Assessing Production Methods To Optimise Profit Finance Essay
In the process of refining, dirt is separated and sent to soap section for making laundry soap.
Saopnification Cooking
Caustic soda solution is added to a batch of raw material and saponified by boiling with live steam. After fat stock has been saponified, common salt is added to it and boiling continues.
Filling in Frames
Liquid is filled in frames to makes blocks of soap
Cutting into Cakes
Solid soap blocks are divided in small cubes.
Packing
Soap is packed in packets and cartons
Godown
Finished soap is sent to Godown and from Godown it is delivered to market.
Ratio Analysis
Ratio analysis is a tool which is used by individuals to conduct quantitative analysis of information of a company's financial statements, where we calculate ratios from current year numbers which are then compare to previous years of competing companies, industry, or even with the economy in order to judge the performance of the company, in ratio analyses there are many ratios which are calculated from financial statements relevant to the company's performance, financing & liquidity, activity. There are some common ratios include debt-equity ratio, price-earnings ratio, earnings per share, working capital, and asset turnover.
Sales
The absolute amount of sales of the firm firstly indicates its size. Size has implication of purchasing and selling power, amount of markets share and economies of scale. In 2012 net sales of pak Ghee mills is Rs 2,301,574 and is therefore of size that should command significant influence and economies of scale in is industry
The next point of interest with sales is the rate of change in the overall sales level.
2012
2013
2014
Sales
2,338,316
2,735,953
3,040,738
17.01%
11.14%
This tells us how sales are growing and may lead to question about growth relative to general economy, growth relative to competitor
The percentage change is sales can be calculated using the formula:
Percentage change in sales= salest - salest-1/ salest-1
Profitability
Profit is difficult term to use unless it is measured in context. For example to say a company has made 20 % profit does not provide any information about company but if you know company has made a 20% return on equity, or 20% gross profit then the term profit is giving meanings. The ratios discussed under profitability are:
Gross profit margins (GPM)
Net profit margins (NPM)
Return on asset (ROA)
Return on equity (ROE)
Gross profit margins (GPM) sometimes also called operating profit margins, is amount remaining after cost of sales. The cost of goods sold is, clearly, an important component of the gross profit margin. It is usually calculated as the sum of the cost of materials the company purchases plus any labor involved in the manufacture of finished goods, plus associated overhead.
Gross profit margins can be calculated using formula:
Gross profit margin = (Sales - Cost of Goods Sold) / Sales
Gross Profit Margin
2012
2013
2014
Sales
2,338,316
2,735,953
3,040,738
Gross Profit
156,688
176,427
206,832
GPM
6.70%
6.45%
6.80%
Having low gross profit margins may result from low prices, high cost of raw material, high cost of labor a bad product mix and a combination of these.
Net Profit Margins (NPM) is most commonly used profitability ratio since it compares the bottom line to the amount of sales. The net profit margin narrows the focus on profitability, and highlights not just the company's sales efforts, but also its ability to keep operating costs down, relative to sales. The formula generally used to determine the net profit margin is:
Net Profit Margin = Earnings After Taxes / Sales
Net Profit Margin
2012
2013
2014
Net Profit
10,966
12,984
23,635
Sales
2,338,316
2,735,953
3,040,738
Net Profit margin
0.47%
0.47%
0.78%
Return on assets (ROA) is most commonly used measure of performance of firm. This measures the amount of profit generated by the assets employed by dividing the profit earned by total assets. This formula will return the percentage earnings for a company in terms of its total assets. The better the job that management does in managing its assets-the resources available to it-to bring about profits, the greater this percentage will be.
It's normal to calculate the return on total assets on an annual basis, rather than on a quarterly basis. There are several ways to measure this return; one useful method is:
Return on Assets = (Net profit) / Total Assets
Return on Assets
2012
2013
2014
Net income
10,966
12,984
23,635
Total assets
300,096
309,119
333,265
ROA
3.65%
4.20%
7.09%
Return of Equity (ROE) measures the return on the funds of owner, where equity is total investment of all the owners of the firm. You can compare return on equity with return on assets to infer how a company obtains the funds used to acquire assets. Again, there are several ways to calculate this ratio; here, it is measured according to this formula:
Return on Equity = Net Income / Owners' Equity
The principal difference between the formula for return on assets and for return on equity is the use of equity rather than total assets in the denominator, and it is here that the technique of comparing ratios comes into play. By examining the difference between Return on Assets and Return on Equity, you can largely determine how the company is funding its operations.
