 8,607
Long-term deposits 5,071 11,317 10,742
Total fixed assets 2,307,244 15,49,562 1,492,304
Current assets
Stores and spare parts 188,578 144,818 131,668
Stock-in-trade 1,009,052 393,723 230,809
Trade debts 11,314 28,978 43,166
Loans and advances 149,526 144,861 109,388
Trade deposits and short-term prepayments 7,164 5,254 3,638
Other receivables 417 23,271 13,993
Income tax recoverable 16,168 - -
Cash and bank balances 86,263 47,597 48,694
Total current assets 1,468,482 788,502 581,356
Total assets 3,775,726 2,338,064 2,073,660
Equity and liabilities 2008 2007 2006
2000000 (2006: 20000) ordinary shares of
Rs.10/- each
200,000 200,000 200,000
Issued, subscribed and paid-up capital 185,703 185,703 185,703
Inappropriate profit 366,139 154,659 178,040
Reserves 190,000 190,000 190,000
Total equity 741,842 530,362 553,743
Surplus on revaluation 730,234 337,261 369,288
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Finance Report 2011
Non-current liabilities
Long-term deposits 4,869 4,874 5,035
Long-term financing-secured 237,500 325,000 67,470
Liabilities against assets subject to finance
lease
28,261 70,840 77,568
Deferred liabilities 492,058 346,074 277,540
Total non-current liabilities 762,688 746,788 427,613
Current liabilities
Trade and other payables 526,054 317,484 187,470
Accrued mark-up 28,416 14,446 25,138
Short-term borrowings-secured 862,684 270,955 397,809
Current portion of long-term financing 123,808 118,679 105,139
Provision for market committee fee - 2,089 7,460
Total current liabilities 1,540,962 723,653 723,016
Total Equity and Liability 3,775,726 2,388,064 2,073,660
2.2 Liquidity and Leverage Ratios of Dewan Sugar Mills
Ratios 2008 2007 2006 Company
Averages
Industry
Averages
Current ratio 0.95 1.09 0.80 0.95 0.73
Quick ratio 0.30 0.55 0.48 0.44 0.34
Debt to equity 3.11 2.77 2.08 2.65 4
Debt ratio 0.61 0.63 0.55 0.60 1.31
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Finance Report 2011
Current ratio Quick ratio debt to equity Debt ratio -
0.50
1.00
1.50
2.00
2.50
3.00
3.50
201020092008 Company AveragesIndustry Averages
2.3 Liquidity ratios
2.3.1 Current ratio
Current ratio = current assets / current liabilities
From 2006 to 2008 both current assets and current liabilities have increased to more than
100%. There has been increase in stock in trade which has increased very rapidly. Loans,
advances and short term prepayments have also increased while trade debts have decreased
considerably.
Liabilities have increased mainly due to increase in trade and other payables. Besides that short
term borrowings and current portion of long term financing have also increased. Firm’s ability
to cover its current liabilities with current assets is significant, better than industry average
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Finance Report 2011
2.3.2 Quick ratio
Quick ratio = (current assets – inventories (stock in trade)) / current liabilities
Quick ratios are lower than Current ratio because stock in trade has increased very rapidly and
hence firm’s ability to cover its current liabilities with its most liquid assets has decreased, but
still the firm is in better financial conditions as compared to industry averages.
2.4 Financial leverage (debt) ratios
2.4.1 Debt-to-equity ratios
Debt-to-equity ratio = total debt / shareholder’s equity
Ratios clearly defines to a great extent firm is using borrowed money. Although liabilities
against assets subject to finance lease has decreased but there is a considerable increase in
deferred liabilities, which is the main reason for increase in non current liabilities.
In shareholder’s equity inappropriate profit has slightly decreased in 2006 to 2007 and than
increased (100% as compared to 2007) rapidly. So due to greater debt, this ratio is greater.
2.4.2 Debt ratio
Debt ratio = total debt / total assets
Firm’s non current assets property, plant and equipment have increased over the period and
similarly its long term investment. Thus on average 60% of the firm’s assets are financed with
debt.
