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Financial Management

Artistic Denim Mills

Presented To

Adeel Salam Shaikh

Presented By

Mohsin Rehman

Date of Submission

Mm\dd\yyyy

University of Management and Technology


Preface

This course is about Financial management and we are to perform the in depth analysis of

the firms financial position and to learn that we have to do this project to gain the

knowledge of maximum professional techniques and the best possible way to smartly do

implement these techniques.

In the project I have chosen a textile based manufacturing company. The name of the

company is Artistic Denim Mills (ADM). I have analyzed the firms financial data with

the help of financial techniques learned from the course Financial Management. With the

help of these tools I have found out the companies financial performance and its market

positioning of shares and their growth and gave my analysis on the company’s

performance.

While doing this project I have to face many problems and to work very hard to find the

exact way to measure the correct performance of the company. While doing so I have

learned a lot about doing the crucial work in the minimum amount of time in the best way

to make it look professional.

Signature: - ______________
Acknowledgement

First of all my thanks to Allah All Mighty who gave me the strength and courage and

given me wisdom and understanding of this course and for this project. I give my thanks

to my parents who have prayed for me all the time and keep encouraging me always for

my studies.

I would like to thank my resource person Mr. Adeel Salam Shaikh who showed his

commitment towards his students and helped us with his heart to make sure that we are

going in the right direction and having the proper understanding of this project. This

course and this project would be difficult for me to understand without his guidance and

his method of teaching that he adopted.

I would also like to thank all of my fellow participants and all the seniors who have

helped me through this project. I would specially like to thank my father Muhammad

Siddique for all of his experience that He shared with me that helped me a lot in this

project.
Content

Executive Summary

Introduction of the company

Market and Book Value Comparison

Net Income Trend

Tax bracket of the Firm

Ratio Analysis

Dividend policy

Retention Rate

Growth rate

Firms Capital Structure

Calculation and analysis of Required Rate of return

Calculation and analysis of Actual Rate of return

Recommendations

Bibliography
Executive Summary

This Project is about the course Financial Management. The requirement of the project

was to apply all the learning from the course and to apply these learning and to apply

them over a company. The project was about the analysis of the financial statement and

to learn about what position does the company holds currently in the market and to

forecast about the companies position in the future. And that weather or not we need to

invest in the company. I selected the company Artistic Denim Mills for the project and

used all my skills and learning of the course to find out the companies position in the year

2008 and 2009. The project starts with the brief introduction of the company followed by

the history of the industry and the manufacturing concerns of the company. ADM book to

market value is analyzed and explained followed by the analysis of the net income of the

company and the average tax bracket of the company. Then the Ratio analysis of the

company is discussed in detail. The company capital structure is defined and we can see

that company is more of equity based and is an optimal structure. The companies divided

policy is discussed and also the company retention policy is discussed in detail showing

the performance of the company. The firm’s rate required rate of return is almost 16%

where as the actual is going in the negative. I have used the Gordon model and found out

the growth trend in the company which is constant. All the necessary calculation along

with the graphical presentations is provided in the project. My recommendations for the

company is that all the indicators of the company are showing that although company is

earning profit for the time but the trend of the profit is negative as the profit percentage is

going down. In the end I have shown the companies market situation and the growth rate

of the company to present a more exact and clearer view of the company for the future.
Company Overview

ADM Denim is a Premium Denim Producer. The company is public listed and started
production in 1993. Current capacity is three Million yards of Fabric and one million
pairs of jeans per month. ADM is a complete vertical unit converting Cotton to Finished
Garments.

On the fabric side, our product range includes weights from 8 oz up to 14 oz using multi-
count/multi-twist ring/open-end yarns using AMSLER technology. We have two rope
indigo dye ranges, which are capable of doing colored bottoming/topping plus very deep
indigo shades. Weaving is done on machines from Switzerland and Italy. We have latest
flat finishing machines designed to give denim constructed denim look and clear optics.
Our medallion finishes foam coats denim with resin or color pigment to give 3-
dimensional effect. We produce denim using 100 % cotton, 99% Cotton 1% Lycra, and
T400 Invista Fiber.

On the garment side, we produce 5-pocket jeans for well know brands in Europe and the
United States. The infrastructure includes computerized cutting tables, specialize robotic
jeans sewing equipment, and TONELLO washing machines. Highly trained staff operates
our laundry with quarterly visits from Italian experts for collection development.

We are an environment friendly company with water treatment and effluent treatment
facilities meeting toughest international standards.

ADM is not just a manufacturer of fabric and garment, but a complete development
facility to provide 'speed to the market' capability required by our customers.
Company Profile

Company Name: Artistic Denim Mills Ltd.

Head Office: Plot No. 5-9, 23- 26, Sector-16,

Korangi Industrial Area,

Karachi, Pakistan.

