Final Project: Financial Decision Making

Financial Statement Analysis of PPL

SUBMITTED TO:

Sir Hassan

SUBMITTED BY:

Ifzal Ahmed MBA1-FA09-003

SUBMITTION DATE:

May 05, 2010

COMSATS Institute of Information Technology,

CONTENTS
Lahore
Financial Statement Analysis |
EXECUTIVE SUMMARY

INTRODUCTION

INDUSTRY ANALYSIS

COMPANY ANALYSIS

MARKET RISK CALCULATION

RATIO ANALYSIS

o LIQUIDITY RATIOS

o ASSETS MANAGEMENT RATIOS

o SOLVENCY RATIOS

o PROFITABILITY MEASURES

RECOMMENDATIONS

BIBLOGRAPHY

Financial Statement Analysis |

 EXECUTIVE SUMMARY
The project assigned to us was on Pakistan Petroleum Ltd. in which we had to discuss main
idea that whether the investment in company’s stocks was feasible or not. Since we have
work-out on this project and we have had done analysis of Petroleum industry and company
analysis through different dimensions. This project on Pakistan Petroleum contains various
aspects and position of companies financial Performance. Than majorly brief but adequate
industry and company analysis for financial statements were important parts of our project. In
this we have done horizontal, vertical and ratio analysis along with Beta, Alpha and CAPM
calculation. Importantly three year projections of company’s financials were significant part
of our project. Last but not the least this project is concluded with recommendations about
whether the investment in company’s stocks is advisable or not. The project of Pakistan
Petroleum Ltd Also contains the contents in ordinal format and the bibliography having links
concerned to this project.

Financial Statement Analysis |

INTRODUCTION

The pioneer of the natural gas industry in the country, Pakistan Petroleum Limited (PPL) has
been a key player in the energy sector since the 1950s.The company has managed to sustain
its positioning due to its robust business programme and persistent efforts to optimize
production from existing fields and new discoveries, currently contributing about 25 percent
of the country’s total natural gas supplies in addition to crude oil, Natural Gas Liquid and
Liquefied Petroleum Gas.

PPL’s history can be traced back to the establishment of a public limited company in June
1950, the majority shares of which were held by Burmah Oil Company (BOC) of the United
Kingdom. In September 1997, BOC disinvested from the E&P sector worldwide and sold its
equity in PPL to the Government of Pakistan. In July 2004, the government, in turn, sold 15
percent of its holding in PPL to the general public through an Initial Public Offer, reducing its
share to 78.4 percent. The remaining equity is divided between International Finance
Corporation and private investors, holding 1.3 percent and 20.3 percent respectively.

The company operates five producing fields across the country at Sui (Pakistan’s largest gas
field), Adhi, Kandkhot, Chachar and Mazarani and holds working interest in seven partner-
operated producing fields. These are Qadirpur, the second largest gas field, Miano, Sawan,
Block 22 (Hasan, Sadiq and Khanpur) and Tal Block (Manzalai).

As a major stakeholder in securing a safe energy future for the country, PPL pursues a
dynamic exploration agenda aimed at enhancing hydrocarbon reserves. In Pakistan, the
company’s exploration portfolio comprises 22 exploration blocks. Of these, PPL operates
seven through joint ventures with other Exploration and Production (E&P) companies and
has working interest in 15 more exploration areas, including three off-shore blocks, as non-
operating partner. PPL is also among the first local E&P companies to extend its operations
beyond national borders and has an interest in an exploration licence in Yemen in a joint
venture with OMV.

Over the years, PPL has developed a reliable foundation and infrastructure for providing
clean, safe energy through sustainable exploitation of indigenous natural resources while
adhering to the highest standards of health and safety and constraining the ecological
footprint of its operations. As a result, Monitoring and Inspection and Design & Construction
departments, Mazarani and Kandhkot gas fields, Adhi field, Sui Field Gas Compressor

Financial Statement Analysis |

Station, Sui Production, Sui Field Engineering and Purification Plant were certified for ISO
9001:2000 Quality Management System.

As such, the company believes in value addition for all its stakeholders and remains
committed to a transparent financial and corporate regime. This factor has been recognized
by the prestigious Management Association of Pakistan that selected PPL as the recipient of
its 25th and 26th Corporate Excellence Awards.

At PPL, the health and safety of employees and sustainable use of natural resources are key
requirements of operational excellence. Every effort is made to enhance Health, Safety and
Environment awareness among staff and other stakeholders. This commitment is evident
from the landmark certification of Mazarani Gas Field, Sui Production, Sui Field Gas
Compressor Station and Adhi Field for ISO 14001 and OHSAS 18001 certification. Besides,
PPL was also awarded the Annual Environmental Excellence Award in 2006, 2008 and 2009
by the National Forum for Environment and Health.

