Analysis of Financial Statements Term Report: COMPANY NAME: National Foods Limited

ANALYSIS OF FINANCIAL
STATEMENTS
TERM REPORT
COMPANY NAME: National Foods Limited
Dated: 10th August, 2019
Financial Analysis: National Foods 1 | Page

TABLE OF CONTENTS
S. No Topic Page No
CHAPTER-1 INTRODUCTION & METHODOLOGY

1.1 Brief History 03
1.2 Objectives of the study 05
1.3 Methodology 05
1.4 Limitations 06
CHAPTER- 2 ANALYSIS & INTERPRETATION (BALANCE SHEET & INCOME

STATEMENT ANALYSIS)
2.1 Balance Sheet & Income Statement Analysis 7-17
CHAPTER- 3 CASH FLOW ANALYSIS

3.1 Cash flow from operating activities 18-19
3.2 Cash flow from investment activities 19-20
3.3 Cash flow from financing activities 20-21
CHAPTER- 4 RATIO ANALYSIS

4.1 Liquidity Ratio 22
4.1.1 Current Ratio 22-23
4.1.2 Quick Ratio 23-24
4.2 Activity Ratios 24

4.2.1 Inventory Turnover Ratio 24-26
4.2.2 Average Collection Period (ACP) Ratio 26-27
4.2.3 Fixed Asset Turnover Ratio 27-28
4.3 Debt Management Ratio 28

4.3.1 Debt Ratio 29-30
4.3.2 Time Interest Earned (TIE) Ratio 30-31
4.4 Profitability Ratio 31

4.4.1 Net Profit Margin 31-32
4.4.2 Return on Asset (ROA) 33
4.4.3 Return on Equity 34
CHAPTER- 5 FINDINGS & CONCLUSION

5.1 Budget Impact 35
5.2 Key Findings 35-36
5.3 Conclusion 36
Appendix to Chapter 4 37-50

CHAPTER-1
INTRODUCTION & METHODOLOGY
1.1Brief History:
National Foods limited was founded in 1970 and currently the company is forty-nine years old.
Although it started as a spice company, it has now emerged as a major food products company in
Pakistan. The company was incorporated on 19th February 1970 as a private limited company
under the Companies Act 1913 but was converted into a Public Limited Company under the
Company Ordinance 1984 by passing a special resolution in its extraordinary General Meeting
which was held on 30th of March 1988. National foods is engaged in the manufacture of
convenience based food products and is listed on the Pakistan Stock Exchange. In1970 a small
company was acquired called National Foods Laboratories Limited in 1971 it moved its
operations to Dinar Chambers West Wharf. In 1986 a new factory in the area of site was
launched then in 1988 it became a certified vendor of McCormick USA as part of their Supplier
Certification Program the same year it got listed on the stock exchange. During the 1990’s the
company had also collaborated with UNICEF to spread awareness about the use of iodized salt
which helps fight against the deficiencies of iodine. In 2000 national foods launched its products
in Australia and also achieved a great milestone by crossing Rs. 1 billion sales.
Vision and Mission:

To be a Rs. 50 billion food company in the convenience food segment by launching products in
the domestic and international markets that enhance lifestyle and create value for our customers
through management excellence at all levels.
⮚ Product Details:
▪ National recipe mix: this includes the various flavorsome recipe masalas manufactured
by the company they are a combination of herbs, spices and seasonings that give an
experience of authentic Pakistani cuisine. This has a range of 48 different masalas being
offered including biryani, haleem, qorma, and nihari masala. Campaigns like National ka
Pakistan have really boosted the sales of its already established line of Masalas where
renown chef explore Pakistani cuisines available at different locations and try to recreate
the dishes using National’s spices.
▪ Ketchup: the second most popular product of national is its range of ketchup, launched
in 1997, it currently has three variants tomato ketchup, hot and spicy sauce and chilli
garlic sauce. It comes in different sizes with bottles of 300g and 800g and pouches of
500g and 1kg. National ketchup zaroori an engaging campaign was launched, it was also

sued during the season of Eid ul Azha to highlight how ketchup is used with various
delicacies of eid.
▪ Desserts: its line of desserts was launched in the year 2001, and is not only limited to
traditional desserts like kheer or falooda but also includes contemporary desserts like
jellies and custards. To increase the awareness about the products and to encourage
consumers to make purchase free samples of National Jelly and Custard were given to
customer in 2018.
▪ National Mayo: thick and creamy textured mayonnaise manufactured by National was
introduced in 2017 and includes two variants classic mayo and garlic mayo, it comes in
pouches of 500g and 1kg.
▪ National Pickles: the range includes spicy and tangy pickles prepared from flavorsome
oils, and freshly picked vegetables and fruits and a national signature spice blend. The
range includes, garlic, mixed, mango and lemon pickle. It had launched its range of
pickles in 1991.
▪ National Jams: the range includes 200g and 440g bottles of marmalades, jellee, and
jams of apple and mangoes.
▪ Basic Spices: These includes a combination of spices most commonly used in Pakistani
cuisines to enhance their flavor. These include 50g and 25g boxes of ginger powder, red
chilli powder, curry powder, black pepper powder etc.
▪ National Snacks: the range includes 50g, 100g and 150g boxes of spices used in making
traditional Pakistani snacks like dahi bara, chana chaat, pakora mix etc.
▪ Chutneys and Sauces: National produces a range of tangy and tasty chutneys to be used
as a meal complement or a dipping sauce. The chutney comes in a bottle of 335g that has
sweet and sour plum chutney, coriander chutney, mango chutney, tamarind chutney,
bhelpuri chutney. Whereas the sauces come in bottles of 300g and 325g and include
green chilli sauce and mango chilli sauce.
▪ Ginger and garlic paste: it is a convenient solution to add the savory Pakistani flavor to
foods instead of making ginger and garlic paste which is used in almost all of Pakistani
dishes consumer can avoid the hassle by using National’s ginger garlic paste which
comes in sizes of 350g,750g and 1kg. The range includes separate pastes of ginger and
garlic as well as one mixed paste.
▪ National Salt: national also produces salt both refined and iodized that comes in pouches
of 800g and a bottle of 400g. National launched its brand of salt in 1978.
▪ Scene-on: it is a brand of chips recently launched by National in 2018, currently it
comes in two shapes hoops and krucnh, the flavors include bbq, cheese, ketchup, achaar
etc.
⮚ Production Capacity:
The capacity and production of the company’s plants is indeterminable as these are multi-
product and involve varying processes of manufacture. The actual production of the
plants for the year 2018 is 100,616 metric tons.
⮚ Production market:
The company produces locally but also exports its products to various international markets. The
company currently has its global presence across 40 countries in 5 continents. The
company has established itself as a multinational company with international subsidiaries
formed in UAE (DMCC) in 2013 that caters to middle-eastern market, in Canada
(National Epicure Inc.), and UK (National Foods Pakistan UK limited) that caters to the
North American and European markets respectively. In 2017, National Epicure had also
acquire 60% stake in A-1 bags which is based in Ontario and deals in the supply of
industrial, retail and restaurant supplies.
⮚ Production site/ sites locations:

The company currently produces at 5 locations which are as follows;
▪ SITE Plant- located at SITE area in Karachi
▪ Port Qasim Plant- located at Bin Qasim Karachi
▪ Muridke Plant: located in Lahore
▪ Gujranwala Plant
▪ Nooriabad Plant: located in Nooriabad Industrial Estate Karachi
⮚ Head office location:-

The company’s head office is located at Claremont Road, Civil Lines, Karachi..
⮚ Number of Employees:-
As of 2018 the total number of employees of the company at year end is 694, the average
number of employees of the company during the year is 680. The number of employees
working at the company’s factory at year end is 186 whereas the average number of
employees working at factory during the year is 194.
National foods with a total Asset size of Rs. 8.8 billion, generated annual sales of Rs. 16.17
billion with Net Profit after Tax of Rs. 946.6 million in the year 2018.
1.2 Objectives of the study:

The objective of this report is to analyze the financial condition of the company, covering the
following areas:
a) Balance Sheet Analysis.
b) Income Statement Analysis.
c) Cash Flow Statement Analysis.
d) Ratios Analysis.
1.3 Methodology:
● Data Source:

The source used for this data is secondary i.e. the annual reports of the company and newspaper
publications.
● Statistical Techniques:
For our analysis, we have used different kind of graphs.
● Period under consideration:
Our point of discussion is based on 2014 to 2018 which is the latest available year for annual
report. For the better comparison of our analysis, we have taken five years data.
● Nature of Analysis:
We have conducted both horizontal and vertical analysis for this report.
● Standard of Comparison:
We have conducted comparison with another firm of the industry names Shezan Foods Limited
due to non-availability of the industry averages.
1.4 Limitations:
● We could not conduct a primary research by actually going to the company and meeting
their officials to get first-hand knowledge this is one of the reason why some of the
information that we had studied in the annual reports remained unclear to us.
● Most of the main competitors of the company like Shan Foods and Mehran Foods are
private limited companies which is why we could not get their figures to compare the
company with them.
● There were no industry average figures available which is why he had could conduct an
analysis and comparison with industry benchmark so we had to compare it with another
firm of the industry.
● Time constraints were another barrier to our study, if we could have gotten more time the
analysis could have been more thorough and detailed.
● We were not able to find a direct impact of the budget 2019-20 on the food and beverages
industry, which is why we have only taken into account all the things that would
indirectly impact the company.

