FINANCIAL STATEMENT ANALYSIS

Attock Petroleum Ltd.

FINANCIAL MANAGEMENT

Submitted to: Sir Mazhar Hussain

Submitted by:
Muhammad Imran Shakeel Ahmed Zubair Anjum 5241 5251 5259

Executive Summary
Attock Petroleum Ltd. is reputed petroleum company, listed on stock exchange of Karachi on March 7, 2005. It is the third largest petroleum company of Pakistan with a total market share of 7.64%. We have conducted a financial analysis of the company for the fiscal year ending at June 30, 2011. It was an academic activity and an opportunity to coupe the theoretical knowledge with the practical aspects of the market. We calculated different financial ratio of five years for APL and three other companies (Pakistan State Oil, Shell Petroleum Pakistan Ltd. and Pakistan Petroleum Ltd.) to assume the industry average for the fiscal year 2011.

Chapter 1 Introduction

Company Profile

Attock Petroleum Limited (APL) is the 4 Oil Marketing Company in Pakistan to be granted a marketing license and commenced operations in February 1998. Jointly sponsored by the Pharaon Investment Group Limited Holding s.a.l. (PIGL) and Attock Oil Group of Companies (AOC); PIGL has diversified global interests in upstream and downstream petroleum sector, chemicals, cement and real estate sectors. APL is the only oil marketing company in Pakistan belonging to a fully vertically integrated group covering all aspects of the Oil and Gas sector of Pakistan; from exploration, production and refining to marketing of a wide range of petroleum products. Though a relatively new entrant in the field of oil marketing, APL has managed to establish its presence and reputation as a progressive and dynamic organization, focused on providing quality petroleum products and services in Pakistan and abroad. Our steadily and substantially growing market share and customer confidence are a testimony to our successful policies, proactive endeavors and visionary outlook. An ambitious strategic corporate policy, implemented by a dedicated team of professionals has enabled us to sustain a commendable level of growth. APL is continuously expanding and our market share and customer confidence is growing steadily. Sustaining a two-fold role in the oil market by meeting the unique demands of the region and at the same time catering effectively to the requirements of an international clientele, we have effectively penetrated the market and are successfully competing with well-established oil marketing companies. Today, with an extensive storage, transportation & retail outlet network, APL is committed to contribute to the nations development by supplying quality products and services are beyond the expectations of our customers and other stakeholders. APL is proud to be synonymous with a future-oriented outlook, and provide technologically advanced products and services that set the standard in precision and quality. Offering a broad spectrum of petroleum products and having over 350 retail outlets. The Company is developing a network of modern petrol pumps, especially catering to far-flung areas of Pakistan, and are significantly contributing to the development and expansion of the petroleum sector in Pakistan by developing state-of-the-art infrastructure for storage, handling and delivery of petroleum products to local and foreign markets. The Company has also penetrated in the oil export business and, in spite of tough competition from other regional and global players, is in line with the governments policy to take maximum advantage of Pakistans foreign exchange and human resources and its strategic geographical location. Developing our products and services based on the needs of our valued customers, we approach the challenge of securing their satisfaction and loyalty by focusing on two-way communication, unparalleled performance, and fostering a continuous improvement culture in all areas of our operations. Strictly adhering to highest ethical standards, we believe in community and environmental well-being and strive to maintain quality at all levels, as demonstrated by our Quality Policy Statement and the stringent quality objectives we have set for ourselves. With strong support and guidance from our sponsors, the relentless and dedicated efforts of our team of professionals and, above all, the confidence and satisfaction of our customers, we are confidently progressing together on the road to success.

th

Company Registration Number 0035831 National Tax Number 0944544-7 Company Auditors A. F. Ferguson & Co., Chartered Accountants Share Registrar THK Associates (Private) Limited Ground Floor, State Life Building No. 3 Dr. Ziauddin Ahmed Road Karachi 75530, Pakistan.

Vision:
To become a world class, professionally managed, fully integrated, customer focused, Oil Marketing Company, offering value added quality and environment friendly products and services to its customers in Pakistan and beyond.

Mission:
To continuously provide quality and environment friendly petroleum products and related services to industrial, commercial and retail consumers, and exceeding their expectations through reliability, economy and quality of products and services. We are committed to benefiting the community and ensuring the creation of a safe, responsible and innovative environment geared to client satisfaction, end user gratification, employees motivation and shareholders value.

Products
1. Commercial products
As the fastest growing Fuel Marketer and trusted Fuel Supplier of both Commercial & Industrial Fuels we provide the wide range of quality petroleum products, lubricants and services. We supply all types of fuels to various magnitudes of businesses including Manufacturing Industry, Armed Forces, Power Producers, Government/Semi-Government Entities, FMCG Companies, Developmental Sector, and agricultural Customers etc. Our product range is as follows: High Speed Diesel (HSD) Premier Motor Gasoline (PMG) Jet Fuels (JP1, JP4, JP8) Superior Kerosene Oil (SKO) Solvent Oils (SO) Light Diesel Oil (LDO) Lube Base Oils (LBO) Jute Batching Oil (JBO) Mineral Turpentine Oil (MTT) Furnace Fuel Oil (FFO) Bitumen (Asphalt) Rubber Processing Oil (RPO) Naphtha Lubricants (Automotive/Industrial) In a very short time, APL has become a major exporter of petroleum products to Afghanistan besides facilitating export of naphtha to the Middle East, Far East and South Asia. We encourage every individual/group to take a step forward in becoming associated with APL for a fruitful business venture.

