spinning sector of pakistan faisal and reliance mills analysis

Spinning Sector of Pakistan | Financial Statements Analysis

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ACKNOWLEDGEMENTS

‘‘In the name of Allah most merciful and beneficent’ “We

raise in degree of rank whom so ever we pleased; and our

every pressure of knowledge is one, most knowing”. (Al-

Quran)

At First we like to thank our beloved Allah. Then we would like to

thank our Professor Maam Beenish for giving us the opportunity to

enhance our knowledge on the subject. We are also grateful for her

support and encouragement all throughout. We also thank our group

members who have enriched our knowledge with immense efforts

and want to appreciate the praise-worthy efforts and the assistance

of some people who have kindly helped us out in the completion of

this report. They definitely include our parents, teachers and friends.


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Table of Contents

Introduction of Spinning sector

Faisal spinning mill Limited

Introduction

Ratio Analysis

Reliance Cotton Spinning Mill

Introduction

Ratio Analysis

Cummulative Industry Analysis

Recommendations

Conclusion

Horizontal and Vertical Analysis

References


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Introduction:

Cotton Spinning

The spinning sector is a vital part of textile industry, a great contributor to the national

economy. In this sector manufacturing process are performed where fibre are converted

into yarn. Spinning is the twisting together of drawn out strands of fibre to form yarn.

This is the largest textile segment in terms of number of listed units. There are 106 listed

companies on KSE - 23% of the total spinning population. Most of these companies are

owned by business families or group of individuals.

The objective of this report is to analyse the different companies of the Spinning Sector

in Pakistan. The data from the past six years (i.e. from 2009 to 2014) of these companies

is taken. The ratios and cash flows are given the higher importance to know the financial

health of the companies.

Two companies are selected from a pool of companies in the Spinning Sector of

Pakistan. The selection of the companies is based on the two factors: the SIZE of the

company in all those years and the business cycle of all the companies end on the 30th

June. The names of these companies are:

Faisal Spinning Mills Limited (Umer group)

Reliance Cotton Spinning Mills Limited (Sapphire group)

Sapphire Group (SG) owns 79% stake in SFL through direct and indirect shareholding.

Mr. Mohammad Abdullah, the chairman of the group, founded SG when he migrated

to Pakistan after the partition. The group is mainly concentrated in the textile industry.

Within the industry, it has significant presence in spinning, weaving and other value

added segments.. The entities constituting Sapphire Group include Sapphire Rextile

mills Limited, Reliance Cotton Spinning Mills Limited, Diamond Fabrics Limited,

Amer Cotton Mills (Pvt.) Limited, Sapphire Power Generation Limited, Sapphire

Finishing Mills Limited, and Sapphire Electric Company Limited.

Let us examine all the companies one by one to know their financial attractiveness. In

the end, a cumulative Analysis will be done to know the relative importance of each

company in the sector.


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Faisal Spinning Mills Limited

Introduction: Faisal Spinning Mills Limited was incorporated in Pakistan in 1982, the Umer Group

of Companies with headquarters in Karachi, Pakistan, has been at the forefront of

industry in Pakistan for many years. Through dedicated efforts, hard work and by the

grace of God, Umer Group is one of the leading groups in textile industry of Pakistan.

The group today is broadly diversified and is involved in Textile ( Weaving and

Spinning ),Power Generation, Footwear manufacturing/Retail, Leather manufacturing,

Leather Garments, Dairy milk and construction activities. The group today enjoys an

annual turnover of over USD 300 million.

Faisal Spinning Mills Limited is a Pakistan-based company, which is engaged in the

manufacturing and sale of yarn and fabric. The Company's segments are Spinning,

Weaving and Power Generation. The Company's production facilities are located at

Nooriabad District, Dadu in the province of Sindh and Feroz Watwan, District

Sheikhpura in the Province of Punjab. The Company offers textile products to local and

international markets. The Company is a part of the textile group of Umer Group.

Umer Group has a total of five spinning mills with an installed capacity of over 160,000

spindles supported by the latest European and Japanese machinery.

The company follows the fiscal year. So, all of its financial statements are made on June

30.


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The market price of Faisal spinning Mills is 152.13. The company is enjoying the

benefits from the 100,000 outstanding shares. The Authorized capital of the company

is constant Rs. 120,000,000 in all that time periods.

Financial statements are audited by M/s Mushtaq and Company Chartered Accountants

407, Commerce Centre, Hasrat Mohani Road, Karachi.

“Ratio Analysis OF FINANCIAL STATEMENTS”

In this section, different elements of the financial statements would be studied to know

the financial health of the company. The analysis will focus on the ratios of the

company..

Liquidity Ratio:

Liquidity ratios measure a company’s ability to meet its maturing short-term

obligations.

Current Ratio:

This ratio reflects the number of times short-term assets cover short-term liabilities and

is a fairly accurate indication of a company's ability to service its current obligations.

The company has managed to increase its liquidity over the years. In 2009, the company

has current assets of only Rs. 1,206,600,842. But they have made efforts to increase the

current assets. Till 2011, they have increased their current assets to Rs.1733161857.

This increase is made possible by increasing the two elements of the current asset i.e.

Bank Balances and Stock in Trade.

The company also made efforts to decrease the current liabilities. In 2010, the liabilities

were Rs.1, 193,096,967. But company has made effort to decrease them. And In 2014,

they were able to decrease them to Rs.1, 127,597,339.