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Finance Report 2011
3. Al-Abbas Sugar Mills Limited
Al-Abbas Sugar Mills Ltd was founded in May 1991 with an initial paid up capital of 500,000Rs.
This was enhanced to Rs 173 million through issue of public shares on 23rd April, 1992.
Production on normal basis began from 1994.
During the year 2008 company has suffered an after tax loss which is attributed to the capacity
under utilization of the core sugar operations , being the result of the delayed commencement
of production and disrupted supply of inputs. The other main reason of losses is the fixing of
minimum support price of Rs.81 per 40 kg which has no relationship with selling price of sugar.
The other factors of production were also on high side due to inflation and the global economic
recession. Financial charges were also on higher side. The extra burden of seasonal cost was
also incurred by the mills early which may have been delayed till the availability of cane for
mills.
In this season the availability of sugarcane is very low and there is tough competition among
the mills. The pace of crushing is low due to insufficient supply of sugarcane. The current
season for distillery seems comparatively tough because of the overall shortage of sugarcane /
yield of sugarcane that would definitely affect the production of molasses. It is feared that the
capacity utilization of distillery overall in Pakistan will remain on lower side. Keeping in view the
present market scenario the recipient of revenue will also be affected by the global fuel market
prices.
Sugar Cane shortage is considered as highest challenge for Sugar Industry in Pakistan generally
and Province o£ Sind particularly. As Sind has suffered a lot due to shortage o~ Irrigation Water
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Finance Report 2011
and on the top of that almost there was no Rain either in Monsoon or in winter. However, your
Management fully appreciates Government's decision to allow Sugar Industry to import
500,000 Mt.'s of Raw Sugar without payment of custom duty. They think it will greatly help the
country to reduce its dependence on Imported Sugar and also help country to utilize
Manufacturing capacity of Sugar Industry at maximum level. We also like to point out that
despite of fact that Sugar Industry is trying its best to use its Production Capacity at Maximum
Level by Refining imported Raw Sugar, Government is still continuing with policy of Import of
Refined Sugar of low quality at very low rate of custom duty.
3.1 Credit Rating
The Pakistan Credit Rating Agency (Pvt.) Limited (PACRA) has assigned the Long Term Rating of A - (A minus) and Short Term Rating of A2 (single A two).
3.2 Balance sheet of Al-Abbas Sugar Mills
Balance Sheet as at sep 30 2008 2007 2006
Assets
Non -current assets
Property, plant and equipment 221,119,546 239,348,527 262,839,530
Long-term deposits 1,426,886 1,426,886 1,426,886
Total fixed assets 222,546,432 240,775,413 264,266,416
Current assets
Stores, spares and loose tools 12,094,745 9,551,228 10,230,150
Stock in trade 44,856,317 7,207,713 1,620,566
Trade debtors - unsecured 1,591,577 8,199,044 149,816
Loans and advances 26,067,919 24,240,956 29,685,065
Deposits, prepayments and other receivable 309,886 274,653 500,000
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Finance Report 2011
Cash and bank balances 1,336,551 1,671,196 1,288,620
Total current assets 86,256,995 51,144,790 43,474,217
Total assets 308,803,427 291,920,203 307,740,633
Equity and liabilities 2008 2007 2006
Share capital and reserves
Authorized capital
15,000,000 (2005: 15,000,000) Ordinary shares
of Rs.10/=each
150,000,000 150,000,000 150,000,000
Issued, subscribed and paid-up capital 141,000,000 141,000,000 141,000,000
Accumulated loss (937,571,932) (970,967,942) (923,722,777)
Total equity (796,571,932) (829,967,942) (782,722,777)
Non-current liabilities
Long term loan 261,996,796 319,294,075 357,866,929
Deferred income 90,814,000 153,301,062 153,301,062
Total non Current Liabilities 352,810,796 472,595,137 511,167,991
Current liabilities
Current portion of long term liabilities 520,540,427 449,629,877 373,727,618
Trade payables 202,848,930 170,487,926 166,692,595
Accrued Mark up on loans 18,991,927 18,991,927 18,991,927
Taxation 10,183,279 10,183,279 7,683,279
Total current liabilities 752,564,563 649,293,009 579,295,419
Total Equity and Liability 308,803,427 291,920,204 307,740,633
3.3 Liquidity and Leverage Ratios of Dewan Sugar Mills
Ratios 2008 2007 2006 Company
Averages
Industry
Averages
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Finance Report 2011
Current ratio 0.11 0.08 0.08 0.09 0.73
Quick ratio 0.06 0.07 0.07 0.06 0.34
Debt to
equity
(1.39) (1.35) (1.39) (1.38)
Debt Ratio 3.58 3.84 3.54 3.66 1.31
Current ratio Quick ratio debt to equity Debt Ratio
(4.00)
(3.00)
(2.00)
(1.00)
-
1.00
2.00
3.00
4.00
5.00
201020092008Company AveragesIndustry Averages
3.4 Liquidity ratios
3.4.1 Current ratio
Current ratio = current assets / current liabilities
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Finance Report 2011
Like Dewan sugar mills there stock in trade has also increased very rapidly. Trade debts have
increased very rapidly from 2006 to 2007 and than decreased in a similar trend.
