Balance Sheet Analysis

Presented to Miss Sidra Waheed

[General

Tyres]

By: Hassan Cheema Section: B

Financial Analysis of General Tyres

Section: B

Table of Contents
Table of Contents...................................................................2 .............................................................................................3 EXECUTIVE SUMMARY:............................................................3
INTRODUCTION..........................................................4

Key Operating and Financial data.........................................5 Balance Sheet...............................................................6 ...........................................................................................8 PROFIT AND LOSS STATEMENT.............................................9 Cash flow statement............................................................................10 General Tyres Pak.................................................................11 Capital Structure & Solvency Ratios...................11 Return on Invested Capital Ratios....................................12 Profit Margin Ratios..............................................14 Asset Utility Ratios..............................................15 Liquidity Ratios.....................................................................16 FIVE YEARS GROWTH RATE...............................................18 TREND INDEX.....................................................19 PER SHARE RESULTS...............................................20 COMMON SIZE ANALYSIS OF CA AND CL.................................21 Conclusion: ..........................................................................23 Formulas Used in Calculations...............................................24

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Financial Analysis of General Tyres

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EXECUTIVE SUMMARY:
After analyzing the financial statements of three years. We come to know that General Tyres are doing well in the industry but not up to the expectations of stock holders. It is a very well-known company. Profitability of the firm has decreased due to higher level of increase in cost of goods sold as compared to increase in the sales. Company is not getting good revenues and profits. Solvency ratios of the company are also not very good and indicate that company is relying more on current or short term debt instead of long term deb. However, company is facing problem in liquidity measures and this might be because its focus is on long-term profits not on short-term profits. Market measures indicate decreasing trends in the value of the securities of the company But the Company is paying good dividends to its shareholders. Company total assets are also decreasing. In short we can say that company is not doing well in the market and is not getting good revenues and sales to meet the demand of shareholders and creditors. However focus should be made on liquidity measures of the company.

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INTRODUCTION

The company was incorporated in Pakistan on March 7, 1963 as a private limited company and was subsequently converted into a public limited company. The company's shares are quoted on the Karachi and Lahore stock exchanges. The company is engaged in the manufacture of tyres and tubes for automobiles. The company had entered into a Royalty Technical Service Agreement dated September 1, 1984 (the 'TSA') with General Tire International Company (GTIC), USA whereby the company was allowed to use the GT1C's trademarks such as 'General' and 'General Tire'. The TSA was last extended by mutual consent of the company and GTIC on August 15, 1999 up to October 31, 1999. On October 29, 1999, GTIC communicated its decision not to extend the TSA. According to the provisions of the TSA the company could use the aforementioned trademarks during a compliance period of three months after the termination of the TSA. However, upon the request of the company, GTIC has been extending the compliance period of the TSA from time to time and the compliance period was last extended upto August 31, 2000 which was accepted by the company. GTIC has sent a compliance extention letter upto September 30, 2000 and has shown its willingness to extend the compliance period further, in pursuance to the execution of a new TSA. However, the compliance letters have not been executed subsequent to August 31, 2000. In the event that the TSA is not extended the company's status as a 'going concern' is not expected to be affected

General Tyres Pak.

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Financial Analysis of General Tyres

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Key Operating and Financial data

Rs in million

2008 Operating Results Gross Sales Net Sales Gross Profit Profit B4 tax Profit After Tax Cash Dividends* Bonuses issued Financial Position Operating fixed assets Shared capital Reserves and inappropriate profit Shareholders equity Long term loans and liabilities 2620 598 697 1295 467 4348 3732 522 210 127 17.5%

2007 3698 3198 598 328 204 -

2006 3267 2803 627 377 236 -

2080 598 675 1273 390

1526 598 472 1070 153

Analysis I see that Operating and financial positions are showing that as companys sales are increasing but profits are decreasing and in the same time long term loans are also increasing showing that company is relying on debt.

General Tyres Pakistan

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Balance Sheet
. As at June 30, 2008.

