University of Central Punjab

ANALYSIS OF FINANCIAL STATEMENTS

FINAL REPORT
Submitted To:

Prof. ASIF BASHIR

Submitted By:
WASEEM AZAM L1F09MBAM2141

Section:

Faculty of Management
Date of Submission: 11-06-2011

PREFACE

The financial analysis of companies is usually undertaken so that investors,

creditors, and other stakeholder can make decisions about those companies.
Business environments are becoming more and more complex with the
passage of time. To understand and deal with such riddle phenomena, one
need a lot of energy and knowledge .So business education has become an
evolving science, which helps to solve the business problems. Academic
education provides general knowledge about business decision and policies.
Financial analysis as an integral part of MBA (Finance) , provides the
opportunity of peeping into real professional life of the business people. It
enables us to evaluate and understand the practical application of all the
terms & techniques that we have studied during our course work.
2

AKNOWLEDGEMENT

Praises to Almighty ALLAH, who blessed upon me the potential and ability
to accomplish the task. Salaam to Holy Prophet Hazrat Muhammad
(S.A.A.W).
I wish to express deep sense of gratitude to, SIR ASIF BASHIR, who provided
me this opportunity to achieve this practical experience under his valuable
supervision and helping suggestions to complete this report.
I am thankful to all those people who help me a lot and provided me an
Opportunity to understand and learn every aspect of analysis.

Waseem Azam

DEDICATED

TO MY

EVER LOVING PARENTS

Table of Contents
PREFACE ....................................................................................................................................... 2
AKNOWLEDGEMENT ................................................................................................................. 3
Introduction: .................................................................................................................................... 9
Principal line of Business: .............................................................................................................. 9
Diversification: ............................................................................................................................. 10
Competitors:.................................................................................................................................. 10
Competitor Comparison: ............................................................................................................... 11
Sales Trend: .................................................................................................................................. 12
Table 1 ...................................................................................................................................... 12
Table 2 ...................................................................................................................................... 13
Sales trend Analysis: ..................................................................................................................... 13
Capitalization: ............................................................................................................................... 14
SECP Registration: ....................................................................................................................... 14
Ownership: .................................................................................................................................... 15
International: ................................................................................................................................. 15
Export Sales .............................................................................................................................. 15
Credit Analysis.............................................................................................................................. 16
Revenue Recognition .................................................................................................................... 16
Stock in trade ................................................................................................................................ 16
Factorization ................................................................................................................................. 16
Line of Credit ................................................................................................................................ 17
Restriction on sales of Assets ....................................................................................................... 18
Business Cycle .............................................................................................................................. 18
Analysis of current assets and current liabilities Composition: .................................................... 18
Current assets composition: ...................................................................................................... 18
Operating current assets cycle: ............................................................................................. 18
Line Graph of Assets composition:....................................................................................... 20
Finding: ................................................................................................................................. 20
Current liabilities composition:..................................................................................................... 21
Break down of Current Liabilities ............................................................................................ 21
5

Findings: ............................................................................................................................... 22
Working Capital: ........................................................................................................................... 22
Current Ratio:................................................................................................................................ 23
Graph of current ratio: .............................................................................................................. 23
Finding: ..................................................................................................................................... 23
Net Trade cycle: ............................................................................................................................ 23
Graph of trade cycle: ................................................................................................................. 24
Findings: ................................................................................................................................... 24
Cash Ratio: .................................................................................................................................... 24
Graph of cash ratio .................................................................................................................... 25
Finding: ..................................................................................................................................... 25
Operating Measures, Account Receivable: ................................................................................... 25
Account Receivable Turnover: ................................................................................................. 26
Collection period ....................................................................................................................... 26
Operating Measure, Inventory Turnover: ..................................................................................... 27
Inventory turnover ratio: ............................................................................................................... 27
Days to sell inventory: .............................................................................................................. 28
Conversion period: ........................................................................................................................ 28
Days in purchases in account payable: ......................................................................................... 29
Liquidity Index: ............................................................................................................................ 29
Acid Test Ratio: ............................................................................................................................ 30
Lines of credits:............................................................................................................................. 31
Credit analysis decision: ........................................................................................................... 31
Sensitivity analysis........................................................................................................................ 32
Pro-forma income statement: ........................................................................................................ 32
Pro- Forma balance sheet statement ............................................................................................. 34
Pro- forma cash flow statement .................................................................................................... 35
LONG TERM SOLVENCY ......................................................................................................... 38
Deferred Tax liability account: ..................................................................................................... 38
Liquidity Risk: .............................................................................................................................. 39
Pension, gratuity and provident fund ............................................................................................ 39
6

Unconsolidated subsidiaries.......................................................................................................... 39
Minority interest: .......................................................................................................................... 40
Inventory: ...................................................................................................................................... 40
Intangible Assets: .......................................................................................................................... 40
Computer software and licenses ............................................................................................... 40
Rights to future gas utilization .................................................................................................. 41
Contingent liabilities ..................................................................................................................... 41
Market value of assets:.................................................................................................................. 41
Borrowing to total capital: ............................................................................................................ 42
Debt to Equity ratio ....................................................................................................................... 43
Fixed assets to common equity ..................................................................................................... 44
Net tangible assets to long term assets .......................................................................................... 44
Total liabilities to net tangible assets ............................................................................................ 44
Time interest earned:..................................................................................................................... 45
Z- Score ......................................................................................................................................... 45
Long term solvency decision: ....................................................................................................... 46
PROFITABILITY ......................................................................................................................... 47
Return On Invested Capital ........................................................................................................... 47
Return on Equity: .......................................................................................................................... 47
Du-Pont Analysis .......................................................................................................................... 48
Return on Assets ........................................................................................................................... 49
Return on long term capitalization:............................................................................................... 50
Disaggregation of return of assets: ............................................................................................... 51
Sustainable rate ............................................................................................................................. 52
VALUATION: .............................................................................................................................. 53
Estimated required rate of Return: ................................................................................................ 53
Interpretation: ............................................................................................................................ 53
COST OF ASSETS PRICING MODEL (CAPM): ...................................................................... 53
Interpretation: ............................................................................................................................ 53
Regression line .............................................................................................................................. 54
Security Market line:..................................................................................................................... 54
7

Estimated price: ............................................................................................................................ 56

Price comparison:.......................................................................................................................... 56
Price valuation decision: ........................................................................................................... 56
Conclusion: ................................................................................................................................... 57
Reference: ..................................................................................................................................... 58

Introduction:
At the end of 2009, Engro Chemcial Pakistan Limited (ECPL) demerged and transferred its core
fertilizer business iinto a new subsidiary, Engro Fertilizers Limited. This demerger is part of
Engro Chemical Pakistan Limiteds conversion into a holding company structure, namely Engro
Corporation Limited.
Engro Chemical Pakistan Limited is the second largest producer of Urea fertilizer in Pakistan.
The company was incorporated in 1965 and was formerly Exxon Chemical Pakistan Limited
until 1991, Exxon decided to divest its fertilizer business on a global basis. The employees of
then Exxon Chemical Pakistan Limited, in partnership with leading international and local
financial institutions bought out Exxons 75% equity. This was at the time and perhaps still is the
most successful employee buy- out in the corporate history of Pakistan. Renamed as Engro
Chemical Pakistan Limited, the company has gone from strength to strength, reflected in its
consistent and enviable financial performance, growth of the core fertilizer business and
successful business diversification into our fields. Its performance & outlook is following the
declared vision,
To be the premier Pakistani enterprise with a global reach, passionately pursuing value
creation for all stake holders

Principal line of Business:

Engro is an agricultural based company. The core business is manufacturing and marketing of
chemical fertilizers. We are Pakistans one of the largest producers of urea fertilizer which is
manufactured at Daharki and marketed under brand name Engro. We also produce crop specific
NPK fertilizers at our plant at Port Qasim Karachi. Engro also markets imported MAP fertilizer
under the brand name of Zorawar and imported DAP fertilizer.
Engro Chemical Pakistan Limited produced a large quantity of fertilizers such as
Engro Urea
Engro DAP
9

 Engro Zorawar ; and

Engro Zarkhez.

