Acc2 Final Project

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Final Project Accounting II

Mohammad Ali Jinnah University, Islamabad

Final Project of Accounting II

Fauji Cement Company Limited

Submitted By:

Usman Nasir BB081020

Muhammad Hasan BB081015

Hasnain Malik BB103002

Submitted To:

Sir Shujahat Haider Hashmi

Mohammad Ali Jinnah University, Islamabad 1


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TABLE OF CONTENTS:

Dedication 3

Acknowledgement 4

Executive Summary 5

Income statement ofFauji Cement Limitedand Its Vertical Analysis 6

Income statement ofFauji Cement Limited and Its Horizontal Analysis 7

Balance sheet ofFauji Cement Limited and Its Vertical Analysis 8

Balance sheet ofFauji Cement Limited and Its Horizontal Analysis 9

Operating Highlights 16



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Executive Summary:

In this report we are going to interpret the financial ratios of Fauji Cement Limited which is

involved in manufacturing of cement. The company sale the cement inside the country and

they also export to the foreign countries. First of all we collected five years data of the

company. Then we collected five year data about the balance sheet of the company and

then the five year data of the profit and loss statement of the company.

After the collection of data we are going to do analysis of the data in vertical form and also

in horizontal form and after that we are going to do the ratio analysis of the company and

this data will be compared with each other through the analysis on the results of the ratios.

Finally we do the conclusion of the report and paste the references from where we collect

the data for the completion of report.



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Company Profile:

A longtime leader in the cement manufacturing industry, Fauji Cement Company,

headquartered in Rawalpindi, operates cement plants 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 13 years. Sponsored

by Fauji Foundation the Company was incorporated in Rawalpindi in 1992.



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Fauji Cement is operating two lines of Cement Plants, one each from FLS Denmark &

POLYSIUS Germany. The plants are well renowned for their high efficiencies,

best quality production and are well maintained with annual total production

capacity of 3.3 million tons of cement. FAUJI Cement enjoys the reputation of

being the Best Quality Cement in the Country and is preferred in the construction

of Mega Projects like Dams, Bridges, Highways & Motorways, Commercial &

Industrial complexes, Residential Housing Societies, and a myriad of other

structures needing speedy strengthening bond, fundamental to Pakistan's

economic vitality and quality of life.

In addition to the Pakistan market, Fauji Cement is expanding its promising

coverage in the neighboring regions /countries like Sri Lanka, India, Afghanistan,

South Africa, Middle East & Africa.

Fauji Cement is ISO certified for its Quality & Environment Management

Systems and has won number of awards in its category.

BOARD OF DIRECTORS

Board of Directors

Lt Gen Hamid Rab Nawaz, HI (M) (Retired) Chairman

Lt Gen Javed Alam Khan, HI (M) (Retired) Chief Executive / MDMr. Qaiser Javed Director

Mr. Riyaz H. Bokhari, IFU Director

Brig Rahat Khan, SI (M) (Retired) DirectorDr. Nadeem Inayat Director



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Brig Liaqat Ali , TI (M) (Retired) Director

Brig Agha Ali Hassan, SI(M) (Retired) Director

COMPANY SECRETARY

Brig Sajjad Azam Khan, SI (M), T Bt (Retired)

AUDIT COMMITTEE

Mr. Mohammed Faruque Chairman

Mr. Iqbal Faruque Member Mr. Akbarali Pesnani Member

AUDITORS

M/s KPMG Taseer Hadi & Co,

Chartered Accountants

BANKERS

ABN Amro Bank

Allied Bank of Pakistan Limited

Bank Al-Habib Ltd.

Citibank, N.A

Habib Bank Limited

Muslim Commercial Bank Ltd.

National Bank of Pakistan

NIB - NDLC IFIC Bank Ltd.

Standard Chartered Bank Ltd.



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Other operating expenses (94,127,471)

PROFIT FROM OPERATIONS 2,041,983,825

Finance cost (264,296,874)

NET PROFIT BEFORE TAXATION 1,777,686,951

Taxation

- Current (21,430,692)

- Deferred (552,520,926)

(573,951,618)

NET PROFIT AFTER TAXATION 1,203,735,333

FOR YEAR 2006:

Rupees('000)

SALES 4,780,036

Less: Government levies (1,316,753)

NET SALES 3,463,283

Less: Cost of sales (2,371,788)

GROSS PROFIT 1,091,495

Other operating income 73,835

1,165,330

Distribution cost (40,645)

Administrative expenses (71,302)

Other operating expenses (58,098)

PROFIT FROM OPERATIONS 995,285

Finance cost (207,105)

