Sir Nadeem r

8/3/2019 Sir Nadeem r

1/38

The Relationship between PROFITABILITY &

Various Economic Indicators

ABSTRACT:Profitability is the most discussed issue of the business sector. A number of

factors have been suggested to increase the profits of a firm. Those factors

are not always useful for all companies of a specific industry. Sometimes

situations deviate from what theories say. We have discussed the same in

this report that whether the profitability of our industry is consistent with the

theories. We have analyzed Fertilizer industry of Pakistan, taking under

consideration the statistics of four listed companies of KSE, which are as

follow:

4. Fouji Fertilizer Company Limited (FFCL)

5. Engro Chemicals Pakistan Limited (Engro)

6. Fouji Fertilizer Bin Qasim Limited (FFBL)

7. Dawood Hercules Chemicals Limited (DHCL)

Research Topic:

Linkage of following financial and economic indicators with

profitability of Fertilizer sector in Pakistan;

8. Liquidity (Current Ratio & Quick Ratio)

9. Leverage

10.Market Price Per Share

11.Year to Year Growth In Revenues

12.GDP

13.GNP

Theories about Profitability:

"Perhaps no term or concept in economic discussion is used with a morebewildering variety of well established meanings than profit."

Frank Knight (1934, p, 480).


2/38

In a noninflationary world of family firms using one-period capital inputs withno taxes or debt, measuring profit would be a relatively straightforwardmatter of deducting expenses from receipts. The accountant's books and theeconomist's books would coincide. But in the presence of long-lived assets ofvarious maturities, price changes, debt financing, and taxation, the two bookkeeping systems diverge and researchers face some difficult questions.

Should profit-type income include net interest payments? How holding gainson real assets or on net financial liabilities should be treated? Shouldprofitability be measured on gross capital stock (including depreciation in thenumerator) or net stock (excluding depreciation), and indeed are averageaccounting rates of profit meaningful at all?Trade-off theory of capital structure basically entails offsetting the costs ofdebt against the benefits of debt. MM 1963 introduced the tax benefit ofdebt. Later work led to an optimal capital structure which is given by thetrade off theory. The first element usually considered as the cost of debt isusually the financial distress costs or bankruptcy costs of debt. It is importantto note that this includes the direct and indirect bankruptcy costs.

Trade-off theory can also include the agency costs from agency theory as acost of debt to explain why companies dont have 100% debt as expectedfrom MM 1963. 95% of empirical papers in this area of study look at theconflict between managers and shareholders. The others look at conflictsbetween debt holders and shareholders. Both are equally important toexplain how the agency theory is related to the trade-off theory.

Following is a brief description of profitability in term of several financial andeconomic indicators.

Leverage and profitability

Theories of capital structure indicate that profitability is an important

determinant of leverage. Element of financial risk is high in highly leveragedcompanies as compared to low leveraged companies. Equity holders are tobe rewarded with a higher financial premium in case of highly gearedcompanies. The more the leveraged firm, more the profits are related to itaccording to the general perception.

Liquidity & Profitability

The firms are considered more sustainable which have good liquidity. This is

backed by the phrase, one in hand is better than two in the bush. The profits

are related to it theoretically. More liquid a firm is, more strongly it can face

its creditors. This will ultimately increase firms strength.

Market price/share & profitability

Usually as per analysis market value of share is linked to profitability and

dividends of the company which is also inherently linked with profits of the

company. Companies in fertilizer sector with substantial profits have a higher

market value as compared to companies with low profits. So it is perceived


3/38

that higher market value of a firm leads to higher profitability.

Growth in Revenues & profitability

Growth in revenues determines the future outlooks and market value of the

company. As revenue increases it not only helps to increase the value of

shareholder but provides liquidity to finance the profitable projects which

may lead to integration and diversification.

GDP & Profitability

GDP is an economic indicator showing income on domestic basis. Usually

when GDP of a country increases, the firms and industries flourish. Increase

in GDP, thus, have a direct impact on profitability.

GNP & Profitability

It is also an economic indicator on national and international basis.

Increase in exports and decrease in imports of fertilizer products would lead

to increase in GNP. Hence exporting more products may lead firms to earn

more and increased profitability.

A Brief Overview of Fertilizer Sector in Pakistan:

Pakistan, an impoverished and underdeveloped country, has suffered from

decades of internal political disputes, low levels of foreign investment, and a

costly, ongoing confrontation with neighboring India. However, IMF-approved

government policies, bolstered by generous foreign assistance and renewedaccess to global markets since 2001, have generated solid macroeconomic

recovery the last five years.

