ANALYSIS OF FINANCIAL STATEMENTS

Assignment
10th July, 2020

Submitted by:

Rimsha Khalid
6th Semester
BS BA –VI (B)
04151713094

Submitted to:

Dr. Ibrahim Khan

Quaid-i-Azam School of Management Sciences,

Quaid-i-Azam University,
Islamabad
 PAKISTAN STATE OIL LIMITED COMPANY

INTRODUCTION:

Pakistan State Oil (PSO), is the nation’s largest energy company, and is currently engaged in
the marketing and distribution of various POL products including Motor Gasoline (Mogas),
High Speed Diesel (HSD), Furnace Oil (FO), Jet Fuel (JP-1), Kerosene, CNG, LPG,
Petrochemicals and Lubricants.

In addition to these products, PSO also import other products based on their demand patterns.

The creation of Pakistan State Oil (PSO) can be traced back to the year 1974, when on
January 1st; the government took over and merged Pakistan National Oil (PNO) and Dawood
Petroleum Limited (DPL) as Premiere Oil Company Limited (POCL).

Soon after that, on 3rd June 1974, Petroleum Storage Development Corporation (PSDC)
came into existence. PSDC was then renamed as State Oil Company Limited (SOCL) on
August 23rd 1976. Following that, the ESSO undertakings were purchased on 15th
September 1976 and control was vested in SOCL. The end of that year (30th December 1976)
saw the merger of the Premier Oil Company Limited and State Oil Company Limited, giving
way to Pakistan state Oil (PSO).

ANALYSIS OF FINANCIAL STATEMENTS:

COMMON-SIZE ANALYSIS:

Common size analysis of Balance sheet

2015 2016 2017 2018 2019

Property plant and 1.86 1.93 1.77 1.82 1.96
equipment
Intangibles 0.02 0.01 0.01 0.00 0.01
Long term 14.85 14.65 1.12 1.19 2.74
investment
Long term loan 0.09 0.10 0.10 0.10 0.08
advances and other
receivables
Long term deposits 0.05 0.06 0.05 0.08 0.08
and prepayments
Deffered tax asset-net 2.35 3.15 3.04 2.91 3.00
Total non current 19.21 19.91 6.09 6.10 7.88
assets
Current assets
Stores, spares, chain 0.06 0.06 0.05 0.06 0.11
and loose tools
Stock in trade 17.14 14.85 16.90 20.27 21.50
Trade debts 52.97 52.08 54.18 61.00 52.65
Loans and advances 0.63 0.55 0.48 0.48 0.06
Short term deposits 0.56 0.78 1.47 0.80 0.76
and prepayments
Current maturity of 0.00 0.00 11.20 0.00 0.00
long-term
investments
Markup/interset 0.66 0.66 0.58 0.00 0.00
receivables on
investments
Other recievables 5.73 7.63 5.84 8.20 13.90
Taxation-net 2.38 1.80 2.16 1.93 2.04
Cash and bank 0.68 1.68 1.05 1.15 1.10
balance
Total current assets 80.79 80.09 93.91 93.90 92.12
Total assets 100 100 100 100 100
Equity and
liabilities :
Equity
Share capital 0.80 0.79 0.69 0.81 0.94
Reserves 23.32 25.96 25.52 26.63 27.64
Total shareholder's 24.12 26.75 26.21 27.44 29.61
equity
Non current
liabilities
Retirement and other 2.44 1.82 2.06 1.28 1.80
services benefits
Non current
liabilities
Current liabilities:
Trade and other 43.08 40.28 37.27 47.73 43.17
payables
Unclaimed dividend 0.00 0.00 0.71 0.86 0.42
Unpaid dividend 0.00 0.00 0.05 0.06 0.02
Provisions 0.20 0.20 0.13 0.12 0.12
Accrued interest / 0.25 0.24 0.32 0.20 0.24
markup
 Short term borrowing 29.91 30.71 33.25 22.32 25.65
Current liabilities 73.45 71.43 71.73 71.28 69.62
Total equity and 100 100 100 100 100
liabilities

Analysis:

 Total non-current assets have initially shown an increasing trend till 2016 and then
decreases in 2017 after which it has shown an increase till 2019. As per vertical analysis,
the increase in 2019 is primarily due to fair valuation of Company's investment in Pak-
Arab Pipeline Company Limited on account of changes in International Financial
Reporting Standard (IFRS) and increase in property, plant and equipment.