2008 Rupees in Share Capital And Reserve Share Capital. Authorised 75,000,000 ordinary shares of Rs 10 each Issued, subscribed and paid-up Reserve

2007 Thousand s

2006

750,000 597,713 697,584 1,297,297 200,000 200,000 66,846 119,350 430 33,298 9,350

750,000 597,713 675,186 1,272,899 300,000 89,823 107,269 577 7,726 9,200

750,000 597713 650,168 1,257,536 400,000 90,879 101,368 600 5,246 9,000

Long term merhaba financing LONG TERM LOANS LIABILITIES AGAINST ASSETS SUBJECT TO FINANCE LEASE STAFF BENEFITS DEFFERED CREDIT DEFFERED TAXATION LONG TERM DEPOSIT FRO, DEALERS

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CURRENT LIABILITY AND PROVISIONS CURRENT MATURITY OF 100,000 Long term merhaba financing LIABILITIES AGAINST 22,950 ASSETS SUBJECT TO FINANCE LEASE SHORT TERM FINANCE 410,764 RUNNING FINANCES UNDER MARK UP ARRANGEMENTS PAYABLES ACCURED MARK UP PROVISIONS 97,829 708,207 7,778 121,300 3,393,399

100,000 12,820 50,000 101,063 528,237 2,860 118,200 2,700,674

100,000 10,124 47,000 105,657 478.543 2,568 17,152 1972,21 2

ASSETS PROPERTY, PLANT AND EQUIPMENT INTANGIBLE INVESTMENTS LONG TERM LOANS AND ADVANCES LONG TERM DEPOSITS AND PREPAYMENTS
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1,456,30 0 482 4,234 7,559

1,019,27 2 554 5,173 8,514

937,421 598 5,254 9,213

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Financial Analysis of General Tyres

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CURRENTS ASSETS: STOCK TRADE DEBT LOANS AND ADVANCES DEPOSITS AND PREPAYMENTS OTHER RECEIVABLES TAXATION CASH AND BANK BALANCE 1,012,679 409,711 15,367 34,600 32,047 40,158 78,975 1,924,824 3,393,399 880,196 322,341 10,336 51,683 33,651 15,278 79,556 1,667,161 2,703,161 720,210 256,514 9,621 623,547 33,920 10,152 80,102 1,477,21 4
1,972,212

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PROFIT AND LOSS STATEMENT

FOR THE YEAR ENDED JUNE 30, 2008 2008 2007 Rupees Thousan in ds NET SALES 3,731,994 3,197,717 COST OF SALES 3,210,524 2,614,233 GROSS PROFIT ADMINISTRATION EXP DUSTRIBUTION COST OPERATING COST FINANCE COST PROFIT AFTER TAXATION BASIC EPS 521,470 75,763 156,398 267,923 83,085 126,998 2.12 583,484 90,009 147,608 319,042 124,662 205,005 3.41

2,802,66 9 2,521,31 3 626,591 90,214 138,923 384,156 132,958

235,847

3.95

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Financial Analysis of General Tyres

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Cash flow statement

Not e Cash flow from operating activities Cash from operations Staff retirement gratuity paid Compensated absence paid Long term deposits from dealers Financial charges paid Tax paid Long term loans and advances Long term deposits and prepayment Net cash from operations Cash flow from investing activities Fixed capital expenditure Proceed on disposal of FA Profit on bank deposits Net cash from Investments Cash flow from financing activities Long term murabaha financing Liabilities against assets Long term loans Short term finances Dividends paid

2008 Rs in ,000

2007

2006

40

371,970 (5,612) (998) 150 (82,049) (82,393) 939 955 202,962

258,162 (3,507) (84) 200 (15,157) (111,045) (1,509) (3,124) 124,736

217,874 (2,140) (70) 210) (13,145) (132,211) (1,612) (4,114) 117,658

(547,673) 2,953 543 (544,177)

(504,042) 189 (503,853)

(487,125) 170 (447,745)

(100,000) (12,847) 476196 360,764 (104,049)

300,000 (1,635) 50,000 (125)

400,000 (1,125) 1070381 47,256 (104)

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Net cash from financing Cash equivalent (+,-) Cash equivalent beg year Cash equivalent end year Total debt/ equity Total debt ratio Long term debt / Equity Equity / total debt Fixed assets / Equity C.L / T.L.

343,868 2,653 at (21,507)

343,240 30,877 9,370

342,958 51,457 10,810 (24,210) 2006 901,831 / 1,070,381 = 0.843 901,831 / 1,972,212 = 0.457 162,050 / 1,070, 381 = 0.151 1,070,381/901,8 31 = 1.19 601,961/1,070,3 81 = 0.56 639,497/901,83 1 = 0.71

at (18,854) (21,507) 2008 41 2007 2,098,102 / 1427775 / 1,295297 = 1.62 1275,386 = 1.21 2,098,102 / 3,393,399 = 0.62 476,196/ 1,295,297 = 0.368 1,295,297 / 2, 098, 102 = 0.617 1,468,828 / 1,295297 = 1.13 1,468,828/ 2098,102 = 0.7 1,427,775 / 2,703,161 = 0.53 399,023 / 1,275,386 = 0.893 1,275,386 /1,427, 775 = 0.893 1,036,000/1,275,3 86 = 0.64 931,810/ 1,427,775 = 0.71

