Finance Report Sugar Mills Adeel A. Siddiqui (11262) Adnan Waqar - - PDF document

Institute of Business Management

Finance Report

Sugar Mills Adeel A. Siddiqui (11262) Adnan Waqar (11828) Zeeshan Memon (12045) 4/13/2011

Table of Contents

• 1. Introduction

............................................................................................................................1

• 2. Dewan Sugar Mills

...................................................................................................................2 2.1 Balance sheet of Dewan Sugar Mills ...................................................................................3 2.2 Liquidity and Leverage Ratios of Dewan Sugar Mills ...........................................................4 2.3 Liquidity ratios ...................................................................................................................5 2.3.1 Current ratio ................................................................................................................5 2.3.2 Quick ratio ...................................................................................................................6 2.4 Financial leverage (debt) ratios ..........................................................................................6 2.4.1 Debt-to-equity ratios ...................................................................................................6 2.4.2 Debt ratio ....................................................................................................................6

• 3. Al-Abbas Sugar Mills Limited

...................................................................................................7 3.1 Credit Rating ......................................................................................................................8 3.2 Balance sheet of Al-Abbas Sugar Mills ................................................................................8 3.3 Liquidity and Leverage Ratios of Dewan Sugar Mills .........................................................10 3.4 Liquidity ratios .................................................................................................................11 3.4.1 Current ratio ..............................................................................................................11 3.4.2 Quick ratio .................................................................................................................11 3.4.3 Debt-to-equity ratios .................................................................................................11

3.4.4 Debt ratio ..................................................................................................................12

• 4. Liquidity and Leverage Ratio’s Comparison with Industry Averages

.......................................13 4.1 Dewan Sugar ....................................................................................................................13 4.2 Al-Abbas Sugar .................................................................................................................14

• 5. Conclusion

.............................................................................................................................15

Finance Report 2011

Chapter: 1. Introduction

1

• 1. Introduction

Financial ratios are used to analyze the financial condition of a firm by comparing it with other firms of same industry or industry average standards. We analyze different ratios to get complete inside of a firm’s financial health. Liquidity ratios show firms ability to cover its current liabilities with its current assets. Leverage ratio shows the extent to which firm is financed by debt. Here we have calculated financial ratios of two sugar mills and we have compared them with each other and industry standards.

Finance Report 2011

Chapter: 2. Dewan Sugar Mills

2

• 2. Dewan Sugar Mills

Dewan Sugar Mills Limited is one of the largest sugar mills of Pakistan having a cane crushing capacity of over 9,000 tons per day. It was established as a public limited company in 1982. Through installation of most modern cane handling and processing systems, delivery times have been shortened. Installation of modern computerized systems has greatly helped in improving the cane procurement and management systems. As a result of these measures, Dewan Sugar Mills Limited is regarded as a preferred customer by most farmers which results in a longer crushing season for the mill. Dewan Sugar Mills Limited enjoys market leadership position in the country and its product enjoys definite premium over its competitors. Dewan Sugar Mills Limited has been awarded with ISO 9002 certificate that proves the company’s strength in producing consistent and high quality product. Their aim is to benefit the customers, employees and shareholders, and to fulfill their commitments to the society. Their hallmark is honesty, initiative and teamwork of their people, and their ability to respond effectively to change on all aspects of life including technology, culture and environment. There was shortfall in sugar cane production in the season due to reduction in the sugar cane plantation area and yield. As a result, sugar cane prices skyrocketed and the entire sugar industry including your company paid very high cost of sugar cane. To meet this contingency, sugar manufacturers imported raw sugar for processing locally which saved the industry to some extent. However, subsequently Government allowed import of white refined sugar resulting in lot of documented and undocumented imports, which created huge unsold stocks

• f sugar with the mills. The carry over stocks from last year kept the sugar market depressed

and hence very little margins are left for the mills.