In 2014, the company have above average ratio, as compared to the company average

(Current Ratio 1.58). This is good sign.


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Activity Ratios:

Activity ratios are financial analysis tools used to gauge the ability of a business to

convert various asset, liability and capital accounts into cash or sales.

Cash Conversion Cycle:

The cash conversion cycle attempts to measure the amount of time each net input dollar

is tied up in the production and sales process before it is converted into cash through

sales to customers.

The cash conversion cycle of the company is on the rising trend. This is due to the

increasing inventory. In 2009, the Average Age of Inventory was 0.0775 days. Then,

there is a tremendous increase comes in 2010 that pushes the Average Age of Inventory

to 73 days. After that there is a rising trend. Until 2013, the Average Age of Inventory

reaches to 104 days. At last in 2014, management took some actions to reduce it and it

reduces to95 days, which results in diminishing trend of Cash Conversion Cycle

In 2014, Cash Conversion Cycle is above average as compared to the company average

of 52 days. This is not a good sign.

2009 2010 2011 2012 2013 2014

Series1 0.9701 1.0828 1.4220 1.5985 1.9785 2.4843

0.9701 1.0828 1.4220

1.5985 1.9785

2.4843

0.0000

0.5000

1.0000

1.5000

2.0000

2.5000

3.0000

Years



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Fixed Asset Turnover:

The fixed-asset turnover ratio measures a company's ability to generate net sales from

fixed-asset investments.

The Fixed Asset Turnover shows a rising trend from 2009 to 2011. This is due to the fact

that the increase in sales is more than the increase in the fixed assets The company had sales of

Rs. 4,271,908,981 in 2009. But, it has managed to increase sales to Rs. 9,137,111,608

in 2011.

After this company shows diminishing trend from 2011 to 2014.The diminishing trend

from 2011 to 2014 is due to the fact that there is more increase in the fixed assets than

the sales. The prominent element in the fixed assets which increase in those years is

“Capital Work in Progress” and “Long-term Investment”

In 2014, the company have close to average ratio, as compared to the company average

(Fixed Asset Turnover 3.6). This is a good sign.

2009 2010 2011 2012 2013 2014 Series1 -6.5463 54.8652 45.8889 48.2280 95.6889 75.9978

- 6.5463

54.8652 45.8889 48.2280

95.6889

75.9978

-20.0000

0.0000

20.0000

40.0000

60.0000

80.0000

100.0000

120.0000

Years



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Total Asset Turnover:

Total Asset Turnover explains efficiency with which a company is deploying its assets

in generating revenue.

The Total Asset Turnover shows a rising trend from 2009 to 2011. This is due to the

fact that the increase in sales is more than the increase in the total assets. The company

had sales of Rs.4, 271,908,981 in 2009. But, it has managed to increase sales to

Rs.9137111608in 2011.

Then company shows a diminishing trend from 2011 to 2014. This is due to the fact that

increase in total assets is more than the increase in the sales. In 2011, the company had

total assets of Rs.3591462075. But company has managed to increase the total assets to

Rs.5838416604 in 2014. Both kinds of assets (i.e Short Term & Long Term) showed an

increase in their accounts.

In 2014, the company have close to average ratio, as compared to the company average

(Total Asset Turnover 1.87)

2009 2010 2011 2012 2013 2014 Series1 2.6298 3.1713 4.9169 4.0779 3.7996 3.2204

2.6298 3.1713

4.9169

4.0779 3.7996

3.2204

0.0000

1.0000

2.0000

3.0000

4.0000

5.0000

6.0000

Years



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Gearing Ratio/Leverage Ratio:

Gearing is a measure of financial leverage, demonstrating the degree to which a firm's

activities are funded by owner's funds versus creditor's funds.

Debt Ratio:

The debt ratio compares a company's total debt to its total assets, which is used to gain

a general idea as to the amount of leverage being used by a company.

The debt ratio shows a decaling trend from 2009 to 2014. This is due to the fact that the

assets have constantly increasing in all those years. These increasing assets were due to

increasing equity. The liabilities have also shown some increase but their increase is

lesser as proportion to increase in assets.

In 2009, the total was Rs.2831025105. But company is getting more and more assets

every year. In 2014, the total assets reach to Rs.5838416604.

In 2014, the company have below average ratio, as compared to the company average.

This is a good sign.

2009 2010 2011 2012 2013 2014 Series1 1.5090 1.7661 2.5441 2.1150 1.6676 1.6752

1.5090 1.7661

2.5441

2.1150

1.6676 1.6752

0.0000

0.5000

1.0000

1.5000

2.0000

2.5000

3.0000

Years

Faisal Spinning Mills Limitedle


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Time Interest Earned Ratio:

Time Interest Earn ratio is a measure of a company's ability to honour its debt payments.

There is only two sharp increase in the graph. In 2011, the TIE ratio increases because

the company managed to increase its sales which causes its EBIT to increase. At the

same time, some liabilities were paid off which reduce the interest expense.

From 2010 to 2014 there is a decrease and increasing in


Equity Multiplier:

The equity multiplier is a measurement of a company’s financial leverage. Companies

finance the purchase of assets either through equity or debt, so a high equity multiplier

indicates that a larger portion of asset financing is being done through debt.