2. Retail Network
APL has managed to establish its presence and reputation as an aggressive and dynamic organization in a short span of time. APL offers top quality fuels on its multi-fuel retail outlets that are environment friendly having supreme quality and the correct quantity. With every passing day we add to our strength by energizing the lives of several hundred thousands of customers in a highly congenial manner and our fast growing market share is a testimony to our superior fuels and services. Currently, we have a well-established multi-fuel retail network of about 350 retail outlets nationwide while hundreds are at different stages of NOCs or construction. Our retail outlets are fully equipped with state-of-

the-art facilities and service techniques for a delighted fueling experience. Beside regular liquid fuels, our selected retail outlets also offer CNG as well as non-fuel retailing options such as tuck shops, car services and lubricants. To set unprecedented benchmarks of site standards & customer/forecourt services, APL has also established COCO sites in major cities of the country. Company Operated retail outlets are also used for conducting multifacet trainings of our dealers for efficient management of their respective stations. Through these trainings dealers know how of managing petroleum oil & lubricants is improved for the benefit of end customers. After having established a reasonable presence on highways and agri belts, APL is now channelizing its energies on enhancing its presence in cities through development of sites in urban centers. This strategic shift has got tremendous response from city dwellers in the past 02 years and through these lines, we further welcome interested individuals and organizations for joining hands with the future of energy by becoming the consistent, reliable and first fueling choice of customers. We are in partnership with several organizations of repute for development of multi-fuel retail outlets nationwide. To name a few APL is collaborating with Askari CNG (AWT), CAA, CDA and DHA through various arrangements for a win-win outcome. APL in its past 12 years of operations has been able to capture a substantial market share and we today rank rd as the 3 largest OMC on the basis of aggregate market share and holds the strongest future prospects in the industry. Our growth trend has outshined the competition particularly in the past 02 years. (Ref: Market Participation Report of OCAC) Attock brand is a symbol of reliability & consistency and we take great pride in being part of the only vertically integrated oil group in the country that explore, produce, refine and market the best quality fuels at its retail stations scattered from Khunjerab in extreme north to the southern borders of the country in Karachi. All our operations and activities are in strict compliance with our environment, health and safety policy. APL has always shown strong commitment towards conducting its business in an honest, ethical and legal manner. The continued success is largely due to our operational excellence, financial discipline, risk management and principles of good corporate governance.

3. Lubricants
APL offers a wide range of high quality lubricants to cater to the growing demand of the market. We are fully equipped to meet the rising needs of our valued clientele in this highly competitive market, as our lubricants range include both automotive and industrial grades blended with top quality base oils and additives. APL lubricants help your vehicles of machinery by: Reduce friction, heat and wear Reduce operating and maintenance cost Improve power and extended equipment life The leading edge technologies of our products endowed with the expertise of our employees provide the value to our customers that exceed their expectations. APL lubricants are American Petroleum Institute (API) certified. APL is constantly developing new products to keep up with the ever changing demands of modern industry. APL products guarantee high quality along with the reduced cost and consistent performance.

Business Activities
Attock Petroleum Limited (the Company) was incorporated in Pakistan as a public limited company on December 3, 1995 and it commenced its operations in 1998. The Company was listed on Karachi Stock Exchange on March 7, 2005. The registered office of the Company is situated at 6, Faisal Avenue, F-7/1, Islamabad, Pakistan. The Company is domiciled in Islamabad. The principal activity of the Company is procurement, storage and marketing of petroleum and related products. Pharaon Investment Group Limited Holding s.a.l holds 34.38% (as of June 30, 2011) shares of the Company.

Statement of Compliance with the Code of Corporate Governance for the Year Ended June 30, 2012
This statement is being presented to comply with the Code of Corporate Governance (the Code) contained in regulation No. 35 xl of the Listing Regulations of the Karachi Stock Exchange for the purpose of establishing a framework of good governance, whereby a listed company is managed in compliance with the best practices of corporate governance. The Company has applied the principles contained in the Code in the following manner: 1. The Company encourages representation of independent non-executive directors and directors representing minority interests on its Board of Directors. At present the Board includes:

*The independent director meets the criteria of independence under clause i (b) of the Code 2002 since the present Board was elected in March 2012, prior to issuance of the revised Code in April 2012. The Code 2012 requires at least one independent director as per the definition of independent director, which would be applicable from next election of directors.

2. 3.

4. 5. 6.

7.

8.

9.

