Financial Statement Analysis - Atlas Battery

Financial Statement Analysis - Atlas Battery

Executive SummaryFor the purpose of my Financial Statement Analysis project , I chose Atlas Battery. The purpose of this project and the whole analysis is to look at the direction of the progress of the company by comparing and compiling its past five years data. The project starts off by looking at the basic statements of the company such as Profit and Loss Accounts, Balance Sheets and Cash Flow Statements. Later on in the project, some important ratios such as cash flow ratios, liquidity ratios, solvency ratios, returns on capital ratios and profit ratios will be used to get a more detailed insight of the operations of the company. In the end the report will discuss the decisions that should be taken by banker as well as an investor by keeping in mind the performance of the company for the last