Pakistan has moved from an economy heavily dependent on agriculture to arelatively balanced economy based on services, industry and agriculture. Asof FY07, agriculture contributed 20% to the overall GDP. The governmentpolicies are directed towards improvement of agricultural output throughincreased credit disbursements to the agricultural sector and improvement inirrigation.

Fertilizer usage in Pakistan is low and the current fertilizer consumptionstands at 162.5kg per hectare. This is in large part responsible for the lowyield per hectare of cultivated land which stands at 1.44tn per hectare.Fertilizer consumption closely follows economic growth of the country asexhibited by the strong positive correlation (R2=0.9841) between fertilizerconsumption per hectare and nominal GDP. As the economy is expected toperform well in the future with an estimated nominal GDP growth of 14%, weexpect fertilizer penetration to increase to 187kg per hectare. This greaterdemand is expected to continue in the future as economic growth continues.

The industry capacity currently stands at 5.8mntpa whereas local demand is


4/38

6.8mntpa. This excessive demand ensures sales of total production.Pakistans fertilizer manufacturers have low resource costs due to feedstockgas subsidy advanced by the government. Through this subsidymanufacturers are able to get feed stock gas at significantly lower rates thanthe market which improves their profitability. This subsidy is expected toremain in place at least for the next three to four years i.e. until the industry

faces an excess supply situation. Later on the subsidy may be withdrawnfrom that portion of production which is exported. Production directedtowards local sales is expected to continue receiving the subsidy. TheCompanies in our coverage are dominant players who hold attractiveinvestment portfolios. This includes FFCs investments in FFBL and ENGROsinvestments in various subsidiaries.

Types of fertilizer

Urea, which represents 65% of total fertilizer consumed and di-ammoniumphosphate (DAP), which accounts for 18%, are the main types of fertilizerused in Pakistan, but there is a total of eight different fertilizer productswhich fall into three categories.

Urea, along with calcium ammonium nitrate (CAN) and ammonium sulphate(AS) together make up almost three fourths of total fertilizer consumptionand come under the nitrogenous category. Under the phosphatic categorywhich makes up about 27%, is DAP, triple super phosphate (TSP), singlesuper phosphate (SSP) and nitrophosphate (NP). And under the last category,potassic is sulphate of potash which makes up only 1%.

Since the soil in Pakistan generally tends to be deficient in nitrogen, urea isthe most used fertilizer. DAP is used, as most phosphatic fertilizers are tocounter the effect of the acidic urea and maintain levels of fertility in the soil.

Pakistans agricultural output has suffered in the recent past due to adverse

weather conditions and crop spoilage. The government is omitted to improveagriculture performance through the following measures1) Irrigation system improvement2) Subsidy to farmers.3) Encouraging use of fertilizer.4) Above average credit disbursementsAs a result of these policies, yield per hectare of Pakistan is showing gradualimprovement although it is still low as compared to other countries.Currently it stands at 1.44tn per hectare.

Statistical AnalysisHYPOTHESIS TESTING

H0: Liquidity, measured by current ratio has no significant

effect on profitability.


5/38

H0: Higher degree of leverage does not lead to change in

profitability in fertilizer sector firms listed on KSE.

H0: MARKET PRICE PER SHARES has no significant effect on

profitability.H0: GDP has no significant effect on profitability.

H0: GNP has no significant effect on profitability.

H0: Growth in Revenues has no significant effect on

profitability.

Before going to an industry analysis, there is an individual analysis of each

firm how the profitability of the firm is affected by liquidity ratio.

Testing tool: CHI SQUARE and LINEAR REGRESSION

LINKAGE OF CURRENT RATIO ON PROFITABILITY

FAUJI FERTILIZERS:-

Fauji Fertilizer is directly affected by liquidity, as the co-efficient of determination(R=76%) indicates strong relationship between the two variables. Also looking at related

graph, we find upward trend in profitability as liquidity increases.For Fouji Fertilizer, there is positive relationship between profitability and current ratio ofliquidity.

