Comparison Between Two Major Textile Companies

Executive Summary In this report, I have discussed ab break the two major textile organizations that atomic number 18 AL-karam and Gul Ahmed textile mills. I have conducted a balance analysis from the information gathered from their financial statements. In my study, I found out that AL-Karam is doing relatively wholesome from Gul Ahmed textiles as various symmetrys proved to be positive in terms of AL-Karam textiles. Accounting Policies by accounting strategies and the methods of computation used in the prepa balancen of this financial information ar the same as those applied in the prepa dimensionn of financial statements for the course of instruction 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 nonified to a lower plac e the Companies Ordinance, 1984, provisions of and directives issued 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 utter at cost less accumulated disparagement and any identified impairment sack however leasehold land which is say at cost. No amortization is provided on leasehold land since the lease is renewable at the option of the lessee. Depreciation is supercharged on reducing balance method at rates specify in the note 13. 1. Full years 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 various(prenominal) lease term. Gains and expiryes on disposal of operating assets are included in salary income and loss account. Capital work-in-progress Capital work-in-progress is stated at cost accumulated up to the balance sheet run into 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 ope balancen. 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 peculiarity of impairment loss. If such indication exists, the carrying amount is reduced to recoverable amount and the difference is recognise as an expense. Where an impairment loss after reverses, the carryi ng 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 state menses ratios 0. 97 0. 95 QuickRatio 0. 39 0. 44 leverage arrivedebtto comeassetsratio 75. 37% 77. 04% Timesinterestearned - 1. 00 clock Fundeddebtto wage operative(a) metropolis 61. 80% 63. 49% Efficiency add upcollectionperiod 4. 3 age 44. 56 days Inventory upset 3. 98 4. 43 Totalassets manoeuvreover 1. 34 1. 11 clear worth turn over 5. 47 2. 99 Networking uppercaseturnover -87. 86 50. 92 Profitability Netprofitmargin 2. 42% -0. 56% Grossprofitmargin 16. 11% 7. 30% dispelontotalassets 3. 27% -0. 71% wagesonNetworking detonator 13. 28% -48. 01% communicateonnetworth -213. 10% -3. 26% Ratios Analysis LIQUIDITY RATIOS A liquid state ratio measures the companys ability to pay its bills. The denominator of a liquidity ratio is the companys menstruation liabilities, i. e. , obligati ons 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 witness 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 fasts 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, metres interest earned, and funded debt to net working capital.Companys 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 out. Whereas in 2010, Gul Ahmeds times interest earned ratio increased to, which was higher(prenominal) than the industry average of that year From this, it is cerebrate 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 whitethorn be concluded that Gul Ahmed is highly leveraged and most of its assets are financed by current debt. EFFICIENCY RATIOS Ratios are typically used to analyze how well a company uses its assets and liabilities in ternally. Efficiency Ratios can calculate the turnover of receivables, the refund of liabilities, the quantity and usage of blondness and the general use of inventory and machinery.The average collection period is furthermost from the medial 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 smashing level by ensuring timely supplies to its customers. The Asset turnover seemed to be in a good strain standingjust 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 firms current assets are sufficiently utilized in producing high sales. However, the net worthTurnover being below the median tells that the Gul Ahmed is bit high on using debt financing and less efficient in usin g equity financing. PROFITABILITY RATIOS Profit margin is 2. 42% (2010) and 0. 57% (2009). This reflects the firms managerial efforts at controlling the markets word meaning of the firms product, the durability of its marketing and sales efforts and the firms boilers suit 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 really profitable as far as its assets are concerned. Return on net working capital=13. 28% (2010) and 2. 50% (2009) reflects the profitability ofmanagerial decisions regarding investments in net current assets. This is improving in a agency that the company is generating profits on its net working capital as compared to 2003. AL-Karam TextilesFinancial Ratios Ratios 2009 2010 Liquidity Ratios Current 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 much than the liabilities and hence 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 public 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 lessen 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) and0. 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 decline in the ones which have been financed by equity. b) Funded debt to net working capital Funded debt/net working capital=1. 365(2010) and0. 3692 (2009). This basically explains the ratio of debt which has a maturi ty of more than one year divided by the difference betwixt 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 trenchant 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 firms overall specialty in generating sales. The decrease in this ratio is not significant enough. However, it shows that the firms 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 firms productivity in gen erating sales. Again here the firms performance is decreasing in a demeanor that the ratio of conversion of the net working capital to sales is decreasing. However, even this difference is not really significant between these two years. Profitability ratios A) Profit margin =0. 0078(2010) and 0. 0075(2009). This reflects the firms 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. 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) and -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 impairment per share is greater in 2009. The higher this ratio the more attractive it is to the investors. B) Debt toequity ratio=0. 3481(2010) and 0. 4937 (2009) shows a decrease inthepreceding year2010. Conclusion Ratios Gul Ahmed Al karam Liquidity Current Ratios 0. 97 1. 04Quick 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 collection 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 increase 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 visitation 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.Efficiency 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 an d effectiveness as compare to Gul Ahmed. Profitability Ratios Al-Karam has been uphill in its profitability continuously, showing improvements in return on net worth and return on total assets. Equity Equity ratios are primary interest to the firms 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 issue and the book value per share. This shows that the company has 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 shar e is highest of Al Karam. . 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