LETTER OF TRANSMITTALDec 22, 2008

Ms. Zeb Un NisaCourse Instructor, Financial ManagementCity UniversityPeshawar.

Madam:We herewith present our “Major Assignment” authorized by you as a requirement for this course. In this report, we have tried to provide analysis of financial statements of Cherat Cement Ltd.We hope we have covered all that was required for the report. If there be any clarification demanded, we would appreciate a call from you to our group members.

Sincerely,Muhammad Mustafa MuqaddisSikandar HayatWajid SultanMohammad IshtiaqFaheem Ullah khan

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ACKNOWLEDGEMENT

In the name of “Allah”, the most beneficent and merciful who gave us strength and knowledge to complete this report. This report is a part of our course “Financial Management”. This has proved to be a great experience. This report is a combine effort of Muhammad Mustafa Muqaddis, Sikandar Hayat, Mohammad Ishtiaq, Faheem Ullah Khan, Wajid Sultan.

We would like to express our gratitude to Ms. Zeb Un Nisa; who gave us this opportunity to fulfill this report. We would also like to thank our colleagues who participated in a focus group session. They gave us many helpful comments which helped us a lot in preparing our report.

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Cherat Cement Company Limited Vision & Mission

Statement

VisionGrowth through the best value creation for the

benefit of all stakeholders.

MissionInvest in projects that will optimize the risk-return profile of the Company. Achieve excellence in business. Maintain competitiveness by leveraging technology. Continuously develop our human resource. To be regarded by investors as amongst the best blue-chip stocks in the country.

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HistoryA premier name in the field of cement manufacturing, was incorporated in 1981 and is listed on the Karachi, Lahore and Islamabad stock exchanges. The plant is located about 52 kilometers from Peshawar (NWFP) near Nowshera. The factory is built on land bordering the Cherat Hills, the factory's source of high quality limestone. It is estimated that the limestone reserves are in excess of 400 million tons with more than sufficient quantity of slate.

Cherat Cement is manufacturing high quality grey portland cement on the most modem and computerized production facilities. It is equipped with the most updated production and quality control systems. Cherat Cement is one of the largest producers and suppliers of cement in the province of NWFP. The production capacity of Cherat Cement is 2500 tons/ day.

The shareholders' equity of the company as at June 30, 2002 was Rs. 916 million and it has total assets of Rs.1,631 million, with turnover exceeding Rs.1,422 million.

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STATEMENT OF ETHICS & BUSINESS PRACTICES

The business policy of the company is based on the principles of honesty, integrity and professionalism at every stage.

Product QualityRegularly update ourselves with technological advancements in the sold of cement production to produce cement under highest standards and maintain all relevant technical and professional standards.

Dealing with Employees Provide congenial work atmosphere where all employees are treated with respect and dignity. Recognize and reward employees based on their performance and their ability to meet goals and objectives.

Responsibility to interested parties To be objective, fair and transparent in our dealings with people who have reposed their confidence in US.

Financial Reporting & Internal ControlsTo implement an effective and transparent system of financial reporting and internal controls to safeguard the interest of our shareholders and fulfill the regulatory requirements.

Procurement of Goods & ServicesOnly purchase goods and services that are tailored to our requirement and are priced appropriately. Before taking decision about procurement of any good or service, obtain quotations from various sources.

Conflict of InterestAll the ads and decisions of the management be motivated by the interest of the company and activities and involvements of the directors and employees in no way conflict with the interest of the company.

Environmental ProtectionTo protect the environment and ensure health and safety of the work force and well-being of the people living in the adjoining areas of our plant.

We recognize the need for working with optimum efficiency to attain desired levels of performance. We endeavor to conduct our business with honesty and integrity and produce and supply cement with care and competence, so that customers receive the quality they truly deserve.

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RATIO ANALYSISA statistic has little value in isolation. Hence, a profit figure of Rs.100 million is meaningless unless it is related to either the firm’s turnover (sales revenue) or the value of its assets.

Accounting ratios attempt to highlight the relationships between significant items in the accounts of a firm.

Financial ratios are the analyst’s microscope; they allow them to get a better view of the firm’s financial health than just looking at the raw financial statements

Ratios are used by both internal and external analysts

Internal uses

· Planning

· Evaluation of management

External uses

· Credit granting

· Performance monitoring

· Investment decisions

· Making of policies

CATEGORIES OF FINANCIAL RATIOS The accounting ratios can be grouped in to six categories:

1. Liquidity Ratios shows the extent to which the firm can meet its financial obligations.

2. Asset Management Ratios shows how effectively the firm manages its assets.

3. Debt Management Ratios examine the degree to which a firm uses debt financing or

financial leverages.

