Financial ratios analysis (FY 08-09) Fixed Line Telecommunication sector Miss Asiya Shirazi Introduction to Business Finance Submitted By Table of Contents Pak Datacom Limited2 Worldcall Telecom Limited6 Telecard Limited10 Pakistan Telecommunication Company Limited11 Year 2009 for Pak Datacom proved much better than the previous year as the company posted a higher EPS of PKR 20. 64 against PKR 14. 53 last fiscal year. Total assets also increased in the year 2009 to PKR 1001 million from PKR 833 million.The overall condition and standing of the company has improved from 2008 to 2009. The major strength has been in utilization of funds in the proper and efficient approach. The profit for the company has increased to for more than 40 percent during the year. The company has not only performed well as compared to its previous year but also stand out from its industry and competitors.
Liquidity Ratios The current ratio improved from 1. 65 in 2008 to 1. 75 in 2009. The current assets increased by 25. 4% where as the current liabilities increased by 18.
5%.This resulted in a much improved liquidity position of Pak Datacom, as now Rs. 1. 75 to cover its Re. 1 liability. Pak Datacom has managed to keep a higher current ratio than the industry averages (1. 16). Improved current ratio in 2009 was primarily because of increase in short term investments and cash and bank balances.
Short term investments and cash and bank balances increased by 142% and 54% respectively. In current liabilities customer deposits grew by 41. 6%, provision for taxation increased by 78. 89% while the trade creditors decreased by 5. 5%.The quick ratio also improved in year 2009 to 1. 36 from 1.
23 in year 2008. This shows that Pak Datacom is allocating most of its current assets in very highly liquid assets, which could easily converted into cash. From a creditors point of view Pak datacom improved liquidity is a healthy sign, and the risk of nonpayment of dues is significantly reduced. Comparing the quick ratio with the industry is also higher showing that the Pak datacom is more liquid than its competitors.
From a view point of the management the higher the liquidity ratios, better it is.Pak Datacom’s both current ratio and quick ratio are greater than the industry averages illustrating that the management has greater capacity to pay their liabilities than the industry. From a view of shareholder, higher investment in liquid assets would lead to lower investment in revenue generating assets.
This means that Pak datacom would generate lesser profits and would be a negative signal to the shareholders wealth. Efficiency Ratios Pak datacom decreased their average collection period significantly from 90 to 35 days in 2009.This shows that the management has more efficiently converted the credit sales into cash. Improving efficiency ratios such as average collection period depicts, management is improving its efficiency during the operations of the business. The average collection period among the industry is 55 days for 2009. This means that Pak Datacom is receiving cash from sales quicker than most competitors in the industry.
From a view point of creditor, the lesser the average collection period, higher would be the cash flow, and lesser would be the risk of default of Pak datacom.Asset turnover increased during year 2009 to 1. 04 from 0. 829 indicating the Pak datacom is efficiently utilizing its assets to generate revenues. Industry averages is much lower than that of Pak datacom. One reason for low average industry of asset turnover is the poor financial performance of the entire sector.
Most of the companies in the telecom sector are experiencing shrinkage in margins due high competition in the industry. Thus most telecom companies are recording lesser revenues and subsequently having lower Asset turnovers. From a creditor view point Pak datacom asset turnover of 1. 4 is considered to be on the lower side. This means that there is a lot of space of the management to improve their efficiency levels during their operation and generate more sales from the existing assets.
Debt Ratios The debt ratio witnessed a decline from 42. 8% in year 2008 to 40. 9% in year 2009. A decrease in debt ratio means that the Pak datacom relying on internal equity rather than debt for financing additional assets.
The debt/equity ratio improved to 57. 5% in 2009 from 60. 2% in 2008. This means that the company is reducing debt of the company and increasing its equity.Industry average debt ratio for 2009 is 47%. This means that Pak datacom is caring lesser debt than the industry.
From the view point of the creditors, the higher the equity of Datacom, the stable the company would be. The lower the debt, the lower would be the interest expense per year and higher would be the cash flows for payments. Times interest earned ratio has decreased over the year 2009 from 585 to 427 times. This decline in TIE ratio over the year will have a negative effect on the company creditors and management. The interest paying capacity of Pak datacom has decreased over the year.
One reason for decreased TIE ratio is 94% increase in financing cost. However, Pak datacom TIE ratio is much better than that of the industry 110. This means that pak datacom ‘s operating income has a greater capability to pay Financing charges. Funded debt to working capital ratio decreased over the year to 0.
272 from 0. 369 showing more net working capital has improved over the year. Profitability Ratio As mentioned earlier Pak datacom’s profitability ratios showed an improvement in the year 2009. The gross profit margin increased to 37. 8% from 21. % in year 2008. Pak datacom’s revenue increased by 51% in comparison to operating expenses increased only by 48%, leading to healthy increase in Gross profit margin.
Despite a huge expansion in operations during year 2009 Pak data com maintained Net profit margin, return on assets, and return on equity ratios to the same levels. From creditors point of view it is a good sign that Pak data com has maintained its profitability levels. Market Ratios Market Price to book value and price to earnings multiple both witnessed a decline in year 2009.P/B ratio multiple declined to 9. 34x from 12.