 Stock in trade balances have initially decreased in 2016 and then showed an increasing
trend. The increasing trend till 2019 is mainly due to increase in international oil prices
which is partially offset by decline in stock volume.

 Trade debts have shown almost an increasing trend initially. Trade debts have declined in
2019. These were at highest in FY 2018 as per vertical due to delay in payments by
Power Sector and SNGPL and increase in prices of products. These went down in FY
2019 due to recoveries from power sector.

 Total Shareholders' equity has shown an increasing trend due to profits of each year.

 Trade and other payables have declined as per vertical analysis primarily due to decrease
in trade payables on account of lower volumes of Furnace oil.

Common size analysis of Income statement

201 201 201 201 201

5 6 7 8 9
Net sales 100 100 100 100 100
CGS - - - - -
97. 96. 95. 96. 96.
49 68 77 27 88
Gross profit 2.5 3.3 4.2 3.7 3.1
1 2 3 3 2
Other income 1.5 1.9 1.3 0.7 0.6
(including 7 8 4 4 5
 share of profit
of associates-
net of tax)
Adm and - - - - -
marketing 1.1 1.5 1.2 1.1 1.0
expenses 7 5 8 2 8
Other - - - - -
expenses 0.3 0.2 0.2 0.3 0.4
8 9 7 1 1
Total - - - - -
operating 1.5 1.8 1.5 1.4 1.4
costs 5 4 5 3 9
Profit from 2.5 3.4 4.0 3.0 2.2
operations 3 6 2 4 8
Finance costs - - - - -
1.2 1.0 0.6 0.4 0.7
1 5 7 8 7
Profit before 1.3 2.4 3.3 2.5 1.5
taxation 2 1 5 6 1
Taxation - - - - -
0.5 0.8 1.2 1.1 0.6
6 9 7 0 0
Profit after 0.7 1.5 2.0 1.4 0.9
taxation 6 2 8 6 1

Analysis:
 Net sales revenue has increased by 8.5% in FY19 vs. FY18 on account of increase in
international prices.
 Gross profit increases initially till 2017 and then declines. Gross profit for FY 2019 is
lower vs. FY 2018 mainly on account of increase in sales in FY2019 by 8.5%. However,
it remained highest in FY 2017.
 Other income has witnessed a decreasing trend as per vertical analysis mainly on
account of increase in sales by 8.5% .
 Total operating cost decreases till 2016 and then increases. It has shown an increasing
trend in 2019 as compared to FY 2018 as per vertical analysis which is mainly
attributable to higher exchange losses in this period on account of significant PKR
 devaluation.
 Finance cost has shown an increasing trend till 2018 and then slightly increases in 2019
as compared to FY 2018 due to increase in interest rates during the year.
 Profit after tax (PAT) increases till 2017 and then has shown a decreasing trend. PAT is
lower in 2019 as compared to FY 2018 mainly due to increase in exchange loss, finance
cost and decline in volumes. However, it was lowest in FY 2015 mainly due to higher
finance cost and provision for impairment against doubtful trade debts in FY 2015.

RATIO ANALYSIS:

Profitability ratios:

2015 2016 2017 2018 2019

Gross profit 2.51 3.32 4.23 3.73 3.12
margin

Net profit 0.76 1.52 2.08 1.45 0.92

margin

Return on 8.43 11.22 17.72 14.00 8.88

shareholder’s
equity

Return on 3.90 5.39 8.48 7.13 4.97

capital
employed

EBITDA 2.51 3.32 4.23 3.73 3.12

Margin to Sale
 Profitability ratios
20

18

16

14

12

10

0
Gross profit Net profit margin Return on Return on capital EBITDA Margin
margin shareholder’s employed to Sale
equity

2015 2016 2017 2018 2019

Analysis:

 Gross profit ratio increases initially till 2017 and then declines in 2019 because of
increase in net sales by 8.5% whereas gross profit has decreased by 9.1%. the increase
suggests that the company is efficient in generating profits for every dollar of cost
involved but the decreasing trend after 2017 indicates that the profitability has decreased
a little as compared to previous years. It indicates that the company has less money to
spend on other business operations.

