Financial Statement Analysis - Crescent Textile Limited and the Nishat Mills Limited - Essay Example

FINANCIAL MENT ANALYSIS Table of Contents Table of Contents 2 Introduction 3 Trend analysis 4 Ratio analysis 8 Analysis of cash flows 12 Conclusion 13 References 14 Introduction Financial statement analysis is an aspect of the business finance function and entails the act of examining financial information to gain an understanding of the current and future financial health of an entity. By understanding the financial data, the management can make critical business decisions (Inc., 2015). The aim of this essay is to identify and select any two companies from the same industry and perform financial analysis of their past four years with a view to evaluating such published accounts. For clarity to be attained, this essay will use different evaluation techniques and include trend analysis, ratio analysis, Z-Score, and analysis of cash flow statement. The companies selected for this by this essay for this analysis are the Nishat Mills Limited and the Crescent Textile Mills Limited. The incorporation of Crescent Textile Mills Limited as a public limited company was done in 1950 in Pakistan under the Companies Act of 1913. It is headquartered in Sargodha Road, Faisalabad. Its business is to textile manufacturing and includes spinning, combing, dyeing, bleaching, printing, weaving, stitching, selling buying, and otherwise dealing in cloth, yarn and other products and fabrics made from raw cotton as well as synthetic fibers (The Financial Times Ltd, 2015). In addition, it generates, accumulates, distributes, supplies and sells electricity. The Crescent Textile Mills Limited also operates a cold storage unit (Crescent Textile Mills Limited, 2013, p. 37). As a publicly listed company, Nishat Mills Limited was also incorporated in Pakistan in 1959 under the Companies Act of 1913 (Nishat Mills Ltd, 2013, p. 54). It is a vertically integrated company and just like Crescent Textile Mills Limited, its business involves textile manufacturing, spinning, combing, weaving, dyeing, printing, stitching, bleaching, apparel, buying, selling, dealing in yarn, cloth, linen, and other products and fabrics made from synthetic fiber and raw cotton. It also generates, accumulates, distributes, supplies and sells electricity (The Financial Times Ltd, 2015). Trend analysis Trend analysis is done by conducting horizontal and vertical analysis. The horizontal analysis is performed to focus on the trends or changes in financial statement items. The management and other users of financial information can see the relative changes over time in terms of positive and perhaps troubling trends (Putra, 2009). In performing this analysis, absolute amount as well as percentages is used to compare financial statements over several time periods (Gibson, 2010). On the other hand, Gibson (2010) notes that the vertical analysis is used to express financial statements’ items as percentages of a key financial statements component or a base amount from the same year. The results of the horizontal analysis done by this essay indicated that both companies’ sales exhibited the same trend. The revenues increased in 2011, dropped in 2012, and then increased in 2013. Nishat Mills Limited’s increase in revenues in 2011 by 54% from that of 2010 was attributable to the increase in the products sales mix and selling prices of its products. These results were boosted further by the fact that all its segments performed tremendously well as a result of effective planning, timely investment as well as the use of modern production facilities (Nishat Mills Limited, 2011, p. 10). The revenues, however, dropped in 2012 relative to 2011 by relative to 2010, the revenues were higher by 42%. According to the Directors report, this drop was attributable to a drop in the sale of some products such as the yarn sales (Nishat Mills Limited, 2012, p. 18). Compared to the year 2012, the 2013 sales increased by 16.70% and 66% compared to 2010. According to the Nishat Mills Limited (2013, p. 19)’s Directors’ Report, the reasons for this increase were the increase in sales volumes from all business divisions and favorable prices. The customer loyalty because of its long term relations and high quality products supported these sales increase. Nishat Mills Limited’s effort to explore new markets such as Africa, Australia, Asia and the USA in order to broaden its customer base also paid off. The horizontal analysis results for Crescent Textile Mills Limited’s revenues showed that its revenues increased by 36% in 2011 relative to 2010. According to the Crescent Textile Mills Limited (2011, p. 10)’s Directors’ Report, this increase was as a result of record breaking cotton prices as they were highest in the last160 years. As at March 