ENGRO FERTILIZER

FINANCIAL ANALYSIS REPORT

SUBMITTED BY:
Muhammad Abdullah Siddiqui (16405)
Hussain Jumani (18794)
Rabia Ajmal (15586)
Raveena Kumari (19698)

SUBMITTED TO:
Ma’am Sabera Suleman

COURSE:
INTRODUCTION TO BUSINESS FINANCE

pg. 1
Contents
Letter of transmittal .................................................................... 3
Ratio Analysis ............................................................................ 4
Matching Principle .................... Error! Bookmark not defined.
Fertilizer Industry of Pakistan .................................................... 6
SWOT Analysis ......................... Error! Bookmark not defined.
About Engro ............................................................................... 8
Engro Fertilizers Limited ......................................................... 9
FINANCIAL REPORTS ........... Error! Bookmark not defined.
Ratios and Analysis .................................................................. 13
1. Liquidity Ratios ............................................................ 13
2. Leverage Ratio ............................................................. 15
3. Coverage Ratio ............................................................. 17
4. Activity Ratios .............................................................. 19
5. Profitability Ratios........................................................ 22
FLOW OF FUNDS.................... Error! Bookmark not defined.

pg. 2
 Letter of transmittal

To Ma’am Sabera,

Respected Ma’am,

We are submitting here the Term Project of IBF given to us on the topic “Financial
report analysis of “Engro Fertilizers” with its 2 competitors “Fatima Fertilizers and
“Fauji Fertilizers”. We have studied 5 years financial reports (ending on 2016) and
based on the ratios and common, trend and comparative analysis we have jot down
our financial analysis. The research on this report has provided us extensive
knowledge of our course concepts as well as its implementation in practical world.
We believe that the report will be in accordance with the guide lines provided for its
preparation.

The following report has prepared us for the financial practices operated in industries
and strategic implementation of almost all the topics of our course which will help us
to a greater extent in our future professional careers.

We are thankful to you for your assistance in making this report. If you have any
queries regarding the report we will be obliged to discuss it with you at your request.
We will be grateful if you provide us with suggestions to improve our study.

Yours sincerely,

Abdullah Siddiqui

Hussain jumani

Rabia ajmal

Reveena kumara

pg. 3
 Ratio Analysis

Ratios help to carry out an evaluative analysis of information in the financial

statements of a company. These ratios are calculated from current year figures and
then compared to past years, other companies, the industry, and also the company
to assess the performance of the company. Besides, ratio analysis is used
predominantly by proponents of financial analysis. There are several benefits of
ration analysis. Most important of these are:

 Determines profitability

Ratio analysis assists managers to work out the production of the company by
figuring the profitability ratios. Also, the management can evaluate their revenues
to check if their productivity. Thus, probability ratios are helpful to the company in
appraising its performance based on current earning.

 Helpful in evaluating solvency

By computing the solvency ratio, the companies are able to keep an eye on the
correlation between the assets and the liabilities. If, in any case, the liabilities
exceed the assets, the company is able to know its financial position. This is
helpful in case they wish to set up a plan for loan repayment.

 Better financial analysis

Ratio analysis is also helpful to recluses, in addition to shareholders, debenture

holders, and creditors. Besides, bankers are also able to know the profitability of
the company to find out whether they are able to pay the dividend and interests
under a specific period.

 Performance analysis

Ratio analysis is also helpful in analyzing the performance of a company. Through

financial analysis, companies can review their performance in the past years. This
is also helpful in identifying their weaknesses and improving on them.

pg. 4
  Forecasting

At present, many companies use ratio analysis to reveal the trends in production.
This provides them an opportunity for estimation of future trends and thus the
foundation for budget planning so as to determine the course of action for the
growth and development of the business.