Model R R SquareAdjusted RSquare

Std. Error ofthe Estimate Durbin-Watson

1 .760(a) .577 .436 5.80487 2.227


6/38

a Predictors: (Constant), Current Ratio

b Dependent Variable: %age change in EBIT

-1.5 -1.0 -0.5 0.0 0.5 1.0

Regression Standardized Residual

0.0

0.5

1.0

1.5

2.0

Frequency

Mean = 1.28E-15

Std. Dev. = 0.866

N = 5

Dependent Variable: %age change in EBIT

Histogram

FAUJI FERTILIZERS BIN QASIM:-

Model of FFBL indicates that the company is not as much dependent on the

liquidity as Fouji Fertilizers. Again strong correlation can be seen in the above

table. But the co efficient of determination is weaker, which shows that

though a positive relation exist between profitability and liquidity, but theheight of strength is not as much as for others. D-W value is more than 2,

which mean that there is no auto correlation in the data.



1 .627(a) .393 .190 62.30031 2.805

a Predictors: (Constant), Current Ratiob Dependent Variable: %age change in EBIT


7/38

-1.0 -0.5 0.0 0.5 1.0 1.5


0.0

0.5

1.0

1.5

2.0

Frequency

Mean = 9.44E-16

Std. Dev. = 0.866

N = 5


Histogram

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedC

umProb


Normal P-P Plot of Regression Standardized Residual

DAWOOD HERCULES:-

Dawood Hercules has less affect of liquidity, as R2 is 12.9% which mean that

the relation is not significantly strong. Also adjusted R square is negative,which is also clearly indicating that the liquidity is not a big consideration in

Dawood Hercules. We also ran regression and F-stats for Dawood Hercules,

so that we should have better insight of the liquidity and profitability. That

showed no any significant relation between the two variables.

Model Summary(b)


8/38



1 .359(a) .129 -.162 45.09484 3.288


ANOVA(b)

ModelSum of Squares Df Mean Square F Sig.

Regression

901.015 1 901.015 .443 .553(a)

Residual 6100.633 3 2033.544

Total 7001.648 4


Coefficients(a)

UnstandardizedCoefficients

StandardizedCoefficients

B Std. Error Beta

(Constant)

36.348 43.596 .834 .466

CurrentRatio

-14.602 21.936 -.359 -.666 .553

a Dependent Variable: %age change in EBIT

-1.0 -0.5 0.0 0.5 1.0 1.5


0.0

0.5

1.0

1.5

2.0

Frequency

Mean = 8.33E-17

Std. Dev. = 0.866

N = 5


Histogram


9/38

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedCumProb



ENGRO CHEMICALS:-

Engro Chemicals is surprisingly different from the rest of industry, while

analyzing for liquidity. The company has no significant effect of current ratio

on profits. Very low values of R and R2 mean that the positive relation

between CR and profitability has no any significance. For certainty, we also

analyzed this company by running regression and constructing ANOVA table,

but it did not show any indication which can prove strong relation between

liquidity and profitability.

Model Summary(b)


Std. Error ofthe Estimate

1 .047(a) .002 -.497 17.10329

a Predictors: (Constant), Current ratiob Dependent Variable: EBIt % age change

ANOVA(b)

ModelSum of Squares df Mean Square F Sig.

Regression

1.307 1 1.307 .004 .953(a)

Residual 585.045 2 292.522

Total 586.352 3

a Predictors: (Constant), Current ratiob Dependent Variable: EBIt % age change


10/38

Coefficients(a)



B Std. Error Beta

(Constan

t)

27.257 28.322 .962 .437

Currentratio

-.898 13.433 -.047 -.067 .953

a Dependent Variable: EBIt % age change

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

Expected

CumProb

Dependent Variable: EBIt % age change


LINKAGE OF LEVERAGE WITH PROFITABILITY

FAUJI FERTILIZERS:-

Even debt is the most dependent variable of todays firms, but here in the

fertilizer sector of Pakistan, its contradictory to that. The Fouji Fertilizer is less

dependent on the debt so this is a low leveraged firm. Following model is

giving clear indication that there is very low association (R2=.236) between

the two variables.

Model Summary



1 .486(a) .236 -.018 7.79986 2.183

a Predictors: (Constant), Leverage%b Dependent Variable: EBIT % age change

Also Adjusted R square is negative, which tells that after the adjustment wedont see any strong relation between profitability and leverage. But positivevalue of beta (.486) tells that an upward slope exist between variables, so at


11/38

least they have connection.

