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Subject: Financial Ratio Analysis
Participants
Hafiz Muhammad Nadeem (2113202)
Adnan Ashraf (2113101)
Imran Mushtaq (2113001)
( )
Submitted to: Sir Athar Ikram
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Acknowledgement
First of all we are thankful to Allah who gave us courage to grape this report then we would like to record our heart full thanks to our respected Teacher “Mr. Athar Ikram” and advisor Mr. Ammar Qasim Jaffari credit Manager at Bank Alfalah & to all Friends of Banking department who helped us in Endeavour of making this report.
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Synopsis
Topic:
The topic of our research report is to study financial Ratio analysis. Purpose:
The purpose of writing this report is to choose the best company for investment between Pakistan Telecommunication (PTCL) and Wateen Telecommunication.
Scope:
Pakistan Telecommunication (PTCL) and Wateen Telecommunication are telecom services providers in Pakistan both are playing very important role in earning GDP of Pakistan.
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Executive Summary:Ratio analysis is one of the techniques of financial analysis to evaluate the financial condition and performance of a business concern. Simply, ratio means the comparison of one figure to other relevant figure or figures. Ratio analysis is an important tool to compare financial performance of different companies. Ratio analysis is widely used to gauge profitability, liquidity, solvency etc. of a company.
We have selected telecom sector for project assigned to us by our worthy teacher Mr. Athar Ikram in subject “Financial Accounting”. M/s PTCL & M/s Wateen Telecom are the two main companies in the telecom sector of Pakistan. We are briefly describing each company before discussing financial statements of respective companies.
About PTCL:
PTCL is all set to redefine the established boundaries of the telecommunication market and is shifting the productivity frontier to new heights. Today, for millions of people, PTCL demand instant access to new products and ideas. PTCL is setting free the spirit of innovation. PTCL is going to be customer’s first choice in the future as well, just as it has been over the past six decades. For clear communication the first choice of business circles is PTCL telephone for local, nationwide and international calling. Today businesses can have 10-100 lines with modern day services to meet their needs. Different options like Caller-ID, call-forwarding, call-waiting, Call Barring etc are on PTCL’s board. Business specific services of PTCL include 0800-Toll free number, 0900-Preminum rate services, VPN-Virtual Private Network, Audio Conference Service, Digital Cross Connect (DXX), ISDN (Policy), Tele plus (ISDN/BRI), Digital Phone Facilities/ Modification Charges, UAN, UIN.
PTCL has the largest Copper infrastructure spread over every city, town and village of Pakistan with over million installed lines. The network of PTCL has over 6 million PSTN lines installed across Pakistan with more than 3 million working. Furthermore installed capacity of broadband is more than 0.6 million ports spread across 605 cities and towns of the country. PTCL has over 10,400 km fully redundant, fiber optics DWDM backbone network. It connects over 840 cities and towns with 270G bandwidth. PTCL also provides carrier services. As carriers-carrier, PTCL provides the core infrastructure services to the cellular, LDIs, Local Loop operators, ISPs, Call Centers and pay phone operators. PTCL provides all carrier services, right from inter-connects and Tele housing to DPLC and IPLC connectivity. Its interconnect services are provided from its 3200 exchange locations that connect carriers networks domestically, in addition to providing IPLC bandwidths to connect internationally through its four international gateways and SEA-ME-WE3 and SEA-ME-WE4 international submarine. Furthermore to provide connectivity to operators in the extreme remote areas of the country, PTCL launched its state of the art satellite service (Skylink). PTCL satellite service (Skylink) is provided using the Intelsat Satellite System, an undisputed leader in satellite communications.
About Wateen Telecom:
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Wateen Telecom is a converged communication services provider that fulfills connectivity requirements for organizations and individuals in Pakistan. Wateen Telecom delivers complete solutions for Internet, Voice, Multimedia and Enterprise Solutions that make it the most comprehensive provider for all of Pakistan’s communication necessities. An Abu Dhabi Group venture, Wateen’s vision is to take Pakistan into the digital revolution of the 21st Century and to make Pakistan a regional communications hub, connecting the East with the West and Central Asia with the Middle East.