CHAPTER -2
ANALYSIS & INTERPRETATION (Balance Sheet & Income Statement
Analysis)
The analysis and interpretation has been done by the means of horizontal as well as vertical
study.
2.0 Balance Sheet & Income Statement Analysis:

We have analyzed the Balance Sheet and Income Statement by doing a common size statement
presented in Table-1 & Table-2. We have also calculated the growth rate for major income
statement and Balance sheet items presented in Table-3.
Table 1
National Foods
Common Size Statement- Balance Sheet
Particulars 2014 2015 2016 2017 2018
Assets
Non-Current Assets
Property Plant and Equipment 25% 27% 30% 39% 47%
Intangibles 0.73% 0.70% 0.93% 1.08% 0.97%
Long Term Investment- Subsidiary 0.64% 0.57% 0.48% 0.40% 0.36%
Long Term Deposits 0.44% 0.63% 0.47% 0.42% 0.46%
Total N.C. Asset 27% 29% 32% 40% 49%
Current Assets
Stores, Spare Parts and Loose Tool 0.11% 0.11% 0.10% 0.14% 0.48%
Stock in trade 45% 41% 49% 38% 35%
Trade Debts 16% 21% 15% 16% 10%
Advances 1.05% 0.9% 1.45% 2.65% 1.16%
Trade Deposits and Prepayments 0.36% 0.54% 0.58% 0.17% 0.42%
Other Receivables 0.27% 0.24% 0.10% 0.90% 0.07%

Sales Tax Refundable
Investment on Mutual Fund Unit 9% 7% 0% 0% 0%
Cash and Bank Balance 1.6% 0.67% 0.9% 1.1% 2.6%
Total Current Asset 73% 71% 68% 60% 51%
Total Assets 100% 100% 100% 100% 100%
Share Capital And Reserves

Issued Subscribed and Paid Up 10% 9% 8% 7% 6%
Capital
Unappropriated Profit 34% 40% 30% 34% 36%
44% 50% 38% 40% 42%
Non-Current Liabilities
Long term finance - secured
Deferred Taxation 2.3% 2% 1.2% 1.8% 1.3%
Retirement Benefit Obligation 0.6% 0.35% 0.0% 0.0% 0.0%
Deferred liabilities
3% 2% 1% 4% 2%
Current Liabilities
Trade and Other Payables 28% 30% 30% 30% 26%
Unclaimed dividend
Accrued Interest/Markup 0.23% 0.05% 0.14% 0.11% 0.17%
Short Term Borrowing 19% 7% 20% 20% 24%
Long term finance classified as
current - secured
Taxation-Provision Less 3% 9% 9% 7% 3%
Payments/net
Sales Tax Payables 2% 3% 1% 0% 0%
53% 48% 61% 56% 57%
Total Liabilities 56% 50% 62% 60% 58%
Total Liabilities and Equity 100% 100% 100% 100% 100%

Table 2
National Foods
Common Size Statement- Income Statement
Particulars 2014 2015 2016 2017 2018
Sales 100% 100% 100% 100% 100%

Cost of Sales 65% 65% 68% 67% 66%
Gross Profit 35% 35% 32% 33% 34%
Distribution Costs 20% 18% 19% 20% 21%

Administrative Expenses 4% 4% 4% 3% 5%
Other Expenses 0.9% 1.0% 0.7% 0.7% 1.3%
Other Income 0.7% 1.0% 0.4% 0.6% 0.3%
Operating Profit 12% 13% 9% 9% 7%

Finance Cost 0.9% 0.3% 0.5% 0.5% 0.7%
Profit Before Taxation 11% 12% 8% 9% 7%

Taxation 3% 4% 3% 2% 1%
Profit After Tax 7% 9% 6% 7% 6%
Table 3
Particulars 2015 2016 2017 2018

Balance Sheet
Property, Plant and Equipment 22% 32% 53% 36%
Total Non-Current Assets 22% 31% 51% 35%
Stock in Trade 1% 44% -7% 2%
Trade Debts 44% -13% 27% -30%
Total Current Assets 8% 13% 6% -5%
Total Assets 11% 18% 20% 11%
Unappropriated Profit 32% -12% 35% 18%
Deferred Taxation -19% -13% 76% -18%
Trade Payables 22% 17% 21% -1%
Short Term Borrowing -60% 241% 18% 39%
Total Current-Liabilities 2% 49% 11% 12%
Total Liabilities 1% 46% 16% 9%
Income Statement
Sales 19% 14% 12% 10%
Cost of Sales 19% 19% 11% 7%
Operating Profit 31% -20% 17% -15%
Finance Cost -57% 81% 2% 58%
Gross Profit Margin 0% -8% 2% 5%
Net Profit Margin 18% -32% 14% -12%
● Property, plant and equipment:

Property, Plant Equipment Growth Rate
60%
53%
50%
40%
36%
32%
30%
22%
20%
10%
0%
2015 2016 2017 2018

The annual growth rate of fixed assets shows a steady growth up till year 2017 after which there
is a prominent decline in the year 2018. The value of capital work in progress has decreased in
the year 2018. During the year the additions to CWIP and transfer to respective assets amounted
to Rs. 951.8 million (2017: Rs.547.8 million) and Rs. 1,102.4 million (2017: Rs. 482.85 million)
respectively. Although the capital expenditure done by the company in 2018 is higher i.e. Rs.
1,657m and the property, plant and equipment also has increased to Rs. 4,150m in 2018 but this
growth had been less than that of 2017.
Total Non-Current Assets:
Total Non-Current Assets Growth Rate

60%
50% 51%
40%
35%
30% 31%
22%
20%
10%
0%
2015 2016 2017 2018
According to the above information it could be deduced that the prominent increase in
intangibles was recorded in the year 2017 which also makes up the major part of the increase in
non-current asset of 2018. The plant and equipment experienced minor increase whereas the
intangibles had not grown in 2018 which also a reason as to why there is slow growth in the total
non-current assets.
● Stock-in-trade:
Stock in trade
50%
44%
40%
30%
20%
10%
0% 1%
-7%
The growth in stock-in-trade has shown major fluctuations throughout the years, with the growth
being the highest in 2016 where the company’s stock-in-trade had risen to Rs. 3,250m (2015: Rs.
2,254m) the reason for this was the increase in raw materials to Rs. 1,450m (2015: Rs. 931m)
and in finished goods to Rs. 562m, however from almost Rs. 1,450m the raw materials went
down to Rs. 1,157m in FY2017. The overall growth rate shows slight improvement in FY2018

because the raw material decreased as compared to the year 2017 and also there was only a slight
increase in work in process, packaged materials and finished goods.
● Trade Debts:
Trade Debts Growth Rate
50%
44%
40%
30%
27%
20%
10%
0%
2015 2016 2017 2018
-10%
-13%
-20%
-30% -30%
-40%
The trade debt had increased by 44% in 2015 to Rs. 1,150m (2014: Rs.796m) since the
receivables outstanding from last 3 months and 6 months had increased to Rs.286m and Rs. 24m
it suggests that there was an increase in the credit sales for that year. From 2015 there was huge
drop in the growth rate of trade debts in the year 2016 which suggests that the company was able
to recover some of the receivables from its distributors and National Foods DMCC. This again
stabilized with an increase in year 2017 while it again went down in year 2018. As of FY2018
the company’s trade debts stand at Rs. 889m (2017: Rs. 1,273m) which is a good sign for the
company as it shows money has been received from debtors the receivables were recovered from
the company’s distributor and National Foods DMCC, a subsidiary of the company to which
entire export sales were made. For FY 2018 the company still has Rs. 541.96M outstanding as
account receivables.
● Total Current Assets:

