Comparison Between Two Major Textile Companies

Executive Summary In this report, I have discussed about the two major textile organizations that are AL-karam and Gul Ahmed textile mills. I have conducted a ratio analysis from the information gathered from their financial statements. In my study, I found out that AL-Karam is doing comparatively well from Gul Ahmed textiles as various ratios proved to be positive in terms of AL-Karam textiles. Accounting Policies Through accounting strategies and the methods of computation used in the preparation of this financial information are the same as those applied in the preparation of financial statements for the year ended June 30, 2011.These financial statements have been prepared in accordance with approved accounting standards as applicable in Pakistan. Approved accounting standards comprise such International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board as are notified under the Companies Ordinance, 1984, provisions of and directives issu ed under the Companies Ordinance, 1984. In case requirements differ, the provisions or directives of the Companies Ordinance, 1984 shall overcome operating assets.Operating assets are stated at cost less accumulated depreciation and any identified impairment loss except leasehold land which is stated at cost. No amortization is provided on leasehold land since the lease is renewable at the option of the lessee. Depreciation is charged on reducing balance method at rates specified in the note 13. 1. Full year’s depreciation is charged on additions except major additions or extensions to production facilities which are depreciated on pro-rata basis for the period of use during the year and no depreciation is charged on assets in the year of their disposal.Structures on leased retail outlets are depreciated over the respective lease term. Gains and losses on disposal of operating assets are included in profit and loss account. Capital work-in-progress Capital work-in-progress is stated at cost accumulated up to the balance sheet date and represents expenditure incurred on property, plant and equipment in the course of construction. These expenditures are transferred to relevant category of property, plant and equipment as and when the asset starts operation. Intangible assets Intangible assets are stated at cost less accumulated amortization.Amortization is charged over the useful life of the assets on a systematic basis to income applying the straight line method at the rate specified in note 14. Investments Investments in subsidiary company are stated at cost. The Company reconsiders the carrying amount of the investments to assess whether there is any indication of impairment loss. If such indication exists, the carrying amount is reduced to recoverable amount and the difference is recognized as an expense. Where an impairment loss subsequently reverses, the carrying amount of the investment is increased to the revised recoverable amount.The reversal of such impairment loss is recognized as an income. GUL AHMED Financial Ratios | 2010| 2009| liquidity| Current ratios| 0. 97| 0. 95| Quick  Ratio| 0. 39| 0. 44| Leverage| Total  debt  to  Total  assets  ratio| 75. 37%| 77. 04%| Times  interest  earned| -| 1. 00 times| Funded  debt  to  net  working  capital| 61. 80%| 63. 49%| Efficiency| Average  collection  period  | 4. 3 days| 44. 56 days| Inventory  turnover  | 3. 98| 4. 43| Total  assets  turnover| 1. 34| 1. 11| Net worth turn over| 5. 47| 2. 99| Net  working  capital  turnover| -87. 86| 50. 92| Profitability| Net  profit  margin| 2. 42%| -0. 56%| Gross  profit  margin| 16. 11%| 7. 30%|Return  on  total  assets| 3. 27%| -0. 71%| Return  on  Net  working  capital| 13. 28%| -48. 01%| Return  on  net  worth| -213. 10%| -3. 26%| Ratios Analysis LIQUIDITY RATIOS: A liquidity ratio measures the company's ability to pay its bills. The denominator of a liquidity ra tio is the company's current liabilities, i. e. , obligations that the company must meet soon, usually with in one year. The numerator of a liquidity ratio is part or all of current assets. The current ratio of Gul Ahmed for year 2010 is 0. 97 and for year 2009 it is 0. 94. When we look at quick ratio, the quick ratio for Gul Ahmed is 0. 39 in 2010 and 0. 