Coefficients



B Std. Error Beta(Constant)

-93.998 109.682 -.857 .454

Leverage%

1.906 1.977 .486 .964 .406

a Dependent Variable: EBIT % age change

-1.0 -0.5 0.0 0.5 1.0 1.5


0.0

0.5

1.0

1.5

2.0

Frequenc

y

Mean = -5.55E-16

Std. Dev.= 0.866

N = 5

Dependent Variable: EBIT % age change

Histogram

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedCumProb

Dependent Variable: EBIT % age change


FAUJI FERTILIZERS BIN QASIM LIMITED:-

Model Summary



1 .808(a) .653 .538 .81198 1.708

a Predictors: (Constant), EBIT %age change


12/38

b Dependent Variable: Leverage %

The negative value of beta (-0.808) in the following table indicates an inverserelationship between debt and profitability. The results are surprising in thisindustry. There are some valid reasons for this, we will discuss them later. Soeven the theory is opposite to it, but there is no dependence of profitabilityon leverage.

Coefficients


StandardizedCoefficients 95% Confidence Interval fo

B Std. Error Beta Lower Bound Upper Bo

(Constant) 69.600 .460 151.415 .000 68.137 71.063

EBIT %agechange

-.014 .006 -.808 -2.379 .098 -.033 .005

a Dependent Variable: Levergae %

-1.0 -0.5 0.0 0.5 1.0 1.5


0.0

0.5

1.0

1.5

2.0

Frequ

ency

Mean = 2.1E-14

Std. Dev. = 0.866

N = 5

Dependent Variable: Levergae %

Histogram

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedCumPr

ob

Dependent Variable: Levergae %


DAWOOD HERCULES:-

Model Summary

Model R R Square

Adjusted R

Square

Std. Error of

the Estimate Durbin-Watson1 .535(a) .287 .049 40.80494 2.634

a Predictors: (Constant), leverage%b Dependent Variable: %age change in EBIT

Following table of coefficients shows a negative beta (-0.535), which meanthe debt and profitability are oppositely related. Because there is no positiverelation between two variables, discussion of strength of correlation isuseless.

Coefficients


13/38



B Std. Error Beta

(Constant)

81.926 67.470 1.214 .312

leverage%

-2.574 2.345 -.535 -1.098 .353


-1.0 -0.5 0.0 0.5 1.0 1.5


0.0

0.5

1.0

1.5

2.0

Fre

quency

Mean = 2.5E-16

Std. Dev. = 0.866

N = 5


Histogram

ENGRO CHEMICALS:-

Model Summary(b)



1 .261(a) .068 -.398 16.52835

a Predictors: (Constant), Leverageb Dependent Variable: EBIT % age change

ANOVA(b)


Regression

39.979 1 39.979 .146 .739(a)

Residual 546.373 2 273.186

Total 586.352 3

a Predictors: (Constant), Leverageb Dependent Variable: EBIt % age change

Positive value of beta (0.261) indicates a positive relation between leverageand profitability. Engros profits are related to debt, though not strongly.

There are very low values of R2 and a negative value of adjusted R2, whichmean that the correlation is weak.

Coefficients(a)




14/38

B Std. Error Beta

(Constant)

15.868 26.383 .601 .609

Leverage

.321 .840 .261 .383 .739

a Dependent Variable: EBIt % age change

We also constructed ANOVA table to see deeply, that either the relation isreally weak. The answer is, yes. This is due to the low F-value, which is notsignificant for the hypothesis to be accepted.

-1.0 -0.5 0.0 0.5 1.0


0.0

0.2

0.4

0.6

0.8

1.0

Frequency

Mean = -5.55E-17

Std. Dev.= 0.816

N = 4


Histogram

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedC

umProb



INDUSTRY ANALYSIS AND

HYPOTHESIS TESTING

H0: Liquidity, measured by current ratio has no

significant effect on profitability.

TEST OF ASSOCIATION USING CHI SQUARE:-

Chi-Square Tests

Value Df Asymp. Sig.(2-sided)

Pearson Chi-Square 304.000(

a) 289 .261Likelihood Ratio 106.344 289 1.000Linear-by-LinearAssociation

.046 1 .830

N of Valid Cases19

a 324 cells (100.0%) have expected count less than 5. The minimum expected count is .05.

Results:


15/38

Pearson chi square test rejects the above described null hypothesis.