Diversification:
The Engro Corp holding the following business units
Engro Fertilizers Limited
Engro Vopak Terminal Limited
Engro Polymer & Chemical Limited
Engro Energy Limited.

Competitors:
Fuaji Fertilizer Company Limited
Dawood Hercules
Pak Saudi Fertilizer Limited
Pak Arab Fertilizer
When we talk about Engro chemicals competitor in the market, engro chemicals main
competitor is FFC (FAUJI FERTILIZER COMPANY).
FFC was incorporated in 1978 as a private limited company. This was a joint venture between
Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark.
The largest urea manufacturing facility of Pakistan consisting of two ammonia/urea units owned
by FFC is built at Goth Machhi in district Rahim Yar Khan. Goth Machhi is situated at a distance
of 2 kms from the main Lahore-Karachi highway and is adjacent to the main railway line. The
two plants are based on natural gas from Mari Gas Fields and have an annual designed
production capacity of 1.3 million tons of urea. Fauji Fertilizer Company currently has 1,769
employees with sales of 16.79 billion Pakistan.
10

The following tables provide a comparison of operating performance of ECPL with its closest
competitor and market leader - Fauji Fertilizer Company:

Competitor Comparison:

Market

Engro Chemical

Fauji Fertilizer

16%

49%

share
Capacity 850,000 tons per annum (2 1,300,000 tons per annum (1

Products

plants)

plant)

Aside from sale of Engro

Sells prilled urea.

urea, ECPL also sells

imported DAP, NP, MOP

Affiliate (FFC Jordan)

and NPK fertilizers and

manufactures granular urea

hybrid seeds.

& DAP.

Brand Engro Urea popular brand

Sona urea very popular

in southern part of the

product, esp. in northern

country.

Pakistan. Sona is granular

urea which is perceived to
be better.

11

Sales Trend:
Table 1
Year
FY 2000
FY 2001
FY 2002
FY 2003
FY 2004
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009

Sales(Million Rupees)
8,080
8,006
10,620
11,884
12,798
18,276
17,602
23,183
23,317
30,172

Sales(Million Rupees)
35,000
30,000
25,000

20,000
15,000

Sales(Million Rupees)

10,000
5,000
-

12

Table 2
Year
FY 2000
FY 2001
FY 2002
FY 2003
FY 2004
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009

Sales(Million
Rupees)
8,080
8,006
10,620
11,884
12,798
18,276
17,602
23,183
23,317
30,172

Change in Change
in
Amount
Percentage
(74)
-1%
2,614
33%
1,264
12%
914
8%
5,478
43%
(674)
-4%
5,581
32%
134
1%
6,855
29%

Change in Percentage 50%

40%
30%
20%

Change in Percentage -

10%
0%
FY FY FY FY FY FY FY FY FY
2001
20022003200420052006200720082009
-10%

Sales trend Analysis:

The table 2 shows that Engro chemical Pakistan limited sales were not consistent. In 2005
company shows a good financial performance in every field, the sales of that year were higher
than 2004 by 43%. But in very next year 2006 sales drop down about 4% which was not good

13

sign for upcoming future. The company performs reverse to the expectation and got 32%
increase in sales in 2007, but repeated the previous situation in 2008.

Capitalization:
Current Price (4/3/2011): Rs. 227.10

Ticker:

ENGRO

Country:

PAKISTAN

Exchanges:

KAR

Major Industry:

Chemicals

Sub Industry:

Miscellaneous
Chemicals

Employees:

873

Market Cap:

74,429,031,595

Shares
Outstanding:

327,736,819

58,152,368,000
(Year
Ending
2010).

2009 Sales

Pakistan Rupees

Currency:
Fiscal
Ends:

Yr December

Share Type:

Ordinary

Jan

Closely
Shares:

Held 135,368,043

SECP Registration:
Name: ENGRO CORPORATION LIMITED
Registration # 0002159
Old Registration # 1879/19650907
Registration Date Tuesday, September 28, 1965
CRO Karachi
14

Ownership:
Engro Corp (Engro chemicals Pakistan limited) is an independent company. Shareholder holding
10% or more voting interest in the company is Dawood Hercules Chemicals Ltd.

International:
Export Sales

Subsidiary
Companies
Engro Foods
Limited
Engro
Ploymer and
Chemical
Limited
Avanceon
Limited
Engro Eximp
(private)
Limited

2009

2008

15,994

9,923

1,463,441

79,223

259,224

212,251

114,303

Nil

15

Credit Analysis
Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefit will flow to the
group and the amount of revenue can be measured reliably. Revenue is measured at the fair value
of the consideration received or receivable and is reduced for marketing allowances. Revenue is
recognized on the following basis:

Sales revenue is recognized when product is dispatched to customers or services are

delivered.

Income on deposits and other financial assets is recognized on accrual basis.

Dividend income from investment is recognized when the Groups right to receive
payment has been established.

Revenue from the supply of electricity is recorded based upon the output delivered.

Stock in trade
These are valued at the lower of cost and net realized value. Cost is determined using weighted
average method except for raw material in transit which are stated at cost (invoice value) plus
other charges incurred thereon till the balance sheet date. Cost in relation to finished goods
includes application purchase cost and manufacturing expenses. The cost of work in process
includes material and proportionate conversion costs.
Net realized value signifies the estimated selling price in the ordinary course of business less all
estimated costs of completion and costs necessarily to be incurred in order to make the sales.

Factorization
There is no concept of factorization in Engro Corporation limited Pakistan.

16

Line of Credit
Engro Corporation Limited has rated as
TFCs-I
TFCs-II

18-Apr-11
24-May-11

Ratings

AA
AA

(April 2011)

ENGRO CORPORATION
LIMITED (ECL)
Entity
Long Term
Short Term
TFCs
Secured, Listed
PKR 4,000mln
Privately Placed
PKR 4,000mln
PKR 2,000mln

New

Previous

AA
A1+
AA

AA
A1+
AA

AA

AA

AA

AA

The above rating of ENGRO reflects relatively low business risk as from source a favorable
demand and supply situation, stable margin an increasing dividend income from subsidiaries.
The company start new urea expansion project, although the project increased leverage in
ENGROs capital structure, but financial risk is predictable to remain within in acceptable limits.
But when started project contributing towards profitability then rating has positive impact.