2009 2010 2011 2012 2013 2014 Series1 % 60.27 % 47.50 % 43.22 37.29 % % 40.85 % 39.15

60.27 % 47.50 % 43.22 %

% 37.29 40.85 % 39.15 %

% 0.00

% 20.00

% 40.00

% 60.00

% 80.00

Year

Faisal SpinningMills Limited

2009 2010 2011 2012 2013 2014 Series1 1.0004 1.0021 4.3806 3.0121 6.7003 3.7359

1.0004 1.0021

4.3806

3.0121

6.7003

3.7359

0.0000

1.0000

2.0000

3.0000

4.0000

5.0000

6.0000

7.0000

8.0000

YEAR



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The Equity Multiplier shows a decreasing trend from 2009 to 2012 after that it show

little increasing trend. This is due to the fact that the total assets have constantly

increased in all those years. In 2009, the total assets were Rs. 2,831,025,105Till 2014,

the total assets reach to Rs. 5,838,416,604 There is a prominent increase in equity in all

those years.

The total liabilities show an enormous increase in 2013, which gives a boast to this

graph

In 2014, the company have close to average ratio; as compared to the company average

.This is a good sign

Profitability Ratios:

A profitability ratio is a measure of profitability, which is a way to measure a company's

performance.

Profit Margins:

Profit margins measures how much out of every dollar of sales a company actually

keeps in earning.

In 2010, the company has shown an increase in sales and net income. But the increase

in Net Income is more than the increase in the sale. The net income increased from

Rs.65, 360,140 to Rs.402, 630,406. In 2011 and 2012 again profit margin show

decreasing trend.

2009 2010 2011 2012 2013 2014 Series1 2.7343 2.0380 1.7613 1.5947 1.6905 1.6433

2.7343

2.0380 1.7613

1.5947 1.6905 1.6433

0.0000

0.5000

1.0000

1.5000

2.0000

2.5000

3.0000

Year



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The company has shown net income Rs. 298,997,452 in 2012, that became the reason

for less profit margin as compare to others time periods. Then company tried to recover

from the situation and managed to increase net income in 2014. This increase in Net

Income gave some boost to ratio.

In 2014, the company have close to average ratio, as compared to the company average.

Return on Assets:

Return on assets is studied to know how efficiently management is using its assets to

generate earnings

The graph shows a peak in 2011, this is due to increase in the net income. The company

has enjoyed net income of Rs.658, 553,965 in 2011. While on the other hand, in 2012

the company has less net income of Rs.298, 997,452 which became the reason for low

return on asset

In 2014, the company have below average ratio, as compared to the company average

2009 2010 2011 2012 2013 2014

Series1 0.0153 0.0782 0.0721 0.0392 0.0948 0.0611

0.0153

0.0782 0.0721

0.0392

0.0948

0.0611

0.0000 0.0100 0.0200 0.0300 0.0400 0.0500 0.0600 0.0700 0.0800 0.0900 0.1000

year



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Return on Equity Ratio:

Return on equity (ROE) is a ratio that provides investors insight into how efficiently a

company is managing the equity.

The company Return on Equity reaches to the highest mark in 2011. This is due to the

fact that the company has shown a higher increase in net income from Rs.65,360,140 to

Rs.402,630,406.

Then it shows a decreasing trend in 2012, due to the decreasing income. In 2012 the

company has shown a low net of Rs.298,997,452. So the ratio becomes low as compare

to 2011. Then company tried hard to recover and it has managed to increase its net

income in 2014, which has a positive effect on its ROE.

In 2014, the company have managed the average ratio, as compared to the company

average. This is a good sign

2009 2010 2011 2012 2013 2014

Series1 0.0231 0.1381 0.1834 0.0829 0.1581 0.1023

0.0231

0.1381

0.1834

0.0829

0.1581

0.1023

0.0000 0.0200 0.0400 0.0600 0.0800 0.1000 0.1200 0.1400 0.1600 0.1800 0.2000

Year



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Earning Per Share:

Earning Per Share gives a thorough look about a company's profit allocated to each

outstanding share of common stock.

The company Earning Per Share reaches to the highest mark in 2011. This is due to the

fact that the company has shown an increase in net income from Rs.65, 360,140 to

Rs.402,630,406.

Then it shows a diminishing trend in 2012, due to the decreasing income. In 2012 the

company has low net income. So the ratio becomes less as compare to 2011. Then

company tried hard to recover and it has managed to increase its net income in 2014,

which has a positive effect on its EPS.

There is no increase in the outstanding shares of the company. The outstanding shares

remain at 100,000,000.

In 2014, the company has above average ratio, as compared to the company average.

2009 2010 2011 2012 2013 2014

Series1 0.0631 0.2815 0.3230 0.1321 0.2672 0.1681

0.0631

0.2815 0.3230

0.1321

0.2672

0.1681

0.0000

0.0500

0.1000

0.1500

0.2000

0.2500

0.3000

0.3500

Year



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Market to Book Ratio:

Market to Book Ratio is used to find the value of a company by comparing the book

value of a firm to its market value.

The Market to Book Ratio shows a decreasing trend in 2010. This is to the fact that

company did not perform well in 2009. So in proceeding years the company was not

able to build a positive word of mouth in the market. But after that market to book ratio

is show an increasing trend from 2011 to 2014.

In 2009, there was only net income of Rs.65,360,140 that put a bad news regarding the

company in market.

In 2014, the company have managed above average ratio, as compared to the company

average .This is a good sign.