0.94 0 .9 0.9 1 1 .07 1.0 4 1 .17 1.34 1.46 1.53 1.53 3.15 1.2 0.45 2.07 2.033.1 1.6 1 .8 1 .5 4

10.5

2.1

11.6

23.78

10.5

3.8

-4

37.46

167.4

35.67

-30.2

46.2

1.7

61.8

-26.4

22.9

6.99

39.07

32.79

-50

0

50

100

150

200

1 2 3 4 5 6 7 8 9 10 11 12 1 3 14 15 16 17 18 19

EBIT % age change

CurrentRatio

]Curre

REGRESSION ANALYSIS:-

Model Summary(b)



1 .050(a) .003 -.056 43.03341


ANOVA(b)


Regression

80.414 1 80.414 .043 .837(a)

Residual 31481.866

17 1851.874

Total 31562.280

18

a Predictors: (Constant), Current Ratio


16/38


Results:

Running simple regression on the fertilizer industry, the hypothesis isrejected, due to insignificant value of F-stats.

Thus we can interpret that the fertilizer sectors profitability is dependent

upon liquidity measured by current ratio.Coefficients(a)



B Std. Error Beta

(Constant)

28.480 24.197 1.177 .255

CurrentRatio

-3.035 14.565 -.050 -.208 .837


-2 -1 0 1 2 3 4


0

1

2

3

4

5

6

Frequency

Mean = -1.13E-16

Std. Dev. = 0.972

N = 19


Histogram

0.0 0.2 0 .4 0.6 0.8 1 .0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedC

umProb

Dependent Variable: %age change i n EBIT



17/38

H0: Higher degree of leverage does not lead to

change in profitability in fertilizer sector firms

listed on KSE.

TEST OF ASSOCIATION USING CHI SQUARE:-

-50

0

50

100

150

200

1 2 3 4 5 6 7 8 9 10 11 1 2 13 14 15 16 17 18 19 2 0

LEVERAGE%

EBIT%C

hange

EBIT %

REGRESSION ANALYSIS:-


18/38

Coefficients(a)



B Std. Error Beta

(Constan

t)

4.153 26.130 .159 .876

Leverage%

.426 .524 .193 .813 .428


Result:

We shall reject the null hypothesis. So the leverage is significant in increasingthe profitability.

-2 -1 0 1 2 3 4


0

1

2

3

4

5

6

7

Frequency

Mean = -1.39E-17

Std. Dev. = 0.972

N = 19


Histogram

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedCumProb



Results:

The regression and chi square tests conclude that the fertilizer industry has

positive association with debt in term of profitability. Thus the correlations

are not strong enough, but the positive values of R and beta mean that

leverage effects the industry according to the theory.

LINKAGE OF MARKET PRICE PER SHARES WITH

PROFITABILTY

H0: MARKET PRICE PER SHARES has no significant

effect on profitability.

FAUJI FERTILIZERS


19/38

FAUJI FERTILIZERS BIN QASIM

DAWOOD HERCULES

ENGRO CHEMICALS

The model of regression is constructed for all the companies simultaneously.

Looking at the coefficients, the negative value of beta tells that the market

price per share has no positive relation with profitability. The values of R and

R2 are very low, so it comes out that profitability is independent of market

price per share, for these four fertilizer companies.

Model Summary (b)



1 .260(a) .068 -.398 16.53155

Predictors: (Constant), Market price per shareB Dependent Variable: EBIT % age change

ANOVA (b)


Regression

39.768 1 39.768 .146 .740(a)

Residual 546.584 2 273.292

Total 586.352 3

Predictors: (Constant), Market price per shareB Dependent Variable: EBIT % age change

Coefficients (a)



B Std. Error Beta

(Constant) 36.787 30.843 1.193 .355

Market priceper share

-.062 .163 -.260 -.381 .740



20/38

-1.5 -1.0 -0.5 0.0 0.5 1.0


0.0

0.5

1.0

1.5

2.0

Frequency

Mean = 1.94E-16

Std. Dev.= 0.816

N = 4


Histogram

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedCumProb



Hence we concluded that there is no significant relationship between profits

before taxes and interests and market price per share.

LINKAGE OF GDP WITH PROFITABILTY

H0: GDP has no significant effect on profitability.

FAUJI FERTILIZERS:-

Positive value of beta indicates relationship of profitability and GDP.

Increasing the GDP, increases the profits of fertilizer companies. Though the


21/38

relationship is not very strong but it exists.