The directors have confirmed that none of them is serving as a director on more than seven listed companies. All the resident directors of the Company are registered as taxpayers and none of them has defaulted in payment of any loan to a banking company, a Development Finance Institution or a Non-Banking Financial Institution, or being a member of a stock exchange, has been declared as a defaulter by that stock exchange. No casual vacancy occurred in the Board during the year. The Company has prepared a Code of Conduct and has ensured that appropriate steps have been taken to disseminate it throughout the Company along with its supporting policies and procedures. The Board has developed vision and mission statements, overall corporate strategy and significant policies of the Company. A complete record of particulars of significant policies along with the dates on which they were approved or amended has been maintained. All the powers of the Board have been duly exercised and decisions on material transactions, including appointment and determination of remuneration and terms and conditions of employment of the Chief Executive Officer, other executive and non-executive directors, have been taken by the Board. The meetings of the Board were presided over by the Chairman and in his absence, by a director elected by the Board for this purpose and the Board met at least once in every quarter. Written notices of Board meetings, along with agenda and working papers, were circulated at least seven days before the meetings. The minutes of the meetings were appropriately recorded and circulated. Most of the Directors meet the exemption requirements of the Directors training program and one of the Directors completed this program during the year 2010-11. No such program was arranged during 201112.

10. The Board has approved appointment of Chief Financial Officer, Company Secretary and Head of Internal Audit, including their remuneration and terms and conditions of employment. 11. The Directors Report for the year has been prepared in compliance with the requirements of the Code and fully describes the salient matters required to be disclosed. 12. The financial statements of the Company were duly endorsed by Chief Executive Officer and Chief Financial Officer before approval of the Board. 13. The directors, Chief Executive Officer and executives do not hold any interest in the shares of the Company other than that disclosed in the pattern of shareholding. 14. The Company has complied with all the corporate and financial reporting requirements of the Code. 15. The Board has formed an Audit Committee. It comprises three members of whom all are non-executive directors and the chairman of the committee is an independent director. 16. The meetings of the Audit Committee were held at least once every quarter prior to approval of the interim and final results of the Company as required by the Code. The terms of reference of the Committee have been formed and advised to the Committee for compliance. 17. The Board has formed a Human Resource and Remuneration Committee. It comprises of three members, of whom two members including the Chairman are non-executive directors. 18. The Board has set up an effective internal audit function. 19. The statutory auditors of the Company have confirmed that they have been given a satisfactory rating under the quality control review program of the Institute of Chartered Accountants of Pakistan, that they or any of the partners of the firm, their spouses and minor children do not hold shares of the Company and that the firm and all its partners are in compliance with International Federation of Accountants (IFAC) guidelines on code of ethics as adopted by the Institute of Chartered Accountants of Pakistan. 20. The statutory auditors or the persons associated with them have not been appointed to provide other services except in accordance with the Listing Regulations and the auditors have confirmed that they have observed IFAC guidelines in this regard. 21. The closed period, prior to the announcement of interim/final results, and business decisions, which may materially affect the market price of Companys securities, was determined and intimated to directors, employees and stock exchange. 22. Material/price sensitive information has been disseminated among all market participants at once through stock exchange. 23. We confirm that all other material principles enshrined in the Code have been complied with.

Shuaib A. Malik Chief Executive Dubai, UAE. September 15, 2012

Chapter 2 Financial Ratio Analysis

Year of Analysis
We have taken data for 2011 and to analyze the trend we have taken data for years 2007 and 2010.

Sources of Data:
Official website of Attock Petroleum Ltd. http://www.apl.com.pk Official website of Pakistan State Oil ltd. http://www.psopk.com Official website of Shell Petroleum Pakistan Ltd. http://www.shell.com.pk Official website of Pakistan Petroleum Ltd. http://www.ppl.com.pk

Assumptions/Conventions
1. 2. 3. 4. We have assumed that all the sales are on credit due to no availability of separate credit sales Year is assumed of 365 days. To calculate receivable activity we have taken avg. amount of receivables. To calculate payable activity we have taken avg. amount of payables. For index analysis 2007 has been considered as base year, and all the values of financial statement items are considered 100 % for that year. Items for subsequent years are expressed as an index relative to 2007.

Ratio Analysis
To check APLs performance, certain types of ratios are calculated for the year 2011 and they are compared to the companys trend over the five years as well as with the industry average.

LIQUIDITY RATIOS
1. Current Ratio It is a liquidity ratio that measures a company's ability to pay short-term obligations. The Current Ratio formula is:

= 22,247,396,000/12,613,827,000= 1.76 Current Ratio 2009 2010 1.5 1.63

Year C.R

2007. 1.48

2008 1.41

2011 1.76

Industry Avg. 1

Current Ratio
2 1.5 1 0.5 0 2007 2008 2009 2010 2011 Industry Avg. 1.48 1.41 1.5 1.63 1.76 1

Analysis
APLs current ratio shows an increasing trend over the past five years as it has increased from 1.48 in 2007 to 1.76 in 2011, and it is above the industry average of 1. It shows that the company has good liquidity compared to the industry average. However, as the current ratio is a crude measure of liquidity, the quick ratio or acid-test ratio should be more revealing for the liquidity state of the company.

2. Quick Ratio
It is a stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets. Calculated by:

= 22247396000-52467050000/126138270000 = 1.35 Quick Ratio 2009 2010 1.49 1.55

Year Q.R.