Total Current Assets Growth Rate
14%
13%
12%
10%
8% 8%
6% 6%
4%
2%
0%
-2%
-4%
-5%
-6%
The highest growth in current assets as shown is reported in 2016 where the current assets
amounted to Rs. 4,454m (2015: Rs. 3,931m) due to the increase in stock-in-trade, advances, and
cash of 44%, 89%,and 54% respectively. 2016 onwards the growth in total current assets of the
company had only taken a dip and in 2017 they had increased but only with a margin of 6%
amounting to Rs. 4,718m and had decreased by 5 % in 2018 coming down to Rs. 4,499m, as
already discussed above one of the reasons for this decline is the reduction in trade debts due to
receivables being recovered, other than that advances, and other receivables had also declined by
51% and 92% respectively. In all the years current assets had formed 60-73% of the total assets
except 2018 where current assets only represent 51% of the total assets.
● Total Assets:
Total Assets Growth Rate
25%
20% 20%
18%
15%
11% 11%
10%
5%
0%
2015 2016 2017 2108
According to the figures presented in annual report each year shows improvement in the total
assets of the company. However, the drop in the growth rate of FY2018 could be explained due
to the decrease in the total current assets of the same year in contrast to the previous years. Trade
debts played the role in the decrease while other receivables were also quite less as compared to
the previous year. Total fixed asset was comparatively better having seen a growth of 35% in
FY2018. Although the total asset had increased to Rs. 8.8B the growth rate had declined due to a
reduction in the amount of current assets.
● Trade Payables:

Trade Payables
25%
22%
21%
20%
17%
15%
10%
5%
0%
2015 2016 2017 -1%
2018
-5%
In 2015 trade and other payables grew by 22% to Rs. 1,672m (2014: Rs. 1,372m) mainly because
of the increase in amount owed to creditors (2015: Rs. 450m) which suggest the company’s
credit purchases had risen and also because accrued liabilities and advances from customers had
increased. Then from 2015-2017 there was a declining growth rate in trade payables much of
which was attributed to decrease in amount owed to creditors except in 2017 and increase in
accrued liabilities and unpaid dividends. Trade payables had declined in 2018 amounting to Rs.
2,330m (2017: Rs. 2,364m) mainly because accrued liabilities had declined sharply although
other liabilities like amount owed to creditors, workers’ welfare fund had increased. As of 2018,
accrued liabilities had decreased to Rs. 1,476m from Rs. 1,711m of which an accrual of Rs52m
is recognized against GIDC act 2015 the applicability of which has been challenged by the
company in court.
● Short-Term Borrowing:
Short term borrowing
300%
250% 241%
200%
150%
100%
50%
39%
18%
0%
2015 2016 2017 2018
-50%
-60%
-100%
In 2015 a decrease of 16% was noticed in short term borrowings to Rs. 384m (2014: Rs. 953m)
because of the repayment of short term loans worth Rs.100m, and the repayment of export re-
finance and murabaha loans. FY2016 is the turning point in the trends of short term borrowing of
the company as from just Rs.384m, the short term borrowing of the company showed massive
jump to Rs. 1,311m because there had been an increase in running finance and export re-finance
both amounting to Rs. 911m and Rs. 400m respectively. As of 2018 the company’s short term
borrowings stand at Rs. 2,148m (2017: Rs.1,549m) attributed to the increase in running finance,
also the company had taken up money market loans worth Rs450m which weren’t previously

present which also suggests that this money may be used in incurring capital expenditures, the
short term borrowings make up 18-24% of total assets in all years.
● Total Current Liabilities:

Total Current Liabilities
60%
50% 49%
40%
30%
20%
11% 12%
10%
2%
0%
2015 2016 2017 2018
The total currently liabilities had seen an upward trend in almost all years they had been
increasing, with a massive growth in 2016 where it was valued at Rs. 3,996m (2015: Rs. 2,685m)
which is attributable to a 241% growth in short term borrowings. The total current liabilities have
over the years formed 48-61% of the total assets.
● Total Liabilities:
Total Liabilities
50%
45% 46%
40%
35%
30%
25%
20%
15% 16%
10% 9%
5%
0% 1%
2015 2016 2017 2018
Overall the accounts show that total liabilities have increased over the year however as
mentioned above the drastic change of 2016 is the reason behind the most prominent change in
the trends of the liabilities of the company.
● Sales:

Sales
20%
19%
18%
16%
14% 14%
12% 12%
10% 10%
8%
6%
4%
2%
0%
2015 2016 2017 2018
The annual reports of the company shows increase in sales each year however, the growth rate
explains that the increase isn’t quite prominent or impressive and hence, the overall growth rate
is on the declining side. The growth was the highest in 2015 when sales amounted to Rs.
11,581m (2014: Rs. 9,725m) this was due to the fact that local sales had increased greatly to Rs.
15,000m whereas export sales grew but only slightly. As of 2018, the sales amounted to Rs.
16,178m an increase in local sales was observed (2018: Rs. 21,785m) whereas sales tax, sales
return, and discount/rebates had also increased due to which the growth in sales was declining.
The export makes only 5% of the total sales of the company whereas 95% sales is from local
market. There is no customer who has more than 10% share in the company’s sale.
● Cost of Sales:
Cost of Sales
20%
19% 19%
18%
16%
14%
12%
11%
10%
8%
7%
6%
4%
2%
0%
2015 2016 2017 2018
As above the annual reports shows the increase in the cost of sales, however, the increase is quite
negligible which can explain the decreasing trend of the growth rate. The cost of sales’ growth
had remained constant in 2015, amounting to Rs. 7,541m (2014: Rs. 6,316m) the increase was
mainly due to an increase in raw material and packaging material consumed. As of 2018 the cost
of sales amounted to Rs. 10,614 (2014: 9,910) much of which was attributable to the slight
increase in fuel, salaries, packaging material consumed and depreciation, also a drop in raw
material consume was seen due to which the cost of sales had increased at a declining rate.

● Operating Profit:
Operating Profit
40%
30% 31%
20%
17%
10%
0%
-15%
-20%
The operating profit in 2015 had been the highest amounting to Rs. 1,469m even though there
was an increase in distribution cost, administrative expenses, and other expenses but due to
increased gross profit of Rs. 4,039m and the increased other income of Rs. 111m (57% change)
the operating profit for this year was higher. In 2016 we had seen a 20% decline in the operating
profit to Rs. 1,179m the reason being 20% rise in distribution cost 50% decline in other income
and only a 5% increase in gross profit. In 2017, operating profit had again increased to Rs.
1,381m due to 14% increase in gross profit and 47% increase in other income. As of 2018, the
operating profit of the company had declined to Rs. 1,171 mainly due to a sharp increase in
administrative expenses of 49% to Rs767m as salaries and wages had increased, there was also a
decline in other income whereas other expenses had increased, the distribution costs were also
high amounting to Rs.3,468m because of high advertising and sales promotion cost.
● Finance Cost:
Finance Cost
100%
80% 81%
60% 58%
40%
20%
0% 2%
2015 2016 2017 2018
-20%
-40%
-60% -57%
-80%
The lowest percentage of finance was paid in 2015 when it amounted to Rs 37m only the major
reason for this was decreased interest on short term loans, export re-finance and running finance
this was due to fact that company had not obtained any more short term debts and had rather
repaid some of these loans which resulted in low finance cost for the year. The finance cost had
risen to Rs. 67m in 2016 due to a 241% increase in short term borrowings. As of 2018 finance
cost amounts to Rs. 108m due to increase in mark up for short term running finance, short terms
loans and mark up for long term loans.

● Gross Profit Margin:
Gross Profit Margin
6%
5%
4%
2% 2%
0% 0%
2015 2016 2017 2018
-2%
-4%
-6%
-8% -8%
-10%
Gross profit margin explains the gross profitability of the company, the gross profit has
insignificant increase in last few years. The small changes in the sales and cost of sales explains
the fluctuation in gross profit margin. Gross profit margin had remained constant in 2015, at 35%
(Rs. 4,039m) then in 2016 it had declined to 32% because the cost of sales and sales both had
increased. Although the gross profit had increased (2016: Rs. 4,254m) but the change in gross
profit was less than the change in sales. After 2016 gross profit margin had been increasing due
to increase in the gross profit as of 2018 gross profit was the highest and stood at Rs. 5,563m
because the sales had increased to a much greater extent than cost of sales which led to gross
profit being the highest in this year and as a result of which an increase of 5% was seen in gross
profit margin.
● Net Profit Margin:

Net Profit Margin
30%
20%
18%
14%
10%
0%
2015 2016 2017 2018
-10%
-12%
-20%
-30%
-32%
-40%
Increase in distribution cost and finance in the year 2016 which impacted operating profit and the
EAT explains the noticeable drop in the growth rate of net profit margin in the year 2016.
However, the finance cost was quite less in the following year even though the expenses
increased the company showed quite an improvement in its trends.. In 2018 the net profit margin
of the company had declined due to enormous increase distribution cost, administrative expenses
and other expenses. Even though the sales had increase this year the finance cost and expenses
had also increased due to which net profit for the year was low as compared to previous years
and this resulted in a decline in the net profit margin.