Wateen began its operations in Pakistan in 2007, with the deployment of the largest fiber optic network in the country. Moreover, Wateen is the world’s first company to commercially roll out a WiMAX network on a nationwide scale. Wateen currently services over 250,000 WiMAX subscribers, provides enterprise solutions and data services to over 200 leading organizations and its wired (HFC/GPON) network reaches over 15,000 households in Lahore and Multan.
With a new strategic vision and management in place, Wateen has steadily improved its service provision and its corporate structure to adequately reflect its corporate motto and beliefs of ‘Enabling Customer Lifestyles’. Wateen is aiming to help shape the education, social and economic development in the country using broad-based internet provision
Ratio Analysis:
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1. Liquidity Ratios:
(i) CURRENT RATIOCurrent ratio is a popular financial ratio used to test a company’s liquidity by deriving the proportion of current assets available to cover current liabilities.
Wateen Telecom PTCL
Current Ratio = Current Assets Current Liability
= 8,201,38824,300,346
= 0.338
Current Ratio = Current Assets Current Liability
= 45,450,23630,192,778
= 1.505
PTCL’s liquidity position is far better than wateen. Wateen is facing problems in meeting its current financial obligations as evident from current ratio. On the other hand, PTCL can easily pay off its current liabilities by liquidating its current assets.
Graphical Representation of Current Ratio
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0.000
0.200
0.400
0.600
0.800
1.000
1.200
1.400
1.600
Wateen PTCL
Current Ratio
Current Ratio
(ii) QUICK RATIO
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Quick ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liability.
Wateen Telecom PTCLQuick Ratio =Cash & Equivalents+ Short Term Investments+ Account Receivables
Current Liability
= 7,096,23724,300,346
= 0.292
Quick Ratio =Cash & Equivalents+ Short Term Investments+ Account Receivables
Current Liability
= 30,875,17230,192,778
= 1.023
Wateen has very little capacity to meet current liabilities through its most liquid assets. PTCL is again in much better position to meet current liabilities even through more liquid assets. Liquidity ratios clearly indicating better liquidity standings of PTCL whereas Wateen is struggling for liquidity.
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Graphical Representation of Quick Ratio:
0.000
0.200
0.400
0.600
0.800
1.000
1.200
Wateen PTCL
Quick Ratio
Quick Ratio
(iii) Cash Conversion Cycle
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The cash conversion cycle (CCC) measures the number of days a company's cash is tied up in the production and sales process of its operations and the benefit it gets from payment terms from its creditors. The shorter this cycle, the more liquid the company's working capital position is. The CCC is also known as the "cash" or "operating" cycle.An often-overlooked metric, the cash conversion cycle is vital for two reasons. First, it's an indicator of the company's efficiency in managing its important working capital assets; second, it provides a clear view of a company's ability to pay off its current liabilities
Wateen Telecom PTCLCash Conversion Cycle =
Days Inventory Held+ Days A/c Receivables –Days A/C Payables
Cash Conversion Cycle =
Days Inventory Held+ Days A/c Receivables –Days A/C Payables
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a. Days Inventory Held:
Cost of Services per Day = 6,272,409 365
= 17,184.68
*Inventory = -
Days Inventory Outstanding= __ 0____
17,184.68
= 0 Days
b. Days Receivables
Revenue per Day= 7,961,103 365 = 21,811.24
Receivables = 3,097,982
Days Inventory Outstanding= 3,097,982
21,811.24
= 142 Days
c. Days Payables
Cost of Services per Day= 6,272,409 365
= 17,184.68
Payables = 5,922,431
Days Inventory Outstanding= 5,922,431 17,184.68
= 345 Days
Cash Conversion Cycle = (a+b) – c = (0+142) – 345 = -203*Since it’s a service concern it doesn’t hold inventory.
a. Days Inventory Held:
Cost of Services per Day = 38,258,711 365
= 104,818.40
*Inventory = -
Days Inventory Outstanding = __ 0____
104,818.40
= 0 Days
b. Days Receivables
Revenue per Day = 57,174,527 365 =
156,642.50
Receivables = 10,171,530
Days Inventory Outstanding= 10,171,530
156,642.50
= 65 Days
c. Days Payables
Cost of Services per Day = 38,258,711 365
= 104,818.40
Payables = 24,922,197
Days Inventory Outstanding= 24,922,197 104,818.40
= 238 Days
Cash Conversion Cycle = (a+b) – c = (0+65) – 238
= -173*Since it’s a service concern it doesn’t hold inventory.