2007 1.42

2008 1.38

2011 1.35

Industry Avg. 0.54

Quick Ratio
2 1.5 1 0.5 0 1.42 1.38 1.49 1.55 1.35 0.54

2007

2008

2009

2010

2011

Industry Avg.

Analysis
The quick ratio of APL has shown a fluctuating trend over past five years, as it decreased from 1.42 in 2007 to 1.38 in 2008 which indicates a decrease in that the increase in current liabilities was greater as compared to the current

assets. However, in 2009 & 2010 the ratio increased again to 1.55, only to decrease again for 2011 to 1.35, which, although still quite greater than the industry average of 0.54, compared to the current ratio of 1.76 for the year shows a significant increase in inventories i.e. the least liquid assets.

Summary of Liquidity
Comparison of APLs current ratio and quick ratio with industry average are favorable, but quick ratio is not encouraging as compared companys trend over past five years. The greater difference between curre nt ratio and quick ratio suggests building up of inventories or in other words lesser sales. However, it needs deeper analysis of the current assets of the company to diagnose the fault. A final opinion on liquidity is reserved until the activity ratios are taken into account.

Financial Leverage (Debt) Ratios

1. Debt-to-Equity Ratio
It is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

= 12934143000/11546208000 = 1.12 Debt to Equity Year Debt to Equity 2007 1.6 2008 1.8 2009 1.6 2010 1.3 2011 1.1 Industry Avg. 6.31

Debt to Equity
8 6 4 2 0 2007 2008 2009 2010 2011 Industry Avg. 1.6 1.8 1.6 1.3 1.1 6.31

Analysis
The debt-to-equity ratio for APL is 1.1 for 2011 which tells us that creditors are financing Rs. 1.1 for every Rs. 1 provided by shareholders. The ratio is constantly decreasing for last five years as it has dropped to 1.1 in 2011 from 1.6 in 2007, which shows that the company is reducing its debt financing or in other words shareholders are financing more and more as compared to financers in the recent years. While comparing it with industry average of 6.31, it shows that the company is far much better than its peer companies in regard of financing the business.

2. Debt-to-Total-Assets Ratio
A metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It is calculated by adding short-term and long-term debt and then dividing by the company's total assets.

= 12934143000/24480351000 = .53 or 53% Debt to T.A. 2008 2009 64% 61.20%

Year Debt to total Assets

2007 61.50%

2010 57%

2011 53%

Industry Avg. 85.70%

Debt to total Assets

100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2007 2008 2009 2010 2011 Industry Avg. 61.50% 64% 61.20% 57% 53% 85.70%

Analysis
This ratio serves the similar purpose to the debt-to-equity ratio. It shows the relative importance of debt financing to the firm by showing the percentage of the firms assets that is supported by debt financing. The debt-to-total-assets ratio showed an increasing trend from 2007 to 2010 as jumped from 53% for 2007 to 64% in 2010, however it decreased a little in 2011 to 61.5%, which is still much better than the industry average of 85.7%. Although the higher debt-to-total-assets ratio suggests higher financial risk for the company in case of liquidation as the cushion of protection to firms creditors is quite low. However, major part of these debts consists of short-term liabilities that are paid by the current assets. The significant current and quick ratios suggest that the company is more than capable of paying its liabilities in time, which reduces the risk factor.

3. Long-Term-Debt-to-Total-Capitalization Ratio
A ratio showing the financial leverage of a firm, calculated by dividing long-term debt by the amount of capital available:

= 320316000/11866524000 = 0.027 Long-Term Debt to Total Capitalization Year Long-Term Debt to Total Capitalization 2007 0.035 2008 0.023 2009 0.03 2010 0.034 2011 0.027 Industry Avg. 0.033

Long-Term Debt to Total capitaliztion

0.04 0.02 0 2007 2008 2009 2010 2011 Industry Avg. 0.035 0.023 0.03 0.034 0.027 0.033

Analysis
The ratio has shown fluctuating trend over last five years. It decreased slightly in 2008 to 0.023 from 0.035 for 2007 and increased in 2008 & 2009 when it rise to 0.034. It again decreased in 2011 to 0.027 which is slightly better the industry average of 0.033, which suggests that the company is using lesser long-term debts compared to the industry in the capital structure.

Summary of Financial Leverage Ratios

The above discussed ratios suggest that APL is much better in financing the business compared to its peer companies in regard to debts. Moreover it is still improving in this regard yet the higher debt-total-assets ratio suggests higher risk as do the higher debt-to-equity ratio. Although better than the industry average, the management needs to take measures in financing the business.

Interest Coverage Ratio

This ratio is simply the ratio of earnings before interest and taxes for particular reporting period to the amount of interest charges for the period. This ratio serves as one measure of the firms ability to meet its interest p ayments and thus avoid bankruptcy.