Cash Flow From Operating Activities:

2009 2010 2011 2012 2013 2014

Series1 6.5360 40.2630 65.8554 29.8997 80.4615 59.7260

6.5360

40.2630

65.8554

29.8997

80.4615

59.7260

0.0000 10.0000 20.0000 30.0000 40.0000 50.0000 60.0000 70.0000 80.0000 90.0000

Year


2009 2010 2011 2012 2013 2014

Series1 0.3001 0.2059 0.2342 0.2798 0.4064 0.5151

0.3001

0.2059 0.2342 0.2798

0.4064

0.5151

0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

year



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Cash flow from operating activities shows the company’s ability i.e. company’s ability

to pay the interest and contractual payments.

The company showed negative cash flow from operating activities in 2013.

In 2014 company learn from the past bad experience and generate positive cash flow

from operations. As the company is not generating the positive cash from the operating

activities. So it would not be able to pay the contractual payments.

After studying all the ratios and cashflow, decisions would be made whether

ShortTerm or Long-term debt financing should be given to company or equity

financing should be done

2009 2010 2011 2012 2013 2014

Series1 331,035,04 539,871,99 295,579,45 444,639,39 -192,410,8 865,377,35

331,035,042

539,871,996

295,579,450 444,639,399

- 192,410,819

865,377,357

-400,000,000

-200,000,000

0

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

Year



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Financial

Ratios

2010 2011 2012 2013 2014 Industry

Average

Remarks

Current Ratio 1.08 1.422 1.598 1.98 2.48 1.58 Good

Quick Ratio 0.45 0.47 0.48 0.53 0.55 0.86 Bad

Cash

Conversion

Cycle

54days 45days 48days 95days 75 Days 52 Days Bad

Inventory

Turnover

5.59 5.61 5.87 4.06 4.49 5.12 Bad

Fixed Asset

Turnover

3.17 4.91 4.07 3.79 3.22 3.63Times bad

Total Asset

Turnover

1.78 2.54 2.11 1.66 1.67 1.87 Not Bad

Debt Ratio 47.50% 49.22% 37.29% 40.85% 39.15% 44.7 % Good

Time Interest

Earned Ratio

1.00 4.38 3.01 6.70 3.73 3.30 Good

Equity

Multiplier

2.03 1.76 1.59 1.69 1.64Ti

mes

1.91Times Good

Return on

Asset

13.81% 18.34% 8.29% 15.68% 10 % 11.02% Not Bad

Profit Margin 7.70 7.21 3.92 9.40 6.1 % 6.01% Good

Gross profit

ratio

16.74 13.67 11.27 15.21% 13.07% 14% Bad

Return on

Equity

28.1% 32.30% 13.21% 26.72% 16.81% 21 % Bad

Earnings Per

Share

40.26 65.85 29.89 80.46Ti

mes

59.7Ti

mes

47.1Times Good

Dividend

yield

0.03 0.05 0.08 0.16 0.18 0.1 Good

Market/Book

Ratio

(Times)

0.21 0.23 0.27 0.41 0.51 0.32 Good

As the company is generating the positive cash from the operating activities. So it would

be able to pay the contractual payments. This is due to the fact that company has used

their total assets efficiently. Both fixed assets turnover and total asset turnover are close


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to average.The firm has also decrease the debt burden, which is a good sign with a

positive cash flow from operating activities.

which shows that the company would not default in future. The company is also using

its equity well and it is close to the average. High profit margin becomes the reason of

high return on equity. Eventually the Earning per share is also good for the company.

Company is also enjoying a nice market to book value.

“Reliance Cotton Spinning Mills Ltd.”

Introduction: Reliance Cotton Spinning Mill Limited is one of the leading, renowned and recognized

Textile Mills in creating, developing and manufacturing of products right from basic to

variety of high quality yarn thus responding to emerging trends in the spinning industry

and exporting yarn to International market.

They have the technology to transform the dreams of absolute quality into reality. Their

in-house, world-class quality control lab has helped achieve the 5% world yarn standard

for quality based on International USTER standards. Our quality management starts in

raw material sourcing from the manufacturers as a club member and insurance of final

parameters by strict Process Orientation and guides throughout the entire production

process including shipping and delivery.

What sets the company apart is an un-compromised commitment towards total quality

management, combined with endeavours in product development plus an ongoing

investment in state of the art equipment. To further cultivate the perspective of absolute

quality in fine count with Special Fibbers., RCSM is committed to maintain its advanced

quality control capabilities by taking every step forward in quality management, and

this is a contribution we intend to make, today & beyond.

Financial Statements are audited by M. yousaf Adil SALEEM and Company

Chartered Accountants.

“Ratio ANALYSIS OF FINANCIAL STATEMENTS”

In this section, different elements of the financial statements would be studied to know

the financial health of the company. The analysis will focus on the ratios After

discovering about the financial health of the company, decisions would be made about

which company is better than average.


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Liquidity Ratio:

Liquidity ratios measure a company’s ability to meet its maturing short-term

obligations.

Current Ratio:

This ratio reflects the number of times short-term assets cover short-term liabilities and

is a fairly accurate indication of a company's ability to service its current obligations.

The company has managed to increase its liquidity over the first three year. In 2009, the

company has current assets of only Rs.903, 571,780

Till 2011, they have increased their current assets to Rs.1, 402,604,121. This increase

is made possible by increasing the two elements of the current asset i.e. Cash & Bank

Balances and Stock in Trade. The company has increased its current liabilities from

2012 to 2014, which became the reason of its lower current ratio. In 2012, the current

liabilities were Rs.1, 247,684,340. On the other hand in 2014, they have increased to

Rs.2, 266,956,937. The Trade & other payable and Short-term borrowing have shown

prominent increase in its accounts and became the reason for increase in current

liabilities.