Liabilities have increased mainly due to increase in trade payables and current portion of long
term liabilities. Firm’s ability to cover its current liabilities with current assets is very limited
almost nil.
3.4.2 Quick ratio
Quick ratio = (current assets – inventories (stock in trade)) / current liabilities
Quick ratios are lower than Current ratio because stock in trade has increased very rapidly and
hence firm’s ability to cover its current liabilities with its most liquid assets is very limited.
3.4.3 Debt-to-equity ratios
Debt-to-equity ratio = total debt / shareholder’s equity
Ratios clearly defines to a great extent firm is using borrowed money. Non current liabilities has
decreased as long term loan and deferred income decreased but current liabilities have
continuously increased.
In shareholder’s equity firm has negative equity, means that spite of returning shareholder’s
money with profit they have consumed it to cover their losses. Their equity clearly defines that
company is financially in very weak position.
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Finance Report 2011
3.4.4 Debt ratio
Debt ratio = total debt / total assets
Firm’s non current assets property, plant and equipment have decreased over the period and
its long term deposits have remained unchanged. Thus on average 366% of the firm’s assets are
financed with debt.
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Finance Report 2011
4. Liquidity and Leverage Ratio’s Comparison with Industry Averages
Ratios Dewan Sugar Al Abbas Sugar Industry Averages
Current ratio 0.95 0.09 0.73
Quick ratio 0.44 0.06 0.34
Debt to equity 2.65 (1.38)
Debt Ratio 0.60 3.66 1.31
Current ratio Quick ratio debt to equity Debt Ratio
-2
-1
0
1
2
3
4
Dewan sugaral abbas sugarIndustry Averages
4.1 Dewan Sugar
More liquid than industry standards, means it has higher liquidity than industry’s
minimum requirement.
It has the capability to payback its creditors in time
Its total debt to total assets is relatively lower than industry means it can increase its
liabilities in case of some unfavorable situation without much difficulty.
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Finance Report 2011
It can meet short term obligations quiet easily.
In short its financially quiet sound and it should further utilize its assets to increase
profitability.
4.2 Al-Abbas Sugar
Under liquid than industry standards, means it has lower liquidity and it’s difficult for
the firm to payback its current liabilities using current assets.
It’s highly incapable to payback its creditors in time and eventually in current situation
it’s not easy for the firm to take raw materials etc on credit.
Its total debt to total assets is very high than industry means it is highly financed by
debt, far more than industry standards.
It can’t meet any short term obligations and any firm can’t bear any further losses.
In short it’s financially very weak and it should not increase its debt anymore.
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Finance Report 2011
5. Conclusion
In comparison with each other, both sugar mills have contrary ratios. Dewan Sugar is more
liquid than industry average while Al-Abbas Sugar mill is very less liquid; similarly Dewan sugar
utilizes fewer assets than industry average while Al-Abbas is highly financed by debt, even
higher than industry standards.
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