PPL has played a significant role as a responsible corporate citizen since the inception of its
commercial activities in Sui by establishing Model School Sui in 1957 for children of
workers and local communities. Over time, the outreach of PPL’s Corporate Social
Responsibility (CSR) portfolio has gone well beyond obligatory requirements. In 2001, PPL
Welfare Trust was founded to provide geographical and thematic diversity within its CSR
initiatives, which include education, health, infrastructure development and socio-economic
uplift of disadvantaged communities, particularly those living in and around its operating
areas. In recognition of these efforts, PPL has won the Corporate Philanthropy Award for
four consecutive years from 2004 to 2007 for its commitment to social development.

INDUSTRY ANALYSIS
Historically the demand of petroleum products has been increasing at an average rate of 7.5
percent per year (last 4 years 4.25 %). The long term growth estimates have been forecast to
range between at 4.5 to 5%. The maximum growth of 9% has been forecast in oil and gas
consumption in the transport sector.

The consumption of furnace oil however, is expected to double itself mainly in power
generation. There are several refinery projects in different stages of development which when
reach maturity shall considerable increase the country’s refining capacity. The recent
overhauling of Pakistan Refinery Limited (PRL) and Park-Arab Refinery Limited (PARCO)
production units have enhanced production of HSD & FO during Jul-Oct 2007, which was up
by 21 percent and 26 percent as against corresponding months of last year respectively. But,
these are deficit products as their local production meets only 47 percent and 45 percent of
the local demand for HSD and FO, respectively. Hence, in the meantime the growing needs
for petroleum products will have to be met from additional imports of refined products as
well as increase crude imports for the new refineries.

The existing infrastructure in the country is not adequate to bear the burden of the large
volumes which are envisaged at the term of this millennium. For storage, transportation and
distribution of the additional quantities of oil, additional facilities on the continuing basis

Financial Statement Analysis |

need to be introduced before the existing facilities become so incapable that the consumers
bear the cost of Shortages & non-availability in the market. In addition to the injection of
adequate and modern facilities, the consumer will look for innovative marketing techniques
and safe and friendly products to satisfy their sophisticated demands & concern about
pollution and ecological imbalance. The petroleum industry must prepare itself to meet the
challenges of free market and discerning consumers of the new era.

Based on the various factors, such as GDP growth, sustainable agricultural activities, increase
in the vehicle population leading to increased petroleum trade activity, and thermal power
generation etc., the POL requirement of the country are on constant increase.

As per OCAC’s long term demand estimates the POL demands, in the next 5 years i.e. up to
2005-10 is expected to increase by about 33% to a volume of 22,345 million tons as
compared to 1998 99 actual of 16,805 million tons. Currently the demand is met by importing
refined products mainly HSD and HSFO to the tune of 63% and the balance 37% demand is
met by processing imported and as well as the indigenous crude.

In developing counties the demand for middle distillates and furnace oil grows at a fast rate.
At present the demand for gas oil & furnace oil constitutes about 84% of the fuel. The four
domestic refineries cannot meet such demand and since the refining capacity has been left far
behind these two products are being and shall continue to be imported in large quantities in
future. In 1998-99 nearly 5026 million tons of gas oil and 5.32 million tons of furnace oil was
imported. At the time kerosene, gasoline and JP-1 were also imported to meet the small
shortfalls in the supply from the local refineries.

The cost of current and next year’s petroleum imports are expected to be close to $7billion,
which is higher than previous years import and about $1.2billion higher than current year’s
revised estimates of $ 6.6billion. The oil import bill for the year 2007-2008 has been reported
as approximately $9.00 billion.

The anticipated total consumption of crude oil for the next year has been estimated at
73.3million tons out of which the consumption of HSD High Speed Diesel and furnace oil,
which recorded at 7.4 million tons and 7.3 million tons in the previous fiscal year, have been
increasing substantially during the current year and it is being estimated that their demand
will increase to 9.1 million tons and 8.1 million this year. The cumulative cost of Diesel and
Furnace Oil has been projected at $2.25billion for the next year against $2.7billion during the
current year. For the current year, an amount of $6.4billion had been estimated for the import
of about 64.75million tons of crude, 4.6million tons of diesel, 2million tons of furnace oil.

COMPANY ANALYSIS
Pakistan Petroleum Limited is one of the oldest and largest E&P companies in the country.
The primary activities of the company involve exploration, development and production of
Financial Statement Analysis |
Pakistan's natural reserves of oil and gas. It was incorporated on 5th June 1950 after the
promulgation of the Pakistan Petroleum Production Rules in 1949. PPL inherited all the
assets and liabilities of its parent company, the Burmah Oil Company (Pakistan Concessions)
Limited and commenced business on 1st July 1952.