General Tyres Pak. Capital Structure & Solvency Ratios

Analysis I see the debt to equity ratio is increasing indicating that the firm has started to focus and rely on the debt financing instead of equity financing. This will also lead to an increase in the firms financial cost. We can also judge by the ratios that the firm is relying more on current or short term debt instead of long term debt. The increase debt level currently indicates that the company has a reputable credibility in the market however if the same trend continues to exist then this will eventually hurt the credibility of the organization.
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General Tyres Pak.

Return on Invested Capital Ratios

ROA [NI + int. exp(1t)] / total assets ROCE (NI preferred dividend) / equity +Long term debt Return on LTD & Equity [NI + Int. exp (1-t)] / LTL + Equity Financial Leverage Index ROCE / ROA 2008 [126998+869 67 (1-0.35)] / 3393399 = 5.40% 126998 / 1295297+ 476196 = 9.80% [126998+ 86967 (10.35)] / 476196 + 1295297 = 10.36% 0.098 / 0.054 = 1.82 2007 [205005+17082(1 -0.35)] / 2703161 = 7.99% 205005 / 1275386 = 16.07% 2006 [235847+7553(1-. 35)] / 1972212 = 12.55% 235847 / 1070381 = 22.03%

[205005 +17082(1-.35)] / 399023 + 1275386 = 12.91% 0.1607 / 0.0799 = 2.011

[235847 + 7553(1-0.35)] / 162, 050 + 1070381 = 19.53% 0.2203 / 0.1255 = 1.76

Analysis These ratios show gloomy picture for the firma s both ROA and the ROE has decreased meaning that the investor would be no longer willing to invest in this firm as the return earned on it is decreasing with the passage of time.
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The major reasons for decrease in both the ratios is that the interest expense of the firm has dramatically increased and the due to this and the increasing cost of good the net income has decreased hence the ratio calculated show a decreasing trend. Three years ago the roce was very healthy i-e 30% and investor could invest in this company but company started relying on debt for financing its long term investments and there is 95% increase in the long term asset in last 3 years. This massive investment is supported by the debt. As a result company is now at a position when profits are decreasing and share holders may be reluctant to invest more money in company. So company can face problem in getting equity finance. But company have to make steps to keep the finance cost low to chance the position in coming years.

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General Tyres Pak.

Profit Margin Ratios

2008 % Gross profit margin Operating profit margin Net profit margin 521,470/ 3731994 = 14% 210083 / 3731994 = 5.6% 126998 / 3731994 = 3.4% 2007 % 583484 / 3197717 = 18.2% 329667 / 3197717 = 10.3% 205005 / 3197717 = 6.4% 2006 % 626591 /2802669 = 22.3% 377459 / 2802669 = 13.47% 235, 847 / 2802669 = 8.4%

Profitability of the firm has decreased due to higher level of increase in cost of goods sold as compared to increase in the sales. Net profit margin has decreased by double amount in the recent years due to significant increase in the finance cost of the firm which is increasing due to higher borrowing done by the firm in order to finance its operations on a daily basis. Long term loan have been increase by 20% from last year loan and 76.83% from last three year figure.. due to massive reliance on debt as source of finance profitability figure in decreasing. So this company is struck in the middle

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General Tyres Pak.

Asset Utility Ratios

Sales / cash & equivale nt Sales / receiva bles Sales /invento ry
Sales / working capital 2008 3731994/78975=47 .26 2007 3197717/79556=40 .19 2006 2802669/44811=6 2.54

3731994/47414=78 .71 3731994/1313906= 2.84 3731994/455996=8 .18 3731994/1468575= 2.54 3731994/3393399= 1.10 3731994/1468828 =2.54

3197717/43987=72 .70 3197717/1154316= 2.77 3197717/753981=4 .24 3197717/1036000= 3.09 3197717/2703161= 1.18

2802669/49810=5 6.27 2802669/896978 =3.12 2802669/730754= 3.84 2802669/601961= 4.66 2802669/1972212 =1.42

Sales / fixed asset Sales / total Assets Sales / Short term liabilitie s

3197717/913180= 2802669/639497= 3.50 4.38

Table analysis how companys asset are utilized in making sales or how many times assets have been converted in to sales, the greater the turnover
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the better will be for the company. Evaluating the general trend we can say that the firm is efficiently and effectively utilizing the current assets however the fixed assets are not contributing much towards sales generations and are on a decreasing trend over the past three years.