Tax Rates:
2014: applicable at 34%
2015: Tax at applicable rate of 33%
The tax rate had decreased over the period of time which has quite an impact in the overall net
profit margin. As of 2018, the tax rate was the lowest however, the increased finance cost had
caused the EBT to decrease due to which Net Income had also decreased.
Chapter- 3
Cash Flow Analysis
3.0 Cash Flow Statement Analysis
In financial accounting, a cash flow statement (also known as statement of cash flows or funds
flow statement) is a financial statement that shows how changes in balance sheet accounts and
income affect cash and cash equivalents. The cash flow statement, as the name suggests,
provides a picture of how much cash is flowing in and out of the business during the fiscal year.
The cash flow is widely believed to be the most important of the three financial statements
because it is useful in determining whether a company will be able to pay its bills and make the
necessary investments. A company may look great based on the balance sheet and income
statement, but if it does not have enough cash to pay its suppliers, creditors, and employees, it
will go out of business. A positive cash flow means that more cash is coming into the company
than going out, and a negative cash flow means the opposite.
The statement of cash flows is designed to show how the firms operations have affected its cash
position by examining the investment and financing decisions of the firm. Often the information
contained in the statement of cash flows answer questions like, Is the firm generating the cash
needed to purchase additional fixed assets for growth? Does it have excess cash flows to repay
debt or to invest in new products? Information contained in the Cash Flow Statement is useful
for both financial managers and investors.

3.1 Cash flow from operating activities:
The following graph shows the cash flow from operations position for the year 2014-2018:
Cash flow from Operations (000's)

1,600,000
1,400,000 1,369,399
1,295,037 1,259,131
1,200,000
1,000,000
800,000
600,000
547,696
400,000 436,851
200,000
0
2014 2015 2016 2017 2018
As can be seen from the graph above the cash flow from operations has greatly increased from
Rs 547 million in 2014 to Rs. 1.29 B in 2015. This was majorly due to the increase in cash
generated from operations which had increased from Rs. 812 mn to Rs.1.5 B in 2015 which is
attributed to higher EBT which had increased from Rs. 1.03B to Rs.1.4B, although there was an
increase in current assets but there was also an increase in current liabilities like sales tax payable
and trade and other payables, depreciation and amortization and also the finance cost paid and
income tax paid in 2015 had declined to Rs 46m and Rs 132m respectively which led to an
increase in the cash flow from operations in 2015.
The cash flow from operations had decreased in 2016 to Rs. 436m mainly because cash
generated from operations had decreased from Rs. 1.5B to Rs.726m. The reason for this decline
is that current assets had greatly increased in 2016 mainly stock in trade and advances which had
shown an increase of 44% and 89% respectively and the finance cost paid and sales tax paid for
the year had also increased which led to net cash from operations being less than the previous
year.
Then in 2017, the net cash generated from operations had increased to Rs. 1.25B mainly because
cash from operations had increased to Rs. 1.7B although the finance cost and income tax paid
had increased to Rs. 67m and Rs. 372m respectively it did not increased at the same rate as the
cash from operations. The cash generated from operations increased because of an increase of
Rs. 319m in current liabilities and only a minor increase of Rs. 248m compared to last year’s
Rs.921m in the current assets also the profit before taxation had increased in 2017 to Rs. 1.3B
from Rs.1.1B.
In 2018, the cash flow from operating activities had only had a slight increase of Rs110m from
Rs. 1.25B to Rs.1.36B which is attributed to slight increase in cash generated from operations
which had increased from Rs.1.7B to Rs. 1.8B in 2018 although the profit before tax for 2018 is
Rs. 1.06B which is lower than that of 2017 due to an increase in depreciation and amortization

which has reduced EBT thereby reducing the taxes to be paid, also there has been a decrease in
the value of current assets of Rs. 275m which has accounted for the increase in cash flow
generated from operations.
3.2 Cash flow from investment activities:

The following graph shows cash flow from investment activity position for the year 2014-2018:
Cash flow from Investment Activity (000's)
0
2014 2015 2016 2017 2018
-200,000
-353,905 -312,306
-400,000
-459,901
-600,000
-800,000
-1,000,000
-1,200,000
-1,320,731
-1,400,000
-1,448,033
-1,600,000
The graph represents continuous outflow of cash due to the investment activities done by the
company. The cash outflow had reduced from Rs. 459m in 2014 to Rs.353m in 2015. Although
there was an increase in purchase property plant and equipment from Rs. 346m to Rs.467m and
also an increase in the purchase of open ended mutual funds from Rs.150m to Rs.777m but this
effect was offset by the increase in sale of open ended mutual funds from Rs. 50m to Rs. 884m
which is why the cash used in investment activity is lower than previous year.
In 2016, the cash used in investment activity had further reduced to Rs. 312m. During 2016 the
company had purchased property, plant and equipment of Rs.684m but the purchase of open
ended mutual funds had gone down to Rs150m as compared to last year’s Rs. 777m. Also the
company had received cash thorugh the sales of open ended mutual funds (Rs.546m) and from
the proceeds of sale of treasury bills which was not there in the last year, this might have reduced
the cash outlays for this year. The company also had paid dividends of Rs.1.03B in 2016 which
could also be a reason as to why it had invested less this year.
In 2017, the cash used for investment activity has increased to Rs.1.32B, such a huge increase in
the cash outlay was due to great increase in the purchase of property plant and equipment which
had amounted to Rs. 1.28B compared with Rs.684m of last year’s also since there was no sales
of open ended mutual funds or T-bills this also has led to an increase in the cash used for
investing activity.
In 2018, the cash used in investing activity only increased by Rs.127m from Rs.1.3B to Rs.1.44B
in 2018. The increase was mainly due to increase in capital expenditure which had increased to
Rs. 1.4 B, there was only a slight increase in the investment activity recorded in this year maybe
because of less cash at the company’s disposal as it had been relying on running finance facilities
from commercial banks to meet its working capital requirements and other obligations.

3.3 Cash flow from financing activities:
The following graph shows cash flow from financing activity position for the year 2014 – 2018:
Cash flow from Financing Activity (000's)

100,000
0 18,707
2014 2015 2016 2017 2018
-100,000 -93,119
-200,000
-300,000
-400,000
-500,000
-596,781
-600,000
-700,000 -712,840 -731,839

-800,000
As seen from the graph the company has made cash outlays for repayment of loans, borrowings
and payment of dividends in all years except 2017 where the cash flow is positive.
In 2015, cash used in financing activities had increased from Rs 596m to Rs.712m the major
reason for this was the repayment of short term borrowings amounting to Rs. 808m in 2015
(previously Rs. 980m) and the payment of dividends to the stockholders that amounts to Rs.
412m (2014: Rs.166m). The dividend payout ratio for the year 2014 was 58.49% and cash
dividend per share was Rs.8, the total number of shares the company has is 51,803,429 and the
net income for the year 2014 was Rs.708.4m according to which the company had to pay
Rs414m in dividends of which Rs.412m was paid in 2015 due to which there is an increased cash
outflow.
In 2016 the cash used for financing activity had increased further but only slightly a change of
Rs. 18.9m was seen. This change is attributed to the short term borrowings obtained worth Rs.
1B of which Rs.700m were paid in the same year. The dividend per share for the year 2015 was
Rs.10 and the payout ratio was 104.28% since the company had generated net income of
Rs993.56m in 2015 it had to pay dividends amounting to Rs. 1,031m in 2016. Although short
term borrowings obtained were Rs. 1B the cash outlay in making dividend payments and
repayment of borrowings had offset this change by slightly increasing the cash used in financing
activity.
In 2017, the cash flow from financing activity is seen as positive amounting to Rs. 18.7m the
reason for this increase was that the company had obtained short term borrowings amounting to
Rs. 1,262m along with long term finance amounting to Rs.140.8m in the year 2017. The
company had also made a repayment of short term borrowing amounting to Rs. 1,100m.
Dividends for the year 2016 were also paid in 2017, dividend payout ratio was 35.74% and
dividend per share was Rs. 2.75, net income for 2016 was Rs. 773.6m according to which the
company had paid Rs. 284m in dividends in 2017. Since the inflow of cash from short term

borrowings and long term finance was greater than the outflow made for repayment and
dividends the cash flow from financing activity was positive in this year.
In 2018, the cash flow from financing activity is again negative which means the company again
made some outlays which amounts to Rs. 93m. The company had obtained long term and finance
and made short term borrowings amounting to Rs. 51.3m and Rs 288m respectively but the
impact of this inflow of cash was offset by making dividend payments. Dividend payout ratio for
2017 was 45.24% and cash dividend per share was Rs.4.25, the net income for the year was Rs.
984.8m according to which the company had paid Rs. 432.4m as dividends for 2017 in 2018.
Since the dividends paid were higher than last year the cash flow from financing activity resulted
in negative.