This is not a good sign.

Activity Ratios:


convert various asset, liability and capital accounts into cash or sales.

2009 2010 2011 2012 2013 2014

Series1 1.0842 1.1350 1.2313 1.0370 1.0819 0.9595

1.0842 1.1350 1.2313

1.0370 1.0819 0.9595

0.0000

0.2000

0.4000

0.6000

0.8000

1.0000

1.2000

1.4000

Years

Reliance Cotton Spinning Mills Limited


Page | 22


The cash conversion cycle attempts to measure the amount of time each net input dollar

is tied up in the production and sales process before it is converted into cash through

sales to customers.

The cash conversion cycle of the company is on the declining trend. This is due to the

decreasing of inventory. In 2009, the Average Age of Inventory was 173 days. But in

2014, it decrease to 137 days. There is also a lower cash conversion cycle in 2013,

because somehow company managed to maintain its Average Age of Inventory to 120

days. But in 2014, the Average Age of Inventory reaches to 137 day, due to increased

inventory.

In 2014, Cash Conversion Cycle is below average as compared to the company average

(Cash Conversion Cycle 168.5). This is a good sign.



fixed-asset investments.

The Fixed Asset Turnover shows amix trend. This is due to the ever changing sales and

changing fixed assets in different time periods. The diminishing trend from 2009 to

2010 is due to the fact that there is more increase in the fixed assets than the sales.

The prominent element in the fixed assets which increase in those years is “Property,

Plant and Equipment”.

2009 2010 2011 2012 2013 2014 Series1 228.9186 185.4985 187.5256 145.9763 122.1877 141.0396

228.9186

185.4985 187.5256

145.9763 122.1877

141.0396

0.0000

50.0000

100.0000

150.0000

200.0000

250.0000

Years



Page | 23

In 2010, the company had sales of Rs.1753876366. But, it has managed to increase

sales to Rs.2,613,863,539 in 2011.Which increases its efficiency. Then in 2012,

company cannot use the asset efficiently to generate sales and its efficiency decreases.

Then in 2013 again a rise in sales comes, which gives boast to efficiency. In 2014, the

company has increased the total assets but cannot generate enough sales from it. So, a

declining trend is shown




in generating revenue.

The Total Asset Turnover shows a rising trend from 2010 to 2011. This is due to the

fact that the increase sales are more than the increase total assets. The company had

sales of Rs.1, 544,922,778 in 2009. But, it has managed to increase sales to Rs.

2,613,863,539 in 2011.

Then company shows a diminishing trend from 2013 to 2014. This is due to the fact that

increase in total assets is more than the increase in the sales. In 2011, the company had

total assets of Rs.2, 400,888,895. But company has managed to increase the total assets

to Rs.4, 203,199,419 in 2014. Both kinds of assets (i.e Short Term & Long Term)

showed an increase in their accounts.

2009 2010 2011 2012 2013 2014

Series1 2.61 2.23 2.62 1.96 2.34 2.09

2.61

2.23

2.62

1.96

2.34 2.09

0.00

0.50

1.00

1.50

2.00

2.50

3.00

year



Page | 24


It is not a good sign.

Gearing Ratios:

Gearing is a measure of financial leverage, demonstrating the degree to which a firm's


Debt Ratio:



The debt ratio shows a decreasing trend from 2009 to 2011. This is due to the fact that

the assets have constantly increased in all those years. In 2009, the total assets were

Rs.1495111306.Till 2011; it reaches to the level of Rs.2400888895. They were mostly

financed by equity. From 2011 to 2013, there is a stable trend. And both assets and

liabilities increase with same pace.

But in 2014, the total liabilities show a tremendous increase and reaches to Rs.2,

396,313,028. There is a prominent increase in both types of liabilities.


This is a good sign.

2009 2010 2011 2012 2013 2014

Series1 1.0333 1.0073 1.0887 0.9831 1.1744 1.0097

1.0333 1.0073

1.0887

0.9831

1.1744

1.0097

0.8500

0.9000

0.9500

1.0000

1.0500

1.1000

1.1500

1.2000

Years



Page | 25

Time Interest Earned Ratio:

Time Interest Earn ratio is a measure of a company's ability to honour its debt payments.

There is only one sharp increase in the graph. In 2011, the TIE ratio increases because

the company managed to increase its sales which causes its EBIT to increase. At the

same time, some liabilities were paid off which reduce the interest expense.


This is not a good sign

2009 2010 2011 2012 2013 2014

Series1 57.50 % % 54.81 49.42 % % 50.08 % 50.35 % 57.01

57.50 %

54.81 %

49.42 % % 50.08 % 50.35

% 57.01

% 44.00 % 46.00

48.00 % % 50.00 % 52.00

54.00 % 56.00 %

% 58.00 60.00 %

Year


2009 2010 2011 2012 2013 2014

Series1 2.5119 2.4235 5.1592 1.7426 3.1869 1.8512

2.5119 2.4235

5.1592

1.7426

3.1869

1.8512

0.0000

1.0000

2.0000

3.0000

4.0000

5.0000

6.0000

year



Page | 26

Equity Multiplier:

The equity multiplier is a measurement of a company’s financial leverage. Companies

finance the purchase of assets either through equity or debt, so a high equity multiplier

indicates that a larger portion of asset financing is being done through debt.