NET PROFIT BEFORE TAXATION 788,180

Taxation



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- Current (17,320)

- Deferred (124,537)

(141,857)

NET PROFIT AFTER TAXATION 646,323

FOR YEAR 2007:

Rupees'000

SALES 6,953,323


NET SALES 5,314,538



Other income 190,424





NET PROFIT BEFORE TAXATION 1,421,517

Taxation (413,894)

NET PROFIT AFTER TAXATION 1,007,623



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FOR THE YEAR 2008:

SALES 7,956,823


NET SALES 6,314,542



Other income 202,465





NET PROFIT BEFORE TAXATION 2,453,271

Taxation (539,235)

NET PROFIT AFTER TAXATION 11,546,875



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Vertical Analysis of Income Statements of theFauji Cement Company:

2005 2006 2007 2008

Sales 100 100 100 100Cost of

Goods Sold 36.86% 49.6% 60.8% 67.1%

Gross Profit 80.1% 83.2% 80% 82%Operating

Expenses 65% 66.6% 68.3% 69.4%Profit before

Tax 79.3% 75.3% 76.3% 79.3%Profit after

Tax 83% 82.3% 88% 84.6%



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COMMENTS ON HORIZONTAL ANALYSIS OF INCOME

STATEMENT

After we conduct a horizontal analysis of the income statement we can see that the sales aresteadily increasing from year 2006 onwards. This shows that the Fauji Cement has an

effective marketing policy and its customer base is increasing year to year.Unfortunately, the Cost Of Goods Sold (COGS) has increased considerabely in the year

2007 to 2008. This increase is due to the rising inflation in the economy and deflation of

the Pakistani Rupee in the Internation market. The rising fuel costs and severe electricityshortage has also increased the cost of production.

Due to increase in COGS the groos profit figure has also been effected. In the year 2007the gross profit reduced 82.3% to 80.4%, due to increase in the COGS during these years.

As we do furthur analysis we can see that other operating expenses have also increased due

to the rising cost of electricity and inflation.

The net profit of Fauji Cement was very good in the year 2006 but due to increase in

operating expenses and COGS the increased profitability could not be maintained and thusthe figure is hovering at around 80 to 85%.



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Due from financial 18108000 8850000 3700000

institutions

Investments 14286949 10535186 2877554

1429053

Operating fixed assets 1880515 1032963 531262 204737

Other assets 4123441 2810494 2266522

1349184

Total assets 85276070 67178559 46438623

19697390

Liabilities

Bills payable 1057017 1192160 563228 196145

Due to other institutions 4008496 2415606 4285212

2862139



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Deferred tax liabilities 453038430377398304 769631

Other liabilities 3548666 2851407 1979079

286

Net assets 5974978 5706656 4763359

2098382

Presented by:

Share capital 4925961 3779897 3779897

1346017

Reserves 845022720785528085 256578

Unappropriated profits5701141219228 448427 258325



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Liabilities

Due to other institutions 140 84 150

100

Deferred tax liabilities 59 56 52

100

Other liabilities 242 195 135

000

Net assets 286 273 228

100

Presented by:

Share capital 367 281 281

100

Reserves 330 281 206

100



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Vertical Analysis on Balance Sheets of the Fauji

Cement Company:

2008 2007 2006

2005

(%) (%) (%)

(%)

Assets

Cash and bank balances 6.75 8.40 12.68

13.31

Investments 16.74 15.68 6.18

7.21

Operating fixed assets 2.20 1.53 1.14

1.02



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Other assets 4.83 4.18 4.86

6.80

Liabilities

Due to other institutions 4.69 3.59 9.22

14.53

Deferred tax liabilities 0.53 0.64 0.84

3.86

Other liabilities 4.15 4.24 4.24

0.00

Net assets 7.00 8.50 10.26

10.65

Presented by:

Share capital 5.77 5.61 8.12

6.81

Reserves 0.98 1.07 1.12

1.27



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COMMENTS ON VERTICAL ANALYSIS OF BALANCE SHEET

In the year 2005, the cash and bank balances were 13.3 percent of the total assets. Similarly

the amount of investments was 7.21 percent, operating fixed assets were 1.02 percent and

the other assets were only 6.80 percent..

The balance due to other institutions was 14.53 percent and the deferred tax liability was

3.86 percent.

In the year 2005, the cash and bank balances, investments, operating fixed assets, and other

assets show a little improvement on the whole but the amount of financing could not be

improved very much.



