LETTER OF TRANSMITTAL
I would like to thank all those who assisted us in compiling this report. In this report I
tried to cover as many aspects of ANALYSIS OF FINANCIAL STATEMENTS along
with the jargons that we learned in the course. Due to scarcity of time I was not able to
put in as much efforts as we would have liked to, hence this report by no means is a
comprehensive one. I would like to offer our gratitude to our teacher Mr. Maqbool Ur
Rehman for giving us the opportunity to express myself both through this report and
during lecture hours, the difference in teaching will always be memorable.
TABLE OF CONTENTS
LETTER OF TRANSMITTAL...........................................................................................1
TABLE OF CONTENTS ....................................................................................................2
EXECUTIVE SUMMARY ................................................................................................3
Automobile Industry in Pakistan.........................................................................................4
Sector Overview...............................................................................................................5
DEWAN FAROOQUE MOTOR COMPANY...................................................................8
Introduction:.....................................................................................................................8
Mission Statement:...........................................................................................................9
Corporate Philosophy.....................................................................................................10
Historical Perspective:...................................................................................................10
Present Past and Future of DFML:................................................................................11
DEWAN FARROQ MOTORS..........................................................................................12
FINANCIAL RATIOS ......................................................................................................12
INTERNAL ANALYSIS ..................................................................................................13
Liquidity ratios...............................................................................................................13
Efficiency Ratios............................................................................................................14
Profitability Ratios.........................................................................................................18
Debt and leverage ratios ................................................................................................20
Equity Ratios .................................................................................................................22
External analysis ...............................................................................................................25
Liquidity ratio................................................................................................................25
Efficiency ratios.............................................................................................................26
Profitability Ratios.........................................................................................................27
RETURN ON ASSET AND EQUITY..........................................................................28
Equity ratios ..................................................................................................................30
Market measures ...........................................................................................................31
Creditor Guidelines ...........................................................................................................32
Investors Guidelines ..........................................................................................................33
Conclusions and Recommendations..................................................................................34
APPENDIX........................................................................................................................35
Dewan motors ltd financial statements .........................................................................35
BALANCE SHEET AS AT JUNE 30, 2004.................................................................36
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED JUNE 30, 2004...................................................................37
Balance sheet 2006 &2005............................................................................................38
Income statement 2006 & 2005.....................................................................................39
Balance sheet 2007 & 2006...........................................................................................40
Income statement 2007 & 2006.....................................................................................41
EXECUTIVE SUMMARY
A regular car industry started in the country in 1983, when Suzuki commenced
production eyeing the small and LCV car segment of 800cc-1000cc range, and
introduced Suzuki car which targeted the middle-income group (constituting the
larger segment of the market) by providing an affordable car.
Then there was a long gap until the early 90’s when Indus Motor Company was
established to manufacture Toyota vehicles in Pakistan. Soon after Honda Atlas
came with the Civic and Gandhara Nissan entered the market with Sunny.
In the late 90,s Dewan Farooque Motors set up a plant to manufacture Hyundai
and Kia vehicles in Pakistan. Since then the market has changed all together.
After struggling through nineties, a decade full of uncertainties and frequent
policy the Pakistani Auto Industry has been able to achieve double digit growth
consistently since the last 4 years. The industry operates under franchise and
technical cooperation agreements with Japanese, European and Korean
manufacturers.
Lately Few new market players entered the market such as Gandhara Nissan
again with now the imported Nissan range of vehicles, Dewan Mushtaq Motors
Apart from these the big brands of the auto industry also entered the Pakistani
market such as BMW , Mini & Rolls Royce by Dewan Motors, Porsche, Mercedes
and Audi have also launched their brands in Pakistan catering to the very upper
niche.
Sector Overview
VPL Ltd.
Introduction:
It was five years ago that Dewan Mushtaq Group diversified its business
activities by entering into the automobile industry. Dewan Farooque Motors
Limited signed Technical License Agreements with Hyundai Motor Company and
Kia Motors Corporation in December 1998, as the progressive manufacturer and
distributor of Hyundai and Kia vehicles in Pakistan.
Over the past five years, Dewan Farooque Motors Limited (DFML) has
earned national recognition in producing a diversified range of vehicles for people
from different walks of life. The plant has state-of-the-art production facilities
located at Sujawal, around 145 km from Karachi in southern Pakistan.
Mission Statement:
Our hallmark is honesty, initiative and teamwork of our people, and our
ability to respond effectively to change in all aspects of life including technology,
culture and environment.
Corporate Philosophy
Historical Perspective:
The Dewan family started business in 1916 at Patiyala State in the Punjab
province of India when a small cottage industry was set up by Dewan
Mohammad and his son Dewan Mushtaq Ahmed to manufacture garments.
During 1918 another trading firms was established for importing clothing and
other commodities, which were sold all over India.