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Cash Conversion cycle of PTCL is better than Wateen. Clearly PTCL is recovering receivables in shorter period of time and paying to its creditors with fewer days as compared to Wateen which CCC is not so liquid. The CCC is also exhibiting good liquidity position of PTCL.
2. Profitability Ratios
(i) Gross Profit to Revenue RatioA telecom service oriented company’s cost of services includes salaries, allowances, annual license fee to regulatory authority, repairs & maintenance costs, communication charges etc. This expense is deducted from the company revenue which results in company’s first level of profit, or gross profit.
Wateen Telecom PTCL
Gross Profit to Revenue Ratio = ____ GP_____
Revenue
= 2,043,302 7,961,103
= 25.66%
Gross Profit to Revenue Ratio = ____ GP_____ Revenue
= 18,915,816 57,174,527
= 33.10%
PTCL’s is effective is controlling cost of services which is evident from GP Ratio. GP Ratio is healthy and it is depicting that a good portion of profit is available for admin, selling and general expenses. Wateen’s GP Margin is lower than PTCL which indicates that its cost of services is high as compared to PTCL and its cushion for selling, admin and other expenses is little as compared to PTCL.
Graphical Representation of Gross Profit Ratio:
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0.000
5.000
10.000
15.000
20.000
25.000
30.000
35.000
40.000
Wateen PTCL
Gross Profit
Gross Profit
(ii) Net Profit to Revenue Ratio
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Net Profit Ratio shows the relationship between Net Profit of the concern and its Net Sales. In order to work out overall efficiency of the concern net profit ratio is calculated. This ratio is helpful to determine the operational ability of the concern. While comparing the ratio to previous years ratios, the increment shows the efficiency of the concern.
Wateen Telecom PTCL
Net Profit to Revenue Ratio = ____ NP_____ Revenue
= (2,020,513) 7,961,103
= -25.4%
Net Profit to Revenue Ratio = ____ NP_____ Revenue
= 9,294,152 57,174,527
= 16.26%
PTCL is generating reasonable profitability and NP is in line with industry average. NP is showing PTCL’s strong operational ability as figure is good. Figure also suggests that investors are getting reasonable return on their investments. On the other hand, Wateen Telecom is incurring loss and figure is putting question mark on its operational viability.
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Graphical Representation of Net Profit Ratio:
-30.000
-25.000
-20.000
-15.000
-10.000
-5.000
0.000
5.000
10.000
15.000
20.000
Wateen PTCL
Net Profit
Net Profit
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(iii) Return on Assets
Return on Assets ratio illustrates how well a management is employing the company’s total assets to make a profit. The higher the return, the more efficiently management is utilizing its asset base.
Wateen Telecom PTCL
Return on Assets = ____ NP_____ Total Assets
= (2,020,513) 29,710,392
= -0.068
Return on Assets = ____ NP_____ Total Assets
= 9,294,152 150,767,727
= 0.062
From the above ratio it has been noted that PTCL is generating small income from utilized assets. This figure should be better. But on the other side, Wateen is incurring loss which is alarming situation. Company management must take corrective measures to better the position.
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Graphical Representation of Return on Asset Ratio:
-0.080
-0.060
-0.040
-0.020
0.000
0.020
0.040
0.060
0.080
Wateen PTCL
Return on Assets
Return on Assets
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(iv) Return on Equity
Return on equity is also known as return on shareholders investment. The ratio establishes relationship between profit available to equity shareholders with equity shareholders funds. Return on Equity judges the profitability from the point of view of equity shareholders. This ratio has great interest to equity shareholders. The return on equity measures the profitability of equity funds invested in the firm. The investors favour the company with higher ROE.