pg. 5
 Fertilizer Industry of Pakistan
Local urea industry demand declined marginally in 2016 by 2% to 5,485 KT vs.
5,582 KT in 2015. The decline came on the back of lower urea offtake in the first
half of 2016 due to weak farmer economics amid falling commodity prices and
expectation of price reduction through subsidy. However, demand for urea
improved significantly in 2nd half due to significant reduction in urea prices, a
direct result of subsidy announcement by the government which also led to better
farmer economics on cotton and rice. Local industry production for 2016 stood at
5,998 KT vs. 5,290 KT in 2015, an increase of 13%. Higher urea production was a
result of higher gas availability in the system including imported LNG. Although
the overall industry declined slightly, share of locally produced branded urea
increased to 100% vs 91% in 2015. This was due to lower difference between price
of locally manufactured and imported urea as well as preference of farmer to use
locally manufactured urea. Local urea prices remained in the range of PKR
1,760/bag to PKR 1850/bag during most of the 1st half 2016. However,
considering the weak farmer income and subsequent adverse impact on Pakistan’s
agrarian economy, the Government of Pakistan (GoP) announced a decrease in
urea price to PKR 1,400/bag in the Federal Budget 2016. The reduction was
carried out through price cut of PKR 50/bag by manufacturers and a combination
of subsidy and reduction in GST by government. On the international front, the
continued slump in global commodity markets including oil, kept urea prices
subdued throughout 2016, with urea prices down to as low as USD 193/ton (CFR
Karachi) equivalent to PKR 1,300/bag at one point during Rabi season. Towards
the year end, however, prices have returned to around USD 240/ton (CFR Karachi)
(equivalent to PKR 1,560/bag). The imported urea however does not have a PKR
156/bag subsidy which is only available on locally manufactured urea which near
the year end was available in the market in the range of PKR 1,200-PKR 1,300 per
bag excluding subsidy. The fertilizer industry consists of 9 companies namely;

 Fauji Fertilizers (Goth Machi)

 Fatima Fertilizers
 Engro Fertilizers

pg. 6
  Pak Arab Fertilizers (Multan)
 Agri Tech Fertilizers (Mianwali)
 Dawoon Hercules Fertilizers (Sheikhupura)

The fertilizer industry of Pakistan is of an oligopolistic nature and 4 out of these 8

companies are the price setters however they are subsidized by the government so
that they don’t exploit the market. For our financial analysis we will compare
Engro’s progress with two of its major competitors “Fatima Fertilizers” and
“”Fauji Fertilizers” The Urea production share of each of these companies is as
follows,

pg. 7
 About Engro
Engro Corporation is a public company based in Pakistan. The company has stakes
in the fertilizer, food, power generation, petrochemicals, automation and terminal
storage industries. Engro underwent an employee led buyout in 1992.

Engro Corporation Limited is one of Pakistan’s largest conglomerates with

businesses ranging from fertilizers to power generation. Currently Engro
Corporation’s portfolio consists of diversified businesses which include chemical
fertilizers, PVC resin, bulk liquid chemical terminal, foods, power generation and
commodity trade.

The company also co-owns Sindh Engro Coal Mining Company.

As a holding company its subsidiaries include:

 Engro Fertilizers Limited

 Engro Foods Limited
 Engro Eximp Private Limited
 Engro PowerGen Limited
 Engro Polymers and Chemicals Limited
 Engro Vopak Limited
 Elengy Terminal Pakistan Limited

pg. 8
Engro Fertilizers Limited

Engro Fertilizers Limited is a wholly owned subsidiary of Engro Corporation and a

renowned name in Pakistan’s fertilizer industry. Engro holds a vast, nationwide
production and marketing infrastructure and produces leading fertilizer brands
optimized for local cultivation needs and demand. Its annual urea production
capacity is 2.3 million tons. In addition, the company also markets and distributes
phosphate and zinc based fertilizers, which are imported by Engro EXIMP. In
addition to Engro Urea, the business markets a wide variety of trusted fertilizer
brands like Engro Zarkhez, Zingro Engro DAP, and Envy. Engro Fertilizers
Limited enjoys loyal customer base across Pakistan owing to its trusted fertilizer
brands and continual farmer assistance in training and education. Engro Fertilizers
Limited was incorporated in June 2009, following a decision to demerge fertilizer
concern from its parent company Engro Chemical Pakistan Limited. Engro
Fertilizers is poised to become the leading urea manufacturer in the country
following major upgrading of its manufacturing capabilities. In reference to the
statistics mentioned the year 2016 was financially a successful year, however
considering the fact that different stake holders demand the analysis through
different angles, a deeper evaluation of the company’s financial progress would
portray a better picture. For this purpose we have calculated and analyzed the
Liquidity, Leverage, Efficiency and Profitability ratios of the firm for the last 5
years and compare it to its competitor’s ratios.

