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Financial Analysis

Silverstone

Chapter 6 FINANCIAL ANALYSIS

This chapter is based on the financial analysis of the company. First the
accounting polices of the company is given, and then the financial analysis of
the company is explained by using different financial ratios.

6.1 Significant Accounting Policies


The company follows the following accounting policies.

6.1.1 Accounting Convention

These accounts have been prepared under the historical cost convention in
accordance with the schedule “ v” of the companies ordinance, 1984.

6.1.2 Fixed Operating Assets

These are stated at cost less accumulated depreciation, except land leasehold
which is stated at cost. Depreciation has been charged by applying reducing
balance method at the normal rates. Full depreciation will be provided on
additions, irrespective of the date of additions.

6.1.3 Stock and Stores


These are valued as under:

a. Raw material: At annual average cost.

b. Finished goods: At lower of cost or net realizablevalue.

c. Stores and spares: At moving average cost.


Financial Analysis
Silverstone

6.1.4 Turn Over Tax


In the light of the decision of supreme court dated 04-06-1997, the units
enjoying the tax holiday period under clause 118-C are exempted from the
payment of turn over lax u/s 80-D, hence the provision for turn over tax has
not bee made in these accounts.

6.1.5 Figures

 Have been rounded off to the nearest rupee.

 Of the previous year have been re-arranged and regrouped.

6.2 Ratios Analysis


The financial analysis Silverstone (Pvt) limited is based upon the company’s
annual audited report. There are different financial analysis procedures that
can be adopted to measure the financial strength of a company. A couple of
these procedures are financial ratios calculated from the annual balance sheet
and statement or cost of goods sold statement, to measure and locate the exact
causes of variation in income in two successive years.

The financial ratios upon which the for-going analysis is going to be based can
be categorized in three broad categories.

a. Profitability Ratios

b. Asset Utilization Ratios

c. Liquidity Ratios
Financial Analysis
Silverstone

BALANCE SHEET (Rs.)


Share Capital 2001 2000
1. Authorized 4000000 ordinary
Shares of RS: 100 / each 40,000,000 40,000,000

2. Issued subscribed and paid up 3,116,000 31,160,000

3. Unappropriated profit 16,196,038 12,337,078

4. Log term loans 457,667 690,667

5. Log term deposits 1,290,000 4,031,911

6. Lease many payable 60,000 900,000

CURRENT LIABILITY
1. Current portion of long term

loans 2,323,000 6,332,668

2. Current portion of lease money

payable 30,000 30,000

3. Short term borrowings 18,606,962 429,556

4. Accruals and other liabilities 7,675,895 5,591,812

PROPERTY AND ASSETS

1. Fixed operating Assets 48,499,991 42,749,333


2. Intangible Assets 4,500 4,500

3. Long term deposits 1,153,425 666,645

CURRENT ASSETS
1. Store and spares 19,509 98,148

2. Stock in trade 1,129,296 13,419,871

3. Trade debtors 13,624,107 6,672,698

4. Advances deposits, prepayments


Financial Analysis
Silverstone

and other accruals 63,337,773 5,887,1333


Financial Analysis
Silverstone

INCOME STATEMENT (Rs.)


2001 2000

Sale 103,967,467 8,748,227

COGS (87,666,934) (72,895,970)

Gross profit 16,900 14,584,317

OPERATING EXPENSES

Administrative (8,704,462) (8,035,515)

Selling & distribution (1,473,124) (1,442,475)

Financial (2,998,884) (2,526,870)

OPERATING PROFIT 37224064 2579,457

Other income 1975,38 280,954

Profit before taxation 3,921,642 2608411

Taxation 62,882 379,628

Profit After Taxation 3,858,960 2,928,039

Unappropriated brought

toward profit 12,337,078 9,409,039

Unappropriated carried

forward 16,196,038 12,337,078


Financial Analysis
Silverstone

6.2.1 Profitability Ratios


Net Income
1. Profit Margin =
Sales
2,928 ,039
2000 = = 3.34 %
87 ,480 ,227
3,858 ,960
2001 = =3.71 %
103 ,967 ,467

PROFIT MARGIN

3.71%
0.04 3.34%
0.035
0.03
0.025
0.02 Series2
0.015 Series1
0.01
0.005
0
0
1 2
2000 2001

Source: Silverstone Annual Report, 2001.

As obvious the profit margin has increased from 3.34% to 3.71. This is
due to the increased income in 2001.
Financial Analysis
Silverstone

Net Income
2. Return on Asset = Total Assets

2,328 ,039
2000 = =10 .67 %
27 ,428 ,219

3,858 ,960
2001 = =11 .939 %
32 ,341 ,651

RETURN ON ASSETS

12.50%
11.94%
12.00%

11.50%

11.00%
10.67%
10.50%

10.00%
2000 2001

Source: Silverstone Annual Report, 2001.


Financial Analysis
Silverstone

Net Income
3. Return on equity = Equaity

292 ,8039
2000 = =0.0673 %
43 ,497 ,078

3858 ,960
2001 = =0.081 %
42 ,356 ,038

RETURN ON EQUITY

0.09
0.081%
0.08
0.0673%
0.07
0.06
0.05
0.04
0.03
0.02
0.01 0
0
2000 2001

Source: Silverstone Annual Report, 2001.

Return on Equity has increased from 0.067% to 0.08%. this is due to the
more income in 2001 as compared to 2000.
Financial Analysis
Silverstone

6.2.2 Asset Utilization Ratios


Sale (Credit )
1. Receivable Turnover =
Re ceivables

87 ,480 ,227
2000 = =13 .1 Times
6672 ,692

103 ,967 ,462


2001 = = 7.63 Times
13 ,624 ,102

RECEIVABLES TURNOVER

0.14
13.10
0.12
0.1
7.63
0.08
0.06
0.04
0.02
0
0
1 2 3
2000 2001

Source: Silverstone Annual Report, 2001.