4. Profitability Ratios relates profits to sales and assets.

5. Market Value Measures are a measure of the return on investment.

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Liquidity ratio

A full liquidity analysis requires the use of cash budgets, but by relating the amount of cash and other current assess to current obligations, ratio analysis provides a quick, easy-to-use measure of liquidity

1. Current ratio = Current assets

Current liabilities

2004 913,913,000 = 2.47

369,844,000

2005 1,384,495,000 =3.07

449,823,000

2006 1,267,950,000 =2.45

516,444,000

2007 1,240,430,000 =2.28

524,025,000

2008 1,719,948,000 =1.07

1,597,703,000

Analysis:

The current ratio shows how a firm is able to cover its current liabilities with its current assets it shows the liquidity of the company.The ratio signifies variant pattern with rising and falling observations. The ratio shows that Cherat Cement has managed to create a good combination of the current assets and liabilities making it financially sound and liquid enough to cover its liabilities.There is however a substantial fall in the year 2008 as compare to the industry average. This phenomenon may be attributed to the large sum of short term running finance taken to feed its growing operational costs during the year

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Quick Ratio

2. Quick ratio = current assets – inventories

current liabilities

2004 913913000 -79931000 = 2.25

369844000

2005 1384495000 - 88498000 =2.88

449823000

2006 1267950000-145227000 = 2.17

516444000

2007 1240430000-117288000 = 2.07

542025000

2008 1719948000-207491000 = 0.94

159703000

Analysis:

The acid test ratio shows how a firm is able to cover its current liabilities with the most liquid of its assets excluding the inventories which are not so easily converted into cash. As it can be seen from the ratios that although the ratios have have been a little higher than normal which is favorable but a major decline is visible in 2008 where the ratio is a lot less than normal This can be due to the fact that current liabilities have risen but the severity can also be attributed to the high levels of inventory held by the enterprise.

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Financial leverage (debt) ratioShows the extent to which the firm is financed by debt.

1. Debt to equity ratio = total debts

Shareholder’s equity

2004 379,810,000 =0.74

531,942,000

2005 1,010,506,000 =1.51

664,905,000

2006 982,519000 =1.18

831,131,000

2007 754,733,000 = 0.78

955,801,000

2008 626,464,000 =0.65

905801000

Analysis:

The magnitude of debt contributed in the financing of the firm is shown by debt to equity ratio. The computation of this ratio brings to life the fact that Cherat cement has not been able to feed its financing through equity as its ratios are considerable higher than the favorable “ 1 or less”. The initial year shows that there was less dependency of debt but there has been a visible increase in the ratio ever since, the last year shows a phenomenal increase and highly unfavorable. The firm must by all means try and reduce its portions as the dependency on debt causes the firm to lose its control and will over the organization as it is then driven to feed the debt.

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TOTAL CAPITALIZATION RATIO

2. Long term debt to total capitalization = long-term debt

Total capitalization

2004 1498963000 = 0.48

3095445000

2005 1460329000 = 0.53

2752977000

2006 1498963000 = 0.48

3095445000

2007 1296758000 = 0.43

29913525

2008 2224167000 = 0.79

2784570000

Analysis

The total debt to capitalization ratio show the proportion of the debt to the amount of funds available to enterprise in order to undertake long term business. The lower this proportion the better it is. As less funds would be mature for payment in short run and funds can suitably be capitalized.

Cherat cement exhibits a downward overall trend with the ratio raising high in 2008 due to the large amount of short term financing undertaken.

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3. Debt to total assets ratio = Total debts

Total assets

2004 749654000 =0.34

2182072000

2005 1460329000 =0.45

3202800000

2006 1498963000 =0.41

3611889000

2007 1296758000 =0.36

3533350000

2008 2224167000 =0.50

4382273s000

Analysis

Total debt to asset ratio gives us an estimate of total amount of debt that is being used in asset or the proportion of an asset that can be used to feed the debt. Cherat cement is in a favorable state in this regard as its debt is covered by a larger base of asset although it does not match the cement industry median of 0.30. it is none the less in a respectable state but the situation may get worse if it keeps on funding it self on debt. This phenomenon can be seen from the 2008 ratio where it shows a tendency to grow unless the proportion is curtailed.

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Coverage ratio 1.Interest coverage ratio = earning before interest and taxes ( EBIT )

Interest expenses

2004 592,781,000 =30.96

19,113,000

2005 718,037,000 =21.10

34,030,000

2006 799,111,000 =9.94

80,364,000

2006 322,558,000 =4.27

75,531,000

2007 25,078,000 =0.30

81,576,000

Analysis

Interest coverage ratio shows how much revenue is being earned in relation to its finance cost. Cherat cement was able to very comfortably cover this cost in the early years but by its growth the inabilities started to show. although revenues are rising but the interest charges to be paid by the enterprise are also rising as the revenues are only resulting due to the rising financing through debt.

The debt, especially the short term financing, needs to be curtailed as they will not result in Cherat Cement’s well being.

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Activity ratio Asset Management Ratio tells us how efficiently a company utilizes its assets for generating sales.