pg. 9
 2016 at a Glance
The Company produced 1,881 KT of urea, compared to 1,968 KT produced in
2015 i.e. 4% decrease in production mainly due to planned turnarounds in 2016.
However, considering the oversupply situation, our sales volume remained 12%
lower vs. 2015 i.e. 1,652 KT vs. 1,879 KT sold in 2015, leading to the Company’s
urea market share declining to 30% from 34% last year. This was mainly due to
reduction in our production share from 37% last year to 31% in 2016 on account of
higher production by other fertilizer manufacturers, due to LNG and increased gas
availability. Phosphates The Company’s sales were recorded at 534 KT in 2016;
up 41% YoY compared to 391 KT sold in 2015, which also led to an increase in
the Company’s market share to 24% vs. 22% last year. The increase in sales were a
direct result of higher domestic offtakes of DAP and sales push by the Company in
2016. The domestic industry increased from 1,814 KT in 2015 to 2,225 KT in
2016, on the back of subsidy on phosphates and lower international DAP prices.
The international DAP prices which started from USD 400/ton at the start of the
year, averaged around USD 345/ton during the year to close at USD 330/ton at the
end of the year. Zarkhez Sales of blended & potash based fertilizers (Zarkhez,
Engro NP, MOP/SOP) of the Company declined by 16% YoY during the year to
114 KT compared to 135 KT during 2015. Despite no subsidy on potash, overall
domestic potash industry increased to 27KT vs. 25 KT in 2016, due to lower
international prices of SOP & MOP. Moreover, due to lower SOP & MOP prices,
farmers switched from Zarkhez to straight potash fertilizers. Resultantly, market
share of Zarkhez declined to 38% in 2016 (47% in 2015). However, overall potash
market share for the Company closed at 48% (49% in 2015).

pg. 10
 Fatima fertilizers
The Fatima Fertilizer Company Limited was incorporated on December 24, 2003,
as a joint venture between two major business groups in Pakistan namely, Fatima
Group and Arif Habib Group.The foundation stone of the company was laid on
April 26, 2006 by the then Prime Minister of Pakistan. The construction of the
Complex commenced in March 2007 and is housed on 950 acres of land.

We produce two intermediate products Ammonia and Nitric Acid and four final
products Urea, Calcium Ammonium Nitrate (CAN), Nitro Phosphate (NP) and
Nitrogen Phosphorous Potassium (NPK) at Sadiqabad, Rahim Yar Khan.

Fauji Fertilizers
Fauji Fertilizer Company Limited (FFC) is the largest chemical fertilizer producer
of Pakistan with biggest market share in the country. It was established by the
Fauji Foundation which holds a controlling interest.

FFC was established in 1978 as a joint venture of Fauji Foundation and Haldor
Topsoe. The first urea complex was commissioned in 1982. Plant-1 was improved
in 1992, and a second plant was built in 1993. In the year 2002, FFC acquired ex
Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated at Mirpur Mathelo,
District Ghotki from National Fertilizer Corporation (NFC) through a privatisation
process of the Government of Pakistan. This acquisition at Rs. 8,151 million
represents one of the largest industrial sector transactions in Pakistan. FFC now has
three plants with a combined capacity of 5770 MTPD of prilled urea.

Fauji Fertilizer Bin Qasim Limited (FFBL) is another company where FFC has
controlling shares – it produces 1670 MTPD of granular urea plus 2250 MTPD
DAP after revamping (1350 MTPD before revamp) DAP. Ammonia and urea
plants capacity factors right from the plants start-up have been 100% or more.

pg. 11
Today, FFC is also involved manpower training and turnaround services provider,
especially within Pakistan and in the Middle East.

Fauji Fertiliser Bin Qasim would enter meat, dairy and power businesses with an
estimated investment of over Rs. 33 billion ($ 330 million). The wholly owned
subsidiaries of Fauji Meat, Fauji Foods and Fauji Power will be involved in these
businesses.

