Acknowledgments

By the grace of the almighty, “The Living Legends” have been able to complete the project assigned to them by the instructor of Business Finance. It really has been a pleasure doing this project as it helped us a lot with a provision of an exposure that would not have been possible anyway else. We therefore thank our instructor Madam Naheed who guided us in this regard and was available to us for any kind of inquiries or problems confronted by us. But above all we thank the almighty for enabling us to achieve our task within time.

Sincerely,

The Living Legends

BBA BATCH 4

Abstract

This analytical report is about the financial situation of the fauji fertilizer limited, the largest manufacturers of fertilizer in Pakistan. They are one of the top companies of the country with a massive share in the market of urea. This analysis would certainly help us in knowing the current financial status of the company as we have done a time series analysis for the last two years.

Company profile

With a vision to acquire self - sufficiency in fertilizer production in the country, FFC was incorporated in 1978 as a private limited company. This was a joint venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark.

The initial authorized capital of the company was 813.9 Million Rupees. The present share capital of the company stands at Rs. 3.0 Billion. Additionally, FFC has Rs. 1.0 Billion stakes in the subsidiary Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited).

FFC commenced commercial production of urea in 1982 with annual capacity of 570,000 metric tons.

Through De-Bottle Necking (DBN) program, the production capacity of the existing plant increased to 695,000 metric tons per year.

Production capacity was enhanced by establishing a second plant in 1993 with annual capacity of 635,000 metric tons of urea.

FFC participated as a major shareholder in a new DAPS/Urea manufacturing complex with participation of major international/national institutions. The new company Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited) commenced commercial production with effect from January 01, 2000. The facility is designed to produce 551,000 metric tons of urea and 445,500 metric tons of DAP.

This excellent performance was due to hard work and dedication of all employees and the progressive approach and support from the top management.

In the year 2002, FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated at Mirpur Mathelo, District Ghotki from National Fertilizer Corporation (NFC) through privatization process of the Government of Pakistan.

This acquisition at Rs. 8,151 million represents one of the largest industrial sector transactions in Pakistan

Company’s brand name is “SONA” under the umbrella of the Fauji fertilizer company that is abbreviated as given.

The company introduced its product under the name of “SONA UREA” in 1982 as the first plant was underway as far as the production is concerned; the company and brand name had already been registered when the company entered the business in 1978.At first, the company had put all its efforts in the production of urea as there was a definite need for the urea production in the country because of the high demand and consumption.Talking about the current situation and the future prospective, the company has been one of the leading Organizations of the country for a long time now and the brand name are very well established.

Ratio Analysis

In this section of the report, we will calculate and analyze some financial ratios for the company for the last two years

in order to see exactly in which direction the company is moving. It will tell us about the financial status of the company at present as well as it would serve the purpose of knowing if it is moving forward or not.

Liquidity Ratios:

Liquidity ratios tell us about the firm’s ability to satisfy its short-term obligations as they come due. Now we will analyze a few of the liquidity ratios regarding the company.

A) Current ratio

Year 2005 2006

C.R 0.91 0.90

Now we can see that the figure has decreased in the current ratio when compared to the year 2005.

It’s a band trend for a manufacturing firm like Fauji Fertilizer Company.

We can see from the financial statements of the company that both the current assets and the current liabilities have decreased but the assets have decreased comparatively more causing a decreasing trend in the current ratio.

One of the major reasons for the problem seems to be lower short term investments.

B) Quick ratio

Year 2005 2006

Q.R 0.69 0.61

The above comparison shows that the quick ratio has decreased as the company ended the year 2006.

It is not a healthy sign for the company. Now it has already been discussed that the company’

current assets have decreased comparatively. The financial statements show that the firm’s inventory has increased. That has caused the quick ratio figure to fall a bit.

Hence the firm’s overall ability to satisfy the short –term obligations is decreasing which is not good at all.

Activity Ratios:

Activity ratios measure the speed with which various accounts of the company are converted into sales or cash-inflows or outflows. For this firm, following are a few activity ratios.

A) Inventory turnover

Year 2005 2006

I.T (times) 47.47 27.31

I.T (days) 08 12

We can see that the inventor turnover has decreased. That is a bad trend as the company is now turning the

inventory into finished goods less frequently as compared to the year 2005.