 Net profit margin increases initially till 2017 and then has shown a decreasing trend. Net
profit ratio went down primarily due to increase in net sales by 8.5% and decline in net
profit by 31.5%. in 2019. the decline in net profit indicates that the company’s
profitability has been decreased.

 EBITDA margins have initially increased and then have shown a decreasing trend
primarily due to increase in net sales by 8.5% and decline in EBITDA by 17.4%. it
measures how much cash profit a company has made as it minimizes the non-operating
and unique effects of depreciation and amortization. Thus, it shows a more accurate
reflection of a company’s profitability.

 Return on equity and return on capital increases initially till 2017 and then shows a
 declining trend. Decline in return on shareholders' equity and capital employed is mainly
due to decline in net profit by 31.5% in 2019. It shows a decline in performance and
profitability levels.

Efficiency ratios:

2015 2016 2017 2018 2019

Total Asset 3.12 2.65 2.98 3.30 3.27
turnover
ratio
Inventory 12.30 11.99 14.36 18.34 13.06
turnover
ratio
Creditors’s 8.20 8.50 11.64 10.75 10.15
turnover
ratio
Debtor’s 6.26 5.05 5.61 5.73 5.77
turnover
ratio

Efficiency ratios
20
18
16
14
12
10
8
6
4
2
0
Total Asset turnover ratio Inventory turnover ratio Creditor’s turnover ratio Debtor’s turnover ratio

2015 2016 2017 2018 2019

Analysis:

Efficiency ratios measure a company’s ability to use its assets to generate revenue and
manage its liabilities effectively.
 Inventory turnover ratio indicate if sales are enough to use or turn the inventory.
Inventory turnover increases initially and then has decreased in 2019 primarily due to
increase in inventory by 9.8% on account of increase in international oil prices which
was partially offset by 2.2% increase in gross revenue.

 Debtors turnover ratio measures how effective a company is in extending credit as well
as collecting debts. Debtors turnover ratio slightly decreases initially and then has
increased primarily due to decrease in trade debts by 10.6% on account of recoveries
from power sector during the period which is partially offset by increase in receivables
from SNGPL.

 Creditors turnover ratio increases initially and then follows a decreasing trend. It has
decreased in 2019 primarily due to increase in cost of purchases by 8.4% on account of
increase in international oil prices. A decreasing turnover rate indicates that the company
is taking longer to payoff its suppliers than in previous years.

 Total Assets turnover shows an increasing trend from 2016 and then slightly decreases in
2019 by 0.9% mainly due to increase in gross revenue by 2.2% and increase in total
assets by 3.6%. Overall it has maintained an increasing trend.

Solvency ratios

2015 2016 2017 2018 2019

Debt to 124.00 115.00 127.00 81.00 90.00
equity ratio
(book value)
Interest 2.09 3.28 5.95 6.30 2.96
coverage
ratio
Financial 124 115 127 81 90
leverage
ratio
 Solvency ratios
140

120

100

80

60

40

20

0
Debt to equity ratio (book value) Interest coverage ratio Financial leverage ratio

2015 2016 2017 2018 2019

Analysis:

 Debt to equity ratio has shown an irregular trend. It has an overall decreasing trend but
increase in 2019 as compared to 2018 mainly on account of increase in average
borrowing levels. A debt to equity ratio indicates the amount of financing via lenders as
compared to funding through equity via shareholders.

 Financial leverage initially shows an irregular trend and then has increased during 2019
mainly on account of increase in average borrowing levels.

 Interest coverage ratio shows how easily a company can pay their interest expenses on
outstanding debt. It has shown an increasing trend but has decreased in 2019 primarily
due to increase in finance cost by 74.5%.

