Financial Analysis of Selected Textile Companies

“FINANCIAL STATEMENT ANALYSIS OF
SELECTED TEXTILE COMPANIES IN

PAKISTAN”
ACKNOWLEDGMENT
Finally by the grace of Al-mighty Allah I did mange to finish my final project. I
have studied “ The Analysis of Financial Statements of Selected Textile
Companies”. It was a healthy learning experience and I ‘m very thankful to my
project supervisor Dr Kashif-ur-Rehman for his sincere gratitude and technical
guidance through out the project. I am also very thankful to my friends specially
Mohsin Rameez Awan, & Ali Abbas Naqvi who supported me through out the
project and gave me the moral encouragement.
“This thesis is dedicated to my
parents”
TABLE OF CONTENTS
ACKNOWLEDGMENT.................................................................................................................................I
TABLE OF CONTENTS.............................................................................................................................III
TABLE OF FIGURES.................................................................................................................................IV
TABLE OF TABLES.....................................................................................................................................V
EXECUTIVE SUMMARY..........................................................................................................................VI
INTRODUCTION........................................................................................................................................IX
1.1- TEXTILE INDUSTRY IN PAKISTAN........................................................XI
1.2- FINANCIAL STATEMENT AND RATIO ANALYSIS..............................XIII
1.3- RESEARCH QUESTIONS.......................................................................XV
1.4- OBJECTIVES........................................................................................XVII
1.5- SIGNIFICANCE OF THE STUDY.........................................................XVIII
1.6- SCOPE AND LIMITATIONS...................................................................XIX
1.7- DEFINITION OF THE TERMS.................................................................XX
LITERATURE REVIEW.........................................................................................................................XXI
RESEARCH METHODOLOGY AND DESIGN................................................................................XXIX
3.1- METHOD OF THE STUDY...................................................................XXIX
3.2- DATA....................................................................................................XXIX
3.3- SAMPLING PROCEDURE...................................................................XXX
3.4- RESEARCH INSTRUMENT..................................................................XXX
3.5- FINANCIAL TOOLS..............................................................................XXX
3.6-TREATMENT OF THE DATA................................................................XXX
ANALYSIS AND INTERPRETATION OF DATA............................................................................XXXI
4.1 COMMON-SIZE INCOME STATEMENT...............................................XXXI
4.2 COMMON-SIZE BALANCE SHEET.................................................XXXVIII
4.3 INTERPRETATION OF PROFITABILITY RATIOS...............................XLIV
4.4 INTERPRETATION OF LEVERAGE RATIOS..........................................LII
4.5 INTERPRETATION OF LIQUIDITY RATIOS...........................................LVI
4.6 INTERPRETATION OF EFFICIENCY RATIOS.......................................LIX
4.7 INTERPRETATION OF ASSET UTILIZATION RATIOS.......................LXIII
4.8 CASH FLOW ANALYSIS......................................................................LXVI
CONCLUSION AND RECOMMENDATION....................................................................................LXIX
5.1 SHORT-TERM LIQUIDITY.....................................................................LXX
5.2 CASH FLOW ANALYSIS.......................................................................LXX
5.3 RETURN ON INVESTED CAPITAL......................................................LXXI
5.4 ASSET UTILIZATION............................................................................LXXI
5.5 OPERATING PERFORMANCE AND PROFITABILITY.......................LXXII
BIBLIOGRAPHY................................................................................................................................LXXIII
TABLE OF FIGURES
FIGURE 4. 1..........................................................................................................................................XXXII
FIGURE 4. 2.........................................................................................................................................XXXIV
FIGURE 4. 3.......................................................................................................................................XXXVII
FIGURE 4. 4 (A)..................................................................................................................................XXXIX
FIGURE 4. 4 (B)..................................................................................................................................XXXIX
FIGURE 4. 5 (A)........................................................................................................................................XLI
FIGURE 4. 5 (B)........................................................................................................................................XLI
FIGURE 4. 6 (A).....................................................................................................................................XLIII
FIGURE 4.6 (B)......................................................................................................................................XLIV
FIGURE 4. 7.............................................................................................................................................XLV
FIGURE 4. 8..........................................................................................................................................XLVII
FIGURE 4. 9...................................................................................................................................................L
FIGURE 4. 10................................................................................................................................................LI
FIGURE 4. 11..............................................................................................................................................LV
FIGURE 4.12..............................................................................................................................................LIX
TABLE OF TABLES
TABLE 4.01………………………………………………………………………..…………..……..24
TABLE 4.02…………………………………………………………………..…..…………………..26
TABLE 4.03………………………………………………………………………………….………..28
TABLE 4.04………………………………………………………………………………...….……..30
TABLE 4.05…………………………………………………………………………….…………….32
TABLE 4.06……………………………………………………………………………….………….34
TABLE 4.07………………………………………………………………………………….……….36
TABLE 4.08……………………………………………………………………………….………….38
TABLE 4.09………………………………………………………………...………………………..40
TABLE 4. 10…………………………………………………………………………………………42
TABLE 4. 11……………………………………………………………………………………....…43
TABLE 4. 12……………………………………………………………………………………....…44
TABLE 4. 13……..………………………………………………………………………………..…45
TABLE 4. 14…………………………..…………………………………………………………..…46
TABLE 4. 15………………………………………………………………………………….……...47
TABLE 4. 16…………………………………………………………………………………………48
TABLE 4. 17…………………………………………………………………………………………48
TABLE 4. 18…………………………………………………………………………………………49
TABLE 4. 19…………………………………………………………………………………………50
TABLE 4. 20…………………………………………………………………………………………51
TABLE 4. 21…………………………………………………………………………………………52
TABLE 4. 22…………………………………………………………………………………………52
TABLE 4. 23…………………………………………………………………………………………53
TABLE 4. 24…………………………………………………………………………………………54
TABLE 4. 25…………………………………………………………………………………………55
TABLE 4. 26…………………………………………………………………………………………56
TABLE 4. 27…………………………………………………………………………………………57
TABLE 4. 28…………………………………………………………………………………………58
EXECUTIVE SUMMARY
Pakistan's garment and textile are two principal industries contributing more than
60 per cent to total export earnings, accounting for 46 percent of total
manufacturing and employing 38 percent of the manufacturing labor-force.
Exports According to official data, textile manufactures exports increased by
23.31 percent to US$6,417.83 million during the period July-May 2002-03 as
compared to the corresponding period of previous year. Their share in overall
exports stood at 64.88 percent as against 63.70 per cent during July-May 2001-
02, thus further reducing the contribution of other categories to exports. So
looking to the increasing trend researcher is doing financial statement analysis of
selected textile companies in Pakistan. As financial statement analysis provide
deep insight to the financial position of a company, which is favorable for present
and its future of its existence. Financial ratios are widely used to develop insights
into the financial performance of companies’ by both the evaluators’ and
researchers’. The firm involves many interested parties, like the owners,
management, personnel, customers, suppliers, competitors, regulatory agencies,
and academics, each having their views in applying financial statement analysis
in their evaluations.
This study is about the financial statements analysis of the selected companies in
the textile industry in Pakistan. The study is descriptive in nature. The researcher
has utilized the descriptive method in acquiring information for evaluating the
financial performance of the selected textile companies. The research data is
secondary in nature as for this particular research. The data is collected for the
consecutive five years i.e. from 1998 to 2002, in the form of annual reports from
the registrar office, containing; balance sheet, income statement and profit & loss
account. The sample for this particular research is three different companies;
(Colony) Sarhad Textile Mills LTD, D.M. Textile Mills LTD, Al- Qadir Textile Mills
LTD. This research is based on secondary source of data and consists of annual
reports, articles, web sites, and books.
By analyzing financial statements the findings are really interesting that Al-Qadir
Textile Company is performing much better than the industry norms, where it has
faced several problems in 1998 and 1999. Al-Qadir has the highest ROA and
ROE for the year 2000. The results and data show that Al-Qadir is highly
financed through debt and has improved the debt position, but still it is high the
company needs to increase its shareholders equity. D.M have a negative net-
profit margin for 1998 and 1999. D.M shows a good ROA for the year 2001 and
over the years company has reduced its debt burden from 93% to 64%. D.M’s
current ratio is below one, which means on average 0.46 is its current ratio
showing that company has 0.45 paisas in current assets for every Rs.1 in current
liabilities. D.M has continuous negative ratio due to high credit sales. D.M are
enjoying high inventory turnover where (Colony) Sarhad is below the industry
average. (Colony) Sarhad is having negative results for the consecutive five
years; high cost of sales is being the reason for this result. (Colony) Sarhad has
debt of average 72%. (Colony) Sarhad shows variability in its current ratio.
Whereas (Colony) Sarhad has positive ratio of net working capital to total assets,
this is because of more assets. (Colony) Sarhad is in a critical situation where it
should try to increase its sales or reduce its cost of sales.
INTRODUCTION
Financial Statements are useful because they provide information that allows
investors and creditors to make better decisions. However, because of selective
reporting of economic events as well as non-comparable accounting methods
and estimates, financial statements are only an approximation of reality. In
addition, because of the tendency to delay accounting recognition, financial
statements also tend to lag reality.
A primary objective of financial analysis is to determine comparable risk and