The cost of goods sold has decreased as compared to inventory.

So the firm is getting less efficient in its production operations.

B) Total asset turnover

Year 2005 2006

T.A.T 0.90 1.09

The total asset turnover is on the rise when we compare the figures in this ratio for the last two years.

It’s a positive trend and is in the good of the company. The financial statements suggest that the sales have

increased and the assets have decreased that resulted in this rising figure.

The increase in total assets turnover depicts an efficient financial management.

Debt Ratios:

Debt ratios indicate the amount or the percentage of other people’s money being used to generate profits. We will now discuss the two debt ratios with respect to the company we have selected.

A) Inventory turnover

Year 2005 2006

D.R 56% 52%

We can see that the percentage has decreased. It indicates a bad trend as the financial leverage of the

company falls with the decrease in the percentage of creditor’s financed proportion.

It indicates the company has lost its credibility for attracting investments to some extent.

The company’s assets have decreased.

B) Times interest earned ratio

Year 2005 2006

T.I.E.R 21.12 12.50

As we can see that the trend is a decreasing one when we compare the calculated ratio for the last two years.

It is a bad trend for the firm. The decreasing trend shows that the firm is loosing its

ability to make the contractual interest payments. It is perhaps because of the decrease in the company’s

earnings.

Profitability Ratios:

Profitability ratios help in evaluating the firm’s profits with respect to a given level of sales, a certain level of assets, or the owner’s investment. We will discuss six ratios in this regard with respect to the company.

A) Gross profit margin

Year 2005 2006

G.P.M 36.06% 32.42%

The gross profit margin has decreased. It depicts a bad trend for the firm. In this case both the sales and the gross profit have

increased but the sales have increased comparatively more.

Cost of goods sold has also increased but not as much as the sales have done.

B) Operating profit margin

Year 2005 2006

O.P.M 28.31% 23.32%

The ratio has a decreased figure when compared with the last year.

It definitely is a bad trend for the firm. We can see from the financial statements that both the

operating profit and sales have increased but sales have increased rather more.

A reason for the decreasing figure may be the effect of rising expenses.

C) Net profit margin

Year 2005 2006

N.P.M 19.22% 15.48%

The net profit margin ratio has decreased from last year.

That is not a good sign for the firm. The sales have increased. The reason for the debacle may be that the earning

available for the common stock has decreased. Initiatives have to be taken to remove the downfall.

D) Earning per share

Year 2005 2006

E.P.S (pre tax) 14.62 14.16

E.P.S (after tax) 9.92 9.39

Earning per share has decreased from what it was last year.

It’s a bad situation for the company.

The reason for this also would be the decrease in the earning available for the common stock.

E) Return on total assets

Year 2005 2006

R.O.A 25.36% 25.47%

Return on assets has increased. It’s a healthy sign for the company. The decrease in both the earning available for common

stock and total assets has contributed in the positive outcome.

Even though both have decreased

F) Return on Common stock equity

Year 2005 2006

R.O.E 39.36% 35.78%

The return on common stock equity has decreased from last year.

That definitely is not a good trend. From the financial statements we have learned that the

common stock equity is the same as it was last year but the earning available for common stock has decreased which resulted in the above situation.

Market Ratios:

Market ratios relate a firm’s market value as measured by its current share price, to certain accounting values. We will discuss two market ratios for the selected firm.

A) Price/ earning ratio

Year 2005 2006

P/E. R 13.80 11.23

The figure has decreased from last year. It’s a bad trend for the firm Both the market price per share of common stock and

the earning per share have decreased. The market price per share has decreased more that

has caused the above situation.

B) Book ratio

Year 2005 2006

B.R 13.89 10.70

The book value has decreased. Its not a healthy trend for the firm. Both the market price of share and the book value has

decreased but market price/ share has decreased more.

Conclusion

If we conclude all the ratios to see where the company is at the end of year 2006, we see that the current assets of the company have decreased as well as the short term investments. The firm is loosing its ability to satisfy its short term obligations. The inventory turnover has become slower as compared to last year hence the efficiency is lacking in the operations. Although the sales have increased its effect has been cancelled out by the increase in expenses. The earning available for common stock has decreased resulting in low net profit margin and the earning per share. The debt ratio has decreased and the financial leverage of the

company has decreased. Hence the company is not attracting as much investments as it should. Collectively we can say that the company has not performed desirably in the year 2006 and initiatives have to be taken.