Model Summary (b)



1 .258(a) .066 -.245 8.62542a Predictors: (Constant), GDPb Dependent Variable: %age change in EBIT

ANOVA table shows that the significance of relation is very weak.

ANOVA(b)


Regressi

on

15.854 1 15.854 .213 .676(a)

Residual 223.194 3 74.398

Total 239.048 4

a Predictors: (Constant), GDPb Dependent Variable: %age change in EBIT

Coefficients(a)



B Std. Error Beta

(Constant)

2.778 19.665 .141 .897

GDP 1.279 2.771 .258 .462 .676a Dependent Variable: %age change in EBIT

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5


0.0

0.5

1.0

1.5

2.0

Frequency

Mean = 1.25E-16

Std. Dev.= 0.866

N = 5


Histogram

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

Ex

pectedCumProb



The trend can be seen from the graph above, that GDP is an indicator of

increasing profits.


22/38


23/38

Model Summary(b)



1 .302(a) .091 -.212 46.05497

a Predictors: (Constant), GDP

b Dependent Variable: %age change in EBITDawood Hercules has a positive and greater value of beta than that ofprevious. Mean there is positive slope between GDP and profitability ofDawood Hercules.

ANOVA(b)


Regression

638.467 1 638.467 .301 .621(a)

Residual 6363.181 3 2121.060

Total 7001.648 4

a Predictors: (Constant), GDP


The value of F is not so significant that we can conclude a strong relationshipbetween the two variables.

Coefficients(a)



B Std. Error Beta

(Constant)

-45.870 105.002 -.437 .692

GDP 8.116 14.793 .302 .549 .621


0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

E

xpectedCumProb




24/38

GDP AND EBIT

-50

0

50

100

150

200

2007 2006 2005 2004 2003

%

ofsa

le

GDP EBIT

Looking at the graph we cannot conclude a relationship, but the positive

value of R and beta cannot be ignored so easily.

ENGRO CHEMICALS:

Engro Chemicals is strongly correlated with GDP. The very high value of Rand beta (0.869) mean a positive slope between profitability and GDP. The

value of R2 (75.6%) and adjusted R2 are both consistent with the

relationship.

Model Summary (b)



1 .869(a) .756 .634 8.45896

a Predictors: (Constant), GDPb Dependent Variable: EBIT % age change

While we constructed ANOVA table, we see that the value of F is significantlylarge indicating strong relationship between profitability and GDP.

ANOVA (b)


Regression

443.244 1 443.244 6.195 .131(a)

Residual 143.108 2 71.554

Total 586.352 3

a Predictors: (Constant), GDPB Dependent Variable: EBIT % age change

Coefficients (a)



B Std. Error Beta

(Constant)

-61.659 35.255 -1.749 .222


25/38

GDP 11.576 4.651 .869 2.489 .131

A Dependent Variable: EBIT % age change

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedCumProb



GDP AND EBIT

0

5

10

15

20

25

30

35

40

45

2007 2006 2005 2004 2003

%ofsales

GDP EBIT

From the graph, the results can be interpreted, that the fluctuations in

profitability are connected to the GDP.

LINKAGE OF GNP WITH PROFITABILTY

H0: GNP has no significant effect on profitability.

FAUJI FERTILIZERS:-

The relation between GNP and EBIT (profitability) is not much significant. The

reason is negative value of beta (-0.070). The values of R and R2 are of no

use that the relation is inverse between the two variables.

Model Summary(b)


26/38



1 .070(a) .005 -.327 8.90487

a Predictors: (Constant), GNPb Dependent Variable: %age change in EBIT

ANOVA table also does not give any strong relation between two variables asthe F value is very low.ANOVA(b)


Regression

1.158 1 1.158 .015 .911(a)

Residual 237.890 3 79.297

Total 239.048 4


Coefficients(a)



B Std. Error Beta

(Constant)

15.692 33.441 .469 .671

GNP -.559 4.624 -.070 -.121 .911


0

5

10

15

20

25

2007 2006 2005 2004 2003

GDP

EBIT %AGE CHANGE


27/38

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedCumProb

Dependent Variable: %age change i n EBIT


The insignificance can be seen in the above graph between EBIT and GNP, for

Fouji Fertilizer.


The value of beta is negative again, so the relation is inverse between GNP

and EBIT. Adjusted R2 is also negative, insisting to not accept the correlation

between the variables.

