Lever Brothers Pakistan Limited

GROUP OF FINANCIAL RATIOS

Financial ratios can be divided into following five major categories.

1. Liquidity ratio
2. Activity ratio
3. Debt analysis ratio
4. Profitability ratio
5. Marketability ratio

LIQUIDITY RATIOS

Liquidity of a business firm is measured by its ability to satisfy its short-

term obligations as they come due. Liquidity refers to the solvency of the
firm’s overall financial position. The easier with which it can pay it bills.
The following four ratios measure the liquidity of the firms.
♦ Networking Capital
♦ Current Ratio
♦ Quick (Acid-Test) Ratio
♦ Cash Ratio

NETWORKING CAPITAL
NWC = Current assets – current liabilities
2004 = 3752573– 3679974
= 72599Rs.
2003 = 4871573-4635286
= 236287Rs.

1
 Lever Brothers Pakistan Limited

In 2003 current assets are greater than current liabilities but in 2001 current
liabilities are greater that current assets. It indicate that company is not in a
good position as compare to previous year.
CURRENT RATIO
CR = Current Assets / Current Liabilities
2004 = 3752573/3679974
= 1.02: 1
2003 = 4871573/4635286
= 1.05: 1
Current ration of Lever Brothers has decreased as compare to previous year.
It indicate that company made no progress in this year. This decreased
mainly due to reduction in trade debtors and stock in trade.
QUICK (ACID – TEST) RATIO
Quick Ratio = (Current Assets – Inventory) / Current Liabilities
2004 = (3752573-1809077) / 3679974
=0.528: 1
2003 = (4871573-2616903) / 4635286
= 0.486 : 1
Quick ratio of Lever Brothers has increased as compare to previous year it
indicates that company has increased its quick assets. (cash and bank
balance)
CASH RATIO
Cash Ratio = (Cash +Cash Equilivant) / Current Liabilities
2004 = 759356 / 3679974
= 0.206 : 1
2003 = 1159603/4635286
= 0.250: 1

2
 Lever Brothers Pakistan Limited

Cash ratio has increased in this year which shows that company has more
liquid assets (cash + Marketable securities) then the last year.

ACTIVITY RATIOS

Activity ratios are used to measure the speed with which various accounts
are converted into sales or cash. With regard to current accounts, measures
of liquidity or generally inadequate and differences in compositions of a
firm’s current assets and liabilities can significantly affect its “true”
liquidity, so for that reasons we go for activity ratios analysis.
♦ Inventory Turnover Ratio
♦ Average Age of Inventory
♦ Average Collection Period
♦ Average Payment Period
♦ Accounts Receivable Turnover
♦ Accounts Payable Turnover
♦ Operating Cycle
♦ Cash Conversion Cycle
♦ Fixed Assets Turnover
♦ Total Assets Turnover

INVENTORY TURNOVER RATIO

Inventory Turnover= Cost of Good Sold / Inventory
2004 = 12713885/1809077
= 7.02Times
2003 = 14676937 / 2616903
= 5.61Times

3
 Lever Brothers Pakistan Limited

Inventory turnover of the company increases from 6.600 times to 7.346

times in this year. This indicates that company converts its inventory into
cash for more times in a year as compare to previous year.

AVERAGE AGE OF INVENTORY

Average Age of Inventory = No. of Working Days/Inventory Turnover
2004 = 360 / 7.02
= 51.28 Days
2003 = 360 / 5.61
= 64.17 Days
Average age of inventory has decreased as compare to previous year which
indicates that company keeps its inventory for short days in its store as
compare to previous year.

AVERAGE COLLECTION PERIOD

Average Sale Per Day = Net Sales / No. of Working Days
2004 = 18238218 / 360
= 50661.72 Rs.
2003 = 21471724/ 360
= 59643.68 Rs.
Average Collection Period = Accounts Receivable/Average Sale per day
2004 = 83751/50661.72
= 1.65 Days
2003 = 469834/59643.68
= 7.88 Days
Average collection period has decreased from the last year it is a good sign
for a company because it indicates that firm collects its receivable early as
compare to previous year.