17

Restriction on sales of Assets

Business Cycle
Analysis of current assets and current liabilities Composition:

Current assets composition:

Current assets composition is the understanding of factors that have caused changes in the
amount of a companys current assets over a period of time or mostly from one period to another
period, for analysis its important to know the changes that have occurred in current assets
composition. The importance of any companys current asset composition depends on the
proportion of current assets to current liabilities not the Rupees amount of current assets
compositions.

Operating current assets cycle:

The first three elements (inventories, accounts receivable and cash) are operating current assets;
the cash is related to investment of excess cash.

Raw Material

Work-in Progress

Finished Goods

Cash and Cash Equivalent

Account Receivable
Cash is used to pay for raw materials and spent also on labor and other aspects that turn raw
materials into work in progress and, finally, into finished goods. The finished goods are sold
either for cash or on credit. In the case of credit customers, there will be a delay before the cash
18

is received from the sales. While the company is waiting for the cash payment to be received, it
will record the amount of sales as accounts receivable. When the cash is received, the cycle is
completed.
The size and composition of current assets can vary between industries. ENGRO is a
manufacturing business and typically invest heavily in raw material, work in progress and
finished goods, and finished goods, and often sell its goods on credit, thereby generating trade
debtors.
Annua
l
Period

Annua
l
%

Period

Descripti
on

2005

Cash
and
Cash
Equivale
nts
Short
Term
Marketa
ble
Securitie
s
Account
s
Receiva
ble
Inventor
y

1,142,4
85

8.10 1,805,2
%
40

138,01
6

0.98
%

228,51
8

543,31
6

3.85
%

1,922,9
82

13.63
%

Other
Current
Assets

1,264,7
56

Annual

2006

Period

Annual

2007

11.30
%

1,617,5
24

Period

Annual

2008

Period

2009

4.21
%

1,687,0
38

2.95
%

3,955,3
42

4.22
%

1.43
%

6,153,9 16.02
48
%

1,549,4
37

2.71
%

527,066

0.56
%

623,34
9

3.90
%

1,408,8
85

3.67
%

261,508

0.46
%

2,514,4
25

2.68
%

923,44
8

5.78
%

2,690,1
53

7.00
%

4,680,8
96

8.19
%

422,607

0.45
%

8.96 2,103,8
%
91

13.17
%

3,814,8
25

9.93
%

3,863,3
42

6.76
%

3,329,4
31

3.55
%

19

Total
Current
Assets

5,011,5
55

35.51 5,684,4
%
46

35.57
%

15,685, 40.83
%
335

12,042, 21.07
%
221

10,748,
871

11.47
%

Line Graph of Assets composition:

Break down of current Assets

18,000,000
Other Current Assets

Amounts
in thousand of Rupees

16,000,000
14,000,000

Inventory

12,000,000
10,000,000

Accounts Receivable

8,000,000
6,000,000

Short Term
Marketable Securities

4,000,000
2,000,000

Cash and Cash

Equivalents

0
2005 2006 2007 2008 2009

Finding:
The above graph shows that the ENGROs assets composition at the peak in 2007 company have
less cash in account and more investment in short term marketable securities, collection from
account receivable was low, major portion of inventory lied under inventory account. The 2007
world financial crunch also effects the ENGROs current assets composition.
The table above is the current composition of ENGRO, the reason of decrease in inventory is the
29.40% increase in sales during the year 2009. During the year company is more successful in
converting inventory into sales. Account receivable by following sales also increase 2.68%, cash
and cash equivalent also increase 4.22% due to the increase in sales and making less investment
in marketable securities and have more reserves in cash.

20

Accounts Payable
Short Term Borrowings
Short Term Portion of
LT Debt
Other Current
Liabilities
Total Current
Liabilities

1,969,001

1,081,745

3,752,945

2,915,274

3,160,852

0
707,730

1,299,961
1,103,977

0
1,318,662

1,866,435
94,934

935,796
830,700

123,363

156,732

193,067

1,122,710

1,468,121

2,800,094

3,642,415

5,264,674

5,999,353

6,395,469

Current liabilities composition:

Accounts Payable
Short Term Borrowings
Short Term Portion of LT Debt
Other Current Liabilities
Total Current Liabilities

13.95%
0.00%
5.02%
0.87%
19.84%

6.77%
8.13%
6.91%
0.98%
22.79%

9.77%
0.00%
3.43%
0.50%
13.70%

5.10%
3.27%
0.17%
1.96%
10.49%

3.37%
1.00%
0.89%
1.57%
6.82%

Amounts in thousand of Rupees

Break down of Current Liabilities

Break down of Current Liabilities

4,000,000
3,500,000

Accounts Payable

3,000,000
2,500,000

Short Term Borrowings

2,000,000
1,500,000

Short Term Portion of

LT Debt

1,000,000

Other Current Liabilities

500,000
0
2005 2006 2007 2008 2009

21

Findings:
The above graph shows the ENGROs current liabilities composition the account payable
increase 3.37% during the year 2009, short term borrowing increase in 2008 to cancel out the
effect of financial crises. Short term portion of the long term debt also increase in 2009. The
reason of increase of account payable is purchase of large amount of raw material on credit, as
mostly done in manufacturing companies they bought raw material at credit.

Working Capital:
Working capital is the current assets minus current liabilities. It measures how much in liquid
assets a company has available to build business.

Total Current Assets

Total Current Liabilities
Working Capital

2005
2006
5,011,555 5,684,446
2,800,094 3,642,415
2,211,461 2,042,031

2007
2008
2009
15,685,335 12,042,221 10,748,871
5,264,674 5,999,353 6,395,469
10,420,661 6,042,868 4,353,402

The above table shows the working capital of ENGRO. The company has positive working
capital it means more in liquid assets the company have to build its business. It shows that in
near future there is no chances of any financial difficulties that might arises. There is not much
need to borrow, working capital available to make payments to creditor.
35,000,000
30,000,000
25,000,000
20,000,000

Working Capital
Total Current Liabilities

15,000,000

Total Current Assets

10,000,000
5,000,000
0
2005

2006

2007

2008

2009

22

Current Ratio:
2005
1.79

Current Ratio

2006
1.56

2007
2.98

2008
2.01

2009
1.68

Graph of current ratio:

Current Ratio
3.5

Current Ratio

3
2.5
2
1.5

Current Ratio

1
0.5
0
2005

2006

2007

2008

2009

Period

Finding:
The above graph shows that the EGNRO company has the current ratio which is higher than 1
throughout the period. It means that company has more current assets against current liabilities.
This ratio is high in 2007 and decrease after the financial crisis.

Net Trade cycle:

Days to Account payable

Days Required to Collect
A/R
Days in Inventory
Net Trade Cycle

2005
50.14
11

2006
29.54
12

2007
75.01
16

2008
62.15
13

2009
49.64
17

31

39

36

79

40

-8.14

21.46

-23.01

29.85

7.36

23

Graph of trade cycle:

Trade Cycle
180.00
160.00
140.00
Days in Inventory

Days

120.00
100.00

Days Required to
Collect A/R

80.00
60.00

Days to Account
payable

40.00
20.00
0.00
2005

2006

2007

2008

2009

Findings:
The above table shows the ENGROs net trade cycle, the trade cycle is negative in 2005 and
2007 means company has the strong financial position manage the cash conversion cycle and
have excess cash to investment. In other years trade cycle is very high which means the
companys cash is caught up in trade functions and not available for other purposes such as for
investment and expansion of project.

