UNIVERSITY OF KARACHI

DEPARTMENT OF PUBLIC ADMINISTRATION

Report on,

THE ANALYSIS OF FINANCIAL RATIOS OF

PAKSITAN STATE OIL (PSO)
AND
SHELL PAKISTAN

Submitted to,

Sir Imtiaz Askari

Prepared by,

Ibrahim Noorani

Roll no: 20

MPA (Prev) Final

RATIO DEFINITIONS
 HORIZONTAL RATIO ANALYSIS
Horizontal Ratio Analysis refers to the comparison of a company’s performance for a
particular period with the performance of a similar company for the same period.
However it is important to pick a similar sized company that operates in the same
industry. In the case of PSO, there is no other company in Pakistan, which can be
compared to the giant. Its closest competitor is Shell Pakistan with a market share of 14%
compared to PSO’s 68%. Nevertheless, a comparison of the major indicators for 2007 is
presented below:

Short Term Solvency Ratios PSO SHELL Difference

Current Ratio 1.22 1.02 19.05%

Quick Ratio 0.64 0.60 6.60%

Cash Flow to Current Liabilities 0.07 0.01 928.93%

Short Term Solvency Ratios are normally calculated to assess a company’s liquidity
position i.e. the amount of cash or cash equivalents that a company has to meet its
immediate obligations. Traditionally, a current ratio of 2 or higher is regarded as
appropriate for most businesses to maintain creditworthiness; however, more recently a
figure of 1.5 is regarded as norm and for quick ratio 1. However it is seen that many oil
companies do fairly well with a current ratio of 1.2 and quick ratio of 0.7.

Both the current and quick ratios for both the companies, namely PSO and Shell, are
below the norm. It could be because of continuous decline in Current assets and increase
in Current liabilities. Also both companies’ balance sheets show a high level of Trade
credit which could also create liquidity problems. But PSO is in a fairly better position to
meet its immediate cash requirements as compared to shell in Pakistan.

Profitability Ratios PSO SHELL Difference

Gross Profit Margin 3.51 5.55 -36.79%

Net Profit Margin 1.34 0.61 118.33%

Return on Capital Employed (ROCE) 35.46 13.42 164.15%

Total Asset Turnover Ratio 4.68 3.94 18.81%

Profitability Ratios measure the overall record of management in producing profits. A
firm must earn an adequate profit or its long term survival is in danger. Profit growth
should be compared with the amount of funds used to make a profit. Profit is usually
taken as PBIT. The most important profitability ratio is therefore the ROCE. The ROCE
for PSO is much higher than that of Shell, giving PSO a competitive advantage.

Net profit margin is a measure of how well a company has controlled overheads. The
asset Turnover ratio (sales/net assets) shows how efficiently the assets are being used.
The advantage of PSO in the ROCE is because of improved Net Profit margins and better
use of assets, and also because PSO holds a market share of 68% as compared to Shell’s
14% which naturally gives rise to it’s profitability.
However, because of PSO’s expanding business it has the requirements for large storage
facilities increasing its respective costs. This gives Shell a higher Gross Profit Margin.

Efficiency Turnover Ratios PSO SHELL Difference

Inventory Turnover in Days 31.98 27.69 15.47%

Accounts Receivables Period in Days 14.19 14.53 -2.30%

Turnover periods for stock and Accounts Receivables (in days) are significant when
analysing the management of working capital cycle (also referred to as trade cycle). They
indicate how soon the stock is convertible into cash and therefore provide further
indications of the company’s liquidity.

Inventory Turnover in Days for both the companies is satisfactory based on their
magnitudes of business. Accounts Receivable period for shell is pretty much better than
PSO which indicates low collection periods for PSO.

Long Term Solvency Ratios PSO SHELL Difference

Debt Ratio 71.98 67.61 6.46%

Interest Coverage 6.86 1.3 427.70%

Long Term Solvency Ratios emphasize the longer term commitments to creditors. Debt
ratios are concerned with company’s long term stability. Increasing debt ratio would
mean that most of the company’s profit would be exhausted in servicing the debt. PSO
has been facing a high debt ratio as compared to Shell, increasing by 6.46%.
Interest cover gauges the company’s ability that how many times over it can pay its
interest obligations. It shows whether the company is earning enough profit before
interest and tax so as to pay its interest cost comfortably or whether its interest cost are
high in relation to the size of its profit. . Norm for the interest cover is 2.5 times.
Anything less than 2.5 begins to indicate a higher degree of risk. Both the companies
show decline in the interest coverage ratio. The extended credit periods and the longer
Inventory turnover days, all contribute to the increasing Short Term Borrowings resulting
in higher Financial Costs. This poses a significant threat to the future's Interest Cover
Ratios and the Working Capital Cycle. Shell on the other part survives with an interest
cover ratio of just 1.3. PSO has been better off in covering its financial costs as compared
to the results of Shell.

Shareholder’s Investment Ratios PSO SHELL Difference

Earnings Per Share 27.34 12.90 111.96%

Dividend Cover 1.30 0.81 61.49%

Investment Ratios help equity shareholders and other investors to assess the value and
quality of an investment in the ordinary shares of a company. Earning per share is used
primarily as a measure of profitability, and so an increasing EPS is a good sign. EPS
measures the earning available to the ordinary shareholder. Shell is far behind with its
EPS when it comes to comparison with PSO, particularly because has lower share capital
than PSO.

But in isolation, EPS ratio is meaningless for inter-company comparisons, so it must be

considered with the actual dividend paid out of current profits, which can be judged by
the dividend cover ratio. PSO has maintained a dividend cover of around 1.30 times as
compared to Shell’s 0.81 which means that PSO is retaining high proportions of profit.