Chapter- 4
Ratio Analysis
4.1 Liquidity Ratio:

Liquidity ratio determines the firm’s ability to meet its debts, ability to pay its debt when they become
due. These ratios establish relation between cash and other current asset and current liabilities.
Commonly used ratios are:
● Current Ratio
● Quick Ratio
4.1.1 Current Ratio:
Current Ratio Current Ratio

Year
National Shezan
2018 0.902 1.524
2017 1.061 1.626
2016 1.114 1.628
2015 1.464 1.576
2014 1.389 1.646
Current Ratio
Company vs Industry
competitor company
3.5
3 1.65 1.58
1.63 1.63
2.5 1.52
2
1.39 1.46
1.5
1.11 1.06
0.9
1
0.5
0
2014 2015 2016 2017 2018
The current ratio measures the company’s ability to pay off its current liability. Trend indicates
current ratio was 1.464, the highest in the year 2015 when compared to other years.
The current ratio of the company is consistently less than that of Shezan, one of its competitor
which shows that the competitor has greater liquidity and will be able to pay short term debts on

the other National will have difficulty in paying short term debts, it should focus on improving
its liquidity to meet all its obligations.
The reason why current ratio was the highest in 2015 is that current assets had grown from Rs.
3,652m to Rs. 3,931m also the current liabilities had increased but the current assets had
increased at a much higher rate. The increase in current assets is attributed to the increase in
trade debts which had grown by 44% amounting to Rs. 1,150m along with that there was an
increase of 65% in trade deposits and pre-payments that amount to Rs29.7m in 2015. The
increase in trade debts suggests that the company’s sales particularly credit sales have increased.
The increase in current ratio was not substantial because the company had also decreased its
investments in mutual funds.
After 2015 a decline can be seen in the current ratio with it being the lowest, 0.902, in 2018. A
sharp decrease can be seen from 2015 to 2016 which is because the company’s current liabilities
(2016: Rs. 3,996m) had increased at a greater extent than its current assets (2016: Rs. 4,454m)
mainly because the company had secured more running finance and export re-finance.
In 2018, the current ratio was at its lowest the reason being the decline in trade debts which
suggest that the company had received payments from related parties, a decline in advances and
other receivables was also seen of 51% and 92% respectively. In 2018, the current liabilities had
also increased from Rs. 4,448m to Rs. 4,990m, a change of about 12%. This was mainly because
company’s short term borrowing i.e. running finance had increased by the year end and also the
company had taken a loan of Rs. 250m which required company to maintain current ratio of
1:1:1 since short term borrowing increased a breach of this covenant took place and the company
had to classify the outstanding loan amount of Rs.193m in its current liabilities.
Although the company was initially able to maintain a current ratio higher than 1 which
meant it had the ability to pay off short term debts but by the end of 2018 the current ratio had
fallen beyond 1 which is not a good indicator for the company’s financial strength. This also
means that the company is focusing more on its profitability rather than liquidity which will
not be fruitful for the company in the long run.
4.1.2 Quick Ratio:

Quick Ratio
Quick RatioCompany vs Industry
Quick Ratio
Year
National IndustryNational
Shezan
1
2018
0.9
0.43 0.2240.32 0.144
0.8
0.7
2017 0.307
0.59 0.232
0.6
0.51 0.29 0.23
0.5
2016
0.4 0.265 0.292 0.31 0.14
0.27
0.3 0.22
0.2
2015 0.587 0.320
0.1
0
2014 0.508
2015 20160.428 2017 2018
2014
Quick ratio is one of the important ratio in finance and the most conservative ratio in calculating
liquidity position. A company with a quick ratio of less than one will find it very difficult to pay
back its current liabilities; it is a bad sign for investors.

The trend indicates quick ratio was the highest 0.587 in 2015 as compared to other years. The
quick ratio is less because the inventory is not included as it is not the most liquid amongst
current assets it cannot be sold easily and takes time to be converted into cash, this makes quick
ratio a better indicator of liquidity than current ratio. Since inventory make most of the current
assets, not taking it into account certainly reduces quick ratio.
In 2014 and 2015 the quick ratio was high compared to other years because the company’s trade
debts were high and also the company had made an investment in open ended mutual funds but
after that quick ratio started declining major reason for that was the reduction in trade debts and
the fact that company had pulled out its investment from the mutual funds. In 2018, quick ratio
was the lowest at 0.224 because there were no investments made by the company in marketable
securities whereas the trade debts had declined to Rs. 889m, the cash and bank balances had
increased to Rs.229m and so did the current liabilities to Rs. 4,990m. Since the change in cash
and trade debts was less than the increase in current liabilities the quick ratio had declined.
The quick ratio same as current ratio is far below the competitors throughout the five years of
analysis. Although by 2018, both the companies had declining quick ratio Shezan was still in a
better position liquidity wise compared to National.
Overall comments on Liquidity ratio:

The company’s current ratio of 0.902 and quick ratio of 0.224 suggest that its liquidity condition
is poor as its assets are not sufficient to pay off its liabilities. The company should therefore seek
to improve its liquidity, if the condition further deteriorates company can face serious financial
crisis and may even lead to bankruptcy.
4.2 Activity Ratios:

Activity ratios are used to evaluate the competence or efficiency, with which the company
manages and utilizes its assets. This ratio also called the turnover ratios because they indicate the
speed with which the assets are transformed or turnover into sales. A proper balance between
assets and sales generally reflects on that the assets.
The asset management ratios are as following-
● Inventory Turnover Ratio
● Average Collection Period
● Fixed Asset Turnover
4.2.1 Inventory Turnover Ratio:
Inv. Turnover Inv. Turnover

Year Ratio Ratio
National Shezan
2018 3.455 3.141
2017 3.294 3.742
2016 2.750 3.983
2015 3.345 3.356

2.837 4.126
2014

Inventory Turnover
Company vs Industry
Shezan national
8
7 4.13 3.74
3.36 3.98 3.14
6
5
4 3.35 3.29 3.46

2.84 2.75
3
0
2014 2015 2016 2017 2018
Inventory turnover ratio shows how many times the company is selling its inventory in a year. It
is used to see how a company is managing its costs and how effective its sales efforts have been.
The higher the inventory turnover ratio the better as it shows that the company is selling off its
inventory quite frequently and that there’s a high demand for its products in the market.
The inventory turnover ratio for National Foods had been consistently lower than that of
Shezan’s from 2014 to 2017 but in 2018 National had a better inventory turnover ratio than
Shezan because Shezan’s inventory turnover ratio decreased substantially whereas National only
had a slight improvement.
In 2015 the inventory turnover ratio increased from 2.837 to 3.345 because of a 19% increase in
cost of sales from Rs. 6,316m in 2014 to Rs, 7,541m in 2015 whereas there was a slight 1%
increase in inventory from Rs, 2,226m in 2014 to Rs, 2,254m in 2015. The increase in cost of
sales was consistent with the 19% increase in sales. This shows that there was an increase in
demand and the company was selling off its inventory at a faster rate.
In 2016 the ratio decreased from 3.345 to 2.750 because of a prominent increase of 44% in
inventory from Rs. 2,254m in 2015 to Rs. 3,250m in 2016 whereas cost of sales increased by
19% from Rs. 7,541m in 2015 to Rs. 8,937m in 2016 and sales increased by 14% from Rs.
11,581m in 2015 to Rs. 13,183m in 2016. The increase in inventory compared to the increase in
cost of sales was very high which caused the ratio to decline by 0.595. The increase in inventory
was due to an increase in raw material which the company must have stocked up on because of
the increase in sales in the previous year. But in 2016 the increase in sales was not as substantial
as that of the previous year which caused the company to have excess inventory.
In 2017 the ratio improved substantially from 2.750 to 3.294 which was due to the decrease in
inventory by 7% from Rs.3,250m in 2016 to Rs. 3,008m in 2017 and the increase in cost of sales
by 11% from Rs. 8,937m in 2016 to Rs. 9,910m in 2017 whereas sales increased by 12%. This is
because after the decrease in sales in the previous year the company must have sold off its
remaining inventory quickly and the sales had a slight decrease of 2% compared to last year’s
growth rate.
In 2018 the ratio increased from 3.294 to 3.455 which is only a slight improvement from the
previous year. The reason for this is that there was only a 2% increase in inventory from Rs.
3,008m in 2017 to Rs. 3,073m in 2018 and an increase of 7% in cost of sales from Rs. 9,910m in
2017 to Rs. 10,614m in 2018 and the sales increased by 10%. Because of the overall decrease in

the rate of sales and inventory there hasn’t been a huge improvement in the inventory turnover
ratio.
4.2.2 Average Collection Period (ACP) Ratio:

Average Collection Average Collection
Year Period Period
National Shezan
2018 20.065 5.654
2017 31.485 13.249
2016 27.700 14.430
2015 36.264 16.370
2014 29.898 17.450
Average Collection Period