CEO NAME: Faisal Ahmad holding 47.8 % of shares

Year of Incorporation: 1993

Capital: 84000000

Current Market Share Price 31.91 Rs


1. Comparison of Book Value and Market Value per Share for the Last three years

2009 2008 2007


Book Value 31.91 29.43 30.33
Market Value 22.46 42.57 69.5

Artistic Denim Mills have shown a negative trend when we see the comparison of market

value with the book value. In year 2007 companies’ book value was Rs.30.33 whereas

the Market value was at a high price of 69.5 Rs but in the year 2008 both book value per

share and market value per share dropped down. And in the year 2009 market value per

share of the company went below the book value of the company showing a negative

approach.

2. Trend in Change of Net Income of the firm in the Last 3 years

The last 3 years net income are as follow.

Year Amount ‘000 (Rs)

2007 406446

2008 349584

2009 376421

When we see the 3 years net income of Artistic Denim we can see that in year 2007 the

Net Income of the company was 406446 and that was decreased in the year 2008 that but

in 2009 there was a positive trend in the companies Net Income as compared to 2008 and

it was stated as 376421.

(Annexure 1)
3. Finding firms Tax Bracket and Average tax that firms pays annually

The firm’s tax bracket is 35% as the rate of corporate tax all over Pakistan is 35 %.

But Artistic Denim Mills is paying average tax of 7.26% in 2007 and in 2008 this was

decreased to 6.46% and in the year 2009 it was 8.27%.

(Annexure 2)

Ratio Analysis

Liquidity ratios:

Current Ratio

The current ratio of the company shows the relationship between the current assets and

the current liabilities of the company. It shows that to pay off the current liabilities of the

company how much current assets the company holds. The good current ratio is

considered to be between 1.90 and 2.10. ADM current ratio for the year 2007 was 1.05

and it dell down to 0.82 in the year 2009. This showed a negative trend in the ratio and it

should improve its ratio.

Asset Management Ratios:

Inventory Turnover Ratio:

This ratio indicates that how many times the company sells its inventory and as a whole

the higher the turnover is the better the company is considered. ADM inventory turnover

ratio was 3.5 times in 2008 and in year 2009 it increased to 4.30. this showed that in

company has showed a positive trend in the year as compared to the last year
Days Sales Outstanding:

This ratio shows the relationship between the Sales and Account receivable of the

company. It shows that how many days it takes for the company to convert the sales into

cash. Since we are on the receiving side the lesser the ratio is better it gets. ADM days

sales outstanding ratio for the year 2008 was at 55 days this improved in the year 2009

and came down to 48 days.

Fixed Asset Turnover Ratio:

The ratio shows the relation between the Sales and fixed assets. It tells that how much

sales are we achieving using the Average Fixed Assets of the company. Now the higher

the sales are its considered better. The ADM Fixed assets turnover ratio was 0.19 in the

year 2008 and it increased to 0.23 in the year 2009. It showed a positive trend but still

company must do some corrective measure to improve this.

Total Asset Turnover:

The ratio shows the relation between the Sales and Average Total assets. It tells that how

much sales are we achieving using the Average Total Assets of the company. Now the

higher the sales are its considered better. The ADM Total assets turnover ratio was 0.53

in the year 2008 and it increased to 0.67 in the year 2009. It showed a positive trend but

still company must do some corrective measure to improve this.

Debt Management Ratios:

Debt Ratio:

The ratio shows the relationship of the Debts of the company with the Total assets of the

company. It shows how much the company is financed by Debts. This ratio is considered
reasonable between 40% and 60%. For ADM the Debt to Total Asset ratio was 45.11% in

the year 2008 and it decreases to 42.36% in year 2009. We still considered this ratio

reasonable but there is still some decreasing trend in the company and company must

make sure that it does not fell more.

Times Interest Earned (TIE) Ratio:

This ratio shows the relationship between the operating profit of the company and the

Interest charges company has to pay. The industry average for Tie ratio is 6.0 times and

more the Tie ratio is better it is for the company. ADM has the TIE ratio of 3.26 in the

year 2008 and I 2009 it is now 3.20 which is lower than the previous year and also below

the average. So the company must improve this situation.

EBITDA coverage ratio:

This ratio shows the relation of all cash flows to all financial charges now low the

EBITDA coverage ratio is more risky it gets. ADM ratio in the year 2008 was 3.26 which

decreased to 3.20 in year 2009 showing a negative trend thus it is not suitable for the

firm.

Profitability Ratios:

Profit Margin on Sales:

This income shows the net income per Rs of Sales, It is the relationship between Net

incomes to Sales. ADM profit margin on sales in the year 2008 was 14.34% and it
decreased to 12.04% in the year 2009. So there is a negative trend in the company when

we see the relation of profit on sales.

Basic Earning Power (BEP) Ratio:

This ratio shows the relationship of the companies operating profit with the companies’

total assets and with the help of this ratio we want to see that what s the potential of our

business. And what is the earning power of our business. In 2008 ADM has the BEP ratio

of 3.0% and in the year 2009 this ratio increased to 3.2% which is better for the company.