The company remained under the management control of Burmah Castrol, UK till 1997.
After that the government purchased the entire equity interest of Burmah Castrol PLC,
formerly Burmah Oil Company. After June 2004, the Government of Pakistan disinvested
around 15% of its equity in the company through an Initial Public Offering (IPO). The
Government of Pakistan intends to privatize PPL and IPO was a significant step towards
achieving this objective. As at June 2008, the government of Pakistan owned 78.4% stake of
PPL, the International Finance Corporation (IFC) had 3.43% of shareholding and the rest
18.17% is free-float.

PPL is the second largest Exploration and Production (E&P) companies, both, in terms of
production and reserves. PPL has been playing a crucial role in augmenting hydrocarbon
resources since 1955. Presently PPL contributes around 25% of the country's total natural gas
production. It is also one of the market leaders in terms of its holdings of exploration area.
Out of 242,714 sq.kms area under exploration in Pakistan, PPL holds the second largest
share, more than 22% in joint venture with partners. PPL is aggressive in exploration but at
the same time conservative in selecting drilling sites.

It has discovered eight gas and three oil fields. PPL has working interest in 24 exploration
blocks, of which eight are PPL operated and the other 14, including 4 off-shore are partner
operated. Sui and Kandhkot gas fields are two of the major PPL operated fields where PPL
has 100% ownership. In 1952 the company discovered the largest gas reserves at Sui. Within
three years (1955) the supply of natural gas to Karachi for industrial and domestic use began
through pipelines. Sui caters to about one-fifth of the total gas demand in the country. In
1959, vital discoveries at Kandhkot gas field and Mazarani field were made. Crude oil was
discovered at Adhi field in 1978 and in 1980 commercial production started at Adhi.

In 1990, the Liquefied Petroleum Gas (LPG) and Natural Gas Liquid (NGL) Plan was
installed and the production of LPG, NGL and gas from Adhi commenced. In the year 2007,
PPL made oil and gas discovery at Mela-1 well (Nashpa Block) and two gas discoveries at
Latif-1 (Latif Block) and Tajjal-1 (Gambat Block).

Profits for the 9 months ending March 2009 were Rs 20.970Billion which is 40% higher than
same period last year. This translated into earnings of Rs 25.27 per share (9M 2008: Rs
18.04per share). This profit started from 37% higher sales this year of Rs 45.337Billion (9M
2008: Rs 33.126Billion). Main contributors to high profits this year are rupee depreciation
against US dollar and delayed effect of the high international Oil prices. Other operating
income has been high contributor in total profits, 3.344Billion, which comes directly from
deposits in bank accounts, Musharika certificates, Pakistan Investment Bonds and TFCs.

Financial Statement Analysis |

On a closer look we get to see that along with high profits Finance cost has also went up by
38%. Similarly, other operating expenses have also increased by 46%. During the year on the
operating front, Gas production from Sui and Sawan fields declined while production started
from Gambat and Latif along with increases in production from Kandhkot and Nashpa. New
business acquisitions included 75% working interest in Tullow Pakistan (Development)
Limited in Chachar Development and Production lease, along with operatorship of the area in
March 2009. The current production of the field is around 10 MMcfd of natural gas.
The Exploration and Production (E&P) companies would be offered $4.08 per mmbtu in as
per 2009 petroleum policy, which was $3.65 per mmbtu in 2007 and $2.99 per mmbtu in
2001. The increase in the gas rates would bode positively for the E&P companies, and the
sector is expected to show better results in the coming times.

Stock Data:
Current Price (4/30/2010): 197.00
(Figures in Pakistan Rupees)

Pakistan Petroleum Limited Key Data:

Ticker: PPL Country: PAKISTAN

Oil, Gas, Coal & Related

Exchanges: KAR Major Industry:
Services

Crude Oil & Natural Gas

Sub Industry:
Producers

61,580,072,000
2009 Sales Employees: 2,667
(Year Ending Jan 2010).