Cash Ratio:
Cash ratio

2005

2006

0.4080

0.4956

2007
0.3072

2008
0.2812

2009
0.6185

24

Graph of cash ratio

Cash Ratio
0.7000
0.6000

Ratio

0.5000
0.4000
Cash Ratio

0.3000
0.2000
0.1000
0.0000
2005

2006

2007

2008

2009

Finding:
The table above shows the cash ratio of ENGRO, company has low amount of cash available to
meet the current liabilities or short term debt. The large amount of accumulated cash is not
always better for company because the cash is the unproductive asset it is better to use it for
investment.

Operating Measures, Account Receivable:

2005
Receivable Turnover
Days Required to Collect A/R

34.29
11

2006
30.17
12

2007
22.82
16

2008
27.92
13

2009
21.74
17

25

Receivable Turnover
40
35
30
25
20

Receivable Turnover

15
10
5
0
2005

2006

2007

2008

2009

Account Receivable Turnover:

The above table shows that the ENGROs management is effective in extending credit as well as
collecting debts. The high account receivable turnover ratio of ENGRO implies that a company
operates on a cash basis and its collection of account receivable is efficient. In 2008 the ratio is
higher as compare to previous year and it decreases in 2009 due to the decrease in sales.

Collection period

Days Required to Collect A/R

18
16
14
12
10

Days Required to Collect

A/R

8
6
4
2
0
2005

2006

2007

2008

2009

26

The figure expresses in the above table the average time, in days, that receivables are
outstanding. It helps in determine if a change in receivables is due to a change in sales, or to
another factor such as a change in selling terms. It is very useful to compare days sales
outstanding with the companys credit terms as an indication of how efficiently the company
manages its receivables. The collection days of ENGROs is not much higher except 2009, this
because of financial crisis, this depict that the credit policies that prevent higher sales are overlystrict; there is no problem in collection and pressure on cash flows.

Operating Measure, Inventory Turnover:

2005
Inventory Turnover
Days in Inventory
Days to Account payable
Conversion Period

11.9
31
30.67
42

2006
9.4
39
38.83
51

2007
10.1
36
36.14
52

2008
4.6
79
79.35
92

2009
9.1
40
40.11
57

Inventory turnover ratio:

Inventory Turnover
14
12
10
8
Inventory Turnover

6
4
2
0
2005

2006

2007

2008

2009

The inventory turnover ratio measures the efficiency of the business in managing and selling its
inventory. This ratio gauges the liquidity of the firm's inventory. The table above shows that the
27

inventory turnover ratio of ENGRO is high it means that the company is efficiently managing
and selling inventory except in 2008 the sales also very low in this year. The company has the
faster inventory sells it means the fewer funds the company has tied up in inventory. The high
inventory turnover is not always better ENGRO should be careful to the stock outs problem.
ENGRO should have the safety stock to handle the stock outs.
100
90
80
70
60

Days in Inventory

50

Days to Account payable

40

Conversion Period

30
20
10
0
2005

2006

2007

2008

2009

Days to sell inventory:

The number of day's inventory is held measures the average numbers of days it takes to sell the
average inventory held. The above table shows that the high no. of days in inventory of ENGRO
is held are a sign of inefficient management and indicate the problem of stocking. The slower the
inventory sells means the more cash tied up in inventory.

Conversion period:
The conversion period is the sum of the days to account receivable and days to inventory. The
lower the conversion the better it is, it take less days to collect and days to sell inventory. The
conversion period of ENGRO is very high mean the management is inefficient in collection from
account receivable and it also take higher days to sell inventory. Conversion period should be
28

less than the days to account payable. But in ENGROs case the conversion period is very higher
than days to account payable.

Days in purchases in account payable:

Days in purchase in account payable that measures how well a business is managing its accounts
payable. The ENGRO has the higher days to account payable it means the slower the business in
paying its liabilities. ENGRO has the better credit terms with its supplier.

Liquidity Index:
2005
Liquidity Index (Days)
Acid Test Ratio
Operating Cash Flow to Net
Income

2006

13
0.65
0.54

2007

8
0.73
1.02

8
1.74
-1.72

2008
31
0.58
1.8

2009
6
1.09
1.06

Liquidity Index (Days)

35
30
25
20
Liquidity Index (Days)

15
10
5
0
2005

2006

2007

2008

2009

29

The liquidity index means the number of days during which assets are removed from cash.
ENGRO takes the normal number of days except 2008 to convert accounts receivable and
inventory into cash. And company has not the strong ability to generate sufficient cash to meet
upcoming liabilities.
2
1.5
1
0.5

Acid Test Ratio

0
2005

2006

-0.5

2007

2008

2009

Operating Cash Flow to

Net Income

-1
-1.5
-2

Acid Test Ratio:

ENGROs quick ratio is less than 1 means it cannot pay their current liabilities and should be
looked at with extreme caution. The companys acid-test ratio is near to working capital ratio, it
means current assets are not highly dependent on inventory. In 2007 and 2009 the ratio is quite
wall but in 2008 the decrease as every in the history of company.

30

Lines of credits:
Ratings

(April 2011)

ENGRO CORPORATION
LIMITED (ECL)
Entity
Long Term
Short Term
TFCs
Secured, Listed
PKR 4,000mln
Privately Placed
PKR 4,000mln
PKR 2,000mln

New

Previous

AA
A1+
AA

AA
A1+
AA

AA

AA

AA

AA

Credit analysis decision:

After calculating the ratios given above I reached in a decision that ENGRO should not make
short term borrowing, in 2009 actual working capital is negative it manipulate it as positive by
buying bulk of inventory to increase current assets. Although it has high current liabilities, a
large portion of its earnings has retained from previous five years, I suggest it should utilize its
retained earning instead o f short term borrowings.

31

Sensitivity analysis
Looking at the pro- forma statement of ENGRO, we find an approximate increase and decrease
in pro-forma income statement. If we decrease cost of goods sold by 10 percent our income
increase by 53.2 percent and decrease 53.2 percent if increase 10 percent. If change decrease by
10 percent in interest and tax then income increase by 2.3 and 3.2 percent respectively. By
changing increase 10 percent in interest and tax our income decreases by 2.3 and 3.2
respectively. It means the interest and tax change have little impact on the net income but
changing in sales and cost of goods sold have high impact on both sides whether we increase or
decrease it.

Pro-forma income statement:

The pro-form income statement of ENGRO is developed for the next five years. The revenue
growth rate is take from the excel sheet of horizontal analysis. All other items of the income
statement are based on the revenue or the percentage of revenue.