Company vs Industry
shezan national
60
16.37
50
17.45
13.25
14.43
40 36.26
29.9 31.49
30 27.7
5.65
20.07
20
10
0
2014 2015 2016 2017 2018
Average collection period represents the amount of time it takes customers to pay back the credit
sales. The lower the number of days the better as it means the company is collecting its debts
faster and that increases the liquidity position of the company.
Overall the average collection period of national is a lot higher than that of Shezan’s. This can be
because Shezan has a lower percentage of trade receivables compared to its sales than National
which contributes to Shezan recovering its debts faster.
In 2015 the average collection period increased from 30 days to 36 days because of the
substantial increase in trade debts by 44% whereas sales had a 19% increase. The increase in the

amount of trade debts must have made it harder for National to collect its debts back from their
customers.
In 2016 the average collection period had a huge decrease from 36 days to 27 days because trade
debts had decreased by 13% and sales had increased by 14% which shows that credit sales might
have decreased in this year which caused easier collection of debts from customers.
In 2017 the average collection period has again increased from 27 days to 31 days which is
because of the increase in trade debts by 27% and increase in sales by 12%. As previously stated
this increase might have been due to the increase in trade debts and it might have become harder
for the company to collect its debts. Another reason for the increase in average collection period
can be a change in policy by the company.
In 2018 there’s a prominent decrease in the average collection period from 31 days to 20 days
which is a huge improvement for National Foods. This decrease can be caused by the 30%
decrease in trade debts and an increase of 10% in sales. This shows that due to the decrease in
the amount of trade debts the company had a better time collecting its debts back. There might
also have been a change in policy which would have caused a better collection period and this
can also explain the decrease in trade debts and stricter rules regarding payback period will make
customers switch to other suppliers thereby causing the company to have fewer sales.
4.2.3 Fixed Asset Turnover Ratio:
Fixed Asset Turnover Fixed Asset Turnover

Year
National Shezan
2018 3.755 5.437
2017 4.615 6.046
2016 6.215 5.712
2015 7.132 5.657
2014 7.312 7.918

Fixed Asset Turnover
Company vs Industry shezan national
16
7.92
14
5.66
12 5.71
6.05
10
5.44
7.31
8 7.13
6.22
6 4.62
3.76
4
0
2014 2015 2016 2017 2018
The fixed asset turnover ratio shows how efficiently a company is using its fixed assets namely
property, plant and equipment to generate sales. This ratio is extremely important for
manufacturing firms as it shows how fruitful their investments in fixed assets have been. The
higher this ratio, the better as it directly correlates to performance.
Overall the fixed asset turnover ratio for National has been lower than Shezan’s except for 2015
and 2016 when National’s ratios were higher. There isn’t a huge difference between the ratios of
both the firms which means that their performance is more or less the same.
In 2015 the ratio decreased slightly which was due to the increase in fixed assets by 22% which
was largely due to an increase in the amount of property, plant and equipment, and an increase in
sales by 19%. As the increase in both the figures balances each other out there wasn’t a huge
increase in the ratio.
In 2016 the ratio decreased from 7.132 to 6.215 which was because of an increase in fixed assets
by 31% mostly because of an increase in intangibles, and sales increased by 14%. The increase
in fixed assets caused the ratio to decrease as sales did not improve accordingly.
In 2017 the ratio decreased substantially because of an increase in fixed assets by 51% mostly
because of an increase in property, plant and equipment, and an increase in sales of 12%. The
prominent increase in fixed assets and a meager increase in sales caused the ratio to decrease by
1.6 which shows great inefficiency in National’s part.
In 2018 the ratio decreased again due to an increase in fixed assets by 35% which was caused by
an increase in property, plant and equipment and an increase in sales by 10%. Sales did not
improve compared to fixed assets which caused the ratio to decrease.
Overall Comments on Activity Ratio:

The activity ratios of National show that the company has been performing very inefficiently in
the past 5 years and it has not been utilizing its assets to their full potential. Continued
investments in property, plant and equipment compared to the slow decline in the growth of sales
shows that they’ve not made smart investments for their company as the sales are not improving.
Their decreasing inventory turnover is also an indicator of their declining sales as capital is tied
up in inventory.

4.3 Debt Management Ratio:
Debt management ratios show the leverage scenario of the company.
The debt management ratio we can justify on the two ratios, those are as follows
● Debt Ratio
● Time Interest Earned (TIE) Ratio
4.3.1 Debt Ratio:
Debt Ratio Debt Ratio

Year
National Shezan
2018 58.5% 45.4%
2017 59.8% 42.6%
2016 62.2% 43.9%
2015 50.4% 49.4%
2014 55.7% 44%
Debt Ratio
Company vs Industry
national shezan
70%
62%
60% 59%
56%
60%
50%
50% 49.40%
44.00% 43.90% 42.60%
40%
30%
20%
10%
0%
2014 2015 2016 2017 2018
Debt ratio basically tell us that how much of the company’s assets are funded by debts and
according to the above data we can see fluctuation throughout the years. In 2014, the debt of the
company stood at 55.7% of the total asset this could be explained because of the increase in short
term borrowing mainly running finances which increased to Rs. 553 million as compared to Rs.

122 million in the year 2013. While as the observation shows that the debt ratio of the company
went down to 50% in the FY2015 due to the reason that markup short-term borrowing of the
company went down to Rs. 284 million in 2015, moreover, as compared to previous years there
was no short term loan reported neither there was murabaha which was reported in 2015 hence it
could have played part in the declining of the debt ratio.
In 2016, however, the ratio again increased by 12%, the debt ratio was the highest in this year
and the major reason behind it was the boom in the running finance which increased up to Rs.
900 million in 2016 and played its part in bringing the debt ratio to 62%. Also, the export
refinance was also increased in this year and these factors brought the overall short term
borrowing structure to Rs. 1 billion as compared to Rs. 300 million of last year hence, resulting
in the increase of debt ratio. Although the total assets of the company had also increased by 18%
but the rate at which total liabilities had increased was greater than that of total assets. This
increased debt ratio shows the risky position of the company as it is highly leveraged in this year.
In 2017, the debt ratio stood at 60% which still is risky for the company, there was an appearance
of long term borrowing in this year and also trade and other payables had increased in 2017. The
minor changes in 2018 brought slight drop in the debt ratio of the company, as compared to the
previous year i.e. 2017, in 2018 trades and other payable of the company decreased, there was
also decrease in deferred taxation and no long term financing was reported, however short term
borrowings had increased and so did the total assets by 11% which had offset the 9% growth in
total liabilities and decreased the debt ratio to 59%.
As compared to the competitor, the company is highly leveraged and on the riskier side whereas
Shezan’s capital structure strongly consists of equity while National Foods is financed through
debt. As of 2018, 59% of national’s assets are funded through debts whereas only 41% through
equity considering the liquidity situation of the company the financial outlook of the company
does not look to promising. If it continues injecting more debt its profitability will reduce due to
higher finance costs.
4.3.2 Time Interest Earned (TIE) Ratio

Times-Interest Times-Interest
Year Earned Ratio Earned Ratio
National Shezan
2018 10.805 13.484
2017 20.149 10.938
2016 17.513 4.900
2015 39.430 6.155
2014 12.796 15.019

Times Interest Earned
Company vs Industry
national shezan
45
39.43
40
35
30
25
20.15
20 17.51
1512.815.02 10.81
10 10.94
5 6.16 4.9
0
2014 2015 2016 2017 2018
Time interest earned ratio explains the capability of the company to pay it interest and the
frequency of the payment each fiscal year. The above graph’s show that comparatively National
Foods has better TIE ratio as compared to that of Shezan but as a standalone the company has
severe fluctuation with 2015 being the year with highest TIE and 2018 being the lowest. As the
calculation shows that the better the earning the better chance there is for the repayment of
interest moreover, the situation helps the company by making it less risky for creditors.
In the last five years the highest operating profit was in 2015 with Rs. 1.5 billion which was the
highest as compared to other years. 2015 is the year where other expenses and other income was
higher than other years.. The income statement of past five years also shows that in gross profit
the noticeable change occur from 2014 to 2015, however, in the following years the change was
quite small. Hence, this made 2015 as the better performing year. The ratio shows that in 2015
the company had the ability to make interest payments 39.43 times, this was mainly due to the
fact that the sales had increased thereby increasing gross profit and other income had also
increase.
In 2018, we notice a dip in the ratio the because of the great increase in other expenses of 107%
and decrease in other income due to which operating profit was lower also the finance cost had
risen greatly to Rs.108m from Rs.68m in 2017 which resulted in the ratio being lower than
previous years.
Overall comments on Debt ratio:

Through debt ratio and time interest earned ratio we can notice that performance wise it was year
2015 during which the capital structure of the company was balanced and it was the year where
the company was also able to pay off its interest frequently, however, after that the situation is
towards decline as the company is on riskier side. As the company is increasing more debt in its
capital structure TIE is getting worse which is the reason why in 2015 when debt ratio was
lowest TIE was better whereas TIE had worsened in 2018 due to increase in debt in capital
structure.