Return on Total Assets (ROA)

This ratio shows the relation between the firms net income to its Total Asset. This shows

that how many returns we can gain by engaging the total assets of the company. ADM

return on total assets in the year 2008 this was 7.95% and in the year 2009 this was 8.1%

which is showing an increasing trend in the company.

Return on Equity (ROE):

The ratio of net income to common equity shows that how much benefit we are getting

rather than checking the performance. In the year 2008 the ROE of the company was

14.13% and in the year 2009 this ratio decreased to 14.03%. This means that there is a

negative trend in the company and company must improve this.


Market Value Ratios:

Price/ Earning Ratio:

This ratio shows the relationship of Price per share and Earning per share. This ratio is

considered better as it is higher. ADM price/earning ratio in the year 2008 is 2.0 Times

and this increased to 7.12 times in the year 2009. This shows a positive trend in the

company and company must take more corrective measures to improve this more.

Price/Cash Flow Ratio:

This ratio shows the relation of firms Price per share with the firm’s Cash flow per share.

This ratio is calculated in times and higher the ratio is more better the ratio is. ADM

price/ Cash flow ratio in the year 2008 was 68 Rs and this reduced in year 2009 to32.73

Rs showing a decrease in the companies price to cash flow per share.

Market/Book Ratio:

This ratio shows the relation between the companies market price per share with the

companies book Value per share. This ratio is calculated in time and is considered higher

the better. ADM market to book value ratio in 2008 was 1.44 times and this decreased

further down to 0.70 in year 2009 showing a negative trend in this ratio.
Dividend Policy:

Artistic Denim Mills have not paid any dividend in the year 2007 and 2008. Company

was earning profit but they retained the profit and kept it in the reserve for future reasons.

In the year 2009 company paid cash dividend @ Rs 2 per ordinary share of Rs 10 each.

And the dividend cost in the year 2009 was Rs. 167590 which was 45 % of the profit as

company retained the rest of 55 %

(Annexure 4)

Retention Policy:

Artistic denim mills retention policy in the year 2007 and in the year 2008 was 100%

retention and not paying any amount as dividend. In the year 2009 company retained

55% and the rest of the amount was issued as dividend to it common stock holders.

(Annexure 5)

Growth Rate:

Artistic Denim Mills growth rate for the year 2007 was constant as they retained 100%

and did not issue any dividends. During the year the growth rate was 19 %.This policy

was maintained in the year 2008 and but the company growth was lowered to 14% as the

profits of the companies were decreasing. In the year 2009 company declared dividend

from their reserves so the growth rate came down to 8% in the year 2009. So we can

clearly see that the company’s growth rate is not constant.

(Annexure 6)
6. Firms Capital Structure

Artistic Denim Mills shows that the firm is more of Equity based as the firms capital

structure include 57.63 % from equity and the rest of 42.36 % from debt. This current

structure is considered almost optimal as the optimal structure for a company is 40 %

debt and 60 % equity based.

(Annexure 7)

7. Required Rate of Return:

The required rate of return is calculated by using the Capital Assets Pricing Model

(CAPM). And we calculated that the required rate of return of Artistic Denim Mills is

8.61% using the β of 0.84.

(Annexure 8)

8. Actual Rate of Return:

The Actual rate of return of the company is different from its required rate of return and

the actual rate of return of the company is 39% in negative. This shows that the company

is not performing upto the task and it must improve to meet the expected rate of return.

Now since the company is not showing any positive actual return I would rather not find

it attractive to invest in this firm.

(Annexure 9)
9. Comparison of Actual with expected:

The Actual rate of return of the company is different from its required rate of return and

the actual rate of return of the company is 39% in negative. Where as the required rate

calculated with the help of CAPM was 16 % .This shows that the company is not

performing up to the task and it must improve to meet the expected rate of return. Now

since the company is not showing any positive actual return I would rather not find it

attractive to invest in this firm.


Suggestions:

After discussing all the financial facts of Artistic Denim Mills ltd following

recommendations are suggested:

- The Companies growth average growth rate is around 11% which is by far above

the industry average but it’s still not in a positive trend. So the company should

make long term investment so that it can maintain an average growth rate that it

currently has.

- The company target is to maximize the profit. And for that company must

increase the production and expand its market.

- The companies’ capital structure is around 42% debts and 58% equity. This is

considered to be optimal structure. But the firm must maintain this ratio and

should keep this investment stable.

- The company is not paying dividend regularly but this year company paid 2 Rs

dividend they have maintain this rate if they want to increase its market share

capital

- The firms most of the ratios are showing a positive trend but still there are some

crucial points like net income must be maintained


Conclusion:

Artistic Denim Mills is performing apparently well under the economic situation of the

country. Firms have somewhat maintained its profit over the year and also given dividend

this year. We are seeing a positive in the company but still there are many areas where

company can improve it self and gain more market share. After seein the overall

performance of the company we can say that we can invest in the company in the short

run but we can not yet take the risk of investing in the company on a longer term.
Bibliography:

http://www.admdenim.com/company.htm

http://www.kse.com.pk/market-data/historical-Data.php

http://www.asiatradehub.com/pakistan/tax1.asp