pg. 12
 Ratios and Analysis

1. Liquidity Ratios
(ENGRO FERTILIZERS)

2016 2015 2014 2013 2012

CURRENT 1.13 0.90 1.02 1.33 0.55

RATIO

QUICK 0.83 0.69 0.99 1.28 0.48

RATIO

Fatima fertilizers
2016 2015 2014 2013 2012

CURRENT 1.03 0.66 0.97 0.81 0.68

RATIO

QUICK 0.83 0.39 0.79 0.63 0.47

RATIO

Fauji Fertilizers

2016 2015 2014 2013 2012

CURRENT 0.91 0.84 0.67 0.77 1.14

RATIO

QUICK 0.81 0.68 0.65 0.76 1.13

RATIO

pg. 13
The liquidity ratio is a computation that is used to measure a company’s ability to
pay its short term debt. For our analysis we have used two major liquidity ratios
that are “Current Ratio” and “Quick Ratio”. Current ratio is simply the current
assets divided by current liabilities, it determines the short term cash flow of the
company thus the higher this ratio the higher is the company’s ability to settle its
short term liabilities through its current assets. The quick ratio is more or less the
same as current ratio however the only difference lies in the current assets, in
which inventory is excluded. This is done because inventory is considered as the
least liquid asset amongst all the current assets, which means that inventory cannot
be easily converted in to cash therefore settling liabilities through stock is not
inevitable.

The liquidity ratios in particular the current ratio of Engro Fertilizers were above
its competitors in the 2016 and however when we look at the quick ratio they are
also above r at par with its competitors. A positive aspect about the liquidity ratios
of Engro Fertilizers in this entire period was that the difference between the quick
ratio and current ratio was minimal, which means the proportion of inventory in
the current assets was low. Thus concluding the liquidity status of the company our
take would be, that apart from the sharp decline in 2012 the liquidity position has
been good for the company’s short term creditors.

pg. 14
 2. Leverage Ratio
(Engro Fertilizers)

2016 2015 2014 2013 2012

DEBT TO 1.48 1.47 2.24 3.39 5.17

EQUITY
(TIMES)
DEBT TO 0.60 0.60 0.69 0.77 0.84
TOTAL
ASSETS
(TIMES)
Fatima Fertilizers

2016 2015 2014 2013 2012

DEBT TO 1.33 1.36 1.26 1.44 1.63

EQUITY

DEBT TO 0.57 0.58 0.56 0.59 0.62

TOTAL
ASSETS
Fauji Fertilizers

2016 2015 2014 2013 2012

DEBT TO 2.2 1.9 2.4 1.7 1.35

EQUITY

DEBT TO 0.68 0.65 0.70 0.63 0.58

TOTAL
ASSETS

pg. 15
Leverage ratios measure how much debt a firm carries and how easily a firm pays
the interest expenses of carrying that debt. Leverage ratios are important for an
obvious reason. Typically, a firm mostly financed with debt needs to continue to
borrow in order to stay in business. Leverage ratios are important for an obvious
reason. Typically, a firm mostly financed with debt needs to continue to borrow in
order to stay in business. The debt to equity is derived by dividing a firm’s total
debt by its shareholder’s equity. The lower the ratio, the higher the level of the
firm’s financing that is being provided by shareholders and the larger the creditor
cushion. Debt to total assets represents the amount of debt used to finance the
asset. Thus the higher this ratio, the higher the financial risk involved.

The leverage ratios of Engro do not display an optimistic picture for the creditors
and lenders. The company throughout the 5 year span has kept a high leverage
ratio. On average the debt of the company is 0.48 times higher than the equity of
shareholders which means that the company is largely financed by liabilities rather
than the shareholder’s money, thus the company follows an aggressive and a high
risk approach for its operations. An important point to note here is that Engro is a
capital intensive firm and a clear market leader in the fertilizer industry so a high
leverage ratio does not necessarily mean that the company’s financial position is at
threat. Similarly the debt to total assets is also pretty high in the entire period
which means the firm is using debt to finance the purchase of new assets. As
mentioned earlier the company’s policy is to prefer debt over shareholder’s equity
for its funding (mainly assets). The cost of equity is generally more than the cost of
liability and this concept has been used by Engro to fund its operations which
according to the figures mentioned has been remarkable.

pg. 16
 3. Coverage Ratio
(Engro Fertilizers)