44 in 2009.It shows that Gul Ahmed had enough liquidity to meet its short term liquidity need during the better economic situation as well as in worst economic situation. The factor behind being well in its liquidity ratio is that company is well managed in financing its assets. LEVERAGE RATIOS: The leverage ratios accomplish two things: First, they are a measure of the extent to which firms finance their assets through debt; second, they are indicators of the financial risk of the firm. .We has considered three leverage ratios for Gul Ahmed: total debt to total assets, times interest earned, and funded debt to net working capital. Company’s datedness increased over the 2009-2010 periods. The times’ interest earned ratio for Gul Ahmed during 2009 show that it is slightly lesser than the industry average. Whereas in 2010, Gul Ahmed’s time’s interest earned ratio increased to, which was higher than the industry average of that year From this, it is concluded that the company has been able to meet its interest obligations from funds available from operations during 2010. The comparatively lower funded debt to net working capital ratio for Gul Ahmed indicates that it follows the industry practice of heavily utilizing credit lines at banks.It appears that the company did not have reasonable funds to meet its funded debt payments although it is performing better than the industry. Taking, the preceding leverage ratios in considerations, it may be concluded that Gul Ahmed is highly leveraged and most of its assets are financed by current debt. EFFICIENCY RATIOS: Ratios are typically used t o analyze how well a company uses its assets and liabilities internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general use of inventory and machinery.The average collection period is far from the median and that shows a loose credit term policies in receiving the payments late but somehow the average collection period reduces close to median in2010 explaining the improvement in receiving payments. The inventory is kept at good level by ensuring timely supplies to its customers. The Asset turnover seemed to be in a good shape standing  just above the median in both years, telling that Gul Ahmed is utilizing its assets properly introducing the sales.The net working capital turnover is far higher than the median telling that the firm’s current assets are sufficiently utilized in producing high sales. However, the net worth  Turnover being below the median tells that the Gul Ahmed is bit high on using debt financing and less efficient in using equity financing. PROFITABILITY RATIOS: Profit margin is 2. 42% (2010) and 0. 57% (2009). This reflects the firm's managerial efforts at controlling the markets acceptance of the firms product, the effectiveness of its marketing and sales efforts and the firms overall reputation.The profit margin is improving hence the firms profitability is improving. Return on total assets= 3. 27% (2010) and 0. 59% (2009) this reflects the earnings productivity of the total assets. Here there is an increase. This is because the firm is very profitable as far as its assets are concerned. Return on net working capital=13. 28% (2010) and 2. 50% (2009) reflects the profitability of  managerial decisions regarding investments in net current assets. This is improving in a way that the company is generating profits on its net working capital as compared to 2003. AL-Karam TextilesFinancial Ratios Ratios| 2009| 2010| Liquidity Ratios| | | Curr ent Ratio| 1. 04| 0. 97| Quick Ratio| 0. 4757| 0. 2787| Leverage Ratios| | | Debt to asset ratio| 0. 7381| 0. 80179| Funded to net working capital| 0. 3692| 1. 365| Efficiency Ratios| | | Average collection period| 30days| 35days| Inventory Turnover| 0. 7089| 0. 008109| Total Asset turnover| 0. 000933| 0. 000693| Net Worth Turnover| 2. 15| 2. 56| Net working capital turnover| -0. 0017583| -0. 010899| Profitability Ratio| | | Profit Margin| 0. 0078| 0. 0075| Return on Total Assets| 0. 6885| 0. 53351| Return on Net Worth| 0. 1792| 0. 853| Return on net working capital| -0. 1643| 0. 08387| Equity Ratio| | | Price to earning Ratio| 2. 11| 2. 01| Dividend payout| 0. 41| 0. 83| Book value per share| $15. 12| $19. 48| Ratios Analysis Liquidity ratios A) Current ratio: Total current assets/Total current liabilities is 0. 97(2010) and 1. 04(2009). This explains that in 2010 the liabilities were outweighing the assets however the previous year the asset became more than the liabilities and he nce the ratio exceeds 1. b) Quick ratio: (Total current assets-inventories)/total current liabilities is 0. 2787(2010) and 0. 4757(2009).This ratio is taken out in order to check the liquidity of the firm. When the inventory was subtracted from the total current assets, it gave us a figure of all the current assets other than the stock. This figure was divided by the total current liabilities which gave us a significant decrease in the overall figure value as compared to the current ratio. However, the ratio is decreasing later on in 2010. This means that the stocks have increased. Leverage ratios A) Total debt to total assets ratio: Total debt/total assets = 0. 80179(2010) and  0. 7381(2009). This tells us about the amount of assets which are debt financed.This means that in the last one year there has been a rise in the amount of assets which are being financed by debt and hence reduction in the ones which have been financed by equity. b) Funded debt to net working capital: Fund ed debt/net working capital=1. 365(2010) and0. 3692 (2009). This basically explains the ratio of debt which has a maturity of more than one year divided by the difference between the current assets and current liabilities. Hence the ability of the firm to retire its funded debt using available relatively liquid assets has increased. Efficiency ratios A) Inventory turnover ratioThe inventory turn over ratio is 0. 