Currency: Pakistan Rupees Market Cap: 196,175,694,279

Fiscal Yr Ends: June Shares Outstanding: 995,815,707

650,689,016
Share Type: Ordinary Closely Held Shares:

Financial Statement Analysis |

BETA=nΣXY - (ΣX)(ΣY)/nΣX² - (ΣX)²
n = 48
ΣX= 54.64
ΣY=68.07
ΣX²=
1118.97
Σxy =
777.35

BETA = 48(777.35) - (54.64)(68.07) / 48(1118.97) - (54.64)²

»
=37312.8 - 3719.3448 / 53710.56 - 2985.5296 0.66

ALPHA = Ȳ - βẊ

= 1.42 - 0.66(1.138) » 0.67

CALCULATION OF MARKET RISK (BETA)

Expected Return
Rs=ᾳ + β(Rm) where Rs= Required Return
Financial Statement Analysis |
 = (0.67 + 0.66(20.30) ᾳ = 0.67
= 14.07% β= 0.66
Rm is assumed to be 20.30

CALCULATION OF CAPM

Rs = Rf + Bs (Rm - Rf)

Where;
Rs= Required Return on Pakistan Petroleum Ltd
Rf= Risk Free rate of Return which is assumed to be 12.25%
Bs= Beta of Pakistan Petroleum stock which was calculated to be 0.66
Rm= Market Rate of Return is assumed to be 20.30

Rs = Rf + Bs (Rm – Rf)
Rs = 12.25 + 0.66(20.30 – 12.25)
= 17.60 %

Financial Statement Analysis |

Financial Statement Analysis |
 RATIO ANALYSIS OF PAKISTAN PETROLEUM LTD

LIQUIDITY RATIOS 2007 2008 2009

Current Assets
Current Ratio 4.35 2.79 3.10
Current Liabilities
Quick Assets
Quick Ratio 4.16 2.67 2.96
Current Liabilities
Cash
Cash Ratio 0.10 0.08 0.09
Current Liabilities
Fixed Asset Turn Sales
2.72 2.48 2.19
Over Ratio Avg. Net Fixed Assets
LONG TERM SOLVENCY MEASURES
Total assets - Total equity
Total Debt Ratio 0.22 0.31 0.28
Avg. Total Assets
Earnings before Interest &
Times interest earned Tax 494 458 448
ratio Times Times Times
Interest
ASSET MANAGEMENT, OR TUROVER, MEASURES
Cost of Goods sold
Inventory Turnover 10.07 10.53 11.87
Avg. Inventory
365 days
Days sales in inventory 36 35 31
inventory turnover
Sales
Receivables Turnover 4.8 4.11 3
Avg. Accounts receivable
Days' sales in 365 days
76 89 122
receivables Receivables turnover
ASSET TURNOVER RATIOS
Fixed Asset Turn Over Sales
2.72 2.49 2.19
Ratio Avg. Net Fixed Assets
Sales
Total Assets Turnover 0.84 0.82 0.86
Avg Total Assets

PROFITABILITY MEASURES
Net Income
Profit Margin 43.68% 43.10% 45%
Sales
Net Income
Return on Assets 36.67% 35.38% 38.49%
Avg Total assets
Net income
Return on equity 41.82% 45.14% 44%
Total Equity
Price Per Share
P/E Ratio 5.68 10.36 12.99
Earning Per Share

Financial Statement Analysis |

FINANCIAL RATIOS
Liquidity Ratios:
1. Current Ratio:
Current Assets
2007: = 4.35 Current Liabilities

2008: = 2.79
2009: = 3.10
This ratio shows that how much current assets a company as against current liabilities. And
how efficiently company uses its current assets to generate more profit and higher ratio shows
better performance. The latest current ratio of PPL is 3.10 which shows that PPL has current
assets of Rs. 3.10 against liabilities of Rs.1. Current Ratio more than 1 is considered good, it
means PPL is doing very good. It is because current assets increased in more proportion than
current liabilities and mainly because of huge increase in trade debts which maybe because of
lengthening credit period.

Quick Assets 2. Quick Ratio:

Current Liabilities

2007: = 4.16
2008: = 2.67
2009: = 2.96
Quick ratio or liquid ratio measures the ability of a company to use its near cash or quick
assets to immediately extinguish its current liabilities. Quick assets include those current
assets that presumably can be quickly converted into cash at close to their book values. Such
items are cash, marketable securities and some accounts receivable. This ratio indicates a
firm’s capacity to maintain operations as usual with current cash or near cash reserves in bad
periods. Quick ratio of PPL was 4.16 in 2007 then it dropped to 2.67 and now 2.96. Still it is
very good and showing good performance of the Company. Here we see that this ratio
decreased because of high portion of trade debts which is not most liquid asset. This ratio is
of more concern to the short term creditors.

Cash 3. Cash Ratio:

Current Liabilities

Financial Statement Analysis |

2007: = 0.10
2008: = .08
2009: = .09
The cash ratio measures the extent to which a corporation or other entity can quickly
liquidate assets and cover short-term liabilities, and therefore is of interest to short-term
creditors. Cash ratio was 0.10 in 2007,.08 in 2008 and .09 in year 2009. It means PPL has
Rs .09 against short term liability of Rs 1. This ratio indicates that PPL has not enough cash
in their hands which shows that they are following aggressive policy. They do not put cash in
their pockets instead invest them which is a positive sign but some of creditors may be think
they will be exposed to high degree of default risk.