Return on Equity
2012
2013
2014
Net Income
10,966
12,984
23,635
Owners Equity
108,603
119,569
132,553
ROE
10.10%
10.86%
17.83%
Liquidity Analysis Ratios
Liquidity analysis ratio determine the ability of company to pay of its short term debts, higher the value of ratio indicate larger margin of safety that a company have to pay of its short term debts, Common ratios include the current ratio and the quick ratio , different analysts use different assets relevant to calculate liquidity, some analysts only use sum of cash and equalents which is divided by current liabilities because they have a view point that they are the most liquid assets and are most likely to be used to cover short term debt at the time of emergency, ratios under liquidity are as follows
Current Ratio
Quick Ratio
Current ratio (CR) is the most commonly used measure of liquidity of a firm. This ratio measures how many dollars of current assets are available to pay one dollar's worth of current liability the usual formula is:
Current Ratio = Current Assets / Current Liabilities
Current ratio is very closely related to working capital. And the working capital is a difference of current asset and current liabilities.
Is a high current ratio good or bad? Certainly, from the creditor's standpoint, a high current ratio means that the company is well-placed to pay back its loans. Consider, though, the nature of the current assets: they consist mainly of cash and cash equivalents. Funds invested in these types of assets do not contribute strongly and actively to the creation of income. Therefore, from the standpoint of stockholders and management, a current ratio that is very high means that the company's assets are not being used to best advantage.
Current Ratio
2012
2013
2014
Current assets
164,120.34
186,947.14
224,897.38
Current liabilities
31,149.57
49,515.21
68,583.94
Current Ratio
5.27
3.78
3.28
Quick ratio (QR) sometimes called acid test ratio, adjust the current ratio to correct for this problem. Since the firm will always have to need inventory and since the inventory cannot be used to pay the bills, so quick ratio is a better indicator of the liquidity of a company. The quick ratio determines the relationship between quickly accessible current assets and current liabilities:
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
The quick ratio shows whether a company can meet its liabilities from quickly-accessible assets.
Quick Ratio
2012
2013
2014
Current assets
164,120.34
186,947.14
224,897.38
Inventory
75,688.81
85,149.91
94,611.01
Prepayments
985.43
985.43
985.43
Current Liabilities
13,865.88
16,456.58
25,010.75
Quick Ratio
6.31
6.13
5.17
Activity Analysis Ratios
Activity ratios measure a firm's ability to convert different accounts within their balance sheets into cash or sales. Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues. Ratios discussed in activity analysis are:
Assets Turnover Ratio
Inventory Turnover Ratio
Asset turnover (AT) is a measure of how well a firm is putting its assets to work. If AT is low it means that firm has to many unproductive assets for example Account receivable, inventory, plant and equipment, machinery for its current level of sales. Or, it may means that the level of sales has no yet reached the amount appropriate for invested assets. It can be calculated using formula:
Assets turnover = Sales/total assets
Assets Turnover Ratio
2012
2013
2014
Sales
2,338,315.80
2,735,953.35
3,040,738.35
Average Total Assets
300,096.04
309,118.84
333,265.07
7.79
8.85
9.12
Inventory Turnover Ratio
No company wants to have too large an inventory. Goods that remain in inventory too long tie up the company's assets in idle stock, often incur carrying charges for the storage of the goods, and can become obsolete while awaiting sale.
The formula for the Inventory Turnover Ratio is:
Inventory Turnover = Cost of Goods Sold / Average Inventory
Where the Average Inventory figure refers to the value of the inventory on any given day during the period during which the Cost of Goods Sold is calculated. The higher an inventory turnover rate, the more closely a company conforms to just-in-time procedures.
Inventory Turnover Ratio
2012
2013
2014
Cost of Goods Sold
2,181,627.44
2,559,526.24
2,833,906.48
Inventories
20,702.41
23,290.21
25,878.01
105.38
109.90
109.51
Capital Structure Analysis Ratios
The capital structure is how a firm finances its overall operations and growth by using different sources of funds. A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. A company's proportion of short and long-term debt is considered when analyzing capital structure. When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered. Capital structure ratios discussed are:
Debt Ratio
Equity ratio
Times interest Earned Ratio
Debt Ratio
The debt ratio is defined by this formula:
Debt ratio = Total debt / Total assets
It is a healthy sign when a company's debt ratio is falls, although both stockholders and potential creditors would prefer to see the rate of decline in the debt ratio more closely match the decline in return on assets. As the return on assets falls, the net income available to make payments on debt also falls. This company should probably take action to retire some of its short-term debt, and the current portion of its long-term debt, as soon as possible.