32

Annual

Annual

Annual

Annual

Annual

Period

Period

Period

Period

Period

2010

2011

2012

2013

Gross Revenues

36,254,241

43,563,267

Growth Assumptions

20.16%

20.16%

Cost of Goods Sold

(27,812,658)

(33,419,822)

Growth Assumptions

76.72%

76.72%

(620,329)
1.71%

Enter Your Forecast Periods =>

2014

Pro Forma Income Statement

52,345,827

62,898,992

75,579,726

20.16%

20.16%

(40,157,415)

(48,253,340)

76.72%

76.72%

(745,391)
1.71%

(895,665)
1.71%

(1,076,235)
1.71%

(1,293,209)
1.71%

7,821,253
21.57%

9,398,054
21.57%

11,292,746
21.57%

13,569,417
21.57%

16,305,076
21.57%

(2,623,450)
7.24%

(3,152,350)
7.24%

(3,787,879)
7.24%

(4,551,533)
7.24%

(5,469,144)
7.24%

Growth Assumption

5,197,803
14.34%

6,245,704
14.34%

7,504,868
14.34%

9,017,884
14.34%

10,835,932
14.34%

Interest Expense

(1,214,391)

(1,459,218)

(1,753,404)

(2,106,898)

(2,531,659)

Growth Assumption

3.35%

3.35%

3.35%

3.35%

Associated Company (loss) Gain

2,909,300

3,495,828

4,200,604

5,047,465

Growth Assumption

8.02%

8.02%

8.02%

8.02%

Income Tax Expense

(1,667,033)

(2,003,115)

(2,406,953)

(2,892,206)

Growth Assumption

4.60%

4.60%

4.60%

4.60%

5,225,677.53

6,279,198.77

7,545,114.87

9,066,245.62

20.16%
(57,981,441)
76.72%

Other operating Expense

Growth Assumptions
Gross Profit
Growth Assumption
Selling, General & Expense
Growth Assumption
Operating Income

3.35%
6,065,058
8.02%
(3,475,288)
4.60%

Total Income
10,894,043.50

33

Pro- Forma balance sheet statement

Pro Forma Balance Sheet
5,265,667
549,941

7,010,078
573,809

9,332,376
598,713

12,424,005
624,697

16,539,828
651,810

3,625,424
2,900,339
2,356,526
14,697,898

4,356,327
3,485,061
2,831,612
18,256,887

5,234,583
4,187,666
3,402,479
22,755,816

6,289,899
5,031,919
4,088,435
28,458,955

7,557,973
6,046,378
4,912,682
35,708,671

120,143,254 171,915,927
Fixed Assets
6,518,395
5,768,027
Accumulated Depreciation
126,661,649 177,683,954
Net Fixed Assets
15,275,544 17,421,851
Longterm Investments
2,787
2,787
Investments
in
Other
Companies
53348.16
131650.78
Intangibles and Other Assets
141,993,328 195,240,243
Total Non Current Assets

233,701,143
4,991,024
238,692,167
19,774,528
2,787

307,435,272
4,186,439
311,621,711
22,353,336
2,787

395,429,166
3,353,293
398,782,459
25,179,921
2,787

324883.29
258,794,365

801735.90
334,779,570

1978496.49
425,943,663

156,691,225 213,497,130

281,550,181

363,238,525

461,652,334

Cash and Cash Equivalents

Short Term Marketable
Securities
Accounts Receivable
Inventory
Other Current Assets
Total Current Assets

Total Assets

6,163,221
7,405,755
8,898,791
10,692,829
12,848,553
Accounts Payable
4,350,509
5,227,592
6,281,499
7,547,879
9,069,567
Short Term Borrowings
Short Term Portion of LT
2,029,370
4,957,677
12,111,424
29,587,768
72,281,841
Debt
2,175,254
2,613,796
3,140,750
3,773,940
4,534,784
Other Current Liabilities
14,718,354 20,204,820
30,432,463
51,602,415
98,734,745
Total Current Liabilities
Long
term
Debt
/
Borrowings
Other Long term Liabilities
Total Non Current Liabilities
Total Liabilities
Preferred Equity
Common Equity
Additional Paid in Capital
Retained Earnings

95,398,550 136,543,655

183,278,335

236,357,790

296,639,804

1,352,352
1,465,975
96,750,901 138,009,630

1,589,145
184,867,479

1,722,663
238,080,453

1,867,399
298,507,204

111,469,256 158,214,450

215,299,943

289,682,868

397,241,949

0
4,531,336
24,580,620
(3,465,978)

0
5,211,037
24,580,620
(9,014,498)

0
5,992,694
24,580,620
(15,404,004)

0
3,426,340
24,580,620
5,572,289

0
3,940,292
24,580,620
1,362,212

34

Adj for Foreign Currency

Transl
Treasury Stock
Total Equity
External Financing Required
(EFR)

1,422,670

(6,164,883)

26,714,415 (115,762,114)

501,634,318

4,717,498
39,719,416

4,717,498
28,435,738

4,717,498
57,077,891

4,717,498
521,521,125

5,502,554

26,846,942

9,172,347

4,717,498
(90,267,458)

163,823,114 (457,110,740)

Pro- forma cash flow statement

35

Pro Forma Cash Flow Statement

Sources of Operating Cash Flow:
Net Income
Depreciation and Amortization
Financial Charges paid
Payment to Engro Foods Limited for
acquisition of tax losses
Other operating
Tax paid
Retirement and other service benefits
paid
(Increase) Decrease Defer Taxes
(Gain) Loss on Sale of Assets
(Increase) Decrease Current Assets
Increase (Decrease) Current Liab
Operating Cash Flow
Investment Sources of Cash Flow:
Planned Sale of Assets
Planned Sale of Investments
Other Investment Sources to be used
Total Investment Sources of Cash
Planned Investments:
Capital Expenditures
Acquisitions in Other Co's
Purchases of Investments
Total Investment Applications of Cash

5,225,678
724,644
(1,421,896)
(489,227)

6,279,199
7,545,115
9,066,246 10,894,044
750367.288 777003.4361 804585.1002 833145.844
(2,663,939) (4,990,921) (9,350,549) (17,518,364)
(531,873)
(578,238)
(628,643) (683,443)

131,710
(1,557,013)
(183,767)

162,519
(1,557,013)
(240,124)

200,535
(1,557,013)
(313,766)

247,443 305,324
(1,557,013) (1,557,013)
(409,993) (535,730)

766,460
0
960,226
6,293,515
10,450,331

1,773,396
0
(1,973,437)
2,558,159
4,557,254

4,103,194
0
(2,371,291)
3,073,896
5,888,515

9,493,765
0
(2,849,355)
3,693,608
8,510,095

21,966,198
0
(3,423,798)
4,438,257
14,718,620

350,986
124,061
2,401,670
2,876,716

2,110,669
139,065
3,096,922
5,346,655

12,692,586
155,884
3,993,440
16,841,911

76,327,351
174,738
5,149,489
81,651,578

458,997,434
195,872
6,640,199
465,833,505

(43,382,703) (51,772,673) (61,785,216) (73,734,129) (87,993,894)

0
0
0
0 0
(2,082,041) (2,285,372) (2,508,561) (2,753,546) (3,022,457)
(45,464,744) (54,058,045) (64,293,777) (76,487,675) (91,016,351)

Cash Flow from Financing Activities:

Proceeds from Loans & Debt
Proceeds from Minority Interest
Other Financing Activities
Total Financing Sources of Cash

36,286,810
0
0
36,286,810

41,202,761
0
0
41,202,761

46,784,701
0
0
46,784,701

53,122,852
0
0
53,122,852

60,319,665
0
0
60,319,665

Cash Flow Applied for Financing:

Payments on Loans & Debt
Dividends Paid to Shareholders
Purchase / Retire Stock
Other Financing Activities
Total Financing Applications of Cash

(66,456)
(2,011,650)
0
0
(2,078,107)