ENGRO FERTILIZERS

2016 2015 2014 2013 2012

INTERETS 5.3 5.6 2.8 1.8 0.63

COVERAGE
RATIO

FATIMA FERTILIZERS

2016 2015 2014 2013 2012

INTERETS 5.2 5.8 4.7 3.9 2.5

COVERAGE
RATIO

FAUJI FERTILIZERS

2016 2015 2014 2013 2012

INTERETS 8.2 17.6 31.9 39.9 32

COVERAGE
RATIO

pg. 17
Coverage ratios are designed to relate the financial charges of a firm to its ability to
service or cover them. It is calculate by dividing the Earnings before interest and
taxes with the interest expense. This ratio serves as one of the measure of the
firm’s ability to meet its interest payments and thus avoid bankruptcy. Engro
fertilizers has interest coverage ratio which is better than that of Fatima fertilizers
but lesser than that of Fauji fertilizers meaning that the firms has the ability of
paying off its interest expense from its EBIT 5 times, which means the firm is not
at risk of defaulting.

pg. 18
 4. Activity Ratios
(Engro Fertilizers)

2016 2015 2014 2013 2012

AVERAGE 40 10 5 6 12
COLLECTION
PERIOD
(DAYS)
INVENTORY 47 45 10 18 29
TURNOVER
(DAYS)
TOTAL 0.67 0.80 0.54 0.45 0.31
ASSET
TURNOVER
(TIMES)

Fatima Fertilizers
2016 2015 2014 2013 2012

AVERAGE 23 4 5 1 2
COLLECTION
PERIOD
(DAYS)
INVENTORY 35 59 46 91 97
TURNOVER
(DAYS)
TOTAL 1.09 1.22 1.1 1.14 0.88
ASSET
TURNOVER
(TIMES)

pg. 19
 2013 2012 2011 2010 2009

AVERAGE 22 8 4 3 18
COLLECTION
PERIOD
(DAYS)
INVENTORY 39 12 5 7 3
TURNOVER
(DAYS)
TOTAL 0.80 1.06 0.94 1.10 1.23
ASSET
TURNOVER
(TIMES)

Activity ratios also known as efficiency ratios or turnover ratios measure how
efficiently the firm is using its assets. The first ratio is the receivable turnover ratio
which is derived by dividing annual net credit sales with total receivables. It
provides an insight into the quality of the firm’s receivables and how successful the
firm is in its collection. The higher the turnover the shorter the time taken between
the typical sale and cash collection. The second ratio is the inventory turnover
ratio, it is calculated by dividing Cost of goods sold with inventory. This ratio tells
how effectively the firm is managing inventory. It tells us how many times
inventory is turned into receivables through sales during the year. Lastly the total
asset turnover ratio is calculated by dividing net sales with the total assets. This
ratio tells us the relative efficiency with which the firm utilizes its total assets.

The activity ratios showcase a smooth financial position of the company. The
average collection period has increased to 40 days in 2016 meaning thereby that on
average the debtors pay has been relaxed to pay their debts. Both its competitors
have a low collection period which means that the competitors are able to receive
cash faster than engro. Similarly the inventory turnover also replicates the
efficiency of Engro Fertilizers. Inventory was sold 47 days after it was
manufactured in 2016 and its competitors sold inventory in 35-37 days, this tells
us that the it takes longer for engro to sell of its inventory as compared to its

pg. 20
competitors, might also be the reason why engro provides a relaxed credit period to
its debtors .Lastly the Total Asset turnover has shown a sluggish progress in the 5
year span. This ratio in the entire period has been below its competitors, this means
that every dollar that Engro invests in its assets does not results in as much sales as
its competitors. One reason for this could be that the company has focused more on
investing on marketable securities (short term investments) which do not result in
sales but rather provide revenue on a regular basis. Apart from the asset turnover
ratio the activity ratios depict a favorable condition for the investors in particular as
the smooth cash flows assures a more regular payment of dividends. In 2016 the
company gave 1 share for every 10 shares giving a clear indication that the
company safeguards the interest of its investors.

pg. 21
 5. Profitability Ratios
(Engro Fertilizers)

2016 2015 2014 2013 2012

NET 12.9 17.7 13.4 10.9 (9.5)
PROFIT
MARGIN
(%)
RETURN 8.8 14.2 7.3 5 (3)
ON ASSETS
(%)
RETURN 21.8 34.3 23.8 21.9 (18.5)
ON EQUITY
(%)

Fatima Fertilizers

2016 2015 2014 2013 2012

NET 28.9 30.6 25.6 24 21
PROFIT
MARGIN
(%)
RETURN 8.8 9.8 11.1 10 8
ON ASSETS
(%)
RETURN 20.65 23 25.2 24.5 21.1
ON EQUITY
(%)