Debt Ratio
2012
2013
2014
Total Liabilities
170,176.95
164,922.05
164,139.96
Total Assets
300,096.04
309,118.84
333,265.07
56.71%
53.35%
49.25%
Equity Ratio
The equity ratio is the opposite of the debt ratio. It is that portion of the company's assets financed by stockholders:
Equity Ratio = Total Equity / Total assets
It is usually easier to acquire assets through debt than to acquire them through equity. There are certain obvious considerations: for example, you might need to acquire investment capital from many investors; whereas you might be able to borrow the required funds from just one creditor. Less obvious is the issue of priority.
Equity ratio
2012
2013
2014
Total Equity
108,602.67
119,569.09
132,553.04
Total Assets
300,096.04
309,118.84
333,265.07
Equity ratio
0.36
0.39
0.40
Time interest earned ratio is also called Interest Coverage Ratio. It is one of measure frequently used by creditors to evaluate the risk involved in loaning money to a firm is the Times Interest Earned ratio. This is the number of times in a given period that a company earns enough income to cover its interest payments. A ratio of 5, for example, would mean that the amount of interest payments is earned 5 times over during that period.
The usual formula is:
Times Interest Earned = EBIT / Total Interest Payments
EBIT stands for Earnings before Interest and Taxes.
Interest Coverage Ratio
2012
2013
2014
EBIT
49,318.79
51,421.70
67,645.17
Interest Expense
30,951.76
29,699.10
28,208.44
Notes to the Financial Statements
1. STATUS AND NATURE OF BUSINESS
M/S PAK GHEE MILLS is a private limited Company which is established under Company's Act 1984 and registered with Securities and Exchange Commission of Pakistan. The Head Office of the unit is situated at 164/14 New Muslim Town, Bahawalpur. Whereas unit will be situated at Hasilpur road near Employees Housing Society, Bahawalpur.
2. BASIS OF PREPARATION
2.1 Statement of compliance
These financial statements have been prepared in accordance with the approved accounting standards as applicable in Pakistan. Approved accounting standards comprise of such International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board as are notified under the Companies Ordinance, 1984, provisions of and directives issued under the Companies Ordinance, 1984
2.2 Basis of measurement
These financial statements have been prepared under the historical cost convention.
2.3 Functional and presentation currency
These financial statements are presented in Pak Rupees, which is the Company's functional currency. All financial
information presented in Pak Rupee have been rounded to the nearest thousand.
2.4 Use of estimates and judgments
The preparation of financial statements in conformity with the approved accounting standards require management
to make judgments, estimates and assumptions that affect the application of accounting policies and the reported
amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
3. Owner's Equity
There are four members of the company who have equally contributed in the equity of company and the return on owner's equity will be equally divided among the members.
4. Retained Earning
PAK Ghee Mills (Pvt) Limited
Projected Statement of Retained Earnings
2012
2013
2014
Openig balance Of Retained Earnings
10,966
23,950
Add:
Net Income
10,966
12,984
23,635
Ending Balance of Retained Earnings
10,966
23,950
47,585
5. Long Term Debt
PAK ghee mill got the loan from HBL bank against the security of Land and Plant. Land and plant pledge for the period of 10 years. The rate of interest charged by the bank 18% p.a.-
Also mention the pledge assets in notes to the accounts
6. Workers welfare fund
Worker welfare fund is a fund created by an employer for the future welfare and benefits of his employees. Workers welfare is maintained under worker welfare fund ordinance 1971. Workers welfare fund is maintained as 0.75% of net profit.
7. Fixed Assets
Fixed assets of the firm are depreciated by using Straight line depreciation method.
8. Intangible assets
Intangible assets of the firm includes preproduction Expenses of the firm. Intangible assets of the firm are amortized over the first three years.
9. Marketable securities
Marketable securities include shares of FFC, OGDCL. The value of marketable securities mention in balance sheet is according to the market value.