return of companies and their securities. Financial statements include the
• Balance Sheet
• Income Statement
• Cash Flow Statement
The financial statements are interrelated and should be used and analyzed
together. Methods of financial statement analysis may be divided into two
general categories, internal analysis and comparative or external analysis.
Internal analysis uses figures from the financial statements of any one date or
period to gain an understanding of the customer. Comparative analysis may be
used to determine trends when two or more successive sets of figures are
reviewed, or may be used to evaluate a given company's financial statement
against industry standards.
These methods may be used separately or in combination. They are part of the
tools that enable experienced credit professionals to reach a credit decision.
Financial statements should be spread and analyzed, with appropriate ratios and
flows calculated as an aid in the customer evaluation. As an important first step
in internal analysis, the financial statement should be examined for validity and
general correctness. After the statement has been accepted as valid and
reasonably accurate, ratios should be calculated and the figures analyzed.
Internal analysis calls for an examination of items within a single financial
statement for the purpose of judging their significance in relation to the capital of
the company, its method of operation and conditions prevailing within the
industry. The major tools for internal analysis are balance sheet ratios and a
working knowledge of the line of business including the method of operation and
seasonal influences.
Ratios are mathematical aids for appraisal and comparison of financial

statements. They are used to supplement currency amount inspection, to
examine inter-item relationships and to compare a specific company's
performance against its industry standard.
The use of ratios reduces the influence of currency size on analysis since these
comparisons are expressed as a percentage, fraction, decimal, or rates of
turnover. Only the combinations that could be made of the items appearing in
both schedules limit the number of ratios that can be developed from the balance
sheet and income statement. The type of operation represented by the account
and the nature of the risk has an important bearing on what ratios are to be
computed and studied. This analysis compares financial information generated
for five periods.
1.1- TEXTILE INDUSTRY IN PAKISTAN
Since its creation in 1947, the Pakistan Textile Industry has grown into the
largest and most significant economic sector in the country. The textile industry
now contributes 65% of the total exports to the national economy, 46% of its total
manufacturing, and 38% of its total employment.
The Textile Industry will continue to play an important role in the economy of
Pakistan as the country is one of the four largest cotton growers in the world and
availability of large quantity (around 10 million bales per annum) of reasonable
quality is the basis of the development and sustenance of the local Textile
Industry. The Pakistan Textile Industry is also very labor intensive with low costs
of manufacturing and raw materials.
Textile products are a basic human requirement next only to food. In spite of the
government’s efforts to diversify export as well as industrial base, the textile
remains the backbone of industrial activity in the country. Its share in the
economy, in terms of GDP, exports, employment, foreign exchange earnings,
investment and contribution to the value added in industry; make it the single
largest determinant of the growth in manufacturing sector with 46 percent share
in overall manufacturing activity. The demand for textiles in the world is around
$18 trillion. Pakistan has emerged as one of the major cotton textile product
supplier in the world market and its share in world yarn trade is about 30 percent
while its share in cotton cloth trade is about 8 percent. However, overall share of
textile exports from Pakistan is around one percent. The share of textile in
Pakistan’s exports earnings is 68 percent at its present worth of exports is
around $ 7 billion. The value addition in the sector account for 9 percent of GDP
and it employ 38 percent of industrial workers. During the last three years,
Pakistan’s textile sector is preparing itself to face the challenges of the post-
quota regime in 2005.
The Government of Pakistan has adopted special steps to boost the country's
cotton industry and market through a series of amendments. A standard
committee has been appointed to look into ways to increase quality cotton
production, to provide better crop knowledge to growers and to upgrade grading,
ginning, and pressing systems to international standards.
Pakistan's cotton production in 2001-02 was 10.6 million bales. Cotton production
in 2002-03, declined to 10 million bales. The industry was not a major player in
the global arena and fiber textile producers from India were large producers. The
Central Board of Revenue (CBR) has extended the compensatory duty drawback
on the export of blended fabrics, garments, and blended yarn from June 30, 2003
to June 30, 2004. Textile industry is now preparing itself to survive the challenges
of new textile market in 2005. The focus is on value addition, quality, and pricing.
A huge investment of US $2 billion has been made on balancing, modernization,
and replacement, which would help the textile sector to position it in order to
survive after 2005. The industry exports one billion dollars worth of bed wear,
knitwear, and readymade garments. In addition, steps are underway to increase
the exports of synthetic textiles.
Pakistan's textile industry will have to face tough competition, both in the
domestic and international markets. China will be the biggest competitor, which
after its accession to the WTO, will corner a very high percentage, which is
estimated to be from 40 per cent to 50 per cent of the global textile market.
Quality, delivery schedules, and price will be the high marks for all textile goods
in the global markets. Increase in productivity will be vital for our textile industry.
Pakistan along with China and India will have advantages, because all these
countries have a plentiful supply of the vital raw material i.e. cotton. (The NEWS,
14th,July 2003)
1.2- FINANCIAL STATEMENT AND RATIO ANALYSIS
Financial ratios are a popular way for users of financial statements to develop
insights into the financial performance of companies. By controlling for the effect
of firm size on the level of performance, ratios enable financial statement users to
examine how a firm has performed relative to its peers and relative to its own
historical performance.
A firm’s ratios can differ from its peers or its own historical performance because
it has selected a different product market strategy, because its management
team has become more effective at implementing its strategy, or because it has
selected a different financial strategy. Sometimes firms can appear to perform
differently because they have selected different accounting methods for reporting
the same underlying economic events. For this reason, a pioneer to effective
financial ratio analysis is the development of a clear understanding of how a
firm’s accounting decisions compare with those of its competitors, or with its own
decisions in prior years.
In assessing the significance of various financial data, managers often engage in

ratio analysis, the process of determining and evaluating financial ratios. A
financial ratio is a relationship that indicates something about a company's
activities, such as the ratio between the company's current assets and current
liabilities or between its accounts receivable and its annual sales. The basic
source for these ratios is the company's financial statements that contain figures
on assets, liabilities, profits, and losses. Ratios are only meaningful when
compared with other information. Since they are often compared with industry
data, ratios help managers understand their company's performance relative to
that of competitors and are often used to trace performance over time.
Ratio analysis can reveal much about a company and its operations. However,
there are several points to keep in mind about ratios. First, a ratio is just one
number divided by another. Financial ratios are only "flags" indicating areas of
strength or weakness. One or even several ratios might be misleading, but when
combined with other knowledge of a company's management and economic
circumstances, ratio analysis can tell much about a corporation. Second, there is
no single correct value for a ratio. The observation that the value of a particular
ratio is too high, too low, or just right depends on the perspective of the analyst
and on the company's competitive strategy. Third, a financial ratio is meaningful
only when it is compared with some standard, such as an industry trend, ratio
trend, a ratio trend for the specific company being analyzed, or a stated
management objective.
Financial ratios can also give mixed signals about a company's financial health,
and can vary significantly among companies, industries, and over time. Other
factors should also be considered such as a company's products, management,
competitors, and vision for the future.
1.3- RESEARCH QUESTIONS
1- What are the profitability ratios of the textile companies with respect to:
a) Return on Assets
b) Return on equity
c) Net profit margin
d) Gross profit margin
e) Operating profit margin
2- What are the leverage ratios of textile companies with respect to:
a) Total debt ratio

b) Debt- equity ratio
c) Long-term debt ratio
d) Times interest earned
3-What are the liquidity ratios of textile companies with respect to:
a) Current ratio
b) Quick ratio
c) Cash ratio
d) Net working capital to assets
4-What are the efficiency ratios of textile companies with respect to:
a) Total asset turnover

b) Fixed asset turnover
c) Inventory turnover
d) Receivable turnover
e) Payable turnover
5-What is the performance of the textile companies in term of:
a) Common-size analysis
6-What are the cash flows generated from different activities
a) Operating activities
b) Investing activities
c) Financing activities
1.4- OBJECTIVES
The following are the objectives of this research:
1. To analyze and interpret the financial reports of selected textile companies.
2. To appraise the financial position using the ratio analysis.
3. To accomplish the common size analysis.
4. Interpret post-retirement obligations and funding implications for future
performance.
5. To determine the level of profit generated.
6. To determine the expense and investments of the company.

1.5- SIGNIFICANCE OF THE STUDY
Financial statement analysis is of interest to shareholders, creditors, and the

firm’s own management. Both present and prospective shareholders are
interested in the firm’s current and future level of risk and return. These two
dimensions directly affect share price. The firm’s creditors are primarily interested
in the short-term liquidity of the company and in its ability to make interest and
principal payments. A secondary concern of creditors is the firm’s profitability;
they want assurance that the business is healthy and will continue to be
successful. Management, like stockholders, must be concerned with all aspects
of the firm’s financial situation. Thus, this study attempts to operate in a manner
that will be favorable to both owners and creditors.
In addition, management uses ratios to monitor the firm’s financial performance
from period to period. It will also help management to make decisions regarding
dividend policies, investments, lending, borrowings etc.
Sofie Vander Meulen in his study in 2003 states that, investors as well as other
stakeholders heavily rely on a company’s financial statements. It is an important
source of information that is readily available to them at a relatively low cost. The
quality of those statements however is highly variable (aggressive reporting or
not, disclosure or not). Therefore, this research would also be obliging for the
company’s investors and stakeholders.
Through this research many of the society members will be benefited and it will
be advantageous for the economy. Like investors, researchers, creditors,
management, employees, lenders, suppliers, customers, auditors, and analysts
will equally be able to take assistance from this research.
1.6- SCOPE AND LIMITATIONS
The sample of this research is basically three textile companies in Pakistan and
five year data has been taken for the analysis. The selected textile companies
are:
1. (Colony) Sarhad Textile Mills LTD.
2. D.M. Textile Mills LTD.
3. Al- Qadir Textile Mills LTD.