Finance Report 2011

Chapter: 2. Dewan Sugar Mills

3

2.1 Balance sheet of Dewan Sugar Mills

Balance Sheet as at sep 30 2008 2007 2006 Assets Non –current assets Property, plant and equipment 2,264,422 1,527,982 1,472,955 Long-term investment 37,751 10,263 8,607 Long-term deposits 5,071 11,317 10,742 Total fixed assets 2,307,244 15,49,562 1,492,304 Current assets Stores and spare parts 188,578 144,818 131,668 Stock-in-trade 1,009,052 393,723 230,809 Trade debts 11,314 28,978 43,166 Loans and advances 149,526 144,861 109,388 Trade deposits and short-term prepayments 7,164 5,254 3,638 Other receivables 417 23,271 13,993 Income tax recoverable 16,168

• Cash and bank balances

86,263 47,597 48,694 Total current assets 1,468,482 788,502 581,356 Total assets 3,775,726 2,338,064 2,073,660 Equity and liabilities 2008 2007 2006 2000000 (2006: 20000) ordinary shares of Rs.10/- each 200,000 200,000 200,000 Issued, subscribed and paid-up capital 185,703 185,703 185,703 Inappropriate profit 366,139 154,659 178,040 Reserves 190,000 190,000 190,000

Finance Report 2011

Chapter: 2. Dewan Sugar Mills

4

Total equity 741,842 530,362 553,743 Surplus on revaluation 730,234 337,261 369,288 Non-current liabilities Long-term deposits 4,869 4,874 5,035 Long-term financing-secured 237,500 325,000 67,470 Liabilities against assets subject to finance lease 28,261 70,840 77,568 Deferred liabilities 492,058 346,074 277,540 Total non-current liabilities 762,688 746,788 427,613 Current liabilities Trade and other payables 526,054 317,484 187,470 Accrued mark-up 28,416 14,446 25,138 Short-term borrowings-secured 862,684 270,955 397,809 Current portion of long-term financing 123,808 118,679 105,139 Provision for market committee fee

• 2,089

7,460 Total current liabilities 1,540,962 723,653 723,016 Total Equity and Liability 3,775,726 2,388,064 2,073,660

2.2 Liquidity and Leverage Ratios of Dewan Sugar Mills

Ratios 2008 2007 2006 Company Averages Industry Averages Current ratio 0.95 1.09 0.80 0.95 0.73 Quick ratio 0.30 0.55 0.48 0.44 0.34 Debt to equity 3.11 2.77 2.08 2.65 4 Debt ratio 0.61 0.63 0.55 0.60 1.31

Finance Report 2011

Chapter: 2. Dewan Sugar Mills

5

2.3 Liquidity ratios

2.3.1 Current ratio

Current ratio = current assets / current liabilities From 2006 to 2008 both current assets and current liabilities have increased to more than 100%. There has been increase in stock in trade which has increased very rapidly. Loans, advances and short term prepayments have also increased while trade debts have decreased considerably. Liabilities have increased mainly due to increase in trade and other payables. Besides that short term borrowings and current portion of long term financing have also increased. Firm’s ability to cover its current liabilities with current assets is significant, better than industry average

• 0.50

1.00 1.50 2.00 2.50 3.00 3.50 CURRENT RATIO QUICK RATIO DEBT TO EQUITY DEBT RATIO 2010 2009 2008 COMPANY AVERAGES INDUSTRY AVERAGES

Finance Report 2011

Chapter: 2. Dewan Sugar Mills

6

2.3.2 Quick ratio

Quick ratio = (current assets – inventories (stock in trade)) / current liabilities Quick ratios are lower than Current ratio because stock in trade has increased very rapidly and hence firm’s ability to cover its current liabilities with its most liquid assets has decreased, but still the firm is in better financial conditions as compared to industry averages.