2011, the price touched $2.14/Lb. compared to $0.76/Lb. in 2010. This price skyrocketed the crop had been damaged in Pakistan and China due to floods and heavy rains. Politically, the government of India aggravated the situation by banning the export of surplus cotton. The drop in revenues in 2012 by 13.76% relative to 2011 and 17% relative to 2010 was attributed to the decrease in cotton prices. The industry at large as also witnessed from Nishat Mills Limited’s performance in this period managed a mediocre growth as a result of gas curtailments and lower international cotton prices as discussed above (Crescent textile Mills Limited, 2012, p. 10). Other factors that negatively impacted on revenues were the security concerns, unsupportive government policies, political infirmity and financing barriers to investment in modern equipment and machinery. However, this essay established that Crescent textile Mills Limited’s revenues for the 2013 increased by 22% relative to 2010 and 22.86% relative to 2012. According to the Crescent Textile Mills Limited (2013, p. 12)’s Directors’ report, the reasons for this increase in revenues were the increase in overall volumes and rates backed on better domestic and international demand. Figure 1 Trend of Nishat Mills and Crescent Mills ltd. This essay established that the cost of sales of the two companies closely followed the revenue trend. In the case of Crescent Textiles Mills Limited, the cost of sales was established to be 87%, 91%, 88% and 89% in 2010, 2011, 2012 and 2013 respectively. This indicated that Nishat Mills Limited remained relatively at the same level of efficiency as far as the management of cost of sales concerned. On the other hand, this essay found that the cost of sales of the Nishat Mills Limited was 81%, 84%, 85% and 83% in 2010, 2011, 2012 and 2013 respectively. These companies recorded higher percentage gross profits in the year 2010 to indicate that their production was more efficient, and their cost management policies were better. The following years experienced an increase in the cost of sales since the industry was facing challenges from the energy crisis because of the shortage of gas and electricity (Nishat Mills Limited, 2013, p. 19). The imposition of Fuel price Adjustment and Gas Infrastructure Development Cess further aggravated these challenges. Figure 2 Cost of Sales expressed as a percentage of revenue Further results also indicated that the operating costs of these companies changed with the changes in revenues, such that they increased with the increase in revenue amount and declined with the decline in revenues level. This was greatly attributable to the fact that the increased sales and market needed further selling and distribution expenses, and other operating expenses. However, despite the increase in operating expenses, this essay established that these companies were able to maintain their operational efficiency in the management of operating expenses. The operating expenses of Crescent Textiles Mills Limited were 7%, 6%, 7% and 7% in 2010, 2011, 2012 and 2013 respectively while those of Nishat Mills Limited were 8%, 7%, 8% and 7% over the same periods. The increase in net profits for Nishat Mills Limited was 66%, 21% and 101% in 2011, 2012 and 2013 all relative to 2010. From vertical analysis, this essay found that, as a percentage of sales, the net profit was 9%, 10%, 8% and 11% in 2010, 2011, 2012, and 2013 respectively to indicate that Nishat Mills Limited has generally been able to control its cost of sales, operating expenses, and financing costs. The remarkable record of 11% net profit in 2013 was attributable fuel cost savings, well diversified investment portfolio and higher profitability of value added segments (Nishat Mills Limited, 2013, p. 20). The Crescent Textiles Mills Limited made losses in 2011 and 2012 because the inflationary impact affected its operational costs. In addition, there was an unprecedented gas curtailment that lasted for long resulting in enormous losses (Crescent Textile Mills Limited, 2011, p. 13). However, in 2013, it recorded profit because it managed to save in finance cost as the discount rate had reduced. In addition, its spinning segment posted better results. Ratio analysis Ratio analysis involves the act of quantifying and comparing relationships that subsists between the variables in the income statement and the statement of financial position among other financial statements (Jain, 2007). The gross profit margin for the Crescent Textile Mills Limited was 13.41%, 9.25%, 11.90%, and 11.22% in 2010, 2011, 2012 and 2013 respectively. The drop in the gross profit margin in 2011 was attributable to the huge increase in the cost of sales of 91% relative to sales and 42% increase compared to the 2010 cost of sales. The