Asset Management

Cost Of Goods sold

1. Inventory Turnover Average inventory
Ratio:

2007: = 10.07
2008: = 10.53
2009: = 11.87
Inventory turnover mean, the number of times the company will completes its operating
cycle. Its mean greater the inventory turnover ratio, more will be the operating cycles. Which
is favorable for the company’s position and as well as the inventory turn ratio is also
increased in the past three years.
Days Sales in Inventory:
2007: = 360/10.07= 35 days
2008: = 360/10.53= 34 days
2009: = 360/11.87= 31 days
This ratio shows that PPL is now more efficient in converting their inventory into sales. This
is because their sales increased but the increase of sales raised from previous inventory on
hand and purchases this year were low.

Sales
Net Fixed Assets
Financial Statement Analysis |
 2. Fixed Asset Turn Over Ratio:

2007: = 2.72
2008: = 2.48
2009: = 2.19
This ratio shows that how company is utilizing its fixed assets efficiently for generating sales
and higher the ratio better the company performance. PPL’s latest fixed assets turnover ratio
is 2.19 which mean PPL is utilizing fixed assets of Rs 1 to generate sales of Rs 2.19. this ratio
also indicates that are relying more on current assets than fixed assets now. In addition they
are following aggressive policy. This increase occurred due to increase in sales which is
higher that increase in fixed assets which was due to utilizing their inventory on hand rather
that further purchases.
3. Total Asset Turnover
Sales
Ratio:
Avg. Total Assets

2007: = 0.84
2008: = 0.82
2009: = 0.86
This ratio shows how company is utilizing its total assets efficiently for generating sales and
more the ratio better the company’s performance. Total assets turnover ratio of PPL is 0.86 in
2009 which is quite good, means PPL is utilizing Rs 1 Total assets to generate sales of Rs
0.86. this ratio increased due to increasing sales and major part of increase was due to
utilizing current assets. Fixed assets also increased but the increase in current assets was low.
4. Receivable
Sales
turnover
A/C Receivable

2007: = 4.8
2008: = 4.11
2009: =3
Receivable turnover means how quickly company’s receivable is converted into cash. It must
be higher. The PPL receivable turnover is 3 in 2009 which means it collects its debts 3 times
in a year.
No. of Days = 365/4.8 = 76 days (2007)
= 365/4.11 = 89 days (2008)
= 365/3 = 122 days (2009)
It is the debt collection period. This ratio describes that how quickly a company collect its
outstanding receivable. PPL debt collection period is 122 days in 2009 which means PPL is

Financial Statement Analysis |

collecting cash from receivables in 122 days. This ratio is high and PPL should collect its
debts earlier in order to maintain performance. This ratio increased due to loosening credit period
notice that sales increased which maybe attributed to lengthening credit period which helped PPL but
it should be kept in mind that they should arrange enough working capital so that risk exposure of long
term investors is decreased.

Debt Management
1. Debt to Total Assets: Total Debt
Total Assets
2007: = 0.20
2008: = 0.28
2009: = 0.24
In the debt to total asset ratio, which shows the comparison of the debt and total assets of the
company. In the past few years, it is observed that the debt of the company is decreasing from
the previous year in relation to the total assets of the company. This is favorable for company
because it will decrease their financing cost and default risk. And it decreased due to large
increase in assets against liabilities. Now they are able to fulfill their long term obligations
effectively but its disadvantage is that now shareholders have increased which will increase
the voting right of shareholder and possibly dilute the earnings of PPL.
2. Times Interest Earned:
EBIT
Interest 2007: =494 times

2008: = 458 times

2009: = 448 times
Times interest earned ratio means how many number of times the company is earning its
profit over its interest expenses. PPL’s Times interest earned ratio is very high which means
it can pay its interest 448 times. This shows that the debt is low compared to the equity. This
ratio decreased due to decrease in financing costs and increase in EBIT. This can be a
positive sign for short term creditors and will decrease their default risk.

Long Term debt

3. Long term Debt ratio:
Long Term debt +Equity

Financial Statement Analysis |

 2007: =0.060 times
2008: = 0.080 times
2009: = 0.076times
The ratios has decreased due to decrease in long term debt while equity on the other
side has increased. This is good for the firm it will decrease risk exposure of long
term debt holders. Now their financing cost will also decrease which will increase
their income left for shareholders which will increase their market value and we will
discuss this effect in detail in market to book ratio.