4
 Lever Brothers Pakistan Limited

AVERAGE PAYMENT PERIOD

Average Purchase Per Day = Net Purchases/No. of Working Days
2004 = 10246126/ 360
= 28461.46 Rs.
2003 = 12483042 / 360
= 34675.12 Rs.
Average Payment Period = Accounts Payable/ Net Purchases Per day
2004 = 2106378/28461.46
= 74.00 Days
2003 = 3323715/34675.12
= 95.85 Days
Average payment period has also increased as compare to previous year,
which indicates that the company enjoys the cash of outsiders for more days
or firm use cash of outside person for long period. Care should be taken that
such delays in payments of accounts payable should not damage the firm’s
credibility.

ACCOUNT RECEIVABLE TURNOVER

Account Receivable Turnover = No. of Working Days/Average Collection Period
2004 = 360 / 1.65
= 218.18Times
2003 = 360 /7.88
= 45.69 Times

ACCOUNTS PAYMENT TURNOVER

Accounts Payment Turnover = No. of Working Days/Average Payment Period
2004 = 360 / 74
= 4.86Times

5
 Lever Brothers Pakistan Limited

2003 = 360 / 95.85

= 3.76Times

OPERATING CYCLE
OC = Average Age of Inventory + Average Collection Period
2004 = 51.28+1.65
= 52.93 Days
2003 = 64.17+ 7.88
= 72.05Days

CASH CONVERSION CYCLE

Cash Conversion Cycle = Operating Cycle – Average Payment Period
2004 = 52.93 – 74
= -21.07Days
2003 = 72.05 – 95.85
= -23.8Days
As for as cash conversion cycle concern, it has decreased as compared to last
year. It is a good sign for firm. It indicates that company only use outsiders’
debt to finance its activities more than last year and no use only 1% of
equity.

FIXED ASSETS TURNOVER

Fixed Assets Turnover = Net Sales / Net Fixed Assets
2004 = 18238218/1523877
= 11.96 Times
2003 = 21471724/1444882
= 14.86 Times

6
 Lever Brothers Pakistan Limited

Fixed assets turnover has increased from the last year which indicates for
firm because it shows that firm has utilized its fixed assets efficiently to
generate sales.

TOTAL ASSETS TURNOVER

Total Assets Turnover = Net Sales / Total Assets
2004 = 18238218/5892125
= 3.095 Times
2003 = 21471724/6820947
= 3.147 Times
Total assets turnover has reduced from last year which indicates less
utilization of total assets in order to generate sales.

LEVERAGE (DEBT) RATIOS

Debt Ratio
♦ Debt Equity Ratio
♦ Time Interest Earned Ratio

DEBT-TO-TOTAL-ASSETS RATIO
Debt Ratio = Total Liabilities / Total Assets
2004 = 3769563/5892125× 100
= 63.98%
2003 = 4787643/6820947× 100
= 70.19%
Debt ratio has increased as compared to previous year which indicating that
in year 2001 the debts are more used in order to finance the total assets.

7
 Lever Brothers Pakistan Limited

DEBT EQUITY RATIO

Debt Equity Ratio = Total Liabilities / Shareholders’ Equity
2004 = 3769563 / 2122562 × 100
= 177.59 %
2003 = 4787943/ 2033004× 100
= 235.51 %
Debt equity ratio also increased as compared to previous year which
indicates that less equity is used to finance the total assets.

TIME INTEREST EARNED RATIO (COVERAGE RATIO)

Time Interest Earned Ratio = Earning Before Interest & Tax / Interest
2004 = 2,202005 / 34909
= 63.08 Times
2003 = 2571869/ 50991
= 50.44 Times
Time interest earned ratio has decreased as compared to previous year which
is not a good sign for firm. Because it indicates that firm is less capable in
regard to pay interest expenses of the year.