The Equity Multiplier shows a decreasing trend from 2009 to 2011. This is due to the

fact that the liabilities have constantly decreasing in all those years. In 2009, the total

liabilities were Rs.859,702,159. In 2012, equity Multiplier shows an increasing trend

from 2012 to 2014. This is due to the fact that the liabilities have constantly increasing

in all those years. In 2014, the total liabilities are Rs. 2,396,313,028.

In 2014, the company have above average ratio, as compared to the company average.


Profitability Ratios:

A profitability ratio is a measure of profitability, which is a way to measure a company's

performance.

Profit Margins:

Profit margins measures how much out of every dollar of sales a company actually

keeps in earning.

2009 2010 2011 2012 2013 2014

Series1 2.3530 2.2130 1.9770 2.0031 2.0139 2.3262

2.3530

2.2130

1.9770 2.0031 2.0139

2.3262

1.7000

1.8000

1.9000

2.0000

2.1000

2.2000

2.3000

2.4000

Year



Page | 27

In 2010, the company has shown an increase in sales and net income. But the increase

in Net Income is more than the increase in the sale. The net income increased from

Rs.137,703,182 to Rs.476,532,191.

This graph show a higher trend of profit margin in 2011 and after this period it shows

that there is a low profit margin in 2012. This diminishing trend is due to the decrease

in the net income.

Then company tried to recover from the situation and managed to increase net income

in 2013. This increase in Net Income gave some increase to ratio. But again profit

margin is decreasing in 2014


Return on Assets:

Return on assets is studied to know how efficiently management is using its assets to

generate earnings

The graph shows a peak in 2011, this is due to increase in the net income. The company

has enjoyed net income of Rs.476,532,191 in 2011. While on the other hand, in 2012

the company show lower return on their asset, it means that company not use their assets

efficiently to generate earning,


2009 2010 2011 2012 2013 2014

Series1 0.0931 0.0785 0.1823 0.0281 0.0802 0.0296

0.0931 0.0785

0.1823

0.0281

0.0802

0.0296

0.0000 0.0200 0.0400 0.0600 0.0800 0.1000 0.1200 0.1400 0.1600 0.1800 0.2000

year



Page | 28

Return on Equity Ratio:

Return on equity (ROE) is a ratio that provides investors insight into how efficiently a

company is managing the equity.

The company Return on Equity reaches to the highest mark in 2011. This is due to the

fact that the company has shown a tremendous increase in net income from

Rs.143,868,898 to Rs.476,532,191.

Then it shows a diminishing trend in 2012, due to the decreasing income. While on the

other hand, in 2012 the company show lower return on their equity, it means that

company not use their equity efficiently to generate return.

Then company tried hard to recover and it has managed to increase its net income in

2013, which has a positive effect on its ROE. But again in 2014, the return on equity is

decreasing.

In 2014, the company has below the average ratio, as compared to the company

average. This is not a good sign

2009 2010 2011 2012 2013 2014

Series1 0.0962 0.0791 0.1985 0.0276 0.0941 0.0299

0.0962 0.0791

0.1985

0.0276

0.0941

0.0299

0.0000

0.0500

0.1000

0.1500

0.2000

0.2500

Year



Page | 29

Earning Per Share:

Earning Per Share gives a thorough look about a company's profit allocated to each

outstanding share of common stock.

The company Earning Per Share reaches to the highest mark in 2011. This is due to the

fact that the company has shown a tremendous increase in net income from

Rs.143,868,898 to Rs.476,532,191.

Then it shows a diminishing trend in 2012, due to the decreasing income. Then it shows

a diminishing trend in 2012, due to the decreasing income. While on the other hand, in

2012 the company show lower return on their equity, it means that company not use

their equity efficiently to generate return.

Then company tried hard to recover and it has managed to increase its net income in

2013, which has a positive effect on its EPS.

There is no increase in the outstanding shares of the company. The outstanding shares

remain at 102,920,000.

In 2014, the company has below the average ratio, as compared to the company average.


2009 2010 2011 2012 2013 2014

Series1 0.2264 0.1750 0.3924 0.0553 0.1896 0.0695

0.2264 0.1750

0.3924

0.0553

0.1896

0.0695

0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

Year



Page | 30

Market to Book Ratio:

Market to Book Ratio is used to find the value of a company by comparing the book

value of a firm to its market value.

The Market to Book Ratio shows a decreasing trend in 2010. This is to the fact that

company did not perform well in 2009. So in proceeding years the company was not

able to build a positive word of mouth in the market. But in 2013 and 2014, the market

to book ratio is show an increasing trend.

In 2014, the company have managed close to average ratio, as compared to the company

average .This is a good sign.


Cash flow from operating activities shows the company’s ability i.e. company’s ability

to pay the interest and contractual payments.

2009 2010 2011 2012 2013 2014

Series1 13.9787 13.3796 46.3012 6.9766 30.0111 12.1996

13.9787 13.3796

46.3012

6.9766

30.0111

12.1996

0.0000 5.0000

10.0000 15.0000 20.0000 25.0000 30.0000 35.0000 40.0000 45.0000 50.0000

Year


2009 2010 2011 2012 2013 2014

Series1 0.4535 0.3215 0.2822 0.2901 0.4305 0.5403

0.4535

0.3215 0.2822 0.2901

0.4305

0.5403

0.0000 0.1000 0.2000 0.3000 0.4000 0.5000 0.6000

year



Page | 31

The company showed negative cash flow from operating activities in 2009 and 2014.