2.4 Financial leverage (debt) ratios

2.4.1 Debt-to-equity ratios

Debt-to-equity ratio = total debt / shareholder’s equity Ratios clearly defines to a great extent firm is using borrowed money. Although liabilities against assets subject to finance lease has decreased but there is a considerable increase in deferred liabilities, which is the main reason for increase in non current liabilities. In shareholder’s equity inappropriate profit has slightly decreased in 2006 to 2007 and than increased (100% as compared to 2007) rapidly. So due to greater debt, this ratio is greater.

2.4.2 Debt ratio

Debt ratio = total debt / total assets Firm’s non current assets property, plant and equipment have increased over the period and similarly its long term investment. Thus on average 60% of the firm’s assets are financed with debt.

Finance Report 2011

Chapter: 3. Al-Abbas Sugar Mills Limited

7

• 3. Al-Abbas Sugar Mills Limited

Al-Abbas Sugar Mills Ltd was founded in May 1991 with an initial paid up capital of 500,000Rs. This was enhanced to Rs 173 million through issue of public shares on 23rd Sugar Cane shortage is considered as highest challenge for Sugar Industry in Pakistan generally and Province o£ Sind particularly. As Sind has suffered a lot due to shortage o~ Irrigation Water and on the top of that almost there was no Rain either in Monsoon or in winter. However, your April, 1992. Production on normal basis began from 1994. During the year 2008 company has suffered an after tax loss which is attributed to the capacity under utilization of the core sugar operations , being the result of the delayed commencement

• f production and disrupted supply of inputs. The other main reason of losses is the fixing of

minimum support price of Rs.81 per 40 kg which has no relationship with selling price of sugar. The other factors of production were also on high side due to inflation and the global economic

• recession. Financial charges were also on higher side. The extra burden of seasonal cost was

also incurred by the mills early which may have been delayed till the availability of cane for mills. In this season the availability of sugarcane is very low and there is tough competition among the mills. The pace of crushing is low due to insufficient supply of sugarcane. The current season for distillery seems comparatively tough because of the overall shortage of sugarcane / yield of sugarcane that would definitely affect the production of molasses. It is feared that the capacity utilization of distillery overall in Pakistan will remain on lower side. Keeping in view the present market scenario the recipient of revenue will also be affected by the global fuel market prices.

Finance Report 2011

Chapter: 3. Al-Abbas Sugar Mills Limited

8

Management fully appreciates Government's decision to allow Sugar Industry to import 500,000 Mt.'s of Raw Sugar without payment of custom duty. They think it will greatly help the country to reduce its dependence on Imported Sugar and also help country to utilize Manufacturing capacity of Sugar Industry at maximum level. We also like to point out that despite of fact that Sugar Industry is trying its best to use its Production Capacity at Maximum Level by Refining imported Raw Sugar, Government is still continuing with policy of Import of Refined Sugar of low quality at very low rate of custom duty.

3.1 Credit Rating

The Pakistan Credit Rating Agency (Pvt.) Limited (PACRA) has assigned the Long Term Rating of A - (A minus) and Short Term Rating of A2 (single A two).

3.2 Balance sheet of Al-Abbas Sugar Mills

Balance Sheet as at sep 30 2008 2007 2006 Assets Non -current assets Property, plant and equipment 221,119,546 239,348,527 262,839,530 Long-term deposits 1,426,886 1,426,886 1,426,886 Total fixed assets 222,546,432 240,775,413 264,266,416 Current assets Stores, spares and loose tools 12,094,745 9,551,228 10,230,150 Stock in trade 44,856,317 7,207,713 1,620,566 Trade debtors - unsecured 1,591,577 8,199,044 149,816 Loans and advances 26,067,919 24,240,956 29,685,065 Deposits, prepayments and other receivable 309,886 274,653 500,000