PROFITABILITY RATIOS
♦ Gross Profit Ratio
♦ Operating Profit Ratio
♦ Net Profit Ratio
♦ Return on Investment (ROI)
♦ Return on Equity (ROE)

8
 Lever Brothers Pakistan Limited

GROSS PROFIT RATIO

Gross Profit Ratio = Gross Profit / Net Sales × 100
2004 = 5524333 / 18238218 × 100
= 30.29 %
2003 = 6794787/21471724× 100
= 31.65 %
Gross Profit ratio has increased from last year which indicates that firm has
made more sales in year 2001 and also control cost of goods sold.

OPERATING PROFIT RATIO

Operating Profit Ratio = Operating Profit / Net Sales × 100
2004 = 2202005/ 18238218 × 100
= 12.07%
2003 = 2571869/ 21471724 × 100
= 11.98 %
Operating profit ratio has also increased as compared to previous year which
is a healthy sign for the firm.

NET PROFIT RATIO

Net Profit Ratio = Net Profit After Tax / Net Sales × 100
2004 = 1724943 / 18238218 × 100
= 9.45 %
2003 = 1599332 / 21471724× 100
= 7.45%
Net profit ratio has just decreased as compared to previous year which is a
not a good symbol for owners.

9
 Lever Brothers Pakistan Limited

RETURN ON INVESTMENT (ROI)

Return on Investment = Net Profit After Tax / Total Assets × 100
2004 = 1724943 / 5892125 × 100
= 29.28 %
2003 = 1599332 / 6820947 × 100
= 23.45 %

RETURN ON EQUITY (ROE)

Return on Equity = Net Profit After Tax / Shareholders’ Equity × 100
2004 = 1724943 / 2122562× 100
= 81.27 %
2003 = 1599332 / 2033004× 100
= 78.67 %
Return on investment and return on equity, both ratios show decreasing
trend as compared to previous year. Which means that firm earned less
return on its investment as compared to previous year.

MARKETABILITY RATIOS
♦ Earning Per Share
♦ Price Earning Ratio
♦ Breakup Value

EARNING PER SHARE (EPS)

Earning Per Share = Net Profit After Tax – Dividend to Preferred Stock
/ Outstanding Shares
2004 = 1,724,943,000 – 239,000 / 13,293,869
= Rs. 129.73
2003 = 1,599,332,000 –239,000/ 13,293,869
= Rs. 120.29

10
 Lever Brothers Pakistan Limited

Earning per share of the company has decreased as compared to previous

share, which is not a good sign for a firm and it is a bad effect on firm to
attract more investors.

PRICE EARNING RATIO

Price Earning Ratio = Market Price of Stock / Earning Per Share
2000 = 900 / 129.73
= 8.937
2001 = 900 / 120.28
= 9.785

BREAKUP VALUE
Breakup Value = Shareholders’ Equity / Outstanding Shares
2004 = 2,122,562,000 / 13,293,869
= 159.66
2003 = 2,033,004,000 / 13,293,869
= 152.93

11
 Lever Brothers Pakistan Limited

CONCLUSION

As a whole if we see that the repute of Lever Brothers Pakistan Limited is

very good but as a finance manager we take decisions according to the
analysis of the accounts. So according to the financial analysis of this firm I
will not like to invest for short-term due to negative net working capital,
decrease in current ratio and increase in average payment period and
also not like to invest for long-term due to increase in debt and debt
equity ratio and decrease in time interest earned ratio. So according to
these results and reduction in earning per share I will not like to purchase
its shares. So I conclude that firms’ current position is not very bad for
existing shareholders but very risky condition for new investors. So I would
like to suggest that firm should increase its current assets and decrease to
some extent in average payment period to gain the confidence of short-term
investors.

Secondly, company should decrease up to some extent its debt ratio and
increase times interest earned ratio to gain the confidence of long term
investors. And at least company should increase its earning per share to
attract more investors to purchase its shares.

12