The history of Dewan Mushtaq Group goes way back to the year 1916.In
1968; Dewan entered the industrial arena and set up the first industrial unit in
1970 in the name of Dewan Textile Mills Limited. Thereafter, the group diversified
into sugar and Polyester Staple Fibre. Dewan Zia-ur-Rehman Farooqui, the
present group Chairman took the helm in 1992. His strategic direction and vision
has helped to turn the group into a business conglomerate in the last thirteen
years.
Profitability Ratios
Gross Profit Margin 13.47% 10.70% 11.94% 12.22% 11.98%
Net profit Margin 2.97% 3.39% 3.48% 2.13% 0.84%
Return on Total Assets 12.04% 8.30% 10.70% 8.18% 6.60%
Return on Equity 16.53% 20.92% 23.52% 13.94% 4.49%
Debt or Leverage
Ratio
Debt Ratio 0.75 0.8 0.612 0.79 0.75
Times Interest Earned
2.1 5.54 4.92 2.16 1.27
Ratio
Equity Ratios
Price to Earnings Ratio 47.97 9.96 4.84 7.37 8.89
Dividend Payout 52.53% 32.50% 37.70% 40.00% 0.00%
INTERNAL ANALYSIS
Liquidity ratios
liquidity ratio
1.2
1
0.8
current ratio
0.6
quick ratio
0.4
0.2
0
2003 2004 2005 2006 2007
years
ANALYSIS:
The current ratio of the company is been progressing since five years
but I think the company is facing a lots of problems facing related to
liquidity this could be the reason behind is the inventory problems or
a company might be facing problems in receiving their credits, but still
the company progress in current ratio is quite nominal it had
increased after 2004 but it is stable since last 3 years. So it is been
observed that company might have highlighted their problems and
trying to resolve them The past five year performance of the company
related to the quick ratio is telling us that the company is highly
involved in inventory problems and the reason behind this that they
are taking to much time in converting their inventory into sales thus in
such a way the company liquidity is below 1.0 this could be a most
dangerous sign for the company .this problems may lead company
towards liquidity crunch. The another reason could be that company
is taking too much time in receiving their credits
Efficiency Ratios
INVENTRY TURNOVER
INVENTRY TURNOVER
4
TIMES
0
2003 2004 2005 2006 2007
YEAR
ANALYSIS
50
40
30
days
20
10
0
2003 2004 2005 2006 2007
year
Analysis
As we can see that the company is taking too much time in receiving
their credits and we can see that by this trend since past 5 year in
2003 and 2004 the company was quite efficient in collecting their
receivables but after year 2005 the company is facing hell lot of
collection problems this problem could lead the company towards
inappropriate growth rate a company should have a nominal
collection period in order to get their payments back and reinvest
those amount
CASH CYCLE
CASH CYCLES
160
140
120
100
DAYS
80 Series1
60
40
20
0
2003 2004 2005 2006 2007
YEAR
Analysis
This ratio basically shows that the how much a company is taking to
convert their inventories into sales and then into cash. In the
beginning the company was quite efficient in converting their
inventories into cash. But later on this period of time increase
drastically the main reason could be the problems in inventories and
in receivables a company needs to improve their cash cycle in order
to improve their liquidity position
ASSET TURNOVER
1.6
1.4
1.2
1
TIMES
0.8
0.6
0.4
0.2
0
2003 2004 2005 2006 2007
YEAR
Analysis
Profitability Ratios
16.00%
14.00%
12.00%
10.00%
return
GP margin
8.00%
NP margin
6.00%
4.00%
2.00%
0.00%
1 2 3 4 5
years
Analysis
The company gross profitability is been quite consistent and from five
years its been stable only slight changes have been occurred but we
have seen a decreased in Np margin in last 2 years it seems that the
company is highly debt finance and the interest expense of the
company is hurting company’s profitability the main reason could be
that company is taking high loans thus leads to high interest
expenses
RETURN
25.00%
20.00%
15.00% ROA
10.00% ROE
5.00%
0.00%
2003 2004 2005 2006 2007
YEARS
ANALYSIS
The company return in the beginning was quite nominal and going
very good in fact till 2005 it was progressing and increasing smoothly
but after 2005 the company’s return on asset and on equity suddenly
decreased drastically and in such a ways the company start loosing
their investor the main reason could be high financing cost, and the
problems in inventories the company should utilize their assets and
work on sales
DEBT RATIO
DEBT RATIO
0.8
0.6
Series1
0.4
0.2
0
2003 2004 2005 2006 2007
YEAR
Analysis
The company debt ratio is been quite consistent through out the
period in just 2005 it was decreased the it came back to it certain
level this is harming company in financing cost but it could be resolve
if the company would focus on other factors.