= 6700177000/682666000 = 9.8

Year I.C.R

2007 128.48

Interest Coverage Ratio 2008 2009 2010 31.41 122.14 16.15

2011 9.8

Industry Avg. 3.34

Interest Coverage ratio

150 100 50 0 2007 2008 2009 2010 2011 Industry Avg. 31.41 16.15 9.8 128.48 122.14

3.34

Analysis
The interest coverage ratio of 33.6 for APL, although better than the industry average of 3.34, has decreased considerably in 2011. The ratio was 265.3 in 2009, after which it decreased dramatically over the next two years when it dropped to 139.3 in 2010 and to 33.6 in 2011. The heavy decrease in ratio in 2011 was due to increased amount of late payment charges, which rose to 661,844,000 from 292,589,000 for the previous year, which shows that for some reason company was not able to pay its liabilities on time. Activity ratios of different current assets may better reveal the cause.

Activity Ratios
1. Receivables Activity
Receivable Turnover Ratio An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. Formula:

= 109394725000/8449676000 = 12.95 Average Collection Period It is the approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients. Average collection period can be calculated by dividing no of days in a year by the account receivable ratio. =365/12.95 = 28.1 days

Year R.T. R.T.D

2007 2008 17.6 12.8 21 29

Receivable Activity 2009 2010 9 10.7 40 34

40 35 30

2011 13 28
35.5

Industry Avg. 35.5 33

Receivable Activity
50 40 30 20 10 0 2007 17.6 12.8 2008 9 2009 10.7 2010 13 2011 21 29 40 34 28

33 28

25 20 15 10 5 0 R.T. APL R.T.D Industry Avg. 13

Receivable Turnover Recievable Turnover in Days

Analysis
The receivable turnover ratio has fluctuated in recent past. It was 17.6 in 2007 and decreased to 9 in 2009 but increased in next two years rising to 13 in 2011, which is well below the industry average of 35.5. The lower receivable turnover shows that company is not collecting receivables efficiently compared to the peer companies. As the bad debts considered by the company are very low (31,000,000) compared to the total debts (9,297,292,000), it shows most of these receivables are current i.e. liquid. The average collection period (receivable turnover in days) is another perspective of looking at the receivable management of the company. Collection period of 28 days is much higher than the industry average collection period of 10 days, which is a sign of concern for the management.

2. Inventory Activity
A ratio showing how many times a company's inventory is sold and replaced over a period. The formula for calculation is:

=104680507000/3119993500 = 33.5

Inventory Activity
Year I.T. I.T.D. 2007 202.4 1.8 2008 157.6 2.3 2009 265.9 1.4 2010 139.3 2.6 2011 33.6 11 Industry Avg. 13.05 28.17

Inventory Activity
300 202.4 200 100 1.8 0 2007 2008 2009 2010 Inventory Turnover Ratio Inventory Turnover In Days 2.3 1.4 2.6 157.6 139.3 33.6 11 2011 265.9

40 35 30 25 20 15 10 5 0

33.6 28.17

13.05

11

I.T. APL

I.T.D. Industry Avg.

Analysis
The inventory turnover ratio has shown a dramatic decrease to 33.6 in 2011 from 265.3 in 2009, although it is still quite better than the industry average of 13.05. The unfavorable decrease in inventory turnover ratio suggests that company is not managing its inventory efficiently since the last two years, and that APL holds excessive inventory stock recently. Inventory turnover in days is an alternative measure to check the inventory activity. For APL, the inventory turnover in days for 2011 is 11 days, which is more than 10 days greater than the year 2009 where it was 1.4 days, although it is still almost 17 days quicker than the industry. But the rapid increase is dangerous for the company and it may affect companys liquidity severely. It suggests that there might be an inventory problem and it must be investigated specifically to determine its cause and take corrective measures to fix the problem.

3. Payables Activity
Payable Turnover Ratio A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period.

= 108933930000/11813672000 = 9.22 Average Payment Period: The average payment period shows the average number of days it takes your business to make payment for purchases on credit. = 365/9.22 = 39.6 Days

Year P.T P.T.D.

Payable Activity 2007 2008 2009 2010 2011 9 7 6 7 9.2 40 55 64 51 40

Industry Avg. 6.45 63.76

Payable Activity
70 60 50 40 30 20 10 0 2007 2008 2009 2010 2011 Payable Turnover ratio Paayable Turnover in days 9 7 6 7 9.2 40 55 64 51 40

70 60 50

63.76

40 40 30 20 10 0 P.T APL P.T.D. Industry Avg. 9.2 6.45

Analysis
The payables turnover ratio is showing the same trend as the receivables turnover ratio. It decreased from 9 for 2007 to 6 in 2009, but increased again to 9.2 in 2011. For APL, the payables turnover ratio of 9.2 is much better than industry average of 6.45. It shows that the company is paying its liabilities more efficiently than the peer companies with a payable period of 40 days compared to the industry average payable period of 63.76 days.

4. Total Asset Turnover

The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars. Formula:

= 109394725000/244803451000 = 4.47

Year T.A.T.