LIMITATIONS:
1. There is a limitation related to the analysis of the result, as researcher
doesn’t have modern software available to analyze the findings so the
result is based on manual work.
2. The availability of funds is the one of the limitations while doing this
research as a student it is difficult for the researcher to manage the funds.
3. The time period for the research is very short because it is difficult to
conduct a full time research for a student.
1.7- DEFINITION OF THE TERMS
1. Income Statement: Financial statement that shows the revenues, expenses,
and net income of a firm over a period of time.
2. Balance Sheet: Financial statement that shows the value of the firm’s assets
and liabilities at a particular time.

3. Liquidity: Ability of an asset to be converted to cash Quickly at low cost.
4. Shareholders: Any one with a financial interest in the firm.
5.Cash Flow Statement: Financial statement that shows the firm’s cash receipts
and cash payments over a period of time.
6. Ratio Analysis: Involves the methods of calculating and interpreting financial
ratios to assess the firm’s performance and status.
7. Current assets: The sum of a firm’s cash, account receivable, inventory,
prepaid expenses and marketable securities which can be converted to cash with
in a single operating cycle.
8. Current Liabilities: Measurable debt owned within one year, including
accounts payable, accrued liabilities, taxes due, and notes payable.
LITERATURE REVIEW
Ratios are a valuable analytical tool when used as part of a thorough financial
analysis. They can show the standing of a particular company, within a particular
industry. However, ratios alone can sometimes be misleading. Ratios are just
one piece of the financial jigsaw puzzle that makes up a complete analysis.
(Leslie Rogers, 1997)
Financial ratios are widely used to develop insights into the financial performance
of companies’ by both the evaluators’ and researchers’. The firm involves many
interested parties, like the owners, management, personnel, customers,
suppliers, competitors, regulatory agencies, and academics, each having their
views in applying financial statement analysis in their evaluations. Evaluators’
use financial ratios, for instance, to forecast the future success of companies,
while the researchers' main interest has been to develop models exploiting these
ratios. Many distinct areas of research involving financial ratios can be
differentiated. (Barne, 1986)
Financial ratios can be divided into several, sometimes overlapping categories.

A financial ratio is of the form X/Y, where X and Y are figures derived from the
financial statements or other sources of financial information. One-way of
categorizing the ratio is on the basis where X and Y come from. In traditional
financial ratio analysis both the X and the Y are based on financial statements.
If both or one of them comes from the income statement the ratio can be called
dynamic while if both come from the balance sheet it can be called static. The
concept of financial ratios can be extended by using other than financial
statement information as X or Y in the X/Y ratio. For example, financial
statement items and market-based figures can be combined to constitute the
ratio. (Salmi, Vitanen, and Olli, 1990)
In trend analysis, ratios are compared over time, typically years. Year-to-year
comparisons can highlight trends and point up the need for action. Trend
analysis works best with three to five years of ratios. The second type of ratio
analysis, cross-sectional analysis, compares the ratios of two or more companies
in similar lines of business. One of the most popular forms of cross-sectional
analysis compares a company's ratios to industry averages. These averages are
developed by statistical services and trade associations and are updated
annually. (Ezzamel, Mar-Molinero and Beecher, 1987)
Financial ratios can also give mixed signals about a company's financial health,
and can vary significantly among companies, industries, and over time. Other
factors should also be considered such as a company's products, management,
competitors, and vision for the future. (Fieldsend, Longford and McLeay, 1987)
There are many different ratios and models used today to analyze companies.
The most common is the price earnings (P/E) ratio. It is published daily with the
transactions of the New York Stock Exchange, American Stock Exchange, and
NASDAQ. These quotations show not only the most recent price but also the
highest and lowest price paid for the stock during the previous fifty-two weeks,
the annual dividend, the dividend yield, the price/earnings ratio, the day's trading
volume, high and low prices for the day, the changes from the previous day's
closing price. The price to earnings (P/E) ratio is calculated by dividing the
current market price per share by current earnings per share. It represents a
multiplier applied to current earnings to determine the value of a share of the
stock in the market. The price-earnings ratio is influenced by the earnings and
sales growth of the company, the risk (or volatility in performance), the debt-
equity structure of the company, the dividend policy, the quality of management,
and a number of other factors. A company's P/E ratio should be compared to
those of other companies in the same industry. (Garcia-Ayuso, 1994)
Several accounting and finance textbooks present a subjective classification of

financial ratios based on the practical experience or views of the authors. It is
common that the classifications and the ratios in the different categories differ
between the authors. In very general terms three categories of financial ratios are
more or less common: profitability, long-term solvency (capital structure) and
short-term solvency (liquidity). (Courtis, 1978)
Financial ratios can be divided for convenience into four basic groups or
categories: liquidity ratios, activity ratios, debt ratios, and profitability ratios.
Liquidity, activity, and debt ratios primarily measure risk; profitability ratios
measure return. (Owens and Epstein, 1995)
The following is a listing of some of the ratios to be aware of in analyzing a

company's balance sheet and income statement. These ratios fall into four
categories — liquidity, profitability, asset management (efficiency), and debt
management (leverage). (Perttunen and Martikainen, 1990)
When a firm borrows money, it promises to make a series of interest payments

and then to repay the amount that it has borrowed. If profits rise, the debt holders
continue to receive a fixed interest payment, so that all the gains go to the
shareholders. Of course, the reverse happens if profits fall. In this case
shareholders bear all the pain. If times are sufficiently hard, a firm that has
borrowed heavily may not be able to pay its debts. The firm is then bankrupt and
shareholders lose their entire investment. Because debt increases returns to
shareholders in good times and reduces them in bad times, it is said to create
financial leverage. Leverage ratios measure how much financial leverage the firm
has taken on. (Brealey, Myers, and Marcus, 2001)
If you are extending credit to a customer or making a short-term bank loan, you
are interested in more than the company’s leverage. You want to know whether it
will be able to lay its hands on the cash to repay you. That is why credit analysts
and bankers look at several measures of liquidity. Liquid assets can be converted
into cash quickly and cheaply. (McLeay and Fieldsend, 1987)
Once you have selected and calculated the important ratios, you still need some
way of judging whether they are high or low. A good starting point is to compare
them with the equivalent figures for the same company in earlier years. Also
known as benchmarking or cross-sectional analysis in which the firm’s ratio
values are compared to those of a key competitor or a group of competitors,
primarily to isolate areas of opportunity for improvement. (Gitman, 1997)
Following are the cautions while doing financial analysis. First, a single ratio does
not generally provide sufficient information from which to judge the overall
performance and status of the firm. Only when a group of ratios is used can
reasonable judgments be made. If an analysis is concerned only with certain
specific aspects of a firm’s financial position, one or two ratios may be sufficient.
Second, It is preferable to use audited financial statements for ratio analysis. If
the statements have not been audited, there may be no reason to believe that
the data contained in them reflect the firm’s true financial condition. Third, the
financial data being compared should have been developed in the same way.
The use of differing accounting treatments, especially relative to inventory and
depreciation can distort the results. (Whitis and Keith, 1993)
Time-series analysis is applied when a financial analysts evaluates performance

over time. Comparison of current to past performance, using ratio analysis,
allows the firm to determine whether it is progressing as planned. Using multiyear
comparisons can see developing trends, and knowledge of these trends should
assist the firm in planning future operations. As in cross-sectional analysis, any
significant year-to-year changes can be evaluated to access whether they are
symptomatic of a major problem. Time-series analysis is often helpful in checking
the reasonableness of a firm’s projected financial statements. A comparison of
current and past ratios to those resulting from an analysis of projected
statements may reveal discrepancies. (Gitman, 1997)
It is important to analyze trends in ratios as well as their absolute levels, for

trends give clues as to whether a firm’s financial condition is likely to improve or
to deteriorate. Common size analysis and percent change analysis are two other
techniques that can be used to identify trends in financial statements. Common
size analysis is also useful in comparative analysis. In a common size analysis,
all income statement items are divided by sales, and total assets divide all
balance sheet items. Thus, a common size income statement shows each item
as a percentage of sales, and a common a common size balance sheet shows
each item as a percentage of total assets. (Brigham and Ehrhardt, 2001)
Financial statement analysis applies analytical tools and techniques to general-

purpose financial statements and relates data to derive estimates and inferences
useful in business decisions. It is a screening tool in selecting investment or
merger candidates, and is a forecasting tool of future financial conditions and
consequences. It is a diagnostic tool in assessing financing, investing, and
operating activities, and is an evaluation tool for managerial and other business
decisions. Financial statement analysis reduces our reliance on hunches,
guesses, and intuition, and in turn it diminishes our uncertainty in decision-
making. It does not lessen the need for expert judgment but rather establishes an
effective and systematic basis for making business decisions. (Bernstein and
Wild, 1990)
The accounting equation is the basis of the financial reporting system:
Assets = Liabilities + shareholder’s equity
The left-hand side of this equation relates to the economic resources controlled
by a company, or assets. These resources are valuable in representing potential
sources of future revenues through operating activities. To engage in operating
activities, a company obtains funding to invest in assets. The right-hand side of
this equation identifies funding sources. Liabilities are funding from creditors and
represent obligations of a company or, alternatively, claims of creditors on
assets. Shareholder’s equity is a total of (1) funding invested or contributed by
shareholders (contributed capital) and (2) accumulated earnings since inception
in excess of distributions to shareholders (retained earnings). From the
shareholders point of view, these amounts represent their claim on company
assets.
A balance sheet summarizes the financial position of a company at a given point

in time. Most companies are required under accepted accounting practices to
present a classified balance sheet. In which assets and liabilities are separated
into current and non-current accounts. Currents assets are expected to be
converted to cash and used in operations within one year or the operating cycle,
which ever is longer. Current liabilities are obligations that the company must
settle in the same time period. The difference between current assets and current
liabilities is working capital. (Gitman, 1997)
Income statement measures a company’s financial performance between

balance sheet dates and hence, reflects a period of time. It lists revenues,
expenses, gains, and losses of a company over a time period. Net income,
shows the increase (or decrease) in net worth of a company before considering
distributions to and contributions from shareholders. (Brigham and Ehrhardt,
2001)
Cross-sectional analysis involves the comparison of different firms’ financial

ratios at the sane point in time. The typical business is interested in how well it
has performed in relation to other firms in the industry. Frequently, a firm will
compare its ratio values to those of a key competitor or group of competitors that
it wishes to follow. (Judy Ward, 1995)
Financial statement users are broadly classified into two groups. Internal users,
primarily the managers of a company, are involved in making operating and
strategic decisions for the business. As employees, they typically have complete
access to a company’s information system. Internally generated financial reports
are, therefore, specifically tailored to the unique information needs of an internal
decision maker, such as CEO, CFO, or internal auditor. External users are
individuals not directly involved in the company’s operations. These users must
rely on information provided by management as part of the financial reporting
process.
There are many classes of external users of financial statements. Creditors are
bankers, bondholders, and other individuals who lend money to business
enterprises. Creditors look to financial statements for evidence concerning the
ability of the borrower to pay periodic interests payments and repay the principal
amount when the loan matures.
Equity investors include existing and potential shareholders of a company.