Inventory activity

1.Inventory turnover ratio = cost of goods sold

Inventory

2004 4,369,785,000 = 17.13

79,931,000

2005 1,544,122,000 = 17.44

88,498,000

2006 1,488,882,000 = 10.25

145,227,000

2007 2,242,296,000 = 19.11

117,288,000

2008 2,834,336,000 =13.66

207,491,000

Analysis

Inventory turnover shows the activity of the inventory held by the enterprise Cherat cement has been able to significantly mobilize inventory through the year. The ratio shows prominent figures of sale frequency there is a variable trend to it though.

But the favorable lines are that Cherat Cement Has been able to capitalize on the market upsurge in 2007 and 2008 with high levels of exports to Afghanistan. The median ratio has none the less been significantly touched throughout the years.

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2. Inventory turnover in days = days in year

Inventory turnover

2004 365 = 21 days

17.13

2005 365 = 21 days

17.44

2006 365 = 36 days

10.25

2007 365 = 19days

19.11

2008 365 = 27 days

13.66

ANALYSIS:

Inventory turnover in days also portray the company’s ability to liquidate inventory. Cherat cement has been able to do so quite efficiently. As the increase to high levels throughout the years show.

Cherat cement has shown that it is able to reach high turnovers therefore the less than optional ratio should motivate them to take measures in successfully reaching them the 2007 – 2008 period has none the less been fruitful.

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3. Total asset turnover = net sales

Total asset

2004 2084955000 = 0.955

2182072000

2005 2400530000 = 0.749

3202800000

2006 2434513000 = 0.674

3611889000

2007 2619960000 = 0.741

3533350000

2008 3013752000 = 0.687

4382273000

ANALYSIS:

The total asset turnover shows how a firm is performing in terms of economic utilization of assets. It shows how a firm is using its assets to earn revenues. The ratio should be high for profitability. In the case of Cherat cement it has not been a favorable situation.

The company has been facing a low total asset turnover since the periods under review. The totals revenues have never been able to cover the assets used to earn them in any year. A regular decline can be seen which can be improverd if the current asset can be liquidated in time. The revenue generation as is evident should also be raised .

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Profitability ratio

1. Gross profit margin = net sales – cost of goods sold

Net sales

2004 2084955000 – 1369785000 = 34.33 %

2084955000

2005 2400530000 – 1544122000 = 35.67%

240053000

2006 2434513000–1488882000 = 40.68 %

2434513000

2007 2619960000 –2242296000 = 14.41%

2619960000

2008 3013752000 –2834336000 = 5.95 %

3013752000

Analysis

The gross profit margin gives us an estimate of the revenues earned by the entity considering the direct cause incurred while earning them.

Cherat Cement shows a period of growth in 2004,2005,2006 but cumulative industrial down fall period of 2007 and 2008 and that did not leave Cherat Cement un affected. Although there is a percentage growth in sales but the cost attributed to them sky rocketed in these years leaving cherat Cement worse off in the industry.

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2.Net profit margin = net profit after taxes

Net sales

2004 425695000 = 20.41%

2084955000

2005 512300000 = 21.34 %

2400530000

2006 537785000 = 22.09%

2434513000

2007 184158000 = 7.02%

2619960000

2008 10354000 = 0.34%

3013752000

Analysis the net profit margin shows what amount of pure revenues is firm earning. The ratio for Cherat Cement shoe that it had been earning high profit earlier but the ratio since then kept on declining. The 2008 horrific condition is nonetheless very regrettable but the situation is attributed to the high operating cost during the year. The sales had risen more then normal but the cost of earning them caused the downfall this trend has been exhibited throughout the industry cherat has suffered majorly

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3.Return on investment / assets = net profit after taxes

Total assets

2004 425695000 = 19.50 %

2182072000

2005 512300000 =15.99 %

3202800000

2006 537785000 = 14.88%

3611889000

2007 184158000 = 5.21 %

3533350000

2008 10354000 = 0.23 %

4382273000

Analysis

The benefits reaped from investments can be seen from this ratio as it can be seen for Cherat that the ratio has kept on declining till the decapitating state in 2008. this is also related to the cost factors discussed above.

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4. Return on equity = net profit after taxes

Share holder’s equity

2004 425695000 = 80.02 %

531924000

2005 512300000 = 77.04 %

664905000

2006 537785000 = 64.70 %

8311311000

2007 184158000 = 29.77%

955801000

2008 10354000 = 1.08%

955831000

Analysis

The investors contributing in the firm suffered the most as is seen by the return on equity ratios. The early 2000 was a very prized period in terms of comparatives estimates as the figures are high but the necessarily do not show a favorable situation. Because the amount of equity was also in the proportion of the profits it gave way to a favorable situation.

Later in the years it is clearly seen that with increasing equity funds the profit margin could not be kept up especially in 2008 where the ratio plunges into a pit of 1.08%. This was due to the high cost and low prices in 2008.

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