4. Debt to Equity Ratio: Total Debt

Total Equity

2007: =0.19
2008: = 0.31
2009: = 0.23
This ratio tells how much debt is taken against every single unit of equity and as we
have seen that their debt has decreased and equity increased so now the firm take less
units of debt against every single unit of equity raised. This will decrease investors
risk but may increase the cost of equity as equity is increased which is high cost form
of equity.

Equity Multiplier:
2007: =1.19
2008: = 1.31
2009: = 1.23
Equity multiplier is another measure of how much debt is taken against each unit of
equity raised but it is very similar to Debt-Equity Ratio so effect is the same is above.

Profitability Ratios

Financial Statement Analysis |

 1. Profit margin on
sale: Net Profit
* 100
Sales

2007: = 43.68 %

2008: = 43.10 %
2009: = 45 %
Net profit ratio refers to a measure of profitability and shows that a company earns how much
profit after deducting all expenses. The profit of PPL is 45 % is 2009 and increasing from the
previous year. PPL is getting 45% profit on sales after deducting all expenses. This was due
to increase in sales while cost of sales not increased by that proportion on the other side
financing cost also decreased.

2. Return on Equity: Net Income

Total Equity

2007: = 42 %

2008: = 45 %

2009: = 44 %

It is the ratio of net income to total equity. It means PPL has got a return of 44% in 2009 on
its total equity. The return on equity in the previous year is averaged 44% which is very good
and showing good performance of the company. This increase was due to increase in net
income. Equity also increased but increase in net income was more than increase in equity.
This ratio is one of the most important ratio for investors because investor wants to see what
they will gain after debt is paid. Although it has decreased but it was due to increase in equity
not decrease in income so its not a problem. The disadvantage is that equity will be diluted if
more equity is raised.

3. Price Earnings Ratio:

Price Per Share
Earning Per Share
2007: = 12.99

2008: = 10.36

2009: = 5.68

The P/E ratio (price-to-earnings ratio) of a stock (also called its "P/E", "PER", "earnings
multiple," or simply "multiple") is a measure of the price paid for a share relative to the
annual net income or profit earned by the firm per share. It is a financial ratio used for
valuation: a higher P/E ratio means that investors are paying more for each unit of net
Financial Statement Analysis |
income, so the stock is more expensive compared to one with lower P/E ratio. PPL’s P/E ratio
as reduced highly compared to the previous year’s which means now investors are paying
less for each unit of net income, showing a healthy sign of the company’s performance.

4. Dividend Yield:

2007: = 4.19 %

2008: = 6.30 %

2009: = 6.86 %

The dividend yield or the dividend-price ratio on a company stock is the company's annual
dividend payments divided by its market cap, or the dividend per share divided by the price
per share. It is often expressed as a percentage. Its reciprocal is the Price/Dividend ratio.PPL
has given 6.86% yield per unit in the year 2009. An increase in this ratio tells that now the
firm pays more to its shareholders in the form of dividend but this increase is not so big
which means PPL stills follow the policy of holding back earnings for future investments and
expansion.

5. Return on Capital Employed:

2007: = 57 &

2008: = 64%

2009: = 62 %

Return on Capital Employed (ROCE) is used as a measure of the returns that a company is
realizing from its capital employed. It is commonly used as a measure for comparing the
performance between businesses and for assessing whether a business generates enough
returns to pay for its cost of capital.

Net Income
6. Return on Assets:
Total Assets

2007: = 33.29%

2008: = 32.29%

2009: = 33.41 %

This ratio tells how much they are earning on their assets. This ratio has increased slightly
which is due to increase in net income against total assets. This is good sign for investors
because it will decrease their risk and increase their return and expectation will also increase
which may increase their cost of equity.
Financial Statement Analysis |
 7. Price to Sale Price Per Share
Sales Per Share
ratio:

2007: = 3.39

2008: = 3.18

2009: = 2.62

We have seen that P/E ratio has decreased and in some cases it may be negative so it may not
provide us with the true side of the picture so we use Price to Sale ratio to enhance the image
of the company. A decrease in this ratio is due to increasing price per share while sale per
share has decreased which is because of increase in total equity in more proportion than the
increase in sales. This might be due to their market value increasing while their performance
has not changed so much. So the firm is going towards equating their internal strengths with
market value of the firm.