4.4 Profitability Ratio:
Profitability ratio represents the organization’s ability to translate sales in to profit at different
stages of measurement. The ratios measure profitability after consideration of all revenues and
expenses, including interest taxes and non-operating items. These ratios specify the capacity of
the company to survive difficult circumstances, which might occur from a number of basis, such
as declining price, increasing cost and declining sale.
The profitability ratio we can justify on the five ratios, those are as follows
● Profit Margin on Sales
● Return on Asset (ROA) Ratio
● Return on Equity (ROE) Ratio
4.4.1 Net Profit Margin:
Net Profit Margin Net Profit Margin

Year
National Shezan
2018 5.9% 5%
2017 6.7% 4%
2016 5.9% 3%
2015 8.6% 4%
2014 7.3% 4%
Ne t Profi t Margin
Company vs Industry
national shezan
10%
9%
9%
8%7% 7%
7% 6% 6%
6%
5% 5%
4% 4% 4% 4%
3% 3%
2%
1%
0%
2014 2015 2016 2017 2018
Net profit margin shows the returns earned by a company in relation to its sales. It’s a very
important ratio for all companies as it shows the overall health of a company. The higher the net
profit margin, the better returns a company is generating. It’s also an indicator of how well a
company’s current practices are working and if there’s any need for improvement or change in
those practices. It also helps to forecast future returns which helps in policy making.
Overall National’s net profit margin has been higher than that of Shezan’s which shows good
returns on their part.

In 2015 the net profit margin increased from 7% in 2014 to 9% in 2015. This was because of a
decrease in finance costs as short-term borrowing had reduced and an increase in other income
due to sale of mutual fund units and gain on disposal of fixed assets.
In 2016 the net profit margin decreased from 9% to 6% as there was a decrease in other income
due to fewer gains on sale of mutual fund units and disposal of fixed assets and an increase in
finance costs by 81% due to increase in short term borrowings.
In 2017 the net profit margin increased from 6% to 7% due to increase in other income and
decrease in finance costs.
In 2018 the net profit margin decreased from 7% to 6% due to decrease in other income and
increase in other expenses and finance costs. There was a decrease in taxation by 65% which
balanced out the margin and there wasn’t a huge decrease in the net profit margin.
4.4.2 Return on Asset (ROA):
Return on Assets Return on Assets

Year
National Shezan
2018 13.3% 12%
2017 17.4% 11%
2016 17.9% 8%
2015 26.5% 11%
2014 22.5% 16%

Return on Asset
Company vs Industry
shezan national
45%
40%
16% 11%
35%
30% 27% 11%
25%23% 8% 12%
20% 18% 17%
15% 13%
10%
5%
0%
2014 2015 2016 2017 2018
Return on Assets indicates the returns generated by investments in assets i.e. how effectively a
company has converted its investments into net income. The higher the percentage of ROA the
better the company’s performance.
Overall National’s ROA is better than that of Shezan’s which shows that National is consistently
earning better returns on its investments than Shezan.
In 2015 the ROA increased from 22% to 26% which was because operating profits increased due
to increase in other income whereas total assets didn’t improve by much.
In 2016 the ROA decreased substantially from 26% to 18% which was because operating profits
decreased by 20% due to a decrease in gross profit and other income and total assets increased
by 18%
In 2017 the ROA decreased slightly because even though operating profits improved due to
increase in other income and decrease in cost of sales, distribution costs and administrative
expenses there wasn’t a substantial increase in total assets.
In 2018 the ROA decreased from 17% to 13% because of a decrease in total assets and operating
income which decreased due to an increase in other expenses by 107% and other income
decreased by 35%.
4.4.3 Return on Equity:

Return On Return On
Year Equity Equity
National Shezan
2018 29.1% 21%
2017 41.3% 18%
2016 44.8% 11%

Return On Equity
Company vs Industry
2015 52% 18% shezan national
80.00%
27%
2014
70.00% 46.8%18% 27%
60.00% 18%
52.00% 11%
46.80%
50.00% 44.80%
41.30%
40.00%
29.10%
30.00%
20.00%
10.00%
0.00%
2014 2015 2016 2017 2018
Return on Equity shows how much net income is a company generating against its equity. It’s an
indicator of how effectively the management is using a company’s assets to generate profits. The
higher the ROE the better equity is being utilized.
Overall National’s ROE is comparatively higher than Shezan’s. This shows that National is using
its equity effectively to generate income.
In 2015 the ROE has increased from 47% to 52% because both profit and total equity has
increased from previous years. Profit for this year has increased by a greater margin compared to
equity.
In 2016 the ROE decreased from 52% to 45% because both profit and equity has decreased.
Equity has decreased because higher dividends were given out that year than the previous year.
In 2017 the ROE has decreased from 45% to 41% even though both profit and equity are
increasing. The reason is that equity is increasing at a much faster rate compared to profit. The
reason for equity increasing is the reduction in the amount of dividend paid out.
In 2018 the ROE decreased from 41% to 29% because of the decrease in profit by 19% and
increase in equity that year was only 15% as dividends paid out had increased.
Overall comment on profitability:

National’s profitability ratios have been higher compared to Shezan’s which shows that they’re
earning better returns than Shezan. National has had a lot of unexpected gains and losses due to
which there has been huge fluctuations in other income and other expenses. They have also had
fluctuations in finance cost because of their increase and decrease in short term borrowings
which have impacted their profitability.

CHAPTER 5
FINDINGS AND CONCLUSION
5.1 Impact of Budget 2019 on the Industry:

Budget 2019-20 is going to have a huge impact on various industries and products which will
indirectly affect National Foods. No direct increase in taxes or duties is mentioned on the spices
and condiments industry but as National is a manufacturing company, increase in taxes for other
commodities and goods will have some effect on National.
One of those products is sugar, which is used in making ketchup, jams etc. The cost of
manufacturing these products will become higher as there’s a 9% increase in taxes on sugar from
8% to 17%. The increase in price of sugar will have an adverse effect on the price of products
which have added sugars in them.
The taxes on all imports by the paper industry have been exempted which means that packaging
will be cheaper as paper will be cheaper. This will have a positive impact on National as they
won’t be spending as much as they used to on packaging their products.
Overall the budget will not greatly impact the operations of the company.
5.2 Findings:
Findings:
Through our detailed study we were able to conclude that among the last five years, 2014 and 2015 in a
glance could be considered as the better performing years. Through the common size analysis the
highest percentage of total currents assets and lowest percentage of total current liabilities stood out in
the balance sheet while income statements showed that overall 2015 was the better performing year
regarding the profitability too. Also the company had highest liquidity in the year 2015 due to increased
trade debts and investment in marketable securities i.e. mutual funds this shows that the company’s
current assets were enough to repay its current debts. This year was better performing also for the
reason that a perfect mix of debt and equity was there as the company’s capital structure was quite
balanced with 50% of assets being financed by debt and 50% by equity, the company was least
leveraged in this year. The company also had the highest Net Profit Margin of 9% in this year which
shows it was quite profitable. ROA and ROE were also quite high this year which must have
strengthened investors’ confidence in it.
However with time the financial position of the company declined 2018 was the worst performing year
for the company, its net profit had decline to Rs. 946m because of increased finance cost and
administrative and distribution expenses to Rs. 108m, Rs. 767m, and Rs. 3,468m respectively.
Company’s current asset had declined to Rs. 4,499m, its current liabilities had increased to Rs. 4,990m
which declined its liquidity ratios. Overall, in regards of current assets 2016 was a better performing year
with good percentages of cash, advances, and stock in trade. However, after that the company hasn’t