008109 (2010) and 0. 7089(2009). It is a ratio which tells the effective inventory management policies. Recently, the ratio has reduced in value than the previous one. Either the firm has a lot of inventory or its sales are reducing. b) Total assets turnover The total asset turn over ratio of the two year is 0. 000693(2010) and 0. 000933(2009). It is a measure of the firm’s overall effectiveness in generating sales. The decrease in this ratio is not significant enough. However, it shows that the firm’s effectiveness in generating sales from assets is decreasing to some extent. ) Net working capital turnover = 0. 010899(2010) and -0. 0017583(2009). It is a measure of the firm’s productivity in generating sales. Again here the firm's performance is decreasing in a way that the ratio of conversion of the net working capital to sales is decreasing. However, even this difference is not very significant between these two years. Profitability ratios A) Profit margin =0. 0078(2010) and 0. 0075(2009). This reflects the firm's managerial efforts at controlling the market's acceptance of the firms product, the effectiveness of its marketing and sales efforts and the firms overall reputation.The profit margin is improving hence the firms profitability is improving. b) Return on total assets =0. 53351(2010) and 0. 6885(2009). This reflects the earnings productivity of the total assets. Here there is a decrease. This is because the firm is not very profitable as far as its assets are concerned. c) Return on net working capital=-0. 08387(2010) an d -0. 1643(2009). This reflects the profitability of managerial decisions regarding investments in net current assets. This is improving in a way that the company is generating profits on its net working capital as compared to2009.Equity ratios A) Price to earnings ratio=2. 01(2010) and 2. 11(2009). This is basically a measure of the desirability of a firm. The more desirable a firm is to the investor the higher the P. E ratio it has. The P. E ratio is slightly decreasing. This is because the ratio of earning per share to price per share is greater in 2009. The higher this ratio the more attractive it is to the investors. B) Debt to  equity ratio=0. 3481(2010) and 0. 4937 (2009) shows a decrease in  the  preceding year2010. Conclusion Ratios| Gul Ahmed| Al karam| | Liquidity| Current Ratios| 0. 97| 1. 04|Quick Ratio| 0. 39| 0. 4757| Leverage | Total debt to total Assets ratio| 73. 37%| 73. 81%| Funded debt to networking capital| 61. 80%| 36. 92| Efficiency| | | Average collect ion period| 43 days| 30 days| Inventory turnover| 3. 98| 0. 7089| Total assets turnover| 1. 34| 0. 000933| Net worth turnover| 5. 47| 2. 15| Net working capital turnover| -87. 86| -0. 0017583| Profitability| | | Net profit Margin| 2. 42%| 0. 78| Return on net worth| -213. 10%| 17. 92| Return on Total Assets| 3. 27%| 6. 88%| Return on Net Working capital| 13. 28%| -0. 1643| Equity| | | Price to earning ratio| 7. 5| 10. 85| Book value per share| 19. 48| 21. 45| The ratio analysis of the two companies shows the result that Al-karam has been increasing its equity and its profitability and showing signs of an efficient company. On the other hand, Gul Ahmed is decreasing its business and going towards loss Liquidity Ratios: Al-karam has a higher Current ratio as well as Acid Test ratio as compare to Gul Ahmed which means that it is in a better shape to meet its current obligations and has more inventories. Gul Ahmed therefore has lower margin safety to meet its current obligation.Efficien cy Ratios: Al-karam seems to be in a better financial standing as compare to its efficiency. The company has a lower turnover ratio for both, the assets and the inventory showing high amount of sales and effectiveness as compare to Gul Ahmed. Profitability Ratios: Al-Karam has been rising in its profitability continuously, showing improvements in return on net worth and return on total assets. Equity: Equity ratios are primary interest to the firm’s stockholders and include the price to earnings ratio, dividend payout, and book value per share.The price to earnings ratio, popularly referred to as the P/E ratio, is an overall measure of the desirability of the firm. The more attractive the firm is to the investors, the higher the P/E ratio. The P/E ratio is highest of Al Karam that is 10. 65 which is higher than the other textile ratio, then comes Gul Ahmed. Al-karam has been showing improvements in the dividend yield and the book value per share. This shows that the company h as been increasing its equity by involving more investors in its base. The company thus shows signs of expansion and higher sense of determination towards acquiring more of the business.The book value per share is highest of Al Karam. . 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