Price Per Share 8. Market to

Book Value Per Share
Book Ratio:

2007: = 3.24

2008: = 3.33

2009: = 2.56

This ratio tells how much a firm is valued in market and how much it should be (book value).
In this case this ratio has decreased which is due to increasing book value per share in more
proportion than it is increasing in market. PPL's stock is overvalued in the market. This ratio
is better when it is around 1. Neither investors has enormous expectations nor they has
chances of takeover. In this case PPL has to perform better and justify their position to
analysts and critics if they want to increase their market value and at the same time survive in
the market

The DuPont Identity

Financial Statement Analysis |
ROE2007=Profit Margin * Total Assets Turnover * Equity Multiplier

= 43.68 % * 0.84 * 1.26

= 42%

ROE2008=Profit Margin * Total Assets Turnover * Equity Multiplier

= 43.10 % * 0.82 * 1.40

= 45.56%

ROE2009=Profit Margin * Total Assets Turnover * Equity Multiplier

= 45 % * 0.86 * 1.31
= 44.44%
This approach is used to analyze the effect of different components on ROE This tells that
ROE can be composed of three parts; profit margin, assets turnover, and equity multiplier. So
if at any time one factor is affected the other factors can be used to compensate so that ROE
is stable and growing.

In this case we see that profit margin remained stable while deviation in ROE has occurred
which can be linked to the decrease in assets turnover as equity multiplier has also increased.
With two factors affecting positive on ROE and one negative in 2008 we can see that the
impact of negative factor was large which alienate the effect of others.

While in 2009 the negative effect was due to equity multiplier i.e. Increase in equity is more
in proportion to debt.

So we can summarize that with other things constant if PPL increase their equity multiplier
they can achieve higher level of ROE and the effect of positive income will not be than
alienated by the decrease in other factors.

Horizontal and Vertical Analysis of Profit & Loss Statement

Financial Statement Analysis |

Horizontal analysis focuses on trends and changes in financial statement items over time.
Along with the dollar amounts presented in the financial statements, horizontal analysis can
help a financial statement user to see relative changes over time and identify positive or
perhaps troubling trends. In one horizontal analysis approach, a base year is selected and the
dollar amount of each financial statement item in subsequent years is converted to a
percentage of the base year dollar amount. I have used chain base year here i.e. 2007 is used
base year for 2008 and 2008 is used base year for 2009 so that immediate increase /decrease
can be seen and not much of the interpretation will be dependent on long past data. Assuming
2007 is the base year, 2008 revenues were 119%% and assuming 2008 as base year 2009
revenues were 134% increased from the previous year, as shown in the above calculations.

Some interesting trends can be noted from this analysis. The percentages for each financial
statement item increased each year, but the trends for each item differed. For example: in
2009 when revenues were 134% of the base year amounts, cost of goods sold was less—only
127% of the base year amount. Which means PPL raised its selling prices and/or its inventory
cost declined?

Notice that 2009 net income was 140% of the base year amount; even though operating
expenses had increased to 148% of the base year amount, this was more than offset by the
favorable trends in revenues and cost of goods sold.

In addition to base year comparisons, dollar and percentage changes from one year to the next
could also be analyzed. For example: 2009 net income increased by 2% over the previous
year, as shown in the above table.

Similarly vertical analysis which is sometimes is referred to as “common-size analysis”

because all of the amounts for a given year are converted into percentages of a key financial
statement component. For example in our analysis of the income statement, total revenue is
100% and each item is calculated as a percentage of total revenue and in year 2009 cost of
sales was 33 % of net sales which was 35% in 2008. Vertical or common-size analysis allows
one to see the composition of each of the financial statements and determine if significant
changes have occurred. We will use the balance sheet information below to explain how one
might prepare a three year vertical analysis. We see that in our analysis of income statement
the only factor that decreased its proportion as a part of net sales is cost of sales which
affected the profit margin in 2009 i.e.it increased by the same percentage as cost of sales
decreased.

Since total revenues usually are set at 100 percent, vertical analysis of the income statement
essentially shows how many cents of each sales dollar are absorbed by the various expenses..

In the case of the above example, the organization appears to be fairly stable over the three
years of data we have. Again, these percentages won’t provide you with a lot of insight in and
of themselves.

Horizontal and Vertical Analysis of Balance Sheet

Financial Statement Analysis |

Vertical analysis of a balance sheet will answer questions relating to asset, liability, and
equity accounts, such as the following:

• What percentage of total assets is classified as current assets? Current

liabilities comprise what percentage of total liabilities and stockholders’ equity?
• Inventory makes up what percentage of total assets? Is this changing
significantly over time? If so, is it increasing or decreasing? [These answers could
lead to additional questions such as the following: If it is increasing, could this
indicate that the company is having trouble selling its inventory? If so, is this because
of increased competition in the industry or perhaps obsolescence of this company’s
inventory?
• Accounts receivable makes up what percentage of total assets? Is this
changing significantly over time? If so, is it increasing or decreasing? (These answers
might lead to additional questions such as the following: If it is increasing, could this
indicate that the company is having trouble collecting its receivables? If it is
decreasing, could this indicate that the company has tightened its credit policy? If so,
is it possible that the company is losing sales that it might have made with a less strict
credit policy?)
• What is the composition of the capital structure? In other words, total
liabilities make up what percentage of total assets and total stockholders’ equity
makes up what percentage of total assets?