Fauji Fertilizers
2016 2015 2014 2013 2012
NET 16.2 19.8 22.4 27 28
PROFIT
MARGIN

pg. 22
 (%)
RETURN 13 20.1 20.1 29.7 34.4
ON ASSETS
(%)
RETURN 41.8 61.4 70.8 80 80.9
ON EQUITY
(%)

A class of financial metrics that are used to assess a business's ability to generate
earnings as compared to its expenses and other relevant costs incurred during a
specific period of time. For most of these ratios, having a higher value relative to a
competitor's ratio or the same ratio from a previous period is indicative that the
company is doing well. Net Profit margin is calculated by dividing the net profit
after taxes by net sales. This ratio shows the percentage of profit generated by each
unit sold. The second in the list is return on investment, this ratio shows the
relationship of net profit with total assets, which means what percentage of profit is
being generated by each dollar invested in assets. Lastly return on equity deals
with the equity held by shareholders, it shows the percentage of profit generated by
the shares held by stockholders.

Apart from the year 2012 the profitability ratios have shown an upward trend in the
5 year period, however having said that Engro still lags behind its major
competitors (Fauji Fertilizers and Fatima Fertilizers). The Net Profit Margin is
showing that the company has failed to capitalize its large amount of sales into net
profit, mainly because of the high cost of expenses incurred. The obvious reason
behind this is the over reliance on financing through debt leading to an additional
burden in the form of interests. The finance costs in the all the 5 years cover one of
the largest percentage of sales causing the net profit margin to decline. The Return
on assets is on a median level, where the competitors fluctuating between 8 to 13,

pg. 23
engro has a ROA of 8.8. Again the finance cost hinders profitability and whatever
investment is made is offset by the expenses. Return on Equity shows a similar
trend, thus the amount invested by stockholders is not giving the same amount of
return as in the case of Fauji Fertilizers but its giving a better return when
compared to Fatima Fertilizers. Although the company has improved on its
profitability in 2016 the overall progress has been alarming and the company needs
to work on decreasing its expenses so that the current investors can be retained and
other potential investors can be attracted.

pg. 24
 Common Size Analysis

ENGRO FERTILIZERS
The cost of sales in 2015 was 65% of the total sales value which has increased to
75% In 2016 which tells us that the cost of production has hiked up in 2016. When
we look at the absolute amounts the value of sales has decreased in 2016 and the
cost of sales is almost the same as of previous years but because of the decrease in
sales it has a huge impact on the gross profit. Due the increase in the cost of sales
the gross profit of the company has decreased from 34 to 24% which is huge
decrease of 10%. The selling and distribution expenses have also increased from
6.4% of total sales in 2015 to 9.6% of total sales in 2016. Which means that selling
was difficult in 2016 than it was in 2015 which can also be linked to the fact that
sales in 2016 has decreased as compared to 2015. Although the company has been
able to decrease the administrative and operating expenses which are now 1.28%
and 1.65% of sales respectively which were 1.58 and 3.27 in 2015. The operating
income of the company has decreased due to the fact that gross income had
decreased at a very high percentage and small decrease in the operating cost and
administrative cost were of little effect. In 2016 income from other sources was
10% of total sales and in 2015 this was 5%, because of the increase in other
income the earnings before interest and tax (EBIT) has had a lesser impact in 2016
than it would have otherwise. EBIT only has a 7% decrease in 2016 in terms of
total sales and it accounts to 23% of total sales in 2016 which was 30% in 2015.
The finance cost has decrease in 2016 in both absolute and relative terms which
means that the firm has paid off some of its debt and now has to pay less interest.
The NPAT in 2016 is 13% of total sales which was 17.5% in 2015. The NPAT in
absolute terms has also decreased in 2016.