improvement depicted in 2012 was as a result of 3% decrease in the cost of sales relative to sales to 88% though in 2013 it increased to 89% leading to a slight dip in the gross profit margin. Nishat Mills Limited recorded higher gross profit margins than Crescent Textile Mills Limited. Its values were 18.96%, 16.16%, 15.11%, and 17.25% over the same periods. The drop in gross profit margin in 2011 was attributable to the increase in the cost of sales to 84% of sales from 81% in 2010. The further drop in 2012 was also due to the increase in cost of sales to 85% of sales, and the improvement recorded in 2013 was as a result of drop in cost of sales to 83% of sales. Figure 3 Gross profit margins The results on the operating margin ratio of Crescent Textile Mills Limited were 8.10%, 4.46%, 6.81% and 6.05% in 2010, 2011, 2012 and 2013 respectively. Even though Crescent Textile Mills Limited recorded the highest increase in revenues in 2011, its operating profit margin dropped significantly cost of sales increased to 91% of sales, in an addition to increase in the operating costs by 12%. The improvement realized in 2012 was attributable to the 5% drop in operating expenses and 23% drop in the cost of sales. The slight decrease in 2013 was as a result of an additional increase in the cost of sales by 5% and 6% increase in the operating expenses to support the increased sales. The operating profit margin of Nishat Mills Limited was 13.99%, 14.44%, 13% and 15.21% in 2010, 2011, 2012 and 2013 respectively. The significant drop in 2012 was attributed to 42% increase in the operating expenses and cost of sales to 85% of sales. The positive results recorded in 2013 largely because of the drop in the cost of sales to 83% of sales. The net profit margin for Nishat Mills Limited was 9.24%, 9.97%, 7.85% and 11.15% while that of Crescent Textile Mills Limited was 3.68%, -0.61%, -0.56% and 0.84% in the year 2010, 2011, 2012 and 2013 respectively. The relatively large drop in the net profit margin in 2012 for Nishat Mills Limited was due to the increase in the cost of sales, operating expenses, and finance cost. The company, however, made better performance all through giving rise to return on investment of 9.22%, 13.96%, 9.84%, and 10,20%; return on owners’ equity of 9.29%, 13.69%, 9.345 and 9.97%; and earning per share of Rupee 0.829, Rupee 1.378, Rupee 1.004 and Rupee 1.663 in 2010, 2011, 2012 and 2013 respectively. The negative net profit margins recorded by Crescent Textile Mills Limited was as a result of losses it made in 2011 and 2012 because of unprecedented gas curtailment that lasted for long. Consequently this leads to a negative return on investment, earning per share and return on owners’ equity in these years. Figure 4 operating Margin ratio From current ratios analyzed, this essay found that Nishat Mills Limited had the capacity to meet its short term maturing obligations from its current assets, through current ratio, since this ratio was above one. In addition, further results from its acid test ratio showed that it had no problems settling its maturing obligations without selling its stock as shown in figure 5 below. However, as indicated in figure 6 below, Crescent Textile Mills Limited had no enough current assets to settle its maturing short term obligations. This could have made it experience some liquidity challenges. Crescent Textile Mills Limited’s management should review it working capital management policies to avert any possible eventualities that might affect its smooth operations in future. Figure 5 Nishat Mills Limited Current and Acid test ratio Figure 6 Crescent Textile Mills Limited’s Current and Acid test ratio The results on the activity ratios for these companies indicated that the inventory turnover for Crescent Textile Mills Limited ranged between 7 to 8 times while that of Nishat Mills Limited was around 8 times. This could be a policy of this industry. Over the four studied years, the Crescent Textile Mills Limited took 40-50 days to clear its stock while Nishat Mills Limited took 43-46 days. The debtors’ turnover for Nishat Mills Limited was 30.90 times, 39.15 times, 25.75 times and 16.79 times leading to debtors’ collection period of 32.36 days, 25.55 days, 38.83 days and 59.55 days in 2010, 2011, 2012 and 2013 respectively. The debtors turnover of Crescent Textile Mills Limited was 4.21 times, 4.35 times, 3.05 times and 5.36 times leading to debtors collection period of 119 days, 115 days, 164 days and 93 days over the same periods. Altman Z-Score The average Altman Z-Score for Nishat Mills Limited was 1.56 while that of Crescent Textile Mills Limited was 0.62. According to this model companies, with a score of above 3 are considered safe and health, with no possibility of getting bankrupt in the near future. Whereas