Finance Report 2011

Chapter: 3. Al-Abbas Sugar Mills Limited

9

Cash and bank balances 1,336,551 1,671,196 1,288,620 Total current assets 86,256,995 51,144,790 43,474,217 Total assets 308,803,427 291,920,203 307,740,633 Equity and liabilities 2008 2007 2006 Share capital and reserves Authorized capital 15,000,000 (2005: 15,000,000) Ordinary shares

• f Rs.10/=each

150,000,000 150,000,000 150,000,000 Issued, subscribed and paid-up capital 141,000,000 141,000,000 141,000,000 Accumulated loss (937,571,932) (970,967,942) (923,722,777) Total equity (796,571,932) (829,967,942) (782,722,777) Non-current liabilities Long term loan 261,996,796 319,294,075 357,866,929 Deferred income 90,814,000 153,301,062 153,301,062 Total non Current Liabilities 352,810,796 472,595,137 511,167,991 Current liabilities Current portion of long term liabilities 520,540,427 449,629,877 373,727,618 Trade payables 202,848,930 170,487,926 166,692,595 Accrued Mark up on loans 18,991,927 18,991,927 18,991,927 Taxation 10,183,279 10,183,279 7,683,279 Total current liabilities 752,564,563 649,293,009 579,295,419 Total Equity and Liability 308,803,427 291,920,204 307,740,633

Finance Report 2011

Chapter: 3. Al-Abbas Sugar Mills Limited

10

3.3 Liquidity and Leverage Ratios of Dewan Sugar Mills

Ratios 2008 2007 2006 Company Averages Industry Averages Current ratio 0.11 0.08 0.08 0.09 0.73 Quick ratio 0.06 0.07 0.07 0.06 0.34 Debt to equity (1.39) (1.35) (1.39) (1.38) Debt Ratio 3.58 3.84 3.54 3.66 1.31

(4.00) (3.00) (2.00) (1.00)

• 1.00

2.00 3.00 4.00 5.00 CURRENT RATIO QUICK RATIO DEBT TO EQUITY DEBT RATIO 2010 2009 2008 Company Averages Industry Averages

Finance Report 2011

Chapter: 3. Al-Abbas Sugar Mills Limited

11

3.4 Liquidity ratios

3.4.1 Current ratio

Current ratio = current assets / current liabilities Like Dewan sugar mills there stock in trade has also increased very rapidly. Trade debts have increased very rapidly from 2006 to 2007 and than decreased in a similar trend. Liabilities have increased mainly due to increase in trade payables and current portion of long term liabilities. Firm’s ability to cover its current liabilities with current assets is very limited almost nil.

3.4.2 Quick ratio

Quick ratio = (current assets – inventories (stock in trade)) / current liabilities Quick ratios are lower than Current ratio because stock in trade has increased very rapidly and hence firm’s ability to cover its current liabilities with its most liquid assets is very limited.

3.4.3 Debt-to-equity ratios

Debt-to-equity ratio = total debt / shareholder’s equity Ratios clearly defines to a great extent firm is using borrowed money. Non current liabilities has decreased as long term loan and deferred income decreased but current liabilities have continuously increased.

Finance Report 2011

Chapter: 3. Al-Abbas Sugar Mills Limited

12

In shareholder’s equity firm has negative equity, means that spite of returning shareholder’s money with profit they have consumed it to cover their losses. Their equity clearly defines that company is financially in very weak position.

3.4.4 Debt ratio

Debt ratio = total debt / total assets Firm’s non current assets property, plant and equipment have decreased over the period and its long term deposits have remained unchanged. Thus on average 366% of the firm’s assets are financed with debt.

Finance Report 2011

Chapter: 4. Liquidity and Leverage Ratio’s Comparison with Industry Averages

13

• 4. Liquidity and Leverage Ratio’s Comparison with Industry Averages

Ratios Dewan Sugar Al Abbas Sugar Industry Averages Current ratio 0.95 0.09 0.73 Quick ratio 0.44 0.06 0.34 Debt to equity 2.65 (1.38) Debt Ratio 0.60 3.66 1.31

4.1 Dewan Sugar

• More liquid than industry standards, means it has higher liquidity than industry’s

minimum requirement.