2007 5.6

Total Asset Turnover 2008 2009 2010 2011 4.3 3.6 4.2 4.8

Industry Avg. 4.17

Total Asset Turnover Ratio

6 4 2 0 2007 2008 2009 2010 2011 5.6 4.3 3.6 4.2 4.8

APL
5 4.8 4.6 4.4 4.2 4 3.8 APL Industry Avg. 4.17 4.8

Analysis
The total asset turnover ratio of 4.8 for APL in 2011 is almost in line with industry average of 4.17, which suggests that the company is utilizing its assets efficiently to generate the sales as the peer companies are doing. But analysis of trend over past five years shows that there have been fluctuations in total asset turnover as it decreased from 5.6 for 2007 to 3.6 in 2009. The reason behind this decrease could possibly be the less efficient management of receivables, as the receivables turnover declined to 9 in 2009. Since then the total asset turnover ratio is increasing but at slow pace. As discussed in inventory activity, the companys management of inventory has been poor since 2009; this could be the major cause in slowing down of the increase in total asset turnover because the receivables are being managed better relatively.

A Second Look at APLs Liquidity

As the final opinion on liquidity state of APL was reserved until the activity ratios were calculated, now it is time to re-evaluate the companys liquidity. The turnover ratio for receivables is significantly worse than the industry average and the inventory turnover ratio has also decreased dramatically in recent years, it suggests that both these assets are not entirely current. This fact suggests that the favorable current and quick ratios are detracting. The receivables are quite slow and there appear to be inefficiencies in inventory management. On the basis of our analysis we conclude that both these assets are not particularly liquid in sense of turning into cash in a reasonable period of time. The inefficiencies in management of these two particular assets have resulted in either the decrease in total asset turnover or slowed down the increase in the same.

Profitability Ratios
1. Profitability in Relation to Sales i. Gross Profit Margin
A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the per cent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations.

=4714218000/10934725000 = 4.31%
Year G.P. Margin G.P. Margin 2007 2008 2009 2010 2011 4.63% 5.16% 5.32% 4.54% 4.31% Industry Avg. 3.90%

Gross Profit Margin

6.00% 4.00% 2.00% 0.00% 2007 2008 2009 2010 2011 Industry Avg. 4.63% 5.16% 5.32% 4.54% 4.31% 3.90%

Analysis
The gross profit margin of 4.31% for APL in 2011 is a tad better than industry average of 3.90%, which shows that it is slightly more effective in producing and selling products above cost. However, the ratio has been decreasing since 2009 when it was 5.32%, which suggests higher prices of the purchases made by the company. The recent hike in international prices of petroleum is a major cause of the decreasing gross profit margin, as the petroleum industry is affected by it worldwide.

ii.

Net Profit Margin

The ratio of net profits to revenues for a company or business segment - typically expressed as a percentage that shows how much of each dollar earned by the company is translated into profits. Net margins can generally be calculated as:

Year N.P. Margin

2007 3.92%

= 4256511000/10934725000 = 3.89% N.P. Margin 2008 2009 2010 2011 Industry Avg. 5.00% 5.00% 4.34% 3.90% 0.71%

Net Profit Margin

6.00% 4.00% 2.00% 0.00% 2007 2008 2009 2010 2011 Industry Avg. 3.92% 5.00% 5.00% 4.34% 3.90% 0.71%

Analysis
For, APL the net profit margin is also decreasing, as the gross profit margin. It was 5% in 2008 & 2009 but decreased in next two years to 3.9%. Although still quite better than the industry average of 0.71%, the decrease in net profit margin over the past few years shows that the companys relative level of sales profitability is decreasing continuously. It suggests that the company is not managing its operating expenses efficiently. Company has to take measures to lower the operating expenses. Considering both, gross profit margin and net profit margin, jointly we see that the higher cost of goods sold has caused the gross profit to decline in recent years while ineffective selling or may be higher taxes have lowered the net profit of the company.

2. Profitability in Relation to Assets i. Return on Investment

An indicator of how profitable a company is relative to its total assets. ROI gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROI is displayed as a percentage. The formula for return on investment is:

Year R.O.I.

2007 19.20%

= 4256511000/24480351000 = 17.39% Return on Investment 2008 2009 2010 2011 Industry Avg. 17% 18.20% 18.10% 17.40% 1.90%

Return on Investment
25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 19.20% 17% 18.20% 18.10% 17.40%

1.90% 2007 2008 2009 2010 2011 Industry Avg.

Analysis
APL has much better return on in investment of 17.40% than the industry average of 1.9%, which suggests that the company is utilizing lesser assets to produce sales than its peer companies. The above average N.P. Margin and ROI show that the companys management of assets to generate sales is much better than the industry. However, the decreasing trend in return on investments indicates that the company is losing its efficiency in this regard as the ratio has decreased since 2009 when it was 18.2%.

ii.

Return on Equity
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder's Equity

= 4256511000/11546208000 = 36.86%

Year R.O.E.

2007 62.90%

2008 58.80%

Return On Equity 2009 2010 48.90% 44%

2011 37%

Industry Avg. 15.53%

Return on Equity
80.00% 60.00% 40.00% 20.00% 0.00% 62.90% 58.80% 48.90% 44% 37% 15.53% 2007 2008 2009 2010 2011 Industry Avg.