(57,656)
(2,206,962)
0
0
(2,264,618)

(50,021)
(2,421,237)
0
0
(2,471,258)

(43,397)
(2,656,315)
0
0
(2,699,712)

(37,650)
(2,914,218)
0
0
(2,951,868)

2,071,007

(5,215,993)

2,750,092

Total Change to Cash

64,097,138 446,903,570
36

Beginning Cash Balance

Forecasted Ending Balance

3,955,342
6,026,349

6,026,349
810,357

810,357
3,560,448

3,560,448 67,657,586
67,657,586 514,561,156

37

LONG TERM SOLVENCY

Deferred Tax liability account:
ENGRO recorded its deferred tax on liabilities side in current liabilities. The company defer
(delay) taxes for some period of time, the longer the period, the longer it has use that cash, which
means it use it to make more money. ENGRO delay its tax payments, it create deferred tax
liability account to reflect future tax obligations. The reason of deferred tax liability accounts is
depreciation. When company buys property, plant, or equipment, it makes assumptions that
reduce the value of such assets slowly or quickly. To impress shareholder company showing
higher income by reducing depreciation slowly. Eventually when the company able to maintain
profit reverses the procedures and will have pay up taxes.
Deferred income tax is provided on temporary differences arising from investments in
subsidiaries and except where the timing of the reversal of the temporary difference is controlled
by the Group and it is probable that the difference will not reverse in the foreseeable future.
In ENGRO deferred tax is recognized using the balance sheet method. Providing for all
temporary differences between the carry amount of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. Deferred tax is measured at the rates that
are expected to be applied to the temporary differences when they reverse, based on the laws that
have been enacted or substantively enacted by the reporting date. A deferred tax asset is
recognized to the extent that is probable that future taxable profits will be available against
which temporary difference can be utilized. Deferred tax assets are reviewed at each reporting
date and are reduced to the extent that is no longer probable that the related tax benefit will be
realized.

38

Liquidity Risk:
In order to maintain adequate liquidity for its working capital requirements, the board had
approved short term funded facilities of Rs. 7.0 billion. ENGROs policy is to ensure that
adequate medium term funding and committed bank facilities are available to meet the forecast
peak borrowing requirements. We mitigate liquidity risk by careful monitoring of our cash flow
needs, regular communication with our credit provides, and careful selection of financially
strong banks to participate in our operating lines.

Pension, gratuity and provident fund

The company maintains plans that provide post employment and retirement benefit s to its
employees. These include a contributory provident fund, a defined contributory (DC) pension
plan, a non contributory gratuity scheme for all employees and a defined benefit (DB) pension
scheme for the annuitants retired before july1, 2005.
The above mention plans are funded schemes recognized by the tax authorities. The latest
actuarial valuation of management pension and gratuity schemes was carried out at December
31, 2009 and the financial statements of June 30, 2009. The company has fully paid all its
obligations on all the above schemes.

Unconsolidated subsidiaries
Engro Vopak Terminal (EVTL) a 50% share joint venture of ECPL is an unlisted public limited
company incorporated in Pakistan under the companies ordinance, 1984. EVTL has been
granted the exclusive concession, right and license to design, finance, insure. Construct, test,
commission, complete, operate, manage and maintain an integrated liquid chemical terminal and
storage firm at the south western zone of port Qasim on build. Operate and transfer (BOT) basis.
In ENGRO subsidiary companies are consolidated are consolidated from the date on which more
than 50% voting rights are transferred to the group or power to control the company is
established and are excluded from consolidation from the date of disposal or reduction of
control.

39

Agrimall (private) Limited

Agrimall limited is a private company ENGRO invested 4096 (thousand rupees) in it for
year 2009.

Arabian Sea Country Club Limited

ENGRO invested 3197 (thousand rupees) in the year.

Minority interest:
Minority interest is that part of the net results of operations and of net assets of subsidiary
companies attributable to interest which are not owned by the holding company.

Inventory:
These are valued at the lower of cost and net realized value. Cost is determined using weighted
average method except for raw material in transit which are stated at cost (invoice value) plus
other charges incurred thereon till the balance sheet date. Cost in relation to finished goods
includes application purchase cost and manufacturing expenses. The cost of work in process
includes material and proportionate conversion costs.
Net realized value signifies the estimated selling price in the ordinary course of business less all
estimated costs of completion and costs necessarily to be incurred in order to make the sales.

Intangible Assets:
Computer software and licenses
Computer software and licenses cost rerated as intangible assets are amortized from the date the
software is put to use on a straight- line basis over a period of 3 to 5 years. The net book value of
computer software and licenses in during the year is 20,392 (thousand rupees).

40

Rights to future gas utilization

Rights for gas utilization represents premium paid to the government of Pakistan for allocation of
100 MMCFD natural gas for a period of twenty years from Qadirpur gas at predetermined price
for a period of ten years commencing from the date of commercial production. The rights will be
amortized on straight line basis. The net book value of rights to future gas utilization in year is
102312 (thousand rupees).

Contingent liabilities

Claims, including pending lawsuits, against the company not acknowledge as debts
amounted to Rs. 47,658 (2008: 27,911)

Corporate guarantees of Rs. 173,482 (2008: Rs. 500,600) have been issued in favor of
third parties.

The company is contesting the penalty of (2008: Rs. 99,936) paid and expensed in 1997,
by imposed by the state bank of Pakistan (SBP) for alleged late payment of foreign
exchange risk cover fee on long term Loans and has filed a suit in the High Court of
Sindh. A partial refund of Rs. 62,618 was, however, recovered in 1999 from SBP and the
recovery of the balance amount is dependent on the courts decision.

Market value of assets:

Current Price (4/3/2011): Rs. 227.10

Ticker:

ENGRO

Country:

PAKISTAN

Exchanges:

KAR

Major Industry:

Chemicals

Sub Industry:

Miscellaneous
Chemicals

Employees:

873

2009 Sales

58,152,368,000
(Year Ending Jan 2010).

41

Currency:

Pakistan Rupees

Market Cap:

74,429,031,595

Fiscal Yr Ends:

December

Shares Outstanding:

327,736,819

Share Type:

Ordinary

Closely Held Shares:

135,368,043

Borrowing to total capital:

Borrowing to total capital
Total borrowing
Total share holders equity
Total Capital

2005
2006
2007
2008
2009
2,889,789 2,889,789 1,800,000 15,422,520 28,674,764
7,375,566 9,370,097 15,740,651 21,053,606 26,888,238
10,265,355 12,259,886 17,540,651 36,476,126 55,563,002
28.15%

Borrowing to Equity

23.57%

10.26%

42.28%

51.61%

Borrowing to Total share holders'

equity
60.00%
50.00%
40.00%
30.00%

Borrowing to Equity

20.00%
10.00%
0.00%
2005

2006

2007

2008

2009

The graph above shows percentage of debt in total shareholder equity. The higher the borrowing
to total shareholders equity, the more debt the company has compared to its equity. This tells
investors whether a company is more prone to using debt financing or equity financing. As this
ratio increases the default risk increases with the borrowings.

42

The borrowing of debt increases over a period of time. In 2008, due to the financial crises of
2007 the percentage of borrowing increases to 42% and in 2009 it is 51% of total shareholder
equity. The portion of debt in equity is high it may cause of failure firms position in future.