When we look at the balance sheet the accounts receivable has increased
tremendously both in absolute and in relative terms. Which might translate that the

pg. 25
firm has now relaxed the credit terms or might have started selling more on credit.
The cash and bank balances have decreased from 0.8% of total assets to 0.2% of
total assets. It has also touched a low in absolute terms. Which hints at a possible
liquidity problem in the company. Out of the total assets 27% was current assets
which has now decreased to 26%. Short term investments have been sold off in
2016 as they now account for 0.1% of total assets which was 10% in 2015. The
total equity remains the same at 40% of total assets in both the years. Taxes
payable has decreased which means that company has paid of some of its due
taxes. Current portion of long term borrowing has also decreased. Short term
borrowing has increased in 2016. Total liabilities account for 60 percent of total
assets. Which means that 60% of the total assets of the firm are financed through
debt and 40% is financed through equity. The firm is also a bit on the riskier side
as 60% is financed through debt. There is not much change in the equity and the
liability part in 2016 as compared to 2015.

Comparative Analysis
Liquidity Ratios
Current Ratio:
Current ratio tells us the short term solvency of the firm and tells the ability of the
firm to repay its short term obligations. In Engro fertilizers, the company has 1.12
ability to repay against the $1 loan. In Fauji fertilizers, the company has 0.91
ability to repay against the $1 loan. In Fatima Fertilizers, the company has 1.03
ability to repay against the $1 loan. This implies that Engro fertilizers has more
ability to repay its short term obligations.

Quick Ratio:
Quick ratio measures the firm’s ability to pay off short term obligations without
relying on the sale of inventory. Engro has the quick ratio of 0.84 whereas Fauji
Fertilizers has 0.81 and Fatima Fertilizers has 0.83 chances of paying off its short
term obligations without relying on the level or sales of inventory.

pg. 26
Asset Management Ratio

Inventory Turnover rate:

The inventory turnover ratio is a key measure for evaluating just how efficient
management is at managing company inventory and generating sales from it.
Engro fertilizers has 7.6, Fauji Fertilizers has 12.9 and Fatima Fertilizers has 2.5
which means Fauji Fertilizers has more times when its inventory is sold as
compared to engro and Fatima fertilizers.

Inventory Turnover in days:

The inventory turnover in days is the average number of days it takes for a firm to
sell off its inventory. Engro Fertilizers has takes 47 days, Fauji Fertilizers takes 28
days and Fatima Fertilizers takes 144 days to convert its inventory into cash or to
sell off. Fauji Fertilizers takes only 28 days which means it has good performance
in inventory turnover.

Account Receivable Turnover:

An accounting measure used to quantify a firm's effectiveness in
extending credit and in collecting debts on that credit. The receivables turnover
ratio is an activity ratio measuring how efficiently a firm uses its assets. Engro
Fertilizers has ratio of 9.9, Fauji fertilizers has 9 and Fatima Fertilizers has 15.9
which means Fatima Fertilizers has a better Account receivable turnover in 2016.

Account Receivable Turnover in Days:

Accounts receivable turnover in days is the number of days that a customer invoice
is outstanding before it is collected. The point of the measurement is to determine
the effectiveness of a company's credit and collection efforts in allowing credit to
reputable customers, as well as its ability to collect cash from them. Fatima
Fertilizers takes 23 days which is less than other two companies.

pg. 27
Operating Cycle:
Operating cycle is the number of days a company takes in realizing its inventories
in cash. It equals the time taken in selling inventories plus the time taken in
recovering cash from trade receivables. Engro Fertilizers has Operating cycle of
57.4, Fauji Fertilizers has 67 and Fatima Fertilizers has 167. Engro Fertilizers has
the best operating cycle as compare to Fatima and Fauji Fertilizers.

Total Asset Turnover Rate:

The total asset turnover ratio measures the ability of a company to use its assets to
efficiently generate sales. Engro Fertilizers has TATR of 67.8, Fauji Fertilizers has
TATR of 0.80 and Fatima Fertilizers has TATR of 0.30. Engro has 67.8 TATR
which is higher tha its competitors and states that Engro has a good asset
management.

Leverage Ratios
Debt Ratio:
Debt ratio is a solvency ratio that measures a firm's total liabilities as a percentage
of its total assets. In a sense, the debt ratio shows a company's ability to pay off its
liabilities with its assets. Engro Fertilizers has a debt ratio of 0.5, Fauji Fertilizers
has 68.8 and Fatima Fertilizers has 0.5 debt ratio. Engro Fertilizers and Fatima
Fertilizers has almost same Debt ratio in 2016. Fauji Fertilizers is highly leveraged
and more risky for lenders.