• It has the capability to payback its creditors in time
• Its total debt to total assets is relatively lower than industry means it can increase its

liabilities in case of some unfavorable situation without much difficulty.

• It can meet short term obligations quiet easily.
• 2
• 1

1 2 3 4 CURRENT RATIO QUICK RATIO DEBT TO EQUITY DEBT RATIO DEWAN SUGAR AL ABBAS SUGAR INDUSTRY AVERAGES

Finance Report 2011

Chapter: 4. Liquidity and Leverage Ratio’s Comparison with Industry Averages

14

• In short its financially quiet sound and it should further utilize its assets to increase

profitability.

4.2 Al-Abbas Sugar

• Under liquid than industry standards, means it has lower liquidity and it’s difficult for

the firm to payback its current liabilities using current assets.

• It’s highly incapable to payback its creditors in time and eventually in current situation

it’s not easy for the firm to take raw materials etc on credit.

• Its total debt to total assets is very high than industry means it is highly financed by

debt, far more than industry standards.

• It can’t meet any short term obligations and any firm can’t bear any further losses.
• In short it’s financially very weak and it should not increase its debt anymore.

Finance Report 2011

Chapter: 5. Conclusion

15

• 5. Conclusion

In comparison with each other, both sugar mills have contrary ratios. Dewan Sugar is more liquid than industry average while Al-Abbas Sugar mill is very less liquid; similarly Dewan sugar utilizes fewer assets than industry average while Al-Abbas is highly financed by debt, even higher than industry standards.

10/4/2012 1

By Adnan Waqar (11828) Adeel Amir Siddiqui (11262) Zeeshan Ahmed Memon (12045)

Liqui Liquidity ratios ty ratios

• Current

Current ratio ratio Current ratio = current assets / current liabilities

• Quic

Quick ratio ratio Quick ratio = (current assets – inventories (stock in trade)) / current liabilities

Lever Leverage Rati Ratio

• Debt

Debt-to

• to-eq

equity ratios ty ratios Debt-to-equity ratio = total debt / shareholder’s equity

• Debt

Debt ratio ratio Debt ratio = total debt / total assets Al-Abbas Sugar Mills Ltd was founded in may 1991 with an initial paid up capital

• f

500,000Rs. This was enhanced to Rs 173 million through issue of public shares on 23rd April, 1992. Production

• n

normal basis April, 1992. Production

• n

normal basis began from 1994.

 Dewan Sugar Mills Limited is one of the largest

sugar mills of Pakistan having a cane crushing capacity of over 9,000 tons per day. It was established as a public limited company in 1982.

 Dewan Sugar Mills Limited has been awarded

with ISO 9002 certificate that proves the company’s strength in producing consistent and high quality product. Their aim is to benefit the customers, employees and shareholders, and to fulfill their commitments to the society.

Liquidity ratios

 Current ratio

d ( k)

 Acid Test (Quick)

ratio

10/4/2012 2

Leverage Ratios

 Debt-to-equity ratio

b

 Debt ratio

 Under liquid than

industry standards.

 In current situation its

not easy for the firm to take raw materials etc

take raw materials etc

• n credit.

 Its total debt to total

assets is very high

• 1.00

 It can’t meet any short

term obligations.

 In short it’s financially

very weak and it

should not increase its debt anymore.

• 1.00

Liquidity ratios

 Current ratio

d ( k)

 Acid Test (Quick) ratio

Leverage Ratios

 Debt-to-equity ratios

b

 Debt ratio

 It can meet short term

• bligations quiet

easily.

 Its debt ratio is

relatively lower than industry averages

• 0.50

10/4/2012 3

 More liquid than

industry standards

 In short its financially

quiet sound and it should further utilize its assets to increase profitability.

• 0.50

• 2
• 1