Exiting shareholders need financial information in deciding whether to continue
holding the stock or sell it. Potential shareholders need financial information to
help in choosing among competing alternative investments. Equity investors are
generally interested in assessing the future profitability or riskiness of a company.
Merger and acquisition analysts are interested in determining the economic
value and assessing the financial and operating compatibility of potential merger
candidates.
Auditors use financial analysis techniques in determining areas warranting

special attention during their examination of a client’s financial statements. A
company’s board of directors, in their role as appointees of shareholders,
monitors management’s actions. Regulatory agencies utilize financial
statements in the exercise of their supervisory functions, including the Securities
and Exchange Commission, which watchfully oversees published financial
statements for compliance with federal rites law. Other users include employees,
intermediaries, suppliers, and customers. (Bernstein and Wild, 1990)
RESEARCH METHODOLOGY AND DESIGN
This chapter presents the basic methodology and requirements in research. It

includes the method of research, source of data, treatment of data, and tools,
which were used in the study.
3.1- METHOD OF THE STUDY
This study is about the financial statements analysis of the selected companies in
the textile industry in Pakistan. The study is descriptive in nature. The researcher
has utilized the descriptive method in acquiring information for evaluating the
financial performance of the selected companies.
3.2- DATA
The research data is secondary in nature as for this particular research. The data
is collected for the consecutive five years i.e. from 1998 to 2002, in the form of
annual reports from the registrar office, containing:
• Balance sheet
• Income statement
• Profit & Loss account
3.3- SAMPLING PROCEDURE
The research, which has been done on the financial analysis of the selected
textile companies, the sample procedure for this particular research is three
different companies:
• (Colony) Sarhad Textile Mills LTD.

• D.M. Textile Mills LTD.
• Al- Qadir Textile Mills LTD.
3.4- RESEARCH INSTRUMENT
This research is based on secondary source of data and consists of annual

reports, articles, web sites, and books.
3.5- FINANCIAL TOOLS
To know the desired results and to get the desired information the researcher
has applied many financial tools like trend- analysis, cross-sectional analysis,
common-size analysis, ratio analysis etc.
3.6-TREATMENT OF THE DATA
The data and information that was gathered was interpreted and analyzed by
using different financial tools.
ANALYSIS AND INTERPRETATION OF DATA
4.1 COMMON-SIZE INCOME STATEMENT
In common-size income statement, each item is expressed as a percentage of

sales, thus enabling the relationship between sales and specific revenues and
expenses to be easily evaluated. Three frequently cited ratios of profitability that
can be read directly from the common-size income statement are gross-profit
margin, operating-profit margin, and the net-profit margin.
Al- Qadir Textile Mills Limited

Common-size Income Statement
For Year 1998 – 2002
TABLE 4. 1
2002 2001 2000 1999 1998
Net Sales 100% 100% 100% 100% 100%

Cost of Sales 92.93 86.70 78.89 87.14 88.89
Gross Profit 7.07 13.30 21.10 12.86 11.12
Operating Expense 3.22 2.63 4.71 4.50 4.49
Operating Profit 3.85 10.75 16.40 8.36 6.62
Other Income 0.19 0.11 0.02 0.11 0.10
4.04 10.86 16.42 8.46 6.72
Financial Charges (3.38) (4.79) (6.89) (9.30) (8.23)
Worker’s Participation Fund (0.01) (0.30) (0.48) ___-__ ___-__
Profit/Loss Before Taxation 2.82 5.77 9.06 (0.84) (1.51)
Taxation:
Current- year 0.79 0.50 - 0.63 0.23
Prior-year 0.08 0.01 1.07 ___-__ 0.74
Profit After Tax 1.95 4.21 7.99 (1.46) (0.97)
Starting with the cost of sales the company’s average cost of sales for five years
are 86.91% for five years, moreover which has changed each year as it depends
on many other factors like raw-material consumed, salaries and wages, electricity
used etc. Gross-profit has gradually decreased for the first four years but for the
last year it is maximum with respect to previous years. Similar is the case with
operating expense; the company has reduced its operating expense, in 2001
these expenses are minimum the attractive thing to note here is company’s sales
are highest for this year and that is Rs. 707,050,099.
Company has also concentrated its financial obligations by the end of 2002. For
the year 1998 and 1999 profit before taxation is negative additionally that makes
the company to bear loss and for three years reduction can be seen in the profit
both before and after taxation.
For Year 1998 – 2002
FIGURE 4. 1
AL-QADIR TEXTILE MILL LTD.
120
Net Sales
100
PERCENTAGE
80 Cost of Sales
60 Gross Profit
40 Operating Expense
20
Operating Profit
0
1998 1999 2000 2001 2002
YEARS
Figure 4.1 shows the common-size analysis of Al-Qadir textile mill, in which sales
are shown as 100 percent and other item as a percentage of sales. When cost of
goods sold is subtracted from the sales we get gross-profit. The company’s cost
of sales is lowest for the year 2000, which is the company’s best performing year;
and year 2002 as highest cost of sales leaving lowest operating profit.
D.M Textile Mills Limited

For Year 1998 – 2002
TABLE 4. 2
2002 2001 2000 1999 1998
Net Sales 100% 100% 100% 100% 100%
Cost of Sales 86.60 85.70 86.40 92.20 93.13
Gross Profit 13.4 14.3 13.6 7.8 6.87
Operating Profit 9.8 10.72 10.34 4.40 2.17
Other Income 0.2 0.36 0.10 0.12 0.16
10.00 11.08 10.44 4.52 2.33
Financial Charges 6.05 5.87 7.89 8.36 12.13
Loss on sale of fixed assets 0.01 - - - -
Worker’s Participation Fund 0.19 0.26 0.13 ___-__ ___-___
Profit/Loss Before Taxation 3.75 4.95 2.46 (3.84) (9.79)
Taxation:
Current- year 0.50 0.50 0.50 0.50 0.50
Prior-year 0.05 0.03 0.42 0.001 -
Deferred ___-__ ___-__ ___-__ 1.63 __-___
Profit/ Loss After Taxation 3.21 4.42 1.50 (2.71) (10.29)
As it can be seen from the profit & loss account of D.M textile in the appendix
section that its sales has always increased but the company has specialized to
reduce its cost of sales, it shows like they are properly utilizing the economies of
scale, by lowering the cost of production, which is also proved by the gross profit
from 6.87% in 1998 it increased to 14.3% in 2001 and 13.4% in 2002. We can
see that there is a reduction in operating expense of a company, which further
provides high operating profit. Financial charges are reduced but due to short-
term borrowing it has increased for the last year 2002. Company has incurred
loss for two years that is for 1998 and 1999 and for other years is also not
making profit after tax of more than 4.42% in 2001.

For Year 1998 – 2002
FIGURE 4. 2
D.M TEXTILE MILL LTD.
120
100
Net Sales
80
PERCENTAGE
Cost of Sales
60
Gross Profit
40
Operating
Expense
20
Operating Profit
0
1998 1999 2000 2001 2002
YEARS
Figure 4.2 shows D.M textile costs of sales that are high for the first two years
and i.e. above 90 % whereas for other three years 2000 to 2002 it is almost
86%. The company’s highest operating profits are for the year 2001.
(Colony) Sarhad Textile Mills Limited

For Year 1998 – 2002
TABLE 4. 3
2002 2001 2000 1999 1998
Net Sales 100% 100% 100% 100% 100%
Cost of Sales 102.71 100.53 112.93 115.75 105.75
Gross Profit/ Loss (2.71) (0.53) (12.93) (15.75) (5.75)
Operating Profit/ Loss (8.25) (6.12) (23.57) (27.18) (10.14)
Other Income 2.88 0.49 14.22 0.99 0.16
(5.37) (5.63) (9.35) (26.19) (9.98)
Financial Charges 3.60 2.69 11.19 11.22 3.13
Loss on sale of fixed assets - - - 6.52 -
Other charges 2.65 3.79 17.76 20.81 2.74
Profit/Loss Before Taxation (11.62) (12.11) (37.70) (64.74) (15.85)
Taxation:
Current- year 0.50 0.50 0.50 0.50 0.50
Profit After Tax (12.12) (12.61) (38.20) (65.24) (16.35)
Company’s common-size income statement depicts its poor performance. The

sales of the company are not even the 50% of the sales of other companies
included in the research. Moreover its cost of sales is higher than its sales, which
on the very first step takes the company into loss. As gross profit of the company
shows on average its cost of sales are 7.5% more than its sales. The company is
also incurring high operating expenses that further more adds to the loss incurred
by the company. For the year 1999 it’s loss after taxation is 65.24% of the sales.
For Year 1998 – 2002
FIGURE 4. 3
(COLONY) SARHAD TEXTILE MILL

LTD.
140
120
100 Net Sales
80
PERCENTAGE
Cost of Sales
60
40 Gross Profit/ Loss
20
Operating Expense
0
-20 1998 1999 2000 2001 2002 Operating Profit/
-40 Loss
YEARS
The unusual company performance can be observed by the figure 4.3. Costs of
sales are even higher than its sales. The company is bearing loss for five years.
Supreme gross-loss is for the year 1999 and an operating loss of 27.18%.
4.2 COMMON-SIZE BALANCE SHEET
Common-size analysis of financial statements is expressing each item as a

percentage of its major item. As in common-size balance sheet each component
is expressed as a percentage of current assets and current liabilities. Common-
size analysis is especially useful in comparing the performance for a particular
year with that for current year. Following are the results of the analysis of the
companies’ common-size balance sheet.