companies with a score of 1.8 to 3 are likely to be bankrupt in the next 2 years, and, in this case, the Nishat Mills Limited falls here. In consideration of the Crescent Textile Mills Limited, Altman Z-Score fell short of this and this company is likely to face bankruptcies in near future. Analysis of cash flows The results of the analysis done by this essay established that the cash flows from operating activities for Nishat Mills Limited were Rupee 988,193, Rupee 260, 523, Rupee 2,750,542, and Rupee 491, 795 n the year 2010, 2011, 2012 and 2013 respectively. The drop in the operating cash flows fr4om operations in 2011 was attributable to a higher increase in trade debts to 22% relative to 20% increase in trade payables. However in 2012 it increased as a result of an increase in trade creditors at a higher rate than a proportionate increase in debtors. The decrease in 2013 was attributable to the increase in stock in trade by 13% and 79% increase in trade debts while trade and other payables decreased by 11%. This essay established that the net cash flows from operating activities of Crescent Textile Mills Limited decreased in 2011 before rising in 2013 and slightly declining in 2013. The reasons for the decline in 2011 were due to 41% increase in trade debts compared to 32% increase in trade and other payables. However, this situation improved in 2012 because of a higher percentage of stock in trade and trade debts relative to the increase in trade and other payables. The net cash flows from the investment activities for Nishat Mills Limited were negative due to continued investment in machinery and non-current assets to support the expanding market. In the case of Crescent textile Limited, the cash flows from investment activities remained negative all through due to its continued investment in the property, plant, and equipment. The net cash flows from financing activities of Crescent textile Limited were negative in 2010 as there was a decrease in the long term financing. Conclusion In conclusion, this essay sought to identify two publicly listed and traded companies and carry out a financial statement analysis of their financial statements. The companies selected were the Crescent textile Limited and the Nishat Mills Limited. This essay identified that Nishat Mills Limited performance has been better relative to that of Crescent textile Limited. References Crescent Textile Mills Limited, 2013. Annual report 2013. Financial Report. Faisalabad, Pakistan: Crescent Textile Mills Limited Crescent Textile Mills Limited. Crescent Textile Mills Limited, 2011. Annual Report 2011. Annual Financial Report. Faisalabad, Pakistan: Crescent Textile Mills Limited Crescent Textile Mills Limited. Crescent textile Mills Limited, 2012. Annual Report 2012. Financial Report. Faisalabad, Pakistan: Crescent textile Mills Limited Crescent textile Mills Limited. Crescent Textile Mills Limited, 2013. Annua; report 2013. Financial Annual Report. Faisalabad, Pakistan: Crescent Textile Mills Limited Crescent Textile Mills Limited. Gibson, F., 2010. Financial Reporting and Analysis: Using Financial Accounting Information. Boston, Massachussets: Cengage Learning. Jain, K.&., 2007. Financial Management. Noida, UP, India: Tata McGraw-Hill Education. Nishat Mills Limited, 2011. Nishat Mills Limited Annual Report 2011. Annual Financial Report. East Hadiara Drain, Pakistan: Nishat Mills Limited Nishat Mills Limited. Nishat Mills Limited, 2012. Annual Report of Nishat Mills Limited. Financial Report. East Hadiara Drain, Pakistan: Nishat Mills Limited Nishat Mills Limited. Nishat Mills Limited, 2013. Annual Report of Nishat Mills Limited. Annual financial report. East Hadiara Drain, Pakistan: Nishat Mills Limited Nishat Mills Limited. Nishat Mills Ltd, 2013. Annual Report of Nishat Mills Ltd for the Year ended June 30, 2013. Annual Financial Report. East Hadiara Drain, Pakistan: Nishat Mills Ltd Nishat Mills Ltd. Putra, L.D., 2009. Horizontal Vs Vertical Analysis of Financial Statements.. [Online] Available at: HYPERLINK "http://accounting-financial-tax.com/2009/10/horizontal-vs-vertical-analysis-of-financial-statements/" http://accounting-financial-tax.com/2009/10/horizontal-vs-vertical-analysis-of-financial-statements/ [Accessed 25 April 2015]. The Financial Times Ltd, 2015. Crescent Textile Mills Ltd- About the company. [Online] Available at: HYPERLINK "http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=CRTM:KAR" http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=CRTM:KAR [Accessed 25 April 2015]. The Financial Times Ltd, 2015. Nishat Mills Ltd - About the company. [Online] Available at: HYPERLINK "http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=NML:KAR" http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=NML:KAR [Accessed 25 April 2015]. Read More