The loss of Rs. 29,497,831 in 2009 became the reason for negative cash flow from

operating activities in 2009.

In 2014, it seems like the company did not learn anything from the past. In 2014

company again have negative cash flow from operating activity. The loss of

Rs.285,296,197 in 2014 became the reason for negative cash flow from operating

activities in 2014.

2009 2010 2011 2012 2013 2014

Series1 -29,497,83 114,703,71 146,819,97 115,415,92 72,291,645 -285,296,1

- 29,497,831

114,703,718 146,819,976

115,415,929 72,291,645

- 285,296,197

-350,000,000 -300,000,000 -250,000,000 -200,000,000 -150,000,000 -100,000,000

-50,000,000 0

50,000,000 100,000,000 150,000,000 200,000,000

Year



Page | 32

Ratio 2010 2011 2012 2013 2014 Industry

Averages

Current Ratio 1.14 1.23 1.04 1.08 0.95 1.39 Bad

Quick Ratio% 0.28 0.33 0.47 0.43 0.31 0.82 Bad

Cash

Conversion

Cycle

185.49 187.52 145.9

7

122.18 141 Days 168 Days Goo

d

Inventory

Turnover

2.01 2.14 2.23 2.17 2.90 2.29

Fixed Asset

Turnover

2.23 2.62 1.96 2.34 2.09 2.30

Times

Bad

Total Asset

Turnover

1.08 0.98 1.17 1.01 1.00 1.04 Bad

Debt Ratio 54% 49% 50% 50% 57% 53 % Bad

Time Interest

Earned Ratio

(Time)

5.15 1.74 3.2 1.85 1.85 2.81 Bad

Equity

Multiplier

2.21 1.97 2.0 2.01 2.32Time

s

2.14Time

s

Bad

Return on

Asset

8% 20% 2.7% 1.0% 3 % 8% Bad

Profit Margin 8% 2% 2% 8% 3% 8% Bad

Gross profit 22.52% 28.22% 14.38

%

16.53% 9.83% 18.29%

Return on

Equity

17.50% 39.24% 5.53% 18.96% 6.95% 14.67 % Bad

Earnings Per

Share

13.38 46.3 6.98 30 12.20Tim

es

20Times Bad

Market/Book

Ratio

0.32 0.28 0.29T

imes

0.43Time

s

0.54Time

s

0.38

Times

Goo

d

Dividend

yield

0.02 0.03 0.05 0.08 0.08

Cashflow

from

Operating

Activities

-

285,296,19

7

--- Bad


Page | 33

As the company is not generating the positive cash from the operating activities. So it

would not be able to pay the contractual payments. This is due to the fact that company

has not used their assets efficiently. Both fixed assets turnover and total asset turnover

are below the average.

The firm has also increase the debt burden, which is not a good sign with a negative

cash flow from operating activities which shows that company would default in future.

Low profit margin becomes the reason for low return on equity. Eventually the Earning

per share is also low for the company. They have managed to maintain a high

market/book value but investment cannot be made on one ratio.

“ CUMMULATIVE INDUSTRY ANALYSIS”

Introduction: This section will focus on all the two mills that we have discussed earlier. In company

analysis, we compared the mills with their company average. But in industry analysis,

the comparison would be on the industry average. All the companies will be compared

with the industry average and studied.

Current Ratio. Faisal Spinning Mills managed to have above average ratio

because current assets are more than liabilities in 2014. Reliance Spinning Mills

has decreasing ratio in 2014 because of increase in current liabilities.

Quick Ratio

0

0.5

1

1.5

2

2.5

3

2010 2011 2012 2013 2014 Industry Avg

current ratio %

faisal Current Ratio reliance Current Ratio


Page | 34

Both Companies have below average ratio because current assets are lower in 2014

of faisal mill.Reliance mill has lower ratio because sales price of yarn decrease nad

inventory sold out at lower cost.

Activity Ratios:


convert various asset, liability and capital accounts into cash or sales. It includes


Faisal Spinning Mills has more than average cash conversion cycle. While on the other

hand, Reliance have longer cash conversion cycle.


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

items 2010 2011 2012 2013 2014 IndustryAverage

quick ratio%

faisal reliance

0

54 45 48

9575

52

00

185.49 187.52

145.97122.18

141168

00

50

100

150

200

items 2010 2011 2012 2013 2014 IndustryAverages

CCC (days)

faisal reliance


Page | 35


fixed-asset investments. Reliance Spinning Mills and Faisal Spinning Mills have below

average ratios in all the years. Faisal mill has more fixed asset investments increase as

compared to sales.



in generating revenue. The efficiency of Faisal Spinning Mill is decreasing with time

because non current assets are not utilizing maximum.Reliance Spinning Mill has not

used their assets efficiently and they have below average ratio over the year

0

1

2

3

4

5

6


fixed asset Turnover

faisal reliance


Page | 36

Inventory Turnover

A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either

strong sales or ineffective buying. Reliance mill has below average ratio which shows company

has poor sale as compared to industry average. Faisal inventory turnover is increasing because

of more sales.

Gearing Ratios: Gearing is a measure of financial leverage, demonstrating the degree to which a firm's


0

0.5

1

1.5

2

2.5

3

items 2010 2011 2012 2013 2014 Industryaverage

Total Asset Turnover

faisal reliance

0

1

2

3

4

5

6

7

2010 2011 2012 2013 2014 IndustryAverages

times

faisal Inventory Turnover reliance Inventory Turnover


Page | 37

Debt Ratio:



Faisal Spinning Mills has decreased their debt burden over the years because this year

credit sales are less .On the other hand, Reliance Spinning Mills are getting more and

more debt every year because trade debt is due from local and foreign customers against

supply of yarn.