General Tyres Pak.

Liquidity Ratios
Measure Current Ratio Acid-test ratio Accounts receivable turnover Inventory turnover Days sales in receivable Days sales in inventory Approximate conversion period Cash to current assets Cash to current liabilities Liquidity Index Working capital Days purchase in accounts payable Average bet trade cycle Cash provided by operation to avg. current liabilities 2008 1.31 0.086 78.71 2.44 4.57 126.74 131.31 0.041% 0.054% 794.10 455996 75.65 55.66 0.253 2007 1.83 0.135 72.70 2.77 4.95 126.95 135.9 0.048% 0.087% 86.01 753981 66.22 68.68 0.283 2006 2.14 0.148 56.27 3.12 6.40 115.22 121.62 0.033% 0.070% 104.55 730754 69.85 51.77 0.264 UNITS Ratio Ratio Times TIMES Days Days Days % % Days $ Days days %

The short term liquidity analysis is very crucial for the company, as it determines its current liquidity position. This will help the financial analyst make a better decision about the need for money to finance companys operations from any external sources or is the

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Financial Analysis of General Tyres

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company in a state to do it internally. The liquidity position of the firm is crucial as shows the decrease current assets and a decreasing acid test ratio. The turnover and the day sales ratio has also increased which signifies that the firm has started a lenient credit policy which is why their cash is stuck with the creditors and in the form of inventory for a longer period of time. Working capital is also decreasing which indicates that the firm will eventually face liquidity problems in running its daily operations if the trends continue to exist.

Common size income statement:

Majority of the revenue generate are distributed in the CGS. We see that the CGS has increased over the period of time however administrative and distribution expenses are decline hence we expect that the net income would increase but the CGS is growing at higher rate as compared to the decline of other expense. We also see that the finance cost has increased significantly which indicates that debt has been increased in order to finance the operations of the firm.

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GENERAL TYERS PAKISTAN

FIVE YEARS GROWTH RATE

3year growth rate net sales net income equity dividends % 56.45845093 79.77114418 22.57393932 85.22134201

Net sales are growing at the 56% rate. Net income also shows rapid growth of 79% over the years. Dividends are growing which shows that company is paying high dividends to share holders. Equity is growing at 22%.

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GENERAL TYRES

TREND INDEX
Trend index of selected accounts Cash and bank balances Other receivables Stock-in-trade total current assets total current liabilities Long-term loans total equity Net sales Cost of sales Distribution costs Administrative expenses Finance costs Profit before taxation Profit after taxation 2008 106.52% 512.50 156.05 131.95 116.02 435.47 185.22 156.46 156.80 162.96 5.84 213.11 179.71 179.77 2007 96.52% 467.56 124.90 112.49 104.45 165.81 132.48 122.56 125.96 120..49 46.31 157.96 101.62 100.77 2006 100% 100 100 100 100 100 100 100 100 100 100 100 100 100

This is the trend analysis which shows that cash, total current assets, current liabilities, long term financing, finance cost, share holders equity, net sales, CGS, interest expense, EBT, net income and total cost and expense are on rising trends. They are increasing with passage of time. On the other hand other administration expense decreased.

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GENERAL TYRES

PER SHARE RESULTS

per share results Net sales Profit after taxation Dividend paid book value 2008 44.83 3.37 1.10 7.96 2007 35.12 1.89 0.90 5.69 2006 28.65 1.87 0.89 4.30

These are all per share results. Sales per share is increasing from 20062008. Net income shows a rise. Dividends per share also rise because company paid more dividends. Book value of the company is increasing per share which is good for the company. As equity contribution increases book value also increases.

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COMMON SIZE ANALYSIS OF CA AND CL

CURRENT ASSETS Stores and spares Stock-in-trade Trade debts Current maturity of finance under musharika arrangements Loans, advances and prepayments short term prepayments accrued mark up Other receivables Taxation net Cash and bank balances total current assets CURRENT LIABILITIES Current portion of liabilities against assets subject to finance lease Short-term running finances Advances from customers and dealers accrued markup Creditors and accrued liabilities provision for other liabilities provision for taxation-net Dividends total current liabilities 2008 1.60 % 28.09 5.24 0.04 2.94 0.06 0.54 8.87 0.00 52.61 100. 00 0.08 0.00 96.73 0.33 0.00 0.00 2.86 100. 00 2007 1.14% 26.37 3.20 0.24 2.52 0.04 0.39 9.49 0.69 55.92 100.0 0 0.43 0.00 99.41 0.16 0.00 0.00 0.00 100.0 0 2006 1.04 % 23.75 4.11 0.27 2.90 0.00 0.00 2.28 0.47 65.17 100. 00 0.46 0.00 66.00 0.00 18.74 8.67 0.00 6.71 100. 00

This table shows the current assets an liabilities. The percentage of each asset item to total current asset and each current liability item to total current liability. In assets side the greater contribution is of stock in trade and cash and bank balances. In liabilities the percentage of advances from customers is higher to total liabilities.