Common-size Balance Sheet
For Year 1998 – 2002
TABLE 4. 4
2002 2001 2000 1999 1998
Current Assets:
Inventory 2.86% 3.14% 4.78% 6.08% 5.67%
Stock in trade 47.67 50.16 58.64 65.28 53.54
Trade Debts 12.05 7.97 1.59 5.47 9.69
Advances, Deposits, prepayments 10.43 4.64 9.38 19.89 24.58
and other receivables
Cash & Bank Balances 26.90 34.09 25.60 3.28 6.52
Total current assets 100% 100% 100% 100% 100%
Current Liabilities:
Current portion of Long-term 14.42 15.16 25.85 12.27 29.58
Liabilities
Short-term borrowings - - - 57.09 34.30
Creditors, accrued & other liabilities 82.95 79.46 65.68 28.24 35.15
Provision for Tax 2.23 1.76 0.48 2.40 1.11
Proposed Dividends - 1.96 7.99 - -
Unclaimed Dividend 0.40 1.66 __-__ __-__ __-__
Total current liabilities 100% 100% 100% 100% 100%
Al-Qadir textiles current assets have increased over the years as can be seen
from the balance sheet in the appendix. The company has reduced its inventory
from 5.67% in 1998 to 2.86% in 2002, which is good in a sense as inventory is
the most illiquid form of current assets. Stock in trade is almost 50% of the
current assets for all five years. Trade debts are considerably low as compared
with the industry, but have gradually increased in the year 2002. Advances,
deposits, prepayments, and other receivables show a variation in the data. Last
cash and bank balances have increased for the last three years.
Current liabilities were low in the year 2001 and 2000 of Rs.95, 039,484 and
Rs.94, 565,386 respectively and for other years it has been above Rs. 10 million.
Short-term borrowings are only for two years i.e. 1998 and 1999. Creditors,
accrued, and other liabilities constitute the major portion of current liabilities. The
same data is depicted in the figure 4.4 (a) and figure 4.4 (b).

For Year 1998 – 2002
FIGURE 4. 4 (a)
CURRENT ASSETS
Cash & Bank Balances
100%
80% Advances, Deposits,

PERCENTAGE
prepayments and other

60% receivables
Trade Debts
40%
20% Stock in trade

0%
1998 1999 2000 2001 2002 Inventory
YEARS
FIGURE 4. 4 (b)
CURRENT LIABILITIES
Unclaimed Dividend
100% Proposed Dividends
80%
Provision for Tax
60%
40% Creditors, accrued & other
liabilities
20%
Short-term borrow ings
0%
1998 1999 2000 2001 2002 Current portion of Long-term
Y EAR S Liabilities

For Year 1998 – 2002
TABLE 4. 5
2002 2001 2000 1999 1998
Current Assets:
Inventory 3.68% 6.21% 4.43% 6.35% 9.29%
Stock in trade 44.51 36.57 57.25 54.93 30.96
Trade Debts 7.45 10.02 6.21 - -
Advances, Deposits, prepayments 39.26 41.13 22.70 36.08 55.42

and other receivables
Current portion of Long-term 22.12 23.41 23.07 39.75 42.66

Liabilities
Short-term borrowings 19.03 21.09 28.39 20.29 14.79
Creditors, accrued & other liabilities 54.02 48.24 46.50 37.24 38.38
Provision for Tax 4.82 7.26 2.04 2.72 4.17
Proposed Dividends - - - - -
Unclaimed Dividend 0.14 __-__ __-__ __-__ __-__

D.M textile has also increased its current assets for five years. Inventory of the
company shows a decreasing trend as can be seen from the table 4.5, starting
from 9.29% in 1998 it has reduced to 3.68% in 2002, although high in year 2001.
Stock in trade represent the major portion of current assets and show
dissimilarity over the years. There are no trade debtors in 1998 and 1999.
Company has reduced the advances, deposits, prepayments, and other
receivables, which is also the major component of current assets. Average
current liabilities are almost equal to Rs. 80 million for five years and there is less
fluctuation in it.

For Year 1998 – 2002
FIGURE 4. 5 (a)
CURRENT ASSETS Cash & Bank Balances
100% Advances, Deposits,

PERCENTAGE

receivables
Trade Debts
50%
Stock in trade
0%
Inventory
1998 1999 2000 2001 2002
YEARS
The above figure shows the current assets for D.M textile. Where major portion
of current assets is in stock in trade and in advances, deposits, prepayments and
other receivables. In addition, inventory is almost less than 10% for five years.
FIGURE 4. 5 (b)
Unclaimed Dividend
CURRENT LIABILITIES
Proposed Dividends
PERCENTAGE
100%
80% Provision for Tax
60%
Creditors, accrued &
40% other liabilities
20% Short-term
0% borrow ings
1998 1999 2000 2001 2002 Current portion of
Long-term Liabilities
YEARS
The current liabilities are more due to creditors, accrued and other liabilities. The
company is also liable to pay current portion of long term liabilities which has
reduced

For Year 1998 – 2002
TABLE 4. 6
2002 2001 2000 1999 1998
Current Assets:
Inventory 49.15% 50.08% 50.01% 48.28% 42.78%
Trade Debts 1.32 0.06 - 2.61 26.83
Advances, Deposits, 49.25 49.45 49.69 49.12 30.07

receivables
Current portion of Long-term - - - - 1.04
Liabilities
Short-term borrowings 55.35 55.07 59.32 44.74 15.94
Creditors, accrued & other 41.99 42.44 38.28 52.86 83.02

liabilities
Provision for Tax 2.66 2.49 2.40 2.40 __-__
Poor performance can be revealed through its common-size balance sheet

analysis, as the company has not made respectable sales to cover its cost of
production so its inventory is almost 50% of its current assets, trade debts are
very low. Advances, deposits, prepayments, and other receivables are 49% of
current assets. Further more the company cash and bank balances remains less
than 1% for all the years.
There are no current portions of long-term liabilities except for the year 1998. The
company have more of the short-term borrowings for all the five years which are
almost of average 46% of current liabilities and 51% of average are creditors,
accrued, and other liabilities.

For Year 1998 – 2002
FIGURE 4. 6 (a)
CURRENT ASSETS Cash & Bank Balances
100%
Advances, Deposits,
80%
PERCENTAGE

receivables
60%
Trade Debts
40%
20%
Inventory
0%
2002 2001 2000 1999 1998
Current Assets:
YEARS
The company’s current assets can only be seen in two colors in the figure 4.6 (a)
reflecting inventory and advances, deposits, prepayments and other receivables.
Moreover some portion of trade debt can be seen in 1998 and 1999.
FIGURE 4.6 (b)
CURRENT LIABILITIES
Provision for Tax
100%
Creditors,
PERCENTAGE
80% accrued & other

60% liabilities
Short-term
40% borrowings
20% Current portion of

Long-term
0% Liabilities
Current
2002 2001 2000 1999 1998 Liabilities:
YEARS
The same is the case for current liabilities there are more of the short-term
borrowings and creditors, accrued and other liabilities.
4.3 INTERPRETATION OF PROFITABILITY RATIOS
Profitability ratios focus on the firm’s earnings. Each relates the returns of the
firm to its sales, equity, assets, or share value. Owners, creditors, and
management pay close attention to boosting profits due to great importance
placed on earnings in the market place.
Profitability Ratios
For Year 1998 – 2002
TABLE 4. 7
2002 2001 2000 1999 1998

Gross Profit Margin 7.07% 13.30% 21.10% 12.86% 11.12%
Operating Profit Margin 3.85 10.75 16.40 8.36 6.62
Net Profit margin 1.95 4.21 7.99 (1.46) (0.97)
Return on Assets 2.24 5.42 10.12 (2.38) (2.18)
Return on equity 16.64 39.38 72.03 (10.18) (16.15)
To know the proportion of revenue that finds its way into profits, we look at profit
margin. Gross-profit, operating-profit and net-profit margin reveals the same
trend. Naturally a firm prefers a high profit margin. A high-price and high-margin
strategy typically results in lower sales, whereas a low-margin but high-volume
strategy can be quite successful.
Al-Qadir’s profit margin is greater than its competitors. Company’s greater

returns are for the year 2000 in which its gross-margin is 21.10%, operating-profit
of 16.40% and the net-profit margin of 7.99%. Additionally, return on assets
(ROA) and return on equity (ROE) are also high fro the year 2000 but decreases
for the next two years.