Time Interest Earned Ratio In 2014, the Faisal Spinning Mill has some how

managed to have average time interest earned ratio this is due to the some increase in

the interest expense over the year. In 2010, the Finance Cost was Rs.211118416, but it

has increase afterwards. Till 2014, the Finance Cost reaches to the level of

Rs.231376766. Reliance Spinning Mills has lost their ability to service the debt in

every year. At last in 2014, both the companies have below average ratio.

0

0.1

0.2

0.3

0.4

0.5

0.6


Debt Ratio

faisal reliance


Page | 38

Profitability Ratio

Net Profit

Faisal Spinning Mill are enjoying nice profits. So in 2014, they have above average

ratios. Reliance Mill net profit has decreased in 2014 as compared to last year beacause

of higher raw material cost and hike in fuel and power cost.Therefore lower ratio than

industry. The profitability of faisal company has decreased due to slowness in spinning

division and increase finance cost and depreciation expense. Lower of demand of cotton

and yarn from China is the main factor of sluggish yarn and cotton market

Gross Profit

0

1

2

3

4

5

6

7

8

items 2010 2011 2012 2013 2014 IndustryAverage

Time Interest Earned Ratio

faisal reliance

0

0.02

0.04

0.06

0.08

0.1


Profit Margin

faisal reliance


Page | 39

Reliance mill has lower gross profit ratio than average because of

high cost of goods sold e.g direct and indirect cost. Faisal mill gross

profit has reduced because of increase in CGS.

Reliance mill and faisal mill both have lower return on asset ratio as compared to industry

which shows company’s management is not efficient at using its assets effectively to generate

earnings. ROA for public companies can vary substantially and will be highly dependent on

the industry.

0

0.05

0.1

0.15

0.2

0.25

0.3

items 2010 2011 2012 2013 Value(2014)

IndustryAverages

Gross profit

faisal reliance%

0

0.05

0.1

0.15

0.2

0.25


Return On Asset%

faisal reliance

http://www.investopedia.com/terms/p/publiccompany.asp


Page | 40

Reliance mill and faisal have lower return on equity because of lower

net income. Profit after tax is less of both companies.

Earning per share

Eps for Reliance mill in 2014 has reduced to (12.20) as compared to last year(30.01)

beacuase profit has fallen. Faisal Eps ratio is less because of lower net income.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45


Return on Equity

faisal reliance

0

10

20

30

40

50

60

70

80

90

items 2010 2011 2012 2013 Value (2014) IndustryAverages

EPS

faisal reliance


Page | 41

As the market/ book ratio of Reliance and Faisal Mill rati have increased in 2014 which

means company is a good investment for investors

The ratio of a company’s total assets to its stockholder’s equity. Reliance mill has

higher equity multiplier indicates that a larger portion of asset financing is being

done through debt. Faisal mill has good ratio because of increase in equity in 2014

and debt burden is reduced.

.

0

0.1

0.2

0.3

0.4

0.5

0.6


Market ratio

faisal reliance

0

0.5

1

1.5

2

2.5


Equity Multiplier

faisal reliance

http://www.investopedia.com/terms/a/assetfinancing.asp


Page | 42

Dividend yield is a way to measure how much cash flow you are getting for invested in an

equity position. Reliance mill has low yield ratio it means company is paying lower to

investors for their investments as compared to faisal spinning mill. They pay their

investors highly than average which will attract

Reliance Spinning Mills and Faisal Spinning Mills have not been able to compete well

in the market and suffers from below average ratio.


Faisal Spinning Mills are generating the positive cash from the operating activities.

While Reliance Spinning Mills have not been able to carry on their operations

effectively. In 2014, they are earning a negative cash flow from operating activities.

This is not a good sign.

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

0.2

2010 2011 2012 2013 2014 IndustryAverages

%

faisal Dividend yield reliance Dividend yield

http://www.investopedia.com/terms/c/cashflow.asp

http://www.investopedia.com/terms/e/equity.asp


Page | 43

Recommendations

Strong reforms to face various challenges including that of

energy, investment, insecurity and law and order

Higher discount rate must be decreased for competitive in

international market.

Technology must be up gradaded to produce quality finished

products. The share of Pakistan's textiles products in the world

markets are declining year by year due to lack of technology.

New projects should be launched to control Shortage of

electricity, gas supply.

Pricing pressure in international market.

Quality of cotton should be improved.

CONCLUSION

Textile industry has been going through one of the toughest periods in

the decade. It has been facing multiple challenges like comparative

lower cost of doing business in neighboring countries, absence of

export incentives from the Government and higher energy cost.

However, the management of your company is vigilant with the

prevailing circumstances and will continue to put all its efforts to

mitigate the negative impacts by planning full utilization of production

capacity, diversification of product range, adopting aggressive

marketing strategy and developing strong customer relation

References

http://www.investing.com/equities/reliance-cotto-financial-summar


Page | 44

https://pkfinance.info/kse/fundamentals/rcml

http://www.scstrade.com/

http://www.investopedia.com/

http://www.psx.com.pk/index.

https://pkfinance.info/kse/fundamentals/rcml

http://www.scstrade.com/

spinning sector of pakistan faisal and reliance mills analysis

Economy & Finance