APPENDIX

CALCULATED RATIOS

Ratios 2005 2006

Current ratio 0.91 0.90

Quick ratio 0.69 0.61

Inventory turnover(times)

Inventory turnover(days)

47.47

08

29.31

12

Total assets turnover 0.90 1.09

Debt ratio 56% 52%

Interest earned ratio 21.12 12.50

Gross profit margin 36.06% 32.42%

Operating profit margin 28.31% 23.32%

Net profit margin 19.22% 15.48%

Earning per share(pre tax)

Earning per share(aft tax)

14.62

9.92

14.16

9.39

Return on total assets 25.36% 25.47%

Return on Common stock 39.36% 35.78%

Price earning ratio 13.80 11.23

Market book ratio 13.89 10.70

Graphical Representation

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

2005 2006

current ratio

quick ratio

FIGURE 1.1

0

5

10

15

20

25

30

35

40

45

50

2005 2006

Inventory turnover

Total assets turnover

FIGURE 1.2

debt ratio

50%

51%

52%

53%

54%

55%

56%

57%

2005 2006

debt ratio

FIGURE 1.3

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

gross profitmargin

operatingprofit

margin

net profitmargin

return ontotal

assets

return onCS equity

2005

2006

FIGURE 1.4

0

2

4

6

8

10

12

14

16

2005 2006

price earning ratio

market ratio

FIGURE 1.5

Fauji Fertilizer Company LimitedBalance sheet

At December 31, 2006

2006 2005

(Rs. ‘000) (Rs. ‘000)SHARE CAPITAL AND RESERVES

Share Capital 4,934,742 4,934,742Capital reserve 160,000 160,000Revenue reserves 7,861,801 7,346,166

NON CURRENT LIABILITIES 1,193,750 981,078

DEFERRED TAXATION 2,396,000 2,401,000

CURRENT LIABILITESTrade and other payables 4,025,926 6,737,803Interest and mark – up accrued 134,039 81,644Short term borrowings 4,531,090 2,504,963Current portion of long term:

-Financing 887,327 1,845,658-Murabaha - 41,667

Taxation 1,305,606 1,414,418 -------------------- ----------------

10,883,988 12,626,153

CONTINGENCIES & COMMITMENTS -------------------- ----------------

27,430,281 28,449,139 -------------------- ----------------

2006 2005 (Rs. ‘000) (Rs. ‘000)

PROPERTY, PLANT AND EQUIPMENT 9,607,957 9,184,727

GOODWILL 1,569,234 1,673,849

LONG TERM INVESTMENT 6,409,382 6,058,006

LONG TERM LOANS & ADVANCES 76,647 64,545

LONG TERM DEPOSITS & PREPAYMENTS 2,474 3,435

CURRENT ASSETS

Stores, spares and loose tools 2,202,053 2,154,318Stock in trade 952,905 560,472Trade debts 961,427 695,713Loans and advances 95,245 116,810Deposits and prepayments 25,488 26,097Other receivables 1,451,390 579,802Short term investments 2,452,850 6,195,252Cash and bank balance 1,623,229 1,172,113

------------------ -----------------9,764,587 11,464,577

------------------ -----------------27,430,281 28,449,139

------------------ -----------------

Fauji Fertilizer Company LimitedProfit and Loss Account

For the year ended December 31, 2006

2006 2005

(Rs. ‘000) (Rs. ‘000)

Sales 29,950,873 25,481,121Cost of sales 20,242,194 16,293,642

GROSS PROFIT 9,708,679 9,187,479Distribution cost 2,746,782 2,371,208

Finance cost 517,362 325,999Other expenses 735,331 715,891

------------------- -----------------5,709,204 5,774,381

Other income 1,275,940 1,439,955

NET PROFIT BEFORE TAXATION 6,985,144 7,214,336Provision for taxation 2,349,000 2,317,000

------------------- -----------------NET PROFIT AFTER TAXATION 4,636,144 4,897,336

------------------- -----------------