Analysis
Return on equity of 37% for APL is better than the industry average of 15.53%. A higher return on equity may be the result of strong investment opportunities and effective expense management. However the decreasing trend in the ratio suggests that the company has to employ higher level of debts to generate sales compared to previous years which indicates a higher and increasing financial risk for company.

Common Size Analysis

The common size analysis shows that the current assets have increased continuously over the past five years but this statement is not entirely true for the cash and bank balances, as the percentage of cash decreased from 43.3% in 2009 & 2010 to 21.3% for 2011. In addition, the receivables as well as inventories increased over the same period to 38% & 45.4% respectively, which is a sign of inefficient management of both these important assets. On the liability and equity portion of balance sheet, the total debt of the company is decreasing on a relative basis, primarily because of a relative decline in payables continuously. It indicates that the company is using lesser and lesser debt financing over the years. The common size income statement shows a decreasing trend of gross profit. The cause behind this can be justified with the increase in cost of goods sold. The increasing finance costs over the period suggest that the company is not paying its liabilities in time, which is resulting in higher late payment charges and hence decreasing the net profit margin of the company. As the trend for provision for taxation shows that the taxes have been reduced in recent years, the conclusion made above, that increasing late payment charges are the major cause of decrease in net profit margin, seems to be correct.

Common Size Analysis

Balance Sheet Items
Property, Plant & Equipment Capital Work in Progress Other Non-Current Assets Cash & Bank Balances Trade Debts Stock in Trade Current Assets Total Assets 2011 Rs. ('000) 1,038,290 336,477 858,188 5,218,037 9,297,292 5,246,705 22,247,396 24,480,351 % 4.2 1.4 3.5 21.3 38.0 45.4 90.9 100 2010 Rs. ('000) 1,019,742 197,475 796,202 9,275,603 7,602,060 993,282 19,429,233 21,442,652 % 4.8 0.9 3.7 43.3 35.5 10.8 90.6 100 2009 Rs. ('000) 939,780 191,095 733,397 7,434,910 7,835,521 141,507 16,408,130 18,272,432 % 5.1 1 4 43.3 35.5 4.6 89.8 100 2008 Rs. ('000) 532,512 390,109 709,081 6,117,891 5,825,869 299,093 13,881,634 15,513,336 % 3.4 2.5 4.6 39.4 37.6 1.9 89.5 100 Rs. ('000) 491,106 110,220 387,246 4,066,809 2,502,998 341,702 7,995,195 8,983,767 2007 % 5.5 1.2 4.3 45.3 27.9 9.9 89 100

Shareholders' Equity Long-Term Deposits Deferred Liability Trade & other Payables Current Liabilities Total shareholders' Equity & Liabilities

11,546,208 209,316 111,000 12,073,287 12,613,827 24,480,351

47.2 0.9 0.5 49.3 51.5 100

9,236,577 178,908 110,000 11,554,057 11,917,167 21,442,652

43.1 0.8 0.5 53.9 55.6 100

7,082,268 159,538 92,000 10,730,633 10,938,626 18,272,432

38.8 0.9 0.5 58.7 59.9 100

5,535,849 121,137 14,000 9,813,929 9,842,350 15,513,336

35.7 0.8 0.1 63.3 63.4 100

3,454,297 113,821 13,000 5,296,183 5,402,649 8,983,767

38.5 1.3 0.1 59.0 60.1 100

Profit & Loss Items

Net Sales Cost of Products Sold Gross Profit Other Operating Income Operating Expenses Operating Profit Finance Cost Income on Bank Deposits & Investments Share of Profit of Associated Companies Other Charges Profit before Taxation Provision for Taxation Profit for the Year 109,394,725 104,680,507 4,714,218 1,978,931 611,315 6,081,834 682,666 962,838 93,211 437,706 6,017,511 1,761,000 4,256,511 100 95.7 4.3 1.8 0.6 5.6 0.6 0.9 0.1 0.4 5.5 1.6 3.9 82,791,918 79,032,034 3,759,884 1,308,904 480,860 4,587,928 319,865 980,736 42,337 444,827 4,846,309 1,252,000 3,594,309 100 95.5 4.5 1.6 0.6 5.5 0.4 1.2 0.1 0.5 5.9 1.5 4.3 61,863,152 58,570,802 3,292,350 843,967 477,069 3,659,248 28,992 848,852 26,510 225,199 4,280,419 1,198,000 3,082,419 100 94.7 5.3 1.4 0.8 5.9 0.04 1.4 0.04 0.4 6.9 1.9 5 53,242,330 50,493,929 2,748,104 896,359 285,806 3,358,954 86,864 381,910 58,918 183,366 3,529,552 888,000 2,641,552 100 94.8 5.2 1.7 0.5 6.3 0.2 0.7 0.1 0.3 6.6 1.7 5 44,130,536 42,085,565 2,044,971 406,218 269,680 2,181,509 13,560 351,747 42,319 126,401 2,435,606 707,000 1,728,606 100 95.4 4.6 0.9 0.6 4.9 0.03 0.8 0.1 0.3 5.5 1.6 3.9