For Year 1998 – 2002
FIGURE 4. 7
PROFITABILITY RATIOS
80 Gross Profit Margin

70
Operating Profit
60 Margin
Net Profit margin
50
Return on Assets
40
PERCENTAGE
30 Return on equity
20
10
0
1998 1999 2000 2001 2002
-10
-20
-30
YEARS
The above figure shows the profitability ratio of the company over the years. It
can be clearly observed that gross-profit, operating-profit and net-profit margin is
on the same trend. Return on equity is at its peak in year 2000.
Managers often measure the performance of a firm by the ratio of net-income to

total assets. However, because net-income measures profit net of interest
expense, this practice makes the apparent profitability of the firm a function of its
capital structure.

For Year 1998 – 2002
TABLE 4. 8
2002 2001 2000 1999 1998
Gross Profit Margin 13.4% 14.3% 13.6% 7.8% 6.87%
Operating Profit Margin 9.8 10.72 10.34 4.40 2.17
Net Profit margin 3.21 4.42 1.50 (2.71) (10.29)
Return on Assets 3.05 5.35 1.73 (2.92) (10.62)
Return on equity 38.6 50.2 15.74 (24.52) (91.09)
D.M textile gross-profit margin is showing an escalating process and so is

operating-profit margin. However the company’s net-profit margin is negative and
a company bears loss for the first two years. The highest net-profit is received for
the year 2001 of 4.42%.

For Year 1998 – 2002
FIGURE 4. 8
60
40
20 Gross Profit
Margin
PERCENTAGE
0 Operating Profit
1998 1999 2000 2001 2002 Margin
-20
Net Profit margin
-40
Return on Assets
-60
Return on equity
-80
-100
YEARS
The above figure shows the profitability performance of D.M textile mill. The
company did improve its gross-profit over the years. Net-profit margin is going
from negative to positive in the mid of year 1999. Return on equity did also
increased in the same time period giving highest return in the year 2001.
(COLONY) SARHAD Textile Mills Limited
For Year 1998 – 2002
TABLE 4. 9
2002 2001 2000 1999 1998
Gross Profit Margin (2.71%) (0.53%) (12.93%) (15.75%) (5.75%)
Operating Profit (8.25) (6.12) (23.57) (27.18) (10.14)

Margin
Net Profit margin (12.12) (12.61) (38.20) (65.24) (16.35)
Return on Assets (1.63) (2.28) (3.70) (5.58) (4.77)
Return on Equity (25.41) (35.73) (58.24) (89.39) (76.30)
The company starting from negative gross-profit margin continues its impact on
profitability ratios. The company is not at all profitable, thus the return on assets
and return on equity are also negative for this reason.
(COLONY) SARHAD Textile Mills Limited
For Year 1998 – 2002
FIGURE 4. 9
10
0
Gross Profit Margin
1998 1999 2000 2001 2002
-10
-20 Operating Profit

Margin
-30
PERCENTAGE
-40 Net Profit margin
-50
Return on Assets
-60
-70
Return on Equity
-80
-90
-100
YEARS
The above figure shows the profitability performance of (Colony) Sarhad mill. The
company remains below the zero percent line, which can be very evidently
observed from the figure the highest loss incurred is in the year 1999.
INDUSTRY
AVE
(COLONY) RAG
AL-QADIR D.M SARHAD E
Gross Profit Margin
13.09 11.194 -7.534 5.58
Operating Profit Margin
9.196 7.486 -15.052 0.54
Net Profit margin
2.344 -0.774 -28.904 -9.11
Return on Assets
2.644 -0.682 -3.592 -0.54
Return on Equity
20.344 -2.214 -57.014 -12.96
FIVE-YEAR COMPANY’S AVERAGE

(PROFITABILITY RATIOS)
TABLE 4.10
FIGURE 4. 10
FIVE YEAR'S AVERAGE (PROFITABILITY RATIOS)

30
20
10
AL-QADIR
0
-10
RATIOS
D.M
-20
-30
-40 (COLONY)
SARHAD
-50
-60 AVERAGE
-70
COMPANIES
The above given table and figure shows the industry average of profitability ratios
for five years. It clearly depicts Al-Qadir textile above the industry average, D.M
textile on the second position but still enjoying being above the industrial norms,
whereas (Colony) Sarhad is the company below the industry average.
4.4 INTERPRETATION OF LEVERAGE RATIOS
When a firm borrows money, it promises to make a series of interest payments

and than to repay the amount that it has borrowed. If profits rise, the debt holders
continue to receive a fixed interest payment, so that all the gains go to
shareholders, whereas if the reverse happen and profits fall shareholders bear all
the pain.

Leverage Ratios
For Year 1998 – 2002
TABLE 4. 11
2002 2001 2000 1999 1998
Total Debt Ratio 0.86 0.86 0.85 0.87 0.87
Long-term Debt Ratio 2.17 2.37 2.66 3.25 2.77
Debt-equity ratio 3.72 3.67 3.94 4.75 4.70
Times Interest ratio 1.73 1.30 2.32 0.91 1.18

The company’s data shows it is highly financed through debt that is of average
86%. Its total debt ratio is almost stable. The highest long-term debt ratio is 3.25
for year 1999. The company’s TIE-ratio has eventually improved in 2000 and
then reduced to 1.73. Banks prefer to lend to those firms whose earnings are far
in excess of interest payments. The regular interest payment is a hurdle that
companies must keep jumping if they are to avoid default. This ratio measures
how much clear air there is between hurdle and hurdler.

Leverage Ratios
For Year 1998 – 2002
TABLE 4. 12
2002 2001 2000 1999 1998
Total Debt Ratio 0.64 0.89 0.86 0.88 0.93
Times Interest ratio 1.65 1.83 1.31 0.54 0.19
The market value of the company finally determines whether the debt holders get
their money back, so the ratio is calculated of total debt. D.M textile has reduced
its debt burden from 93% to 64%. Long-term Debt includes not just bonds or
other borrowings but also the value of long-term leases. Total long-term capital
also called total capitalization, is the sum of long-term debt and shareholders’
equity. Thus this means in year 2002 there are 0.73 paisas of every rupee of
long-term capital is in the form of long-term debt.
The company’s earnings before interest and taxes are more than 1.00 for three
years that means company is earning far in excess than its interest payments.
The data for five years shows the company has improved its times interest ratio
after facing trouble in 1998 and 1999.
(COLONY) Sarhad Textile Mills Limited

Leverage Ratios
For Year 1998 – 2002
TABLE 4. 13
2002 2001 2000 1999 1998
Total Debt Ratio 0.77 0.75 0.73 0.70 0.67
Times Interest ratio -2.29 -2.27 -2.11 -2.43 -2.80
(Colony) Sarhad is financed on average 72 percent with debt, both long-term and
short-term and 28 percent with equity. The company could be said to have a debt
ratio of 0.83 (the long-term debt ratio) or 0.77 (total debt ratio) for the year 2002.
Since company is incurring losses therefore its times interest ratio is negative the
company is not in a position to pay the interest payments.
(LEVERAGE RATIOS)
TABLE 4. 14
(COLONY) INDUSTRY
AL-QADIR D.M SARHAD AVERAGE
Total Debt Ratio 0.862 0.84 0.724 0.80
Long-term Debt Ratio 2.644 0.858 0.686 1.39
Debt-equity ratio 4.156 8.182 2.962 5.1
Times Interest ratio
1.488 1.104 -2.38 0.070
Here is the compiled data for five years. Total debt ratio is 86.2 percent for Al-
Qadir, 84 percent for D.M, and 72.4 percent for (Colony) Sarhad whereas the
industry average is 80 percent.
FIGURE 4. 11
FIVE YEAR'S AVERAGE( LEVERAGE RATIOS)
10
8
6 AL-QADIR
RATIOS
4
D.M
2
(COLONY) SARHAD
0
AVERAGE
-2
-4
COMPANIES
Figure 4.11 shows the average leverage ratios of the companies with the industry
average. Al-Qadir and D.M textile being above the industry average and (Colony)
Sarhad below the industrial average.
4.5 INTERPRETATION OF LIQUIDITY RATIOS
Creditors extending credit to its customer or making a short-term bank loan, are
interested in more than a company’s leverage. They want to know whether the
customer will be able to lay its hand on the cash to repay. Liquid assets can be
converted into cash quickly and cheaply.

Liquidity Ratios
For Year 1998 – 2002
TABLE 4. 15
2002 2001 2000 1999 1998

Current Ratio 1.38 1.29 0.96 0.89 0.64
Quick Ratio 1.34 1.25 0.71 0.86 0.59

Cash Ratio 0.37 0.44 0.24 0.03 0.04
Net Working Capital To 0.38 0.29 -0.05 -0.11 -0.36

Assets
Al-Qadir’s current ratio has improved each year showing for the last year Rs.1.38
in current assets for every Rs. 1.00 in current liabilities. As some assets are
closer to cash than others, if there is a trouble inventory may not sell at anything
above fire-sale price, thus quick or Acid-test ratio is useful to calculate. The
company’s quick ratio has also improved, as there is no much difference after
extracting inventory from its current assets.
A company’s most liquid assets are its holdings of cash and marketable
securities, however a low cash ratio may not matter if the firm can borrow on
short notice. Al-Qadir’s cash ratio is low as its position is strong in the industry it
can easily handle emergency situations by borrowing money on short notice.