Wateen Telecom PTCL
Return on Equity = ____ NP_____ Shareholders Equity
= (2,020,513) 4,209,667
= -0.48
Return on Equity = ____ NP_____ Shareholders Equity
= 9,294,152 99,758,711
= 0.093
PTCL is generating somewhat reasonable return on shareholders equity. Shareholders are getting reasonable return on their investment in PTCL whereas Wateen is not generating return for its shareholders rather incurring loss to their investment. Management has to take revolutionary steps to satisfy its shareholders.
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Graphical Representation of Return on Equity Ratio:
-0.080
-0.060
-0.040
-0.020
0.000
0.020
0.040
0.060
0.080
0.100
0.120
Wateen PTCL
Return on Equity
Return on Equity
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3. Solvency Ratios
(i) Interest Coverage RatioInterest coverage ratio is used to determine how easily a company can pay interest expense on outstanding debt.
Wateen Telecom PTCL
Interest Coverage Ratio = ____ EBIT_____
Interest Expense
= 354,608 1,974,257
= 0.1796
Interest Coverage Ratio = ____ EBIT_____ Interest Expense
= 14,684,358 403,240
= 36.42
PTCL holds strong financial health and can pay 36 times more than current interest expense through current level of operating profit. It’s a healthy sign and shows company’s strong financial position. But Wateen is exhibiting other side of the picture and is not able to meet interest expense through its current level of operating profit. The reason may be the high interest expense due to high debt obtained.
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Graphical Representation of Interest Coverage Ratio:
0.100
0.700
4.900
34.300
Wateen PTCL
Interest Coverage
Interest Coverage
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(ii) Debt Ratio
Debt ratio compares a company total debt to its total assets, which is used to gain a general idea as the amount of leverage being used by a company.
Wateen Telecom PTCL
Debt Ratio = ____ Total Liabilities_____ Total Assets
= 25,500,725 29,710,392
= 0.858
Debt Ratio = ____ Total Liabilities_____ Total Assets
= 51,009,016 150,767,727
= 0.338
PTCL’s debt ratio states that it has more assets than its liabilities and company may obtain further debt if needed. Wateen has already been highly leveraged as its debt is on higher side and just getting equal to company’s assets which is not a positive trend.
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Graphical Representation of Debt Ratio:
0.000
0.200
0.400
0.600
0.800
1.000
WateenPTCL
Debt Ratio
Debt Ratio
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(iii) DEBT to EQUITY RATIO
Debt ratio compares a company total debt to its total assets, which is used to gain a general idea as the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage. The lower the percentage, the less leverage of a company is using and stronger its equity position.
Wateen Telecom PTCL
Debt to Equity Ratio = ____ Total Liabilities_____ Shareholder’s Equity
= 25,500,725 4,209,667
= 6.058
Debt to Equity Ratio = ____ Total Liabilities_____ Shareholder’s Equity
= 51,009,016 99,758,711
= 0.511
PTCL is being operated at equity and debt accounts fall 50% of equity. It’s the evident of better financial health of the company. Wateen is highly leveraged company and is being run on debt which is negative sign. Its liabilities are 6 times higher than assets which is depicting weak financial health of the company.
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Graphical Representation of Debt Equity Ratio:
0.000
1.000
2.000
3.000
4.000
5.000
6.000
7.000
Wateen PTCL
Debt Equity Ratio
Debt Equity Ratio
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Conclusion:
It is obvious from above ratio analysis that PTCL is performing well and all financial indicators are showing positive trend. Wateen’s performance is not up to the mark and financial indicators reflecting negativity in financial health of the company.
An investor interested in making investment into some company considers risk and return aspects of that investment. An important tool is ratio analysis of financial statements. Since we are considering only ratios for decision making (although other factors should also be consider e.g. management, market share, stock price, future plans) and on the basis of this result we will invest in PTCL and will not make any investment in Wateen Telecom.