GENERAL TYRES ANALYSIS OF

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CASHFLOW RATIOS

Cash flow adequacy ratio= 3 year sum of sources of cash flow 3 year sum of capital exp/inv/cash div =0.640

This ratio gives insight into whether company generates sufficient revenues to cover its capital expenditures, investment in inventories and cash dividends. This ratio shows that cash generated from operations are insufficient and there is a need for external financing

Cash reinvestment ratio= cash by operations-dividends FA+inv+nwc 2008=28.4% 2007=4% 2006=9.5%

This ratio gives insight into the amount of cash reinvested into the company for both asset replacement and growth. This ratio is on an increasing Trend which is good for the company.

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Conclusion:
From the point of view of the investor I would not invest in the company as the returns on investment are decreasing. Until the firm is able to control its cost the net income will continue to decreasing resulting in a marginal return to the investor. From the point of view of the creditors the company is in need for external financing hence it is search of debtors but looking at the liquidity position of the company there isnt any risk that the company might default. There is no risk that company will default as company has good base of assets and reserve in hand. Company is sales are increasing and products are in demand, though profit is not in line with sale. But it is not a good short term investment as company not seem to produce good short term profit The company earning is decreasing and seem to decrease more in coming years thats due to massive increase in debt as source of finance. As its a fixed cost and company need to change either its source of finance or to increase it sales to nullify the fixed cost effect Hence financially the company is not strong enough and in a more efficient manner in order to improve its financial

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Formulas Used in Calculations

Profit Margin Ratios Formulas to calculate profit margin ratios: Net Profit Margin Ratio (After Tax Margin Ratio) = net profit after tax / sales. Pretax Margin Ratio = net profit before taxes / sales. Operating Profit Margin (Operating Margin) = net income before interest and taxes / sales. Profit Margin Ratios definitions and explanations: These three profit margin ratios state how much profit the company makes for every dollar/Rs of sales. The net profit margin ratio is the most commonly used profit margin ratio. A low profit margin ratio indicates that low amount of earnings, required to pay fixed costs and profits, are generated from revenues. A low profit margin ratio indicates that the business is unable to control its production costs. The profit margin ratio provides clues to the company's pricing, cost structure and production efficiency. The profit margin ratio is a good ratio to benchmark against competitors. The net profit margin ratio is included in the financial statement ratio analysis spreadsheets highlighted in the left column, which provide formulas, definitions, calculation, charts and explanations of each ratio Debt to Equity Ratio (Financial Leverage Ratio) Formula to calculate debt to equity ratio (financial leverage ratio): Debt to Equity Ratio = Short Term Debt + Long Term Debt Total Shareholders Equity Debt to equity ratio definition and explanation: Debt to Equity Ratio is also referred to as Debt Ratio, Financial Leverage Ratio or Leverage Ratio. The debt to equity (debt or financial leverage) ratio indicates the extent to which the business relies on debt financing. Return On Invested Capital ROIC

What Does Return On Invested Capital - ROIC Mean?

A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns. Comparing a company's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was 24 | P a g e Lahore School Of Economics

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used effectively.

The general equation for ROIC is as follows:

Also known as "return on capital" More Accurately

Calculating ROA (Return on assets)

The simplest way to determine ROA is to take net income reported for a period and divide that by total assets. To get total assets, calculate the average of the beginning and ending asset values for the same time period. ROA = Net Income/Total Assets Or ROA = EBIT/Total Assets ROCE (return on capital employed) ROCE is calculated by determining what percentage of a company's utilized capital it made in pre-tax profits, before borrowing costs. To calculate ROCE, you determine what percentage of a company's invested capital it made in pre-tax profit before borrowing costs. The ratio looks like this:
= Profit Before Interest and Taxation Capital Employed

NWC Required Net Working Capital = Cash + Account Receivable + Inventory - Account Payable - Accrued Liability

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