Liquidity ratios:

2015 2016 2017 2018 2019

Cash to -0.16 -0.12 -0.15 -0.03 -0.06
Current
Liabilities
Current 1.10 1.12 1.31 1.32 1.32
ratio
 Quick acid 0.87 0.91 1.07 1.03 1.01
ratio
Cash Flow 0.03 0.001 0.03 0.002 0.01
from
Operations
to Sales

Liquidity ratios
1.6

1.4

1.2

0.8

0.6

0.4

0.2

0
Cash to Current Liabilities Current ratio Quick acid ratio Cash Flow from
Operations to Sales
-0.2

-0.4

2015 2016 2017 2018 2019

Analysis:

 Cash to current liabilities ratio shows how well a company can payoff its current
liabilities with only cash and cash equibalents. A ratio below 1 means that the company
needs more than just its cash reserves to payoff its current debt. Cash to current liabilities
have overall increasing trend. It has slightly decreased in 2019 due to increase in short
term borrowings by 19%.

 Cash flow from operations to sales indicate the ability of a company to turn its sales into
cash. It has decreased primarily due to decrease in trade payable and increase in other
receivables.

 Current ratio indicates a company’s ability to meet its short-term debt obligations. The
 current ratio initially had an increasing trend and then remained almost same.

 Quick ratio assists in verifying if the business has the capacity to payoff its current
liabilities by means of the most liquid assets. Quick ratio has an increasing trend initially
and then slightly decreases due to increase in stocks by 9.9%.

Cash flow ratios

2015 2016 2017 2018 2019

Cash flow -29574 -994 -27965 2580 -9232
from
operating
activities
Cash flow 3489 4098 3925 45226 -2534
from
investing
activities
Cash flow -22619 6206 12812 -14229 3223
from
financing
activities

2015 2016 2017 2018 2019

Cash flow -0.0324 -0.0015 -0.032 0.0024 -0.008
margin
ratio
 Cash flow margin ratio
0

0
Cash flow margin ratio

-0.01

-0.02

-0.02

-0.03

-0.03

-0.04

2015 2016 2017 2018 2019

Analysis:

 In FY 2019 Cash flow from Operativing activities is negative as compared to positive

cash flow in last year. The cash flows have decreased in FY 2019 primarily due to
decrease in trade and other payables in FY 2019 whereas trade and other payable
increased in FY 2018.

 Cash flow from investing activities is negative as compared to positive cash flows in last
year I.e. 2018. The cash flow were positive in FY 2018 primarily due to Maturity of PIBs
in FY 2018 resulting in cash flow generation.

 Cash flow from financing activities is positive as compared to negative cash flows in last
year. The cash flow are positive in FY 19 primarily due to additional borrowings
obtained during the year.

 Cash flow margin ratio indicates the amount of cash generated per dollar of net sales.
The larger the percentage, the better the firm is at converting sales to cash flow. Cash
flow margin ratio shows an irregular trend. It increases initially and then decreases in
2017 and then increases in 2018 and then decreases in 2019.

CONCLUSION:
The company’s profitability ratios such as gross profit margin, net profit margin, return on
capital employed, return on shareholder’s equity and EBITA margins to sale increase
initially and then have shown a declining trend. The declining trend of profitability ratios
indicates that the company’s profitability and performance has decreased. The decreasing
trend of inventory turnover ratio and creditor turnover ratio indicate that the company is not
utilizing its resources efficiently and takes longer to payoff its debs which indicate that it is a
risky company.

The solvency ratios have initially shown a declining trend and then they increase in 2019.
The financial leverage ratios increase along with the decrease in interest coverage ratio. The
company liquidity ratios show an increasing trend suggesting that the company is able to
meet its short-term obligations. Moreover, cash flow margin ratio has also decreased in 2019.

The overall analysis suggests that the company could not control its costs efficiently and
could not manage its assets and liabilities to generate profits. Therefore, the investor will find
this company riskier and unattractive for investment.

******