Intrafirm Trend Analysis PSO

PAKISTAN STATE OIL

Intrafirm Analysis IBF

byRazia PukhrajSamiya Illias

2009A

Submitted to: Mr Laiq-ur-RehmanCourse: Introduction to Business Finance Pakistan Institute of Management

ContentsIntroduction..........................................................................................................................3Financial Ratios...................................................................................................................4Intrafirm Analysis................................................................................................................5

Profitability Ratios...........................................................................................................5Gross Profit Ratio........................................................................................................5Net Profit Ratio............................................................................................................5EBITDA Margin..........................................................................................................6Return on Shareholders’ Equity...................................................................................6Return on Total Assets.................................................................................................7Return on Capital Employed.......................................................................................7Profitability Ratios Analysis........................................................................................8

Asset Utilisation Ratios...................................................................................................9Inventory Turnover Ratio............................................................................................9Debtor Turnover Ratio.................................................................................................9Total Assets Turnover Ratio......................................................................................10Fixed Assets Turnover Ratio.....................................................................................10Asset Utilization Ratios’ Analysis............................................................................11

Investment Ratios..........................................................................................................12Earnings Per Share.....................................................................................................12Market Value Per Share.............................................................................................12Break Up Value.........................................................................................................13Price Earnings (P/E) Ratio.........................................................................................13Dividends Per Share..................................................................................................14Bonus Share...............................................................................................................14Dividend Payout........................................................................................................15Dividend Yield...........................................................................................................15Dividend Cover Ratio................................................................................................16Investment Ratios’ Analysis......................................................................................16

Leverage Ratios.............................................................................................................17Interest Cover Ratio...................................................................................................17Current Ratio.............................................................................................................17Quick Ratio................................................................................................................18Leverage Ratios’ Analysis.........................................................................................18

Financial Ratios and Intrafirm Analysis of Pakistan State Oil 2

Introduction

Pakistan State Oil1 (PSO) is the largest Oil Marketing Company (OMC) in Pakistan commanding over 70% of the market share. The Government of Pakistan (GOP) is a major stake-holder in the company.

Pakistan State Oil Company Limited is a public company incorporated in Pakistan under the repealed Companies Act, 1913 (now Companies Ordinance, 1984) and is listed on Karachi, Lahore and Islamabad stock exchanges. The address of its registered office is PSO House, Khayaban-e-Iqbal, Clifton, Karachi. The principal activities of the Company are procurement, storage and marketing of petroleum and related products. It also blends and markets various kinds of lubricating oils.2

Fluctuations3 in the international oil prices have severely affected the economy of Pakistan. There are, at one hand, accusations of outrageous profits by the OMCs, while on the other hand, the oil industry is mired in circular debt and is struggling for survival. Government directives for uninterrupted supply of fuel to the power-generation companies, irrespective of mounting receivables, have put a major strain on the OMCs and the Oil Refineries, as the GOP is unable to retire its debts to these companies.

Till April 2006, the fuel prices were set by Oil Companies Advisory Committee4 (OCAC) as per the formula provided to them by the government. Now, Oil and Gas Regulation Authority5 (OGRA) sets the fuel prices according to the information provided to them by the oil companies.

Therefore, it would be interesting to study the financial ratios and do a trend analysis using the main indicators to gain a better insight into the actual state of affairs.

PSO’s financial statements prepared for the year ended June 30, 2008 have been used for this research, and the key documents are appended at the end of this report.

1 www.psopk.com2 PSO Financial Overview 2008, Notes to the Financial Statements 1.13 Graph: International Crude Oil Price Trend for the past 5 years4 www.ocac.org.pk5 www.ogra.org.pk


Financial Ratios

2008 2007 EvaluationShort-term solvencyCurrent Ratio 1.24 1.22 ImprovedQuick Ratio 0.57 0.64 LowLong-term solvencyDebt-Equity Ratio 0.76 0.72 SatisfactoryTimes Interest Earned 16.63 7.15 Very GoodFixed Charge Coverage6 Asset UtilizationAverage Collection Period 21.2 12.0 PoorInventory Turnover Ratio 12.7 11.7 GoodFixed Asset Turnover Ratio 74.3 52.0 GoodProfitabilityOperating Profit Margin % 4 2 GoodNet Profit Margin % 2.4 1.14 GoodBook Return on Assets (ROA) 11.6 6.99 GoodBook Return on Equity (ROE) % 11.1 6.3 Good

6 Not relevant to PSO as they do not have Lease and Rental Payments as such


Intrafirm AnalysisThe PSO yearbook contains the following ratios under the title PSO at a Glance. Using the 10-year data provided there, graphs have been plotted and an analysis done to interpret what these ratios tell us about the company.

Profitability Ratios

Gross Profit Ratio

Net Profit Ratio


EBITDA Margin

Return on Shareholders’ Equity


Return on Total Assets

Return on Capital Employed


Profitability Ratios Analysis

A closer look at the trends of the world oil prices7 shows that an OMC’s profit margins fluctuate in a similar manner.

All ratios appear to have risen sharply in 2008. This is attributable to the steep rise in world oil prices. As the profit margins were a percentage of the fuel price, thus gains and losses were a direct function of fluctuations in international price, and thus impacted the profitability.

The basic reason why all the profitability ratios are affected is a huge inventory gain.

7 http://en.wikipedia.org/wiki/File:Brent_Spot_monthly.svg


Asset Utilisation Ratios

Inventory Turnover Ratio

Debtor Turnover Ratio


Total Assets Turnover Ratio

Fixed Assets Turnover Ratio


Asset Utilization Ratios’ Analysis

Compared to last year, inventory turnover was high due to increased sales volumes, and debtor turnover decreased significantly. Total assets turnover trend is more or less the same whereas fixed assets turnover shows a consistent rise. As Asset Utilization ratios are a measure of management’s efficiency, this implies that the management is doing a good job, and company resources are being used to optimize profits.


Investment Ratios

Earnings Per Share

Market Value Per Share


Break Up Value

Price Earnings (P/E) Ratio


Dividends Per Share

Bonus Share


Dividend Payout

Dividend Yield


Dividend Cover Ratio

Investment Ratios’ Analysis

As is evident from the Earnings per Share graph, the company has been highly profitable. The consistent rise in the Break-up Value over the years is an indicator of credible amount of assets and places the company in a very favourable position in potential investors’ eyes. Even though investment ratios have taken a positive turn, the company was not able to declare generous dividends due to the liquidity issues caused by the non-retirement of debts due from the government on account of the power-generation companies. Inspite of the economic crunch which has severely affected cash flows of all players in the industry, PSO has done exceptionally well, as is evident from the Earnings per share and Market value per share for 2008.


Leverage Ratios

Interest Cover Ratio

Current Ratio


Quick Ratio

Leverage Ratios’ Analysis

The relationship of owners’ equity to borrowed funds is an important indicator of financial strength. Interest Cover is far stronger in 2008 (16.4) as compared to 2007(6.86). PSO mainly resorts to short-term financing and has no long term loan as of 2008. This financial year, it resorted to Rs10.9 bn of short-term borrowings. Thus, inspite of high profitability, huge receivables have contributed to the negative cash flows.

There is a mild variation in the current ratio over the years indicating a more or less continuation of the same trend, indicating that the company has been able to maintain the balance between its current assets and liabilities, whereas the quick ratio is in a steady but constant state of decline, which is probably due to the huge inventory, caused by the steep rise in world oil prices.


Intrafirm Trend Analysis PSO

Documents

Transcript of Intrafirm Trend Analysis PSO