Equity Ratio:
The equity ratio is an investment leverage or solvency ratio that measures the
amount of assets that are financed by owners' investments by comparing the total
equity in the company to the total assets. Engro fertilizers has 0.4, Fauji Fertilizers
has 31.1 and Fatima Fertilizers has 0.4 equity ratio. Fauji Fertilizers has a better
leverage than its competitors.

pg. 28
Profitability Ratios
Gross Profit Margin:
Gross profit margin is a profitability ratio that calculates the percentage of sales
that exceed the cost of goods sold. Engro Fertilizers has GPM of 24.6, Fauji
Fertilizers has 24.7 and Fatima Fertilizers has 53.27. Engro Fertilizers and Fauji
Fertilizers both has a better profitability performance.

Net Profit Margin:

Net profit margin is the percentage of revenue remaining after all operating
expenses, interest, taxes and preferred stock dividends (but not common stock
dividends) have been deducted from a company's total revenue. Engro Ferilizers
has NPM of 12.9, Fauji Fertilizers has NPM of 16.17 and Fatima Fertilizers has
NPM of 28.9. Fatima Fertilizers has more NPM than its competitors.

Return on Total Assets:

In other words, the return on assets ratio or ROA measures how efficiently a
company can manage its assets to produce profits during a period. Engro Fertilizers
has ROA of 8.8, Fauji Fertilizers has ROA of 12.99 and Fatima Fertilizers has
ROA of 8.8 in 2016.

Return on Equity:
In other words, the return on equity ratio shows how much profit each dollar of
common stockholders' equity generates. Engro Fertilizers has ROE of 21.8 on
every $1 of net income, Fauji Fertilizers has 41.76 on every $1 of net income and
Fatima Fertilizers has 20.6 on every $1 of net income.

pg. 29
 Engro Fertilizers
Trend Analysis of FY 16 and 15

Liquidity position
In 2016 the overall liquidity position has improved.

The firm’s ability to pay off its current liabilities from its current assets has
increased from 0.9 to 1.12, which is a 19.6% increase in current ratio.

The current ratio shows that the current liabilities have decreased at faster rate than
the current assets.

In year 2016, firm’s ability to pay off from its most liquid assets has increased
from 0.68 to 0.84. Quick ratio shows that current liabilities have decreased at a
faster rate than the quick assets.

Asset Management
In 2016, firm’s ability to generate sales from inventory has declined from 7.9 to
7.6. Inventory turnover rate shows that the cost of goods sold has decreased at a
higher rate than the stock in trade.

The number of times the inventory is sold and replaced in a year has increased
from 45 days to 47 days which means that the inventory is held for two days longer

Account Receivable turnover has decreased from 63.91 to 9.95. This shows that
the number of times the firm collects cash from its customers has declined sharply
from 63.91 to 9.95. The ratio shows that other receivables have increased at a
much higher rate than the sales.

Average collection period has increased from 51 days to 84 days. The firm takes
33 more days to collect cash from its credit sales.

The operating cycle has shortened from 81 days to 68 days in 2016. It takes 23 less
days to collect cash from it’s from inventories sold

pg. 30
The firm’s ability to generate sales from its total assets has declined from 80.66 to
67.87. Total Asset turnover ratio shows sales have decreased at a higher rate than
the total assets.

Financial Leverage
Debt Ratio has declined from 1.47 to 0.59. Company’s total assets that are
financed by both long and short term debt have reduced.

Long term debt to total capitalization has remained the same.

Interest coverage ratio has declined from 5.6 to 5.2. EBIT has decreased at a higher
rate. This means company’s ability to pay interest expense on outstanding debt has
decreased.

Profitability
Gross profit margin decreased from 35 to 25. The net sales decreased at a faster
rate than cost of goods sold. This resulted in gross profit as a percentage of sales to
decrease. This shows the efficiently this firm to use its materials and labor to
produce and sell products profitably has reduced by almost 10%.

Net Profit Margin has declined from 17.6 to 12.9. NPAT has declined at a higher
rate than the Sales. NPM shows how much each collected dollar by the company
turns into revenue.

Return on Assets show how efficiently a company is utilizing its assets to generate
sales. ROA has declined 14.2 to 8.8.Net Sales have declined at a faster rate than
the total assets.

Return on Equity shows amount of net income as a percentage of shareholders’

equity. ROE has decreased from 35.3 to 21 due decrease in sales at higher rate than
the total equity.

pg. 31