6
5
4
3
2
1
0
2003 2004 2005 2006 2007
YEAR
Analysis
The company was capable enough with covering their finance cost till
2005 but after this the company profitability starts declining thus in
such a way company was unable to cope with their interest expenses
and in such a ways the efficiency of recovering loans has been
decreased
Equity Ratios
PRICE/EARNING RATIO
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1 2 3 4 5
YEAR
DIVIDEND PAYOUT
EP
5.00
4.00
Analysis
3.00
The company price and earning has been performing very
significantly in till the year 2005 but after that it start decline like other
RS
1.00
DEWAN MOTORS AND HONDA ATLAS MOTORS LTD 22
0.00
ANALYSIS OF FINANCIAL STATEMENTS
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0.00
2003 2004 2005 2006 2007
YEAR
Dividend payout
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2003 2004 2005 2006 2007
year
ANALYSIS:
MARKET/BOOK VALUE
MARKET/BOOK VALUE
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
2003 2004 2005 2006 2007
YEAR
Analysis
External analysis
Liquidity ratio
Curre
1.0
nt 0.75 0.83 1.04 1.03 Dewan 1.9 1.2 1.1 1.1 0.9
5 Honda
ratio Motor
Atlas
Quick s
0.36 0.32 0.45 0.9 0.67 1.2 0.9 0.7 0.4 0.2
Ratio
Analysis
Honda atlas is far better than dewan motors the main reason could
be that they have maintained their inventories and receivables in
such a way that have better liquidity as compare to dewan motors but
in the last year.
Honda atlas also faced problem in their liquidity and that’s why they
are suffering.
Efficiency ratios
Inventor
3.1
y 4.98 3.04 4.21 4.06 4.6 6.5 6.7 6.7 4.9
3 Dewan
Turnover Honda
Motor
Total Atlas
1.1 s 1.3 1.6
Asset 1.35 1.129 1.39 1.05 2.57 1.4 2.1
6 3 4
Turnover
Analysis
Profitability Ratios
Gross
Profit 10.7 11.9 12.2 11.6 8.10 1.70 4.60
13.47% 11.98% 0.60%
Margi 0% 4% 2% 0% % % %
n Dewan Honda
Net Motors Atlas
profit 3.39 3.48 2.13 7.10 4.40 1.00 2.80 -
2.97% 0.84%
Margi % % % % % % % 1.60%
n
Analysis
Honda is doing well the main reason is that dewan motors has a
higher financing cost that’s leading is to low profitability in such a
ways we can say that Honda is not taking up so much loans as
compare to dewan motors. and the expenses of dewan motors are
much higher than Honda atlas this will lead to low np margin so in
such a way Honda Is better that dewan in margin .
Retur
-
n on 12.04 8.30 10.70 8.18 11.5 1.30
6.60% 5.80% 7.60% 3.10
ASSE % % % % 9% %
% Hond
T Dewan
a
Retur Motors Atlas
-
n on 16.5 20.9 23.52 13.9 21.6 0.08 30.00
4.49% 0.23% 10.30
Equit 3% 2% % 4% 0% % %
%
y
ANALYSIS
As we can see that the return of dewan motors is much higher than
the Honda atlas. And in the last year Honda has a negative return
because they have incurred a major loss in 2007
0.61 0.8
Debt Ratio 0.75 0.8 0.79 0.75 0.43 0.72 0.7 0.7
2 2
Times Dewan Honda
Interest Motors 686. 179. 28. Atlas
2.1 5.54 4.92 2.16 1.27 16.2 0.1
Earned 1 5 2
Ratio
Analysis
In debt ratio we can see that both the companies have a very slight
difference, dewan motor is bit higher than Honda atlas and that’s why
it is incurring high financing cost
Equity ratios
Analysis
Market measures
Price to
19.
Earnings 47.97 9.96 4.84 7.37 8.89 6.7 9.1 6.7 -15.7
2
Ratio Dewan Honda
MARKET Motors Atlas
1.4
/BOOK 3.29 1.70 1.13 1.06 0.77 1.34 1.93 1.75 1.7
8
VALUE
Analysis
Creditor Guidelines
Investors Guidelines
From the past five year dewan and Honda both were providing
valuable dividends except the last year as there were very low
profitably in automobile industry
But from stock market point of view Honda atlas is much better
then dewan motors this can be said by the P/E ratio of both the
company
Dewan motors has a very high P/E ratio which can led investors
to move away from dewan motors shares
Eps of Honda atlas is higher then dewan motors except the last
year due lost incurred by the company
• The main problem can be seen in net profit margin due to the
high interest expenses which led the companies into low
profitability.
APPENDIX
Long-term investment 5 - -
Deferred cost 6 - 2,922
CURRENT ASSETS
The annexed notes from 1 to 33 form an integral part of these accounts. 5,102,798 3,477,741
APPROPRIATIONS
Proposed dividend 10% (2003: 10%) (Re. 1 per share) 73,403 73,403
Issue of Bonus Shares @ 5% (2003: NIL) 36,702
110,105 73,403