The Receivable Turnover ratio has been decreased during the financial
year 2001 as compared to that of financial year 2000. The net change
observed is 5 times, which shows that the conversion of receivables into
cash has been decreased for the year.
Financial Analysis
Silverstone

A/ R
Average Collection Period = Average daily Credit Sale

667 ,2692
2000 = = 27 Days
239672

13 ,624 ,107
2001 = =47 Days
284892

AVERAGE COLLECTION PERIOD

47
50

40
27
30

20

10

0
1 2
2000 2001

Source: Silverstone Annual Report, 2001.

The average collection period has been prolonged by 20 days in the


financial year 2001 as compared to that in 2000. This is due to the
decreased in receivables turnover.
Financial Analysis
Silverstone

Sale
3. Inventory turnover = Inventory

87 ,480 ,227
2000 = =6.51 Times
13 ,419 ,871

103 ,967 ,467


2001 = =7.63 Times
13 ,624 ,107

INVENTORY TURNOVER

7.8 7.63
7.6
7.4
7.2
7
6.8
6.6 6.51
6.4
6.2
6
5.8
2000 2001

Source: Silverstone Annual Report, 2001.

The inventory turnover ratio has been increased during the year 2001.
Net change is 1 times, which shows the greater efficiency of the
organization.
Financial Analysis
Silverstone

Sale
4. Fixed Asset Turnover = Fixed Asset

87480 ,227
2000 = = 2.046 Times
42 ,749 ,333

103967467
2001 = = 2.14 Times
48 ,499 ,991

FIXED ASSET TURNOVER

0.025
2.05
2.14
0.02

0.015
Series2
Series1
0.01

0.005

0 0
2000 2001

Source: Silverstone Annual Report, 2001.

The fixed assets turnover has been increased slightly during the year
2001 as compared to that in 2000, which is a good sign for the
organization.
Financial Analysis
Silverstone

Sale
5. Total Asset Turnover = Total Asset

87 ,480 ,227
2000 = =1.23 Times
20 ,848 ,692

103 ,967 ,467


2001 = =1.26 Times
81 ,999 ,567

TOTAL ASSETS TURNOVER

0.014
0.012
1.23 1.26
0.01
0.008
0.006
0.004
0.002
0
2000 2001

Source: Silverstone Annual Report, 2001.

The total assets turnover of the organization has also been slightly
increased during the financial year 2001 as compared to that in financial
year 2000. The total assets turnover ratio for the period is 1.26 times,
which was 1.23 times in 2000, which shows the better performance for
the year.
Financial Analysis
Silverstone

6.2.3 Liquidity Ratios


Current Assets
1. Current ratios = Current Liabilitie s

27 ,428 ,219
2000 = =1.68 Times
16 ,249 ,041

321 ,341 ,651


2001 = =1.12 Times
28 ,635 ,862

Current Asset − Inventory


2. Quick Ratio = Current Lialities

29428 ,219 ,13419 ,871


2000 = = 00 .86 Times
16 ,249 ,041

2001 =

32341 ,651 ,13 ,624 ,102


=0.65 Times
28635 ,862

QUICK RATIO

0.01
0.86
0.008
0.65
0.006 Series1
Series2
0.004

0.002
0
0
2000 2001

Source: Silverstone Annual Report, 2001.


Financial Analysis
Silverstone

The quick ratio of the organization has been decreased for the year
2001. The net change is 0.21 times, which shows that the most liquid
assets of the organization has been decreased for the year.

6.3 Explanations to the Ratios Determined


In the coming paras explanation has been given to the all above determined
ratios.

6.3.1 Asset Utilization Ratio

Analyzing the Income Statement and Balance Sheet of the company for the
year 2000 and 2001. We see a drop on the receivable turnover ratio from 13.1
to 7.63. The sale and receivables to increased but not in that proportion as in
2000. This is due to the increases rate on credit , which has caused the
receivables to increase.

The same thing is pronounced by the average collection periods, which is 27


days in 2000 but has increased to 47 days in 2001, which means that the
company should improve its receivables channels.

The inventory turnover, has increased from 0.51 763 the figures shows that the
sale has been increased but at the same time the inventory has increased and is
not maintained in that efficient manner as were in the year 2000.

Fixed asset turnover has increased from 2.01 to 214, which shows in forced
asset evolution. This is because of the fact total asset turnover has also
increased from 1.23 to 1.26 again the fact in the increase in the sale in 2001.

6.3.2 Profitability Ratio

Profit margin shows increase from 3.34% to 3.71. The figure shows a high
increase in the sale, but at the same tine the company has increases its profit
Financial Analysis
Silverstone

margin this is because that sale has increases and increased sale means high
production and high promotion means, low manufacturing cost, and low
manufacturing cost means high net income and high net income means high
profit margin. The same thing is pronounced by the ratios of return on asset,
and return on equity. In both the cases at has increased in 2001 as compared to
2000, which is as stated above is because of the improvement net income.

6.3.3 Liquidity Ratios

As the Calculations shows that current and quick ratio has been decreased.
The current ratio is decreased from 1.68 to 1.12 and which ratio has been
decreased from 0.86 to 0.65. This is because that current liabilities has
increased and the reason for increase in current liabilities is due to the use of
increased raw materials on credit, which was required for the high production
as needed for increased sale in the year 2001.