Liquidity Ratios
For Year 1998 – 2002
TABLE 4. 16
2002 2001 2000 1999 1998

Current Ratio 0.57 0.52 0.57 0.37 0.30
Quick Ratio 0.53 0.49 0.51 0.36 0.28
Cash Ratio 0.03 0.03 0.05 0.01 0.01
Net Working Capital To -0.43 -0.48 -0.43 -0.63 -0.69

Assets
D.M textile current ratio on average is 0.46, which means the company is
having Rs. 0.46 in current assets for every Rs. 1.00 in current liabilities.
Company’s current ratio and quick ratio are also not varied, as its inventory is
low in current assets. Net working capital to total assets is negative due to
large short-term borrowings.

Liquidity Ratios
For Year 1998 – 2002
TABLE 4. 17
2002 2001 2000 1999 1998
Current Ratio 2.12 2.33 2.52 3.04 2.59
Quick Ratio 1.07 1.16 1.26 1.57 1.45
Cash Ratio 0.01 0.01 0.01 0.004 0.03
Net Working Capital 1.12 1.33 1.52 2.04 1.36

To Assets
This company’s current ratio illustrate that its currents assets are far more than
its current liabilities. The decrease in current ratio signifies trouble, that
company has drag out its payables by delaying payment of its bill that cause
increase in its current liabilities and decrease in current ratio. Cash ratio is
very poor since company is not having enough money in its current assets.

FOR LIQUIDITY RATIOS
TABLE 4. 18
(COLONY) INDUSTRY
Current Ratio 1.032 0.466 2.52 1.33
Quick Ratio 0.95 0.434 1.302 0.89
Cash Ratio 0.224 0.026 0.0128 0.08
Net Working Capital To

Assets 0.03 -0.532 1.474 0.32
The above table is about the industry average and average of the companies’
liquidity ratios for five years.
FIGURE 4.12
FIVE YEAR'S AVERAGE (LIQUIDITY RATIOS)

3
AL-QADIR
2.5
2
D.M
1.5
RATIOS
1 (COLONY)
0.5 SARHAD
0 AVERAGE
-0.5
-1
COMPANIES
The important aspect to note here is that this graph is about liquidity position of
the companies the line above the industry average shows bad performance of
the company and vice versa.
4.6 INTERPRETATION OF EFFICIENCY RATIOS

Efficiency ratios are to judge how efficiently the firm is using its assets or we can
say the speed with which various accounts are converted into sales or cash.

Efficiency Ratios
For Year 1998 – 2002
TABLE 4. 19
2002 2001 2000 1999 1998
Total asset turnover 1.15 1.29 1.27 0.95 0.87
Fixed asset turnover 1.59 1.66 1.52 1.15 1.05
Inventory turnover 132.68 158.59 139.29 76.60 83.64
Receivable turnover 39.16 123.88 80.41 89.06 57.64
Payable turnover 2.51 2.21 1.81 1.28 1.23
The asset turnover ratio shows how hard the firm’s assets are being put to use.
Al-Qadir’s asset turnover has increased over time. For Al-Qadir textile each
rupee of assets produce Rs. 1.15 of sales, and each rupee of fixed assets
produce Rs. 1.59 of sales in year 2002.
Efficient firms turn over their inventory rapidly and don’t tie up more capital than
they need in raw materials or finished goods. Thus this company is a better
performer in this aspect too.

Efficiency Ratios
For Year 1998 – 2002
TABLE 4. 20
2002 2001 2000 1999 1998
D.M textile asset turnover was highest in the year 2001 where each rupee of
assets produce Rs. 1.21 of sales, and each rupee of fixed assets produce Rs.
1.62 of sales. Its inventory turnover is acceptable than the industry norms.
Whereas receivable turnover are much better than any other company.
Efficiency Ratios
For Year 1998 – 2002
TABLE 4. 21
2002 2001 2000 1999 1998
(Colony) Sarhad Textile Company is much below the average efficiency. The
company’s asset turnovers are below 1.00 for all the five years. It shows that
they are unable to produce even Rs. 1.00 of sales for each rupee of assets. The
company’s inventory turn over is very low due to low sales and very high
inventory level.

FOR EFFICIENCY RATIOS
TABLE 4. 22
(COLONY) INDUSTRY
Total asset turnover
1.106 1.084 0.142 0.77
Fixed asset turnover
1.394 1.308 0.218 0.97
Inventory turnover
118.16 124.458 0.926 81.18
Receivable turnover
78.03 21.672 1.014 33.57
Payable turnover
1.808 1.118 0.208 1.04
The above table 4.22 shows the industry average and companies five-year
average efficiency ratios.
4.7 INTERPRETATION OF ASSET UTILIZATION RATIOS
Asset utilization ratio measures asset intensity in generating revenues to reach a

sufficient profitability level.

Asset Utilization Ratios
For Year 1998 – 2002
TABLE 4. 23
2002 2001 2000 1999 1998

Sales to cash & 15.14 16.86 29.47 162.98 81.81
Equivalents
Sales to Receivables 39.16 123.88 80.41 89.06 57.64
Sales to Inventories 142.78 183.09 157.73 87.91 94.09
Sales Working-Capital 14.91 25.29 -161.96 -42.54 -9.35
Sales to Fixed Assets 1.59 1.66 1.52 1.15 1.05
Sales to Total Assets 1.15 1.29 1.27 0.95 0.87
Sales to Short-term 6.78 9.36 10.98 8.31 9.91

Liabilities
As Al-Qadir’s asset turnover is escalating over previous five years. Up till now
this increase in asset earnings makes major variation in turnover for individual
asset components. Cash and equivalents evidence the most significant variability
during this period, which is also evidenced from common-size balance sheet.
Company’s account receivables shows a slight improvement in year 2001.
Regarding inventory turnover, company expressed desire to decrease
inventories at every stage of its manufacturing process is revealing itself through
an improved turnover ratio. It is important to note that Al-Qadir’s asset and asset
component turnover ratios often compare favorable to industry norms.

For Year 1998 – 2002
TABLE 4. 24
2002 2001 2000 1999 1998

Sales to cash & 118.57 131.34 64.30 333.09 289.65
Equivalents
Sales Working-Capital -7.94 -8.64 -7.94 -5.10 -5.36

Liabilities
D.M’s asset turnover is fluctuating over the years as it has decreased for the last
year 2002. Cash and equivalents also show a fluctuating trend. Account
receivable turnover has decreased for the last year but was better in the previous
years. Inventory turnover ratio has improved continuously for all the years.
For Year 1998 – 2002
TABLE 4. 25
2002 2001 2000 1999 1998
Sales to cash & 136.94 118.44 92.08 180.54 203.29

Equivalents
Sales Working-Capital 0.71 0.89 0.46 0.36 1.18

Liabilities
(Colony) Sarhad ‘s asset turnover has decreased. Inventory turnover is much

lower than the industry norms, as company’s cost of sales are high and moreover
inventory constitutes about 50% of assets. Receivable turnover is also very low
as more of their sales are on credit. The depressing blow of sales can be seen
throughout the analysis.
4.8 CASH FLOW ANALYSIS

Cash Flows
For Year 1998 – 2002
TABLE 4. 26
2002 2001 2000 1999 1998
Rupees Rupees Rupees Rupees Rupees
Cash 21,969,593 52,872,333 74,371,921 2,966,040 14,007,027
Flows from
Operating
Activities
Cash (3,841,698) (1,797,925) (19,922,155) (12,790,708) (7,172,889)

Flows from
Investing
Activities
Cash (17,386,931) (32,273,166) (34,542,709) 7,059,934 (6,876,559)

Flows from
Financing
Activities
Increase 740,964 18,801,242 19,907,057 3,228,545 5,993,279

(Decrease)
in Cash
Al-Qadir’s operating cash flows is high for the year 2000, reason being low cost
of sales, which have resulted in high profit before taxation. This analysis reveals
cash flows are steady source of cash, with a substantial increase in year 2000.
The cash down turn in year 1999 is due primarily to financial charges. Investing
activities were more in 1999 and 2000, due to major out flow of fixed capital
expenditure. Financing out flows are more for the last three years, where
dividends are paid in year 2001 and 2002.

Cash Flows
For Year 1998 – 2002
TABLE 4. 27
2002 2001 2000 1999 1998
Cash 28,768,565 40,351,744 17,315,639 22,815,401 1,836,244
Flows from
Operating
Activities
Cash (19,665,511) (16,354,183) (17,158,917) (2,171,480) (4,924,553)

Flows from
Investing
Activities
Cash (8,637,153) (26,333,169) 3,986,573 (20,746,316) 3,198,789

Flows from
Financing
Activities
Increase 465,901 (2,335,608) 4,143,295 (102,395) 110,480

(Decrease)
in Cash
D.M have been able to maintain high cash flows from operations even after
incurring loss before taxation for the year 1998 and 1999. Cash flow has
decreased for the year 2002 because of more payments made to creditors.
Investment has increased for 2001 and 2002 by acquiring fixed assets. Whereas
financing out flow is more for the year 2001 as company made a repayment of
long-term loan.

Cash Flows
For Year 1998 – 2002
TABLE 4. 28
2002 2001 2000 1999 1998
Cash (6,098,470) 230,093 (19,908,780) (21,881,180) (993,496)
Flows from
Operating
Activities
Cash (5,893) 64,047 10,589 1,893,920 (260,035)

Flows from
Investing
Activities
Cash 5,760,173 127 20,251,705 19,632,506 (535,235)

Flows from
Financing
Activities
Increase (344,190) 294,267 358,515 (354,754) (1,788,766)

(Decrease)
in Cash
(Colony) Sarhad has incurred losses all the way through the years, which has
affected its operating activities. They are not having enough sales even to cover
their production costs. In spite of incurring losses they have an addition to fixed
asset in year 1998 and 2002, that shows an out flow.
CONCLUSION AND RECOMMENDATION
Financial statement analysis focuses on one or more elements of a company’s

financial condition or operating results. Researcher emphasizes five areas of
inquiry, with varying degrees of importance.
• Short-Term Liquidity. Ability to meet short-term obligations.