Debt to Equity ratio

2005
2.29

Total debt to Equity Capital

2006
1.34

2007
2.27

2008
2.23

2009
2.93

Total debt to Equity Capital

3.50
3.00
2.50
2.00
Total debt to Equity
Capital

1.50
1.00
0.50
0.00
2005

2006

2007

2008

2009

The above graph shows the debt to equity ratio of ENGRO limited over the five years. A high
debt/equity ratio generally means that a company has been aggressive in financing its growth
with debt. This can result in volatile earnings as a result of the additional interest expense. The
ratio is high in 2008 and 2009.it means a lot of debt is used to finance increased operation, the
company could potentially generate more earnings than it would have without this outside
financing. High debt to equity ratio of ENGRO is better if the utilize debt in efficient way to
generate more earnings than the cost of debt, in other words the earnings from debt easily meet
the

cost

of

debt

and

they

still

left

out

some

portion

after

it.

43

Fixed assets to common equity

Fixed assets to common equity

2005
0.927

2006
0.700

2007
0.878

2008
1.594

2009
2.585

Fixed assets to common equity is a measure of the extent of an ENGROs investment in nonliquid and often over valued fixed assets. The ratio is more than .75 except 2006 it means the
possible over- investment and causes a large annual depreciation charge that will be deducted
from the income statement. The ENGROs depreciation expenses increases over period of time,
one reason of high investment in fixed assets.

Net tangible assets to long term assets

2005
2006
2007
2008
2009
7,353,948 9,352,035 15,606,784 20,930,748 26,765,534
Net tangible Assets
3,935,970 2,968,304 17,410,060 30,111,780 60,425,731
Long term Borrowing
1.87
3.15
0.90
0.70
0.44
Net tangible assets to long term
debt
This ratio measures that a firm has sufficient tangible assets to meet the long term obligations
without the intangible assets in case of liquidation. In first two years ENGRO easily meet the its
long term borrowing, but after that the company has less tangible assets to meet long term
borrowing in case of liquidation. The long term creditors of the firm are uncomfortable with the
firms situation of fewer tangible assets to meet the long term obligations.

Total liabilities to net tangible assets

Net tangible Assets

Total Liabilities
total liabilities to net tangible

2005
2006
2007
2008
2009
7,353,948 9,352,035 15,606,784 20,930,748 26,765,534
6,736,064 6,610,719 22,674,734 36,111,133 66,821,200
0.9160

0.7069

1.4529

1.7253

2.4965

44

This ratio yields a still more conservative assessment of debt-paying ability when the carrying
amounts of tangible assets are understated. The ratio is lower means the firm have less tangible
assets to meets total liabilities in the case of liquidation which is also a bad signal for the
creditors.

Time interest earned:

2005

2006

2007

2008

2009

12

11

Time Interest earned

It measure how many times a company can cover its interest charges on pretax basis. The ratio is
high in 2005, 2006 but it fell to down to 5 times in 2009. In previous years the earnings are
significantly greater than annual interest obligations. In lower times to interest earned into means
fewer earnings are available to meet interest payments. It is an indicator to tell if a company is
running into financial trouble. Failing to meet interest obligations could force a company into
bankruptcy.

Z- Score

Z Score

2005
7.66

2006
11.79

2007
3.49

2008
1.52

2009
1.30

Z- Score measure the long term solvency of the company. If

Z-Score < 1.2

high chances of bankruptcy

Distress Zones

Z-Score > 2.9

low chances of bankruptcy

Safe zones

1.2<Z-score<2.9

Ambiguity

Grey zone

Z-score measures the probability of failure of firm in future. The overall situation of company is
favorable in first three years and lies under the safe zone and in last two years the company has
little weak financial situation, ambiguity and lies under grey zone. The reasons of decrease z45

score is the decrease in the ratio of market value of capital to book value of debt in last two year
it is .43 and .55 respectively and in previous year it is 5.22,9.56 and 2 respectively.

Long term solvency decision:

After the deep analysis of capital structure and debt ratio of ENGRO, I decided that ENGRO
should take the long term loan but only for mega project and for exiting project expansion.
ENGRO started urea expansion project on the basis of the long term loan. And they expect high
production on completion of it. According to debt to equity ratio the firm should not take long
term loan because firm has 51.6% debt in total capital of the firm. The portion of debt increase
continually, in first 2 years the z-score is very high which has positive impact on image of
company but in last three years especially in last year the z-score is 1.30 and company lie down
under grey zone which could be dangerous in future, so suggestion of long term debt might be
another punch on face firm in his financial bad condition.

46

PROFITABILITY
Return On Invested Capital

Operating
Income
Tax
rate
Income after tax
Total Capital
ROIC

2005
2006
2,354,634 2,468,353
35%

35%

2007
2,939,275

2008
3,959,192

2009
4,562,058

35%

35%

35%

1,530,512 1,604,429 1,910,529 2,573,475 2,965,338

7,375,566 9,370,097 15,740,651 21,053,606 26,888,238
20.75%
17.12%
12.14%
12.22%
11.03%

Return on invested capital used to measure efficiency at allocating the capital under its control to
profitable investments. It gives sense of how well a company is using its money to generate
returns. If the ROIC is 10% or less than of it, means company invested in neutral project that
generate less return. The ROIC of ENGRO is more than 10% it means the company invested in
profitable projects that generating excess return on investment.

Return on Equity:

Percentages

Return on Shareholder Equity

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Return on Shareholder Equity

2005

2006

2007

2008

2009

79%

52%

32%

26%

17%

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ROE indicates what return a company is generating on the equity, the rate that shareholders are
earning on shares. It tells investors how effectively their capital is being reinvested. The ROE of
ENGRO is very high it means company pays its shareholders off handsomely; the reason of
periodical decrease in ROE is the increase in the total shareholder capital. In shareholder capital
retain earning continuous increases over period of time. High and growing ROE always attract
the investors and shareholders. When I compare ROE of ENGRO with industrial ROE,
companys ROE is greater than the industry.

Du-Pont Analysis
Title of Ratio
Financial leverage

2005
1.9

2006
1.7

Total Asset Turnover

1.3

Net Profit Margin

Du-Pont Analysis ROE

2007

2008

2009

2.4

2.7

3.5

1.1

0.6

0.4

0.3

13%

14%

13%

17%

15%

31.92%

26.34%

18.67%

18.81%

16.97%

When we compare simple ROE with the Du-Pont analysis ROE, it is lower than of simple ROE.
In 2006, the ROE decrease as compare to previous year but it is good sign that the net profit
margin ratio increases in this year and decrease in financial leverage. ROE decreases over all
periods.

Financial leveraged increases over last three years, it means firm taking debt more
aggressively and the portion of debt in equity increases over a period of time. The
planning and controlling area of ENGRO is little weak and not efficiently manage the
capital structure of firm.

Assets turnover decrease over period of time. It means ENGROs management not
efficiently utilized the assets to generate the sales; they generate less than on sale against
each unit of asset.

Net profit margin has little fluctuation and decrease in last year. It is because the sales
increase over a period of time. It has less portion of profit in sales.