38x. P/E multiple decreased to 3. 37x from 5. 37x.
The reason for decline in P/E, P/B multiple is low market prices during 2009. The market prices declined PKR 60 per share from PKR 78 during 2008. Moreover both book value per share and earnings per share increased during year 2009 leading double effect decrease the multiples.
The dividend yield improved for Pak datacom over the year. This increase from 7. 7% to 10.
1% was due to increase in Dividends per share and a lower stock market price during 2009.Dividend yield is the highest among the industry, a brilliant sign for the shareholders. From a point of view of the management higher divident yield is highly beneficial for the company future. The year end of the Worldcall Telecom Limited is Dec 2009 and Dec 2008. The company is running is heavy losses and problems that are prominently visible on the balance sheet and income statement of the company for the FY 09-08. The company has PKR 0. 57 per share loss in 2009 which was PKR 0. 35 per share in 2008.
The total assets for the company increased to PKR 22. 15 billion in 2009 from PKR 21. 003 billion in 2008. The company overall performance has been in disastrous conditions with high losses and non utilization of assets for generation of profits for the company. The company has a negative networking capital although the Current assets for the company has increase which show that current liability has significantly increased during the year. Liquidity Ratio The current ratio for Worldcall Telecom Limited has decrease from 1. 154 in FY 2008 to 0. 803 to FY 2009 which prominently show that liquidity has decreased.
Although the current assets for the company has increased by 23 % during the year but current liability has increased with a greater proportion of about 78 % which has resulted into a decrease in current ratio during the year. Lack of liquidity is not a good sign for the creditors and management as it may lead to lack of availability for the funds for operation of the company and repayment of debts. The company has also show a lower current ratio than the industrial average for FY 2009. The company has insufficient liquidity as compare to its industry.World call management must improve current ratio in order to avoid a default. The quick ratio has also decreased from 1. 106 in FY 2008 to 0.
768 in FY 2009. There are huge amount of account receivable (trade debt) which has grown to more than double during the year. For the creditors, this is not a good sign as the company has large assets in the form of receivables showing lack of liquidity. Management is facing a major unavailability of funds for operations and payment of debts. The quick ratio of the industry is higher than the company’s which show that Worldcall has lower liquidity for its competitors.Efficiency Ratio Although the average collection period improved to 90 days in FY 2009 from 114 days in FY 2008, it is still much higher than the industry average of 58 days. Improvement in world call’s average collection period is healthy sign for the company and its cash flow position. Now credit sales are collected within 90 days from the customers.
In comparison with the industry averages, world call needs to increase its efficiency and collect receivable in time. Cash discounts may be one of the strategies that world call may do in order to decrease their average collection period.Total asset turnover increased to 0. 369 from 0.
147 indicating that world call management has done a significant effort to improve the revenue generating capacity of its assets. Although the efficiency of total assets has improved during the year, asset turnover is far lesser than that of the industry averages which is at 0. 564. For creditors, world call inefficiency of generating greater revenues could be a cause of concern.
In efficient management would ultimately result in lower profit and lower cash flows available for short term payments.Debt ratios As stated above year FY 2009 proved to be a very bad year for world call. This statement could further be supplemented by the fact that world call in debtness in continuously increasing. Debt ratio increased from 44.
3% to 50. 1%. This indicates that world call is more inclined to finance its assets from debt rather than increasing their equity base. The short term debt increased by almost 79% during the year while equity decreased by 3%.
For creditors, increased focus on short term liabilities to fund their asset is the biggest risk.The higher world call would take the debt, the higher would be the world call’s probability to default. Debt ratio in comparison with the industry averages is slightly higher.
This means that the norm of the industry is to finance about 47% of its total assets from debt while the remaining from equity. World call equity base quickly eroded because of continuous losses for the last three years. This is evident from the debt to equity ratio which rose from 81% to 100% in FY 2009. High leveraged world call capacity to pay interest also decreased.
TIE ratios significant decreased 0. 029 in year 2009 because of a 320% increase in financing cost. This is an alarm for management as well as for the creditors. World call has to turn on its head if it wants to continue its operations.
Profitability World call has continued to post heavy losses. A slight respite for world call is the fact that during 2009 world call posted a much higher gross profit than last year. Also its operating income is in positive numbers at PKR 15. 355 million.
While most of the industry is incurring reasonable profits, world call has posted a loss of 490 million.For shareholders, world call decreasing return on equity is a very bad sign. Market ratios World call posted a LPS of Rs. 0. 57 in 2009.
Due to lower market prices during 2009, market price to book ratio decreased to 0. 1947. Shareholder point of view world call is a very bad share to invest into. Since the last two years it has not declared any profit or dividends for its shareholders. The management must at urgent basis remove all inefficiencies and try consolidating the company. Telecard Limited By Hamza Arshad Pakistan Telecommunication Company Limited By Danish Saleem