Model Summary(b)



1 .226(a) .051 -.265 77.89087

a Predictors: (Constant), GNP


ANOVA table gives very low F-value, indicating no significant relationbetween two variables.

ANOVA(b)


Regression

976.137 1 976.137 .161 .715(a)

Residual 18200.962

3 6066.987

Total 19177.099

4


Coefficients(a)



B Std. Error Beta

(Constant)

164.562 292.511 .563 .613

GNP -16.225 40.450 -.226 -.401 .715


28/38


0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedCumProb



GNP AND EBIT

-50

0

50

100

150

200

2007 2006 2005 2004 2003

%ofsales

GNP EBIT

The graph tells the opposite fluctuations among the two variables, indicating

weak relationship.

DAWOOD HERCULES:-

Model Summary (b)



1 .507(a) .257 .009 41.64856


The negative beta value (-.507) tells that the variables are again inverselyrelated. So apparently there is no relationship between EBIT and GNP.

ANOVA(b)


Regression

1797.841 1 1797.841 1.036 .384(a)

Residual 5203.807 3 1734.602

Total 7001.648 4



29/38

ANOVA is also unable to build any significant relation between two variables.

Coefficients(a)

Unstandardized

Coefficients

Standardized

Coefficients

B Std. Error Beta

(Constant)

168.719 156.407 1.079 .360

GNP -22.019 21.629 -.507 -1.018 .384


GNP AND EBIT

-50

0

50

100

150

200

2007 2006 2005 2004 2003

%

ofsale

GNP EBIT

The graph is again oppositely sketched, so no direct relationship of

profitability on GNP.

ENGRO CHEMICALS:-

Model Summary(b)



1 .656(a) .431 .146 12.91730

a Predictors: (Constant), GNPB Dependent Variable: EBIT % age change

Engro is positively correlated with GNP, like in GDP, in term of profitability.The significance is strengthened by large and significant value of F in ANOVAtable.

ANOVA (b)


Regression

252.638 1 252.638 1.514 .344(a)

Residual 333.713 2 166.857

Total 586.352 3

a Predictors: (Constant), GNP


30/38

B Dependent Variable: EBIT % age change

Coefficients (a)



B Std. Error Beta

(Constant)

-34.191 48.900 -.699 .557

GNP 8.401 6.827 .656 1.230 .344


0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedCumProb



GNP AND EBIT

0

5

10

15

20

25

30

35

40

45

2007 2006 2005 2004 2003

%ofsales

GNP EBIT

The fluctuations in the graph can be noticed. They are along the same


31/38

proportion, giving strong relationship between GNP and EBIT.

LINKAGE OF GROWTH IN REVENUE WITHPROFITABILITY:

H0: Growth in Revenues has no significant effect on

profitability.

FAUJI FERTILIZERS:-

There is very strong relation between growth in revenues and profitability.

The large values of R and adjusted R2 are clear indications that the profits

are dependent upon change in revenues.

Model Summary (b)



1 .682(a) .465 .286 6.53108

a Predictors: (Constant), MKT PRICEb Dependent Variable: %age change in EBIT

ANOVA (b)

Model

Sum of

Squares df Mean Square F Sig.Regression

111.083 1 111.083 2.604 .205(a)

Residual 127.965 3 42.655

Total 239.048 4

a Predictors: (Constant), MKT PRICEb Dependent Variable: %age change in EBIT

The value of F-stats is also significantly high that we can easily conclude thestrong relationship between the two variables.

Coefficients(a)



B Std. Error Beta

(Constant)

-20.823 20.352 -1.023 .382

MKTPRICE

.273 .169 .682 1.614 .205



32/38

-1.0 -0.5 0.0 0.5 1.0


0.0

0.5

1.0

1.5

2.0

Frequency

Mean = 6.66E-16

Std. Dev. = 0.866

N = 5


Histogram

0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedCumProb




Model Summary(b)



1 .981(a) .963 .950 15.44412

a Predictors: (Constant), GROWTH IN REVENUESb Dependent Variable: %age change in EBIT

Fauji Fertilizer Bin Qasim is also strongly correlated with Revenues in term of profitability, due to very strongR values (98.1%).