experienced any promising growth in its current asset. For liabilities, in 2015 a decrease of 16% was
noticed in short term borrowings to Rs. 384m (2014: Rs. 953m) because of the repayment of short term
loans worth Rs.100m, and the repayment of export re-finance and murabaha loans. FY2016 is the
turning point in the trends of short term borrowing of the company as from just Rs.384m, the short term
borrowing of the company showed massive jump to Rs. 1,311m because there had been an increase in
running finance and export re-finance both amounting to Rs. 911m and Rs. 400m respectively. Overall,
total current liabilities have grown but the highest growth was observed in 2016 due to the immense
short term borrowing and similar factor impacted the total liability of the year.
As for the items from income statement, sales haven’t shown any impressive progress over the years,
there has been a slow and declining growth in sales The company faced impressive growth in its sale in
2015 after which the increase was quite low and with the increased tax in last one year alongside of
sales return the overall growth in sales was quite negligible resulting in declining trend. 2015, was also
the year which enjoyed better operating profit with good gross profit, however, after which there was a
decline in trend with some improvement in 2017 but 2018 again faced decline.
Moreover, the cash flow statements also highlights 2015 with the highest cash generated from
operation amounting to almost Rs. 1.5 billion, after which the company again faced serious fluctuation,
regaining its cash flow in 2017 with only slight improvement in 2018. The cash flow from investing
however, showed decline in 2015 and 2016, with figures in Rs. 300 million, however, there was massive
cash outflow from investing in last two year with amount more than Rs. 1 billion.
As the inventory turnover ratio explains the efficiency of the company so through the ratio it was shown
that as compared to its competitor, National Foods lacks efficiency except in the last year where the
ratio is higher. National foods had an improvement in its ratio in 2015 which again faced a dip and then
gradual improvement in last two years. Average collection period signifies the frequency with which the
customers pay back the credit sales. The lower the number of days the better as it means the company
is collecting its debts faster and that increases the liquidity position of the company. The activity ratios
of National show that the company has been performing very inefficiently in the past 5 years and it has
not been utilizing its assets to their full potential.
Whereas through debt ratio and time interest earned ratio we can notice that performance wise it was
year 2015 during which the capital structure of the company was balanced and it was the year where
the company was also able to pay off its interest frequently, however, after that the situation is towards
decline as the company is on riskier side. As the company is increasing more debt in its capital structure
TIE is getting worse which is the reason why in 2015 when debt ratio was lowest TIE was better whereas
TIE had worsened in 2018 due to increase in debt in capital structure. In the end, National’s profitability
ratios have been higher compared to Shezan’s which shows that they’re earning better returns than
Shezan.
5.2 Conclusion:
The company has been performing well in the initial years taken into consideration i.e. 2014 and
2015 however its performance had decline 2015 onwards. The company has focused more on
debt financing which has disrupted its current ratio which is well below the industry this could be
dangerous for the company if they do not have enough assets to pay off its liabilities it will not
be able to meet its obligations and can even go bankrupt. Lately the company has become very
profit driven and this profitability has come at the cost of its liquidity. The company should seek

to opt for a balanced capital structure that gives it profitability as well as good liquidity which
will be beneficial for it in the long run.
Appendix to Chapter 4
4.1 LIQUIDITY RATIO:

2014 2015 2016 2017 2018
3,652,481/ 3,931,164/ 4,454,221/ 4,718,695/ 4,499,479/
2,629,876 2,685,229 3,996,913 4,448,710 4,990,260
= 1.389 = 1.464 = 1.114 = 1.061 = 0.902
4.1.1 Current ratio:
4.1.2 Quick Ratio:

2014 2015 2016 2017 2018
(796,624 + (1,150,666 (1,000,468 (1,273,826 (889,385+229,728)
461,585 +78,418) / +389,245 +56,979) / +90,288) / /
2,629,876 +37,041) / 3,996,913 4,448,710
4,990,260
2,685,229
= 0.508 = 0.265 = 0.307
= 0.224
= 0.587
4.2 TURNOVER RATIO:

4.2.1 Inventory Turnover:
2014 2015 2016 2017 2018
6,316,132 / 7,541,804 / 8,937,467 / 9,910,728 / 10,614,639 /

2,226,562 2,254,723 3,250,374 3,008,831 3,072,291
= 2.837 = 3.345 = 2.750 = 3.294 = 3.455
4.2.2 Average Collection Period:

2014 2015 2016 2017 2018
365 / 12.208 365 / 10.065 365 / 13.177 365 / 11.593 365 / 18.190
= 29.898 = 36.264 = 27.700 = 31.485 = 20.065
4.2.3 Fixed Asset Turnover:

2014 2015 2016 2017 2018
9,725,258 / 11,581,436 / 13,183,185 / 14,767,390 / 16,178,301 /
1,329,968 1,623,862 2,121,032 3,199,914
4,308,450
= 7.312 = 7.132 = 6.215 = 4.615
= 3.755
4.3 DEBT MANAGEMENT RATIOS:

4.3.1 Debt Ratio:
2014 2015 2016 2017 2018
2,774,531 / 2,798,138 / 4,091,481 / 4,738,920/ 5,149,636 /
4,982,449 5,555,026 6,575,253 7,918,609 8,807,929
= 0.557 = 0.504 = 0.622 = 0.598 = 0.585
4.3.2 Times Interest Earned Ratio:

2014 2015 2016 2017 2018
1,119,844 / 1,469,522 / 1,179,291 / 1,381,585 / 1,171,158 /
87,513 37,269 67,338 68,567 108,388
= 12.796 = 39.430 = 17.513 = 20.149 = 10.805
4.4 PROFITABILITY RATIOS:

4.4.1 Net Profit Margin:
2014 2015 2016 2017 2018
708,492 / 993,563 / 773,676 / 984,897 / 946,606 /
9,725,258 11,581,436 13,183,185 14,767,390 16,178,301
= 0.073 = 0.086 = 0.059 = 0.067 = 0.059
4.4.2 Return on Assets:

2014 2015 2016 2017 2018
1,119,844 / 1,469,522 / 1,179,291 / 1,381,585 / 1,171,158 /
4,982,449 5,555,026 6,575,253 7,918,609 8,807,929
= 0.225 = 0.265 = 0.179 = 0.174 = 0.133
4.4.3 Return on Equity:

2014 2015 2016 2017 2018
1,032,331 / 1,432,253 / 1,111,953 / 1,313,018 / 1,062,770 /
2,207,918 2,756,888 2,483,772 3,179,689 3,658,293
= 0.468 = 0.520 = 0.448 = 0.413 = 0.291


Analysis of Financial Statements Term Report: COMPANY NAME: National Foods Limited

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ANALYSIS OF FINANCIAL

COMPANY NAME: National Foods Limited

Dated: 10th August, 2019

Financial Analysis: National Foods 1 | Page

CHAPTER-1 INTRODUCTION & METHODOLOGY

CHAPTER- 2 ANALYSIS & INTERPRETATION (BALANCE SHEET & INCOME

CHAPTER- 3 CASH FLOW ANALYSIS

CHAPTER- 4 RATIO ANALYSIS

4.2 Activity Ratios 24

4.3 Debt Management Ratio 28

4.3.2 Time Interest Earned (TIE) Ratio 30-31

4.4 Profitability Ratio 31

CHAPTER- 5 FINDINGS & CONCLUSION

Appendix to Chapter 4 37-50

Financial Analysis: National Foods 2 | Page

Vision and Mission:

Financial Analysis: National Foods 3 | Page

⮚ Production site/ sites locations:

⮚ Head office location:-

1.2 Objectives of the study:

Financial Analysis: National Foods 5 | Page

Financial Analysis: National Foods 6 | Page

2.0 Balance Sheet & Income Statement Analysis:

Long Term Deposits 0.44% 0.63% 0.47% 0.42% 0.46%

Total N.C. Asset 27% 29% 32% 40% 49%

Financial Analysis: National Foods 7 | Page

Total Assets 100% 100% 100% 100% 100%

Share Capital And Reserves

Total Liabilities and Equity 100% 100% 100% 100% 100%

Financial Analysis: National Foods 8 | Page

Sales 100% 100% 100% 100% 100%

Gross Profit 35% 35% 32% 33% 34%

Distribution Costs 20% 18% 19% 20% 21%

Operating Profit 12% 13% 9% 9% 7%

Profit Before Taxation 11% 12% 8% 9% 7%

Financial Analysis: National Foods 9 | Page

Total Non-Current Assets 22% 31% 51% 35%

Stock in Trade 1% 44% -7% 2%

Trade Debts 44% -13% 27% -30%

Total Current Assets 8% 13% 6% -5%

Total Assets 11% 18% 20% 11%

Unappropriated Profit 32% -12% 35% 18%

Deferred Taxation -19% -13% 76% -18%

Trade Payables 22% 17% 21% -1%

Short Term Borrowing -60% 241% 18% 39%

Total Current-Liabilities 2% 49% 11% 12%

Total Liabilities 1% 46% 16% 9%

Cost of Sales 19% 19% 11% 7%

Operating Profit 31% -20% 17% -15%

Finance Cost -57% 81% 2% 58%

Gross Profit Margin 0% -8% 2% 5%

Net Profit Margin 18% -32% 14% -12%

● Property, plant and equipment:

Financial Analysis: National Foods 10 | Page

Total Non-Current Assets Growth Rate

Financial Analysis: National Foods 11 | Page

● Total Current Assets:

Financial Analysis: National Foods 12 | Page

Financial Analysis: National Foods 13 | Page

Financial Analysis: National Foods 14 | Page

● Total Current Liabilities:

Financial Analysis: National Foods 15 | Page

Financial Analysis: National Foods 16 | Page