In our analysis we see that there is significant decrease in long term investments and long
term loans while fixed assets has increased from 2008 to 2009. While on the other side
loans and investment and other receivables have increased significantly. While short term
investments have decreased significantly. The overall increase in total assets was 35%
from base year 2008 and 21% from base year 2007. While on liabilities and owners
equity side reserves increased largely from 8% in 2008 to 56% in 2009. On liabilities side
deferred taxation has decreased from 607% in 2008 to 87% in 2009. A decrease in growth
rate of overall liabilities has decreased from 76% in 2008 to 7% in 2009.

Similarly in vertical analysis we took total assets as base amount and divide other parts on
it. And on the liability side we took total liabilities and owners equity as base amount and
divide other sub parts on it.

We will analyze major parts here. On the assets side we see that fixed assets were 35% of
total assets in 2008 while 42% of total assets in 2009. We saw in horizontal analysis that
fixed assets increased but vertical analysis tells us about a decrease in proportion to total
assets. This is because the overall assets increase in more percentage against that of fixed
assets. Another large change can be seen in trade debts which was 21% of the total assets
in 2008 while it is 33% of the total assets the same increase we can see in horizontal
analysis which shows in an increase of 110% taking 2008 as base year. This is showing
that company has extended its credit period and their investments in trade credit. We see
that long term assets in 2008 were 38% of total assets while in 2008 while in 2009 long
term assets were 45% of total assets. On the other side the ratio for current assets has
decreased from 62% in 2008 to 54% in 2009.

On the liabilities and owners equity side equity was 71% of TL&OE while in 2009 it was
76% of TL&OE this truly shows the increase in owners' equity but major part of this
increase is due to increase in reserves. PPL's long term liabilities have not increased by

Financial Statement Analysis |

 large percentage. Trade and other payables were 20% of TL&OE in 2008 while it was
16% of TL&OE in 2009. This percentage has decreased which shows that now PPL does
not rely majorly on short term borrowings and this ratio is compensated by the increase in
reserve. Overall current liabilities have also decreased as portion of TL&OE in 2009.

RECOMMENDATIONS
Below are some recommendations which justify our investment in securities of the
Pakistan Petroleum Ltd.

1. Pakistan Petroleum Ltd. Is the pioneer of natural gas industry in Pakistan and is the
front line player in the Industry, so we recommend investment in Pakistan Petroleum
Ltd.

2. The last three years averaged growth rate of the Company is 25 % which means
company’s performance in term of profitability, growth and sales is increasing.

3. PPL’s stock is considered reliable for investor as the stock price is constantly moving
upwards in the recent time.

4. PPL had announced a dividend of Rs 15.50 per share in the year 2008, and in the year
2009, the announced dividend per share is Rs 13.00 which is quite attractive for an
investor.

5. Shares of PPL are currently trading in Stock Exchange between 190 and 205 and are
continuously moving upward which shows the sign of Investor’s confidence on the
company.

6. Pakistan petroleum Ltd is the leader of the market in its industry and thus has a very
high demand, so it is worth buying their shares.

7. If we see the Capital structure of PPL, we can see that there is a very little portion of
Debt as compared to the Equity of the company, it’s another plus point of PPL.

8. The dividend on the PPL’s shares is attractive and the shares prices are going upward
so an investor can earn handsome dividend and capital gain as well.

9. The Market risk of the PPL’s Stock is below 1 i-e 0.66 which means it is less risky. It
has less deviation with the market.

Financial Statement Analysis |

Bibliography:
The following links were used to obtain all the information about the project on Pakistan
Petroleum Ltd.

• http://www.ppl.com.pk/AboutPPL/CompanyInfo/Pages/CompanyOvervie
w.aspx

• http://www.ppl.com.pk/Repository/AnnualFinancialReport/Annual
%20Financial%20Report%202007.pdf

• http://www.ppl.com.pk/Repository/AnnualFinancialReport/Annual
%20Financial%20Report%202008.pdf

• http://www.ppl.com.pk/Repository/AnnualFinancialReport/PPL
%20Annual%20Report%202009.pdf

• http://www.brecorder.com/index.php?
id=943778&currPageNo=1&query=&search=&term=&supDate

• http://www.kse.com.pk/listing-companies/analysis_report.php?
id=3&sid=3.07

Financial Statement Analysis |