ratio analysis of nadeem textile mills

Published on: **Mar 3, 2016**

Published in:
Business

- 1. NADEEM TEXTILE MILLS LIMITED 1
- 2. Presented by : M.WAQAR IBRAHIM SP14-BBS-005 Presented to : IMRAN-UR-REHMAN 2
- 3. • Assessment of the firm’s past, present and future financial conditions • Done to find firm’s financial strengths and weaknesses • Primary Tools: – Financial Statements – Comparison of financial ratios to past, industry, sector and all firms 3
- 4. Objectives of Ratio Analysis Evaluate current operations • Compare performance with past performance • Compare performance against other firms or industry standards • Study the efficiency of operations • Study the risk of operations 4
- 5. Types of Ratios • Financial Ratios: – Liquidity Ratios • Assess ability to cover current obligations – Leverage Ratios • Assess ability to cover long term debt obligations • Operational Ratios: – Activity (Turnover) Ratios • Assess amount of activity relative to amount of resources used – Profitability Ratios • Assess profits relative to amount of resources used • Valuation Ratios: • Assess market price relative to assets or earnings 5
- 6. Liquidity Ratios Current Ratio: Years 2015 Industry norm Current Ratio 0.867 0.931 In 2015, the firm’s ability to cover its current liabilities with its current assets is 0.867. the industry norm, goes up to 1.09 , which means that the company has the ability to pay its liabilities, as the definition says that higher the ratio, greater the ability of the firm to pay its bills. This tells that nadeem testile mills needs to improve their liquidity, because their current ratio is less than industry norm. 6
- 7. 7 Quick Ratio: Years 2015 Industry Norm Quick Ratio 0.24 0.54 According to the definition of quick Ratio, the company should have the ability to pay its liabilities through its most liquid assets. The table shows that in 2015, the firm has the ratio 0.24 cents. Then we observe the industry norm is 0.54. low liquidity ratio could signal the company is suffering financial trouble. So we can figure out from the ratios that the company blocked their funds in inventory. This leads us to believe that the company is a somewhat risky business.
- 8. Net working capital: 8 Years 2015 Industry norm Net working capital -196 1560 The ratio is supposed to be high Working Capital is a measure of both a company's efficiency and its short-term financial health. The working capital ratio indicates whether a company has enough short term assets to cover its short term debt. this company has negative working capital so it uses aggressive approach. Company not covering their short term liabilities through its short term assets.
- 9. Debt Ratios Debt equity Ratio: Years 2015 Industry norm Debt Ratio % 19:81 42:58 The ratio shows the company’s ability to cover its debts through its total assets. The ratio is 19:81 % in current year , and the industry norm is 42:58 % The ratio has to be low. So we can interpret that in the current year company is in good condition because company has 19 % debts, the risk of the firm is getting higher if the ratio goes up. 9
- 10. 10 Interest coverage Ratio: Years 2015 Industry norm I.C Ratio -0.89 1.42 In the current year Company has a ratio of -0.89 which is a large decrease from industry standards. This means that the company haven’t comfortable coverage of interest, and that the coverage has to increased in the next year.
- 11. 11 Activity Ratios Inventory Turnover Ratio: Years 2015 Industry norm Inventory Turnover (times) Days 14.3 26 21.4 17 The company’s Inventory turnover ratios decreased from industry standards. which means that its ability to sell inventory has relatively come down. In current year Company has ratio of 14.3 times and the industry standard has ratio of 21.4. These ratios are not what we expected; we assumed that the ratios would be much higher because company taking 9 days more to sell its inventory.
- 12. Average Collection Period: Years 2015 Industry norm Avg. Collection Period (Times) Days 12.6 29 15.8 23 The ability of the firm of collecting the receivables in the specific time. Here in the current year the turnover in days is almost 29, but the collection days of the industry norm is 23 . This shows company giving flexibility of the 6 days to their customer . This shows that the collection is not faster as compared to the industry standards. 12
- 13. 13 Average Payment Period: Years 2015 Industry norm Avg. Payment Period (Times) Days 13 28 15 24 Company’s average period for payment is increase to 04 days from industry standards. This increasing average payment period trend shows that how efficiently company using creditor’s money and also assuring that payments are being made in a prompt manner by company to its creditors.
- 14. Gross operating cycle: 14 Years 2015 Industry norm Avg. collection period (Days) inventory (Days) Total 29 26 ------- 55 23 17 -------- 40 Gross operating cycle shows that company has 55 days in which company making their finished goods and converted into sale. While industry standards is 40 days . Company need to decrease the inventory and collection period of days to meat the industry standards .
- 15. Net operating cycle: 15 Years 2015 Industry norm Avg. collection period (Days) inventory (Days) Avg. payment period 29 26 ------- 55 (28) ------ 27 23 17 -------- 40 (24) ------- 16 Net operating cycle is the number of days that the company takes to generate revenues with assets. Industry standards is 16 while our company is 27 days 11 days larger than standards which is not good, this happened due to inventory because company takes 9 days more from the standards to produce goods and sell.
- 16. Profitability Ratios Gross Profit Margin: Years 2015 Industry norm Gross Profit Margin % 3.8 8.3 The ratio should be high according to the definition. Because higher the ratio, higher will be the firm’s ability to produce goods and services at low cost with high sales. Here in this table there is big difference between the company’s ratio and industry standards . Because its lower than the industry standards which means it is unfavorable. 16
- 17. Net Profit Margin: Years 2015 Industry norm Net Profit Margin % -1.7 -2.7 According to the definition, higher the ratio, higher will be the firm’s ability to pay its taxes. In the current year, the company has negative ratio that is 1.7. which shows Company is not working efficiently to converting sales into actual profit. 17
- 18. Return on Assets (ROA): Years 2015 Industry norm ROA % 3 0.2 The increase in Return on Assets indicates that the company is generating profits from all of its resources in the current year as compared to the industry standards. The higher of this ratio is, the better for the company. Because company blocking their funds in inventory and operating profit is negative. 18
- 19. 19 Return on Equity (ROE): Years 2015 Industry norm ROE % 2 -1.3 The ratio should be higher. the ratio is 2 % that is 3.3 % increase from industry stanards. This increase in Return on Equity is a good thing for stockholders and indicates that company is using the equity provided by stockholders during this specific year effectively and using it to generate more equity for the owners.
- 20. Market Ratios Earning per share Ratio: Years 2015 Industry norm EPS Ratio -7.3 5.4 Company’s earning per share ratio is decreased by12.7 times which suggests that investors may be looking less favorably in this company. This ratio should be high, because the higher the earning per share ratio, the higher will be the investors confidence in company. 20
- 21. Conclusion After applying all the ratios we got an idea that the Nadeem textile mills suffering in loss. Because through out the analysis of the company with the industry standards, we found that the company is in loss because company’s net profit is negative, working capital is negative and company not in a position to pay their debts with in their resources. 21
- 22. Thank you! 22 Presented By : MUHAMMAD WAQAR IBRAHIM SP14-BBS-005