Index Analysis
Indexed balance sheet shows that there is a relative as well as absolute decrease in cash and bank balances of the company although the current assets are still on a rise which is due to a dramatic increase in inventories both, relatively and absolutely. The account receivables are also too high. The great increases in both these assets made us collude once again that the companys management of these important current assets is not good and these assets are not entirely liquid. It raises questions over companys liquidity state although the liquidity ratios are quite good looking. On the other side of balance sheet the current liabilities are also increasing as do the payables. Again it shows signs of concern over companys liquidity. The fixed assets are also increasing accompanied by the sales generated by the company which has resulted in an increasing total asset turnover ratio. The indexed profit and loss account shows that although the gross profit is increasing but the accompanied greater increase in cost of goods sold has resulted in the decrease of the gross profit margin. The increasing operating expenses and finance costs have reduced the net profit margin although the relative net profit is increasing comprehensively.

Index Analysis
Balance Sheet Items
Property, Plant & Equipment Capital Work in Progress Other Non-Current Assets Cash & Bank Balances Trade Debts Stock in Trade Current Assets Total Assets 2011 Rs. ('000) 1,038,290 336,477 858,188 5,218,037 9,297,292 5,246,705 22,247,396 24,480,351 % 211.4 305.3 221.6 128.3 371.4 1535.5 278.3 272.5 2010 Rs. ('000) 1,019,742 197,475 796,202 9,275,603 7,602,060 993,282 19,429,233 21,442,652 % 207.6 179.2 205.6 228.1 303.7 290.7 243.0 238.7 2009 Rs. ('000) 939,780 191,095 733,397 7,434,910 7,835,521 141,507 16,408,130 18,272,432 % 191.4 173.4 189.4 182.8 313.0 41.4 205.2 203.4 2008 Rs. ('000) 532,512 390,109 709,081 6,117,891 5,825,869 299,093 13,881,634 15,513,336 % 108.4 353.9 183.1 150.4 232.8 87.5 173.6 172.7 2007 Rs. ('000) 491,106 110,220 387,246 4,066,809 2,502,998 341,702 7,995,195 8,983,767 % 100 100 100 100 100 100 100 100

Shareholders' Equity Long-Term Deposits deferred Liability Trade & other Payables Current Liabilities Total shareholders' Equity & Liabilities

11,546,208 209,316 111,000 12,073,287 12,613,827 24,480,351

334.3 183.9 853.8 228.0 233.5 272.5

9,236,577 178,908 110,000 11,554,057 11,917,167 21,442,652

267.4 157.2 846.2 218.2 220.6 238.7

7,082,268 159,538 92,000 10,730,633 10,938,626 18,272,432

205.0 140.2 707.7 202.6 202.5 203.4

5,535,849 121,137 14,000 9,813,929 9,842,350 15,513,336

160.3 106.4 107.7 185.3 182.2 172.7

3,454,297 113,821 13,000 5,296,183 5,402,649 8,983,767

100 100 100 59.0 100 100

Profit & Loss Items

Net Sales Cost of Products Sold Gross Profit Other Operating Income Operating Expenses Operating Profit Finance Cost Income on Bank Deposits & Investments Share of Profit of Associated Companies Other Charges Profit before Taxation Provision for Taxation Profit for the Year 109,394,725 104,680,507 4,714,218 1,978,931 611,315 6,081,834 682,666 962,838 93,211 437,706 6,017,511 1,761,000 4,256,511 247.9 248.7 230.5 487.2 226.7 278.8 5034.4 273.7 220.3 346.3 247.1 249.1 246.2 82,791,918 79,032,034 3,759,884 1,308,904 480,860 4,587,928 319,865 980,736 42,337 444,827 4,846,309 1,252,000 3,594,309 187.6 187.8 183.9 322.2 178.3 210.3 2358.9 278.8 100.0 351.9 199.0 177.1 207.9 61,863,152 58,570,802 3,292,350 843,967 477,069 3,659,248 28,992 848,852 26,510 225,199 4,280,419 1,198,000 3,082,419 140.2 139.2 161.0 207.8 176.9 167.7 213.8 241.3 62.6 178.2 175.7 169.4 178.3 53,242,330 50,493,929 2,748,104 896,359 285,806 3,358,954 86,864 381,910 58,918 183,366 3,529,552 888,000 2,641,552 120.6 120.0 134.4 220.7 106.0 154.0 640.6 108.6 139.2 145.1 144.9 125.6 152.8 44,130,536 42,085,565 2,044,971 406,218 269,680 2,181,509 13,560 351,747 42,319 126,401 2,435,606 707,000 1,728,606 100 100 100 100 100 100 100 100 100 100 100 100 100

CONCLUSION

APL, being the third largest petroleum company of Pakistan with total market share of 7.64% (Combined market share of Black oil and White oil markets), is managing the financial health above the industry average for petroleum in Pakistan. However, companys profitability and liquidity are falling although the liquidity ratios suggest otherwise. The reason behind this falling liquidity and profitability, as explained earlier, is inefficient or mismanagement of receivables and inventories. The management must take precautionary measurements to correct this inefficient management of these two important current assets.