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Return on Assets

Percentages

Return on Total Assets - Company

18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%

2005

Return on Total Assets 15.41%

Company

2006

2007

2008

2009

16.93%

11.60%

8.91%

5.25%

The return on assets will be lower than the return on capital. The ROA gives investor an idea of
effectively the company is converting the money it has to invest into net income. In 2006
ENGRO was earning more money on less investment. But in last two year the company has 9%
and 5% ROA respectively; the company earns less money on more assets invested.

For

acceptance of any new project is necessary that ROA rate should be greater than borrowing rate.
ENGRO need to invest more money to continue generating earning.

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Return on long term capitalization:

Return on long term capitalization

25.00%

percentages

20.00%
15.00%
10.00%
5.00%
0.00%
Return on long term
cpitalization

2005

2006

2007

2008

2009

20.50%

20.65%

9.52%

8.32%

4.54%

Return on long term capitalization measure the firms return on equity and long term debt
respectively. This ratio shows the decrease trend over the period. It means firm generates less
income by utilizing equity and long term capitalization. The other reason of decrease in ratio is
the dramatically increase in long term debt over last three year.

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Disaggregation of return of assets:

Disaggregation
1.4
Percentages

1.2
1.0
0.8
0.6
0.4
0.2
0.0

2005

2006

2007

2008

2009

Total Asset Turnover

1.3

1.1

0.6

0.4

0.3

Net Profit Margin

13%

14%

13%

17%

15%

16.43%

15.94%

8.21%

7.45%

4.23%

Disaggregation of ROA

Disaggregation ROA is lower than simple ROA. The above chart shows the decrease trend in
assets turnover over the period. It means the ENGROs management generates fewer sales by
utilizing its assets. The utilization of assets is not efficient in the firm. There is little fluctuation
in net profit margin. The firm has little control on expense relative to sales. Sales increase over
the period of time in ENGRO and sales have less portion of profit in it. ENGROs can improve
the ROA by increasing profit margin ratio or asset turnover ratio or both.

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Sustainable rate

Sustainable Growth rate

Percentages

90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Retention ratio
ROE

2005

2006

2007

2008

2009

35.56%

30.53%

64.58%

69.32%

53.73%

79%

52%

32%

26%

17%

15.74%

20.37%

18.15%

9.33%

Sustainable growth rate 27.99%

How much a firm grows without utilizing external borrowing money is a sustainable growth rate.
When firm achieves this growth rate it must borrow from other resources for further growth. It is
the lenders major concern while lending money to company. Sustainable growth rate is very high
in 2005, and in decrease in 2006, 2008 and 2009. It is because the ROE is higher in 2005 and
decrease in respective years. ENGRO has more in retained earnings and pays less as dividend.
ENGRO should make invest instead of save money in retained earnings.

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VALUATION:
Estimated required rate of Return:
K^= (D1/P) + g
Sustainable growth rate

gs

9.33%

Current Price of stock in stock exchange

194.3

Dividend in period one

D1

6.728694

Estimated Required Return

K^

12.80%

Interpretation:
I have calculated the sustainable growth rate by multiplying ROE into RR of year to 2009. P is
the current price of ENGROs stock on 31 may, 2010 in stock exchange. And D1 is the dividend
on period one after growing dividend with growth rate.

COST OF ASSETS PRICING MODEL (CAPM):

K= Rf + (MRP)

Risk free rate

Rf

13.2%

Sensitivity of market

Beta

Market risk premium

MRP

8.00%

current dividend paid

Do

6.1543

Required rate of return on stock

Ks

19.72%

0.814984

Interpretation:
In CAPM the risk free rate, the rate on 3 month treasury bills that we convert it into annually
basis, the rate compensates the investors for placing money in government over a period of time.
The other half of the formula represents risk and the amount of compensation the investor needs

53

for taking on additional risk of beta (beta is the market sensitivity) with the market risk premium
on taking of risk.

Regression line
40.00%
30.00%
20.00%

KS

10.00%

-60.00%

-40.00%

0.00%
-20.00%
0.00%
-10.00%

Km
20.00%

40.00%

Linear (Km)

-20.00%
-30.00%
KM

-40.00%

Linear regression line analyze the relationship of X and Y variables. In this case we take the
market return KM of indices on the X-axis as independent variable and return of stock KS on Yaxis as dependent variable. The regression line fit between the data, it means the market return
and stock return have strong correlation during the period of time.

Security Market line:

Beta

K
0

13.2%

0.814983656

19.72%

1.314983656

23.72%

1.814983656

27.72%

2.314983656

31.72%

2.814983656

35.72%

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Security market line graph shows the relationship of systematic risk or beta and the required rate
of return. Beta is the market risk on X-axis and Return on Y-axis. SML shows all risky assets.
The blue line shows the required rate of return which is the 19.72%. The area below the intercept
line is the risk free rate which is 13.2%.
K > K^

Stock Overvalued

K< K^

Stock Undervalued

K=K^

Fairly valued

The estimated return that I calculate is 12.08% at the beta of 0.815, which means the stock is
overvalued.

The stock is overvalued because for a given amount of risk (beta), the return is

lower as compare to required rate of return.

55

Estimated price:
P^=D1 / (K-gs)
Sustainable growth rate

gs

9.33%

Required rate of return

19.72%

Dividend of period one

D1

6.728694

Estimated value of stock

P^

64.78498

Price comparison:
Estimated Price of P^
stock
price in stock exchange P
Price to Earnings (P/E)

64.78498
194.3
10.8

11.3

16.3

4.8

13.8

When we compare estimated price with the current stock price, the current stock price is greater
than the estimated price so stock is overvalued, ENGRO should sell the stock. The price to
earnings ratio of EGNRO in 2009 is 13.8 times due to the high earning investor more buy the
stock of company and stock is overvalued, but the stock should be traded at Rs. 64.78. So, we
can say that the price to earnings ratio is the one of reason of being stock overvalued.

P > P^

Stock Overvalued

Sell the stock

P< P^

Stock Undervalued

Buy the stock

P=P^

fairly valued

nor buy and sell

The earnings ratio of company is much higher than its competitor and investors willing to pay
more for ENGROs stock because the company has superior growth potential.

Price valuation decision:

The value of stock is overvalued and the price of the stock should be fall in future.
56

Conclusion:
The ENGRO LMITED PAKISTAN is manufacturing company and major operation of ENGRO
is fertilizer but it also has unrelated diversification in energy sector, food, chemicals and joint
venture with some firms. It has unconsolidated firms in which they invest money and not
mention these firms in balance sheet. ENGRO is financially strong companies its market worth is
high and behind the FFC, which is its major competitor. It has good market share as compare to
the competitors. Companys management manipulate the current assets in 2009, and they
acquired inventory just before the end of financial year to increase current assets, working capital
of firm is negative during the year but they have not mention it in statement. Debt ratio
continually increases over a period of year which is not good sign of firm, it might at other hand
helpful for firm because they start urea expansion project with the help of it.

57

Reference:
http://www.kse.com.pk/
http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=C58640650
http://www.engro.com/
http://www.engro.com/investors/financial-reporting/engro-corporation-limited/
http://engro.com/wp-content/themes/engro-v1.0/pdf/pastanualreports/ar_engro2009.pdf
http://www.marketwatch.com/
http://www.brecorder.com/market-data/karachistocks/stock/568/?currExchange=K&currPageType=W&currSector=29&currDate=2011-0606&scrType=1366%7C768

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