• Cash Flow Analysis. Future availability and disposition of cash.
• Return on Invested Capital. Ability to provide financial rewards sufficient
to attract and retain financing.
• Asset utilization. Asset intensity in generating revenues to reach a
sufficient profitability level.
• Operating performance and Profitability. Success at minimizing
revenues and minimizing expenses from operating activities over the long
run.
5.1 SHORT-TERM LIQUIDITY
Important measures of short-term liquidity for the last five years have been
analyzed by the use of liquidity ratios. Al-Qadir’s current assets have increased
each year except for the year 2000. From 1998 to 2002 its assets have increased
by approximately 40%. The company’s current liabilities remained high up till
1999 and did reduced for two years then again increases in 2002, as they have
more short-term borrowings for the last year. Al-Qadir’s liquidity position is far
much better then the industry average.
D.M’s current assets also show an increasing trend, but that is slow with respect
to increase in current liabilities. Current liabilities have accelerated for the reason
of more creditors, accrued and other liabilities.
(Colony) Sarhad liquidity position is not favorable they have increased their
current assets especially inventories and they are not making enough sales, so if
they sell those assets they can’t even recover the cost. And amounts of their
liabilities have increased due to excessive short-term borrowings. They are in a
trouble to meet their short-term obligations.
5.2 CASH FLOW ANALYSIS
Al-Qadir’s operating cash flows is high for the year 2000, reason being low cost
of sales, which have resulted in high profit before taxation. This analysis reveals
cash flows are steady source of cash, with a substantial increase in year 2000.
The cash down turn in year 1999 is due primarily to financial charges. Investing
activities were more in 1999 and 2000, due to major out flow of fixed capital
expenditure. Financing out flows are more for the last three years, where
dividends are paid in year 2001 and 2002.
D.M have been able to maintain high cash flows from operations even after
incurring loss before taxation for the year 1998 and 1999. Cash flow has
decreased for the year 2002 because of more payments made to creditors.
Investment has increased for 2001 and 2002 by acquiring fixed assets. Whereas
financing out flow is more for the year 2001 as company made a repayment of
long-term loan.
(Colony) Sarhad has incurred losses all the way through the years, which has
affected its operating activities. They are not having enough sales even to cover
their production costs. In spite of incurring losses they have a addition to fixed
asset in year 1998 and 2002, that shows an out flow.
5.3 RETURN ON INVESTED CAPITAL
Al-Qadir return on assets (ROA) shows a variation due to constant increase in

assets and fluctuating net income. Net income is supreme for the year 2000.
Return on equity (ROE) similarly shows the same trend as ROA.
D.M return on assets (ROA) is also changing according to the net income
received. Its return on assets (ROA) is lowest for the year 1998 as the cost of
sales and operating expenses are high.
(Colony) Sarhad is not having any positive return from its assets for the reason of
continuously incurring losses for the successive five years.
5.4 ASSET UTILIZATION

Al-Qadir’s asset turnover is increasing over last five years. Yet this increase is in
asset turnover makes significant changes in turnover for individual asset
components. Cash and equivalents evidence the most significant variability
during this period, which is also evidenced from common-size balance sheet.
Company’s account receivables shows a slight improvement in year 2001.
Regarding inventory turnover, company expressed desire to decrease
inventories at every stage of its manufacturing process is revealing itself through
an improved turnover ratio. It is important to note that Al-Qadir’s asset and asset
component turnover ratios often compare favorable to industry norms.
D.M’s asset turnover is fluctuating over the years as it has decreased for the last
year 2002. Cash and equivalents also show a fluctuating trend. Account
receivable turnover has decreased for the last year but was better in the previous
years. Inventory turnover ratio has improved continuously for all the years.
(Colony) Sarhad ‘s asset turnover has decreased. Inventory turnover is much

lower than the industry norms, as company’s cost of sales are high and moreover
inventory constitutes about 50% of assets. Receivable turnover is also very low
as more of their sales are on credit.
5.5 OPERATING PERFORMANCE AND PROFITABILITY
Al-Qadir’s gross-profit margin has increased for the first three years and reduces
eventually for the year 2001 and 2002, as cost of sales are highest for the year
2002. Operating-profit margin is following the same trend in spite that over the
years they have reduced their operating expenses. Net-profit margin is negative
for year 1998 and 1999 as they have paid the financial charges and reduced their
debt burden.
D.M’s gross-profit margin is stable for the last three years and was low for 1998
and 1999, as their cost of sales were 93% and 92% respectively. Company’s
operating profit show an increasing trend, excluding the year 2002, their
operating expenses are very much stable for five years. Net-profit margin is
highest for the year 2001 due to less cost of sales.
(Colony) Sarhad starts from the negative gross-profit margin as its cost of sales
are higher than its net sales. Therefore, operating-profit and net-profit margin are
also negative.
BIBLIOGRAPHY
• Trevor D'Souza, July 14th Monday, 2003. “Pakistan textile industry: a
brief review.” The NEWS.
• Sofie Vander Meulen. 2003. “Determinants of financial statements.”
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flow data.” The National Public Accountant.
• Barne, 1986. “The statistical validity of the ratio method in financial analysis:
an empirical examination: a comment", Journal of Business Finance and
Accounting. Pg.13-14, 627-635.
• Salmi, Vitanen, and Olli, 1990, “On the classification of financial ratios. A
factor and transformation analysis of accrual, cash flow, and market-based
ratios.” Acta Wasaensia, no 25.
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properties of financial ratios.” Journal of Business Finance and
Accounting. Pg 14/4, 463-481.
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ratio analysis: indirect tests of ratio proportionality.” Accounting and
Business Research. Pg. 17/66, 133-140.
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further empirical evidence, “ Venice.
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analysismework,” Journal of Business Finance and Accounting. Pg.
5/4, 371-386.
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World. Pg.54-55.
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stock prices: international evidence and implications for the E/P
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408.
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Finance. Pg 485.
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Practice. Pg.30.
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Wall Street Journal.

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Financial Analysis of Selected Textile Companies

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“FINANCIAL STATEMENT ANALYSIS OF

SELECTED TEXTILE COMPANIES IN

A primary objective of financial analysis is to determine comparable risk and

• Cash Flow Statement

Ratios are mathematical aids for appraisal and comparison of financial

1.2- FINANCIAL STATEMENT AND RATIO ANALYSIS

In assessing the significance of various financial data, managers often engage in

a) Total debt ratio

a) Total asset turnover

5-What is the performance of the textile companies in term of:

6-What are the cash flows generated from different activities

The following are the objectives of this research:

1. To analyze and interpret the financial reports of selected textile companies.

2. To appraise the financial position using the ratio analysis.

3. To accomplish the common size analysis.

4. Interpret post-retirement obligations and funding implications for future

5. To determine the level of profit generated.

6. To determine the expense and investments of the company.

Financial statement analysis is of interest to shareholders, creditors, and the

1.6- SCOPE AND LIMITATIONS

1. (Colony) Sarhad Textile Mills LTD.

2. D.M. Textile Mills LTD.

3. Al- Qadir Textile Mills LTD.

1. There is a limitation related to the analysis of the result, as researcher

doesn’t have modern software available to analyze the findings so the

result is based on manual work.

research as a student it is difficult for the researcher to manage the funds.

conduct a full time research for a student.

1.7- DEFINITION OF THE TERMS

1. Income Statement: Financial statement that shows the revenues, expenses,

and net income of a firm over a period of time.

and liabilities at a particular time.

4. Shareholders: Any one with a financial interest in the firm.

and cash payments over a period of time.

6. Ratio Analysis: Involves the methods of calculating and interpreting financial

ratios to assess the firm’s performance and status.

7. Current assets: The sum of a firm’s cash, account receivable, inventory,

in a single operating cycle.

8. Current Liabilities: Measurable debt owned within one year, including

accounts payable, accrued liabilities, taxes due, and notes payable.

Financial ratios can be divided into several, sometimes overlapping categories.

Several accounting and finance textbooks present a subjective classification of

The following is a listing of some of the ratios to be aware of in analyzing a

When a firm borrows money, it promises to make a series of interest payments

Time-series analysis is applied when a financial analysts evaluates performance

It is important to analyze trends in ratios as well as their absolute levels, for

Financial statement analysis applies analytical tools and techniques to general-

The accounting equation is the basis of the financial reporting system:

Assets = Liabilities + shareholder’s equity

A balance sheet summarizes the financial position of a company at a given point

Income statement measures a company’s financial performance between

Cross-sectional analysis involves the comparison of different firms’ financial

Equity investors include existing and potential shareholders of a company.

Auditors use financial analysis techniques in determining areas warranting

This chapter presents the basic methodology and requirements in research. It

3.1- METHOD OF THE STUDY

• (Colony) Sarhad Textile Mills LTD.

3.4- RESEARCH INSTRUMENT

This research is based on secondary source of data and consists of annual

3.5- FINANCIAL TOOLS

3.6-TREATMENT OF THE DATA

4.1 COMMON-SIZE INCOME STATEMENT

In common-size income statement, each item is expressed as a percentage of

Worker’s Participation Fund 0.19 0.26 0.13 _- _-_

Deferred _- _- _- 1.63 -_

Unclaimed Dividend 0.14 - - - -