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Ratio Analysis:

Key Indicators 2005 2006 2007 2008

Operating

Gross Profit Margin % 51.12 31.52 26.7 31.75

Operating Profit Margin % 47.64 50.74 52.96 56.45

Pre Tax Margin % 60.48 54.76 50.82 53.75

Performance

Return on total assets % 19.42 10.10 3.32 4.70

Total Assets turnover Times 0.69 0.54 0.28 0.25

Fixed Assets turnover Times 0.97 0.81 0.50 0.28

Return on Paid up % 28.70 15.41 5.57 13.58

Share Capital

Leverage

Debt Equity Ratio Times 0.60 0.38 0.09 0.40

Current Ratio Times 1.25 1.35 2.16

Quick Ratio Times 1.13 1.23 2.06

Valuation

Earnings per share Rs 3.21 1.73 0.85 1.43

(basic)

Market Price per share Rs 19.38 20.09 16.06 6.49

(average)



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INTERPRETATION OF RATIO ANALYSIS:

GROSS PROFIT MARGIN:

Gross profit margin accesses the firm's financial health by revealing the proportion ofmoney left over from revenues after accounting for the cost of goods sold. The analysis

shows that the GP is increasing over the years and therefore Fauji Cement has excess

revenues for its future operations.

OPERATING PROFIT MARGIN:

Operating margin is used to measure company's pricing strategy and operating efficiency.

It gives an idea of how much a company makes (before interest and taxes) on each dollar ofsales. The data shows that the operating margin of Fauji Cement is increasing over the

years, therefore the management of the company is operating efficently.

PRETAX PROFIT MARGIN:

The Pretax Margin measures how well a company can generate before-tax profits at the

current level of sales. The analysis of this data shows that the pretax margin of Fauji

Cement is decreasing over the years. This is a bad sign for the Fauji Cement because this

shows that the operational costs of the company are high.

RETURN ON ASSETS (ROA):

ROA gives an idea as to how efficient management is at using its assets to generate

earnings. The analysis shows that the ROA is decreasing which is not a good sign for the

company. It shows that the company is not utilizing its assets (machinery andmanufacturing plant) to manage production.

DEBT TO EQUITY RATIO:

This ratio indicates what proportion of equity and debt the company is using to finance its

assets. The analysis shows that this ratio is decreasing. This means that the company is notaggressive in financing its growth with debt.

If a lot of debt is used to finance increased operations (high debt to equity), the companycould potentially generate more earnings than it would have without this outside financing.



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CURRENT RATIO:

Current Ratio is a liquidity ratio that measures company's ability to pay its debt over thenext 12 months or its business cycle. The analysis shows that the current ratio is increasing

over the years. A high current ratio indicates safe liquidity.

QUICK RATIO:

Quick Ratio is an indicator of company's short-term liquidity. It measures the ability to useits quick assets (cash and cash equivalents) to pay its current liabilities. The analysis shows

that Fauji Cement has ratio of around 1 for the first two years but in the third year the quick

ratio has increased which is a bad sign and shows that Fauji Cement has excess levels of

inventory.

EARNINGS PER SHARE:

The earnings per share is a good measure of profitability and when compared with EPS ofsimilar companies, it gives a view of the comparative earnings or earnings power of the

firm. The analysis shows that the EPS is decreasing and this is a bad sign for the company.

PRICE EARNING RATIO:

A valuation ratio of a company's current share price compared to its per-share earnings.The analysis shows that price earnings ratio for the year 2005 and 2006 are higher than

2007 and 2008. This means that investors are losing confidence in the company and they

are willing to pay much less for per rupees of earnings.



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GRAPHS OF RATIOS:

Gross Profit Margin:

Operating Profit Margin:



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Return on Paid up:

Current Ratio:

Debt Equity Ratio:



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Earnings per share:

Market Price per share:



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CONCLUSION:

After we analyzed the ratios of the company and did a vertical and horizontal analysis of its

income statements and balance sheet we conclude that Fauji Cement needs to improve its

management because its return on assets show that the company is not utilizing its assetsefficently. Although the sales are increasing over the years but other factors such as

Operating profit margin plays an important part.

In view of the increasing inflation in the economy the COGS of the company is obviously

increasing. Fauji Cement needs to lower its COGS by introducing JIT inventory systems

and others operations management principles.

Fauji Cement has enough resources to pay its debts and the situation is satisfactory. Fauji

Cement needs to lower its operating expenses because if these are high than the profits are

reduced greately.

The debt to equity ratio shows that the firm is not following an aggressive financing policy

for its growth. Only in the year 2008 onwards its debt to equity ratio has increased showingthat the company is using more debt to finance its growth. In our opinion the company

needs to adopt aggressive debt financing policy.

To conclude we would advice the company to increase its sales by reducing its COGS and

adopting a aggressive debt financing policy.

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