ANOVA (b)


Regression

18461.536

1 18461.536 77.400 .003(a)

Residual 715.563 3 238.521


33/38

Total 19177.099

4

a Predictors: (Constant), GROWTH IN REVENUESb Dependent Variable: %age change in EBIT

Coefficients(a)



B Std. Error Beta

(Constant) 6.433 8.373 .768 .498

GROWTH INREVENUES

1.283 .146 .981 8.798 .003


0.0 0.2 0.4 0.6 0.8 1.0

Observed Cum Prob

0.0

0.2

0.4

0.6

0.8

1.0

ExpectedCumProb



Growth in ReVenue AND EBIT

-50

0

50

100

150

200

2007 2006 2005 2004 2003

%

ofsales

GROWTH IN

REVENUES %EBIT

Looking at the graph, we can see the strong relation between two variables.

DAWOOD HERCULES:-

The profitability of Dawood Hercules is strongly dependent upon the change

in revenues. The R value is high which shows strong correlation.


34/38

Model Summary (b)



1 1.000(a) 1.000 1.000 .00000

a Predictors: (Constant), GROWTH IN REVENUES %


ANOVA(b)


Regression 7001.648 1 7001.648 . .(a)Residual .000 3 .000

Total 7001.648 4

a Predictors: (Constant), GROWTH IN REVENUES %b Dependent Variable: %age change in EBIT

Coefficients(a)



B Std. Error Beta

(Constant) .000 .000 . .

GROWTHINREVENUES%

1.000 .000 1.000 . .


Growth in revenues AND EBIT

-50

0

50

100

150

200

2007 2006 2005 2004 2003

%ofsales Growth in

RevenuesEBIT


35/38

The graph also tells strong association between profitability and growth in

revenues.

ENGRO CHEMICALS:-

Model Summary (b)



1 .278(a) .077 -.384 16.44862

a Predictors: (Constant), Growth in revenuesB Dependent Variable: EBIT % age change

Though the relationship is direct due to positive values of R and beta, but thestrength is not as high as in the other company case.

ANOVA(b)


Regressi

on 45.237 1 45.237 .167 .722(a)Residual 541.114 2 270.557

Total 586.352 3

a Predictors: (Constant), Growth in revenuesb Dependent Variable: EBIT % age change

The F-value is not as highly significant as in the case of other companies.Coefficients(a)



B Std. Error Beta

(Constant)24.120 8.846 2.727 .112Growth in

revenues.120 .294 .278 .409 .722


-1.5 -1.0 -0.5 0.0 0.5 1.0


0.0

0.5

1.0

1.5

2.0

Frequency

Mean = 2.78E-17

Std. Dev. = 0.816

N = 4


Histogram


36/38

CONCLUSION

The four firms are analyzed in our study of fertilizer sector of Pakistan.

We came with following results.

14.Liquidity has statistically significant positive effect on the

profitability of fertilizer industry.

15.In fertilizer sector, leverage does not significantly affect the

profitability of firm.

16.Average market Price per Share has no significant effect on

profitability of fertilizer industry.

17.Year to year Growth in Revenues has significant effect on the

profitability of firms in Fertilizer Industry of Pakistan

18.GNP of country has significantly positive effect on the

profitability of firms.

19.GDP of Pakistan has statistically significant effect on the

profitability of the firms in Fertilizer Industry of Pakistan.


37/38

KEY FINDINGS

20.After having deep insight of the fertilizer sector, we see that the

sector keeps high level of liquidity. Because this is a chemical

industry, and all chemical industries keep high liquidity. Becausethe chemicals used in the production cannot be acquired once in

a year due to their vulnerability to expire. So they have to buy on

regular basis. So their liquidity is high.

21.We came with another finding, that the current ratio and quick

ratios are almost same. Which simply mean that they dont have

high inventory piled up? That is why; we didnt use the quick

ratio along with current ratio.

22.All over the world, the corporations and financial institutes aremoving toward debt financing to be saved against government

taxes. But contrary to this all, the fertilizer sector in Pakistan is

mostly not depending upon it, as per statistical analysis.

23.The reason for above said implications is simple. The fertilizer

sector is a selling sector like automobile industry. Whatever they

produce is must be sold because of higher demand. So they

dont have high level of receivables, instead they take money in

advance. So they dont have any risk in the business, and the

profits are not highly related to the leverage.


38/38

REFERENCES:

http://wiki.answers.com

www.levy.org/pubs

www.engro.com

www.ffc.com.pk

www.ffbl.com

www.dawoodhercules.com

www.sbp.org.pk

www.fertilizer.org

www.pakistaneconomist.com

www.allbusiness.com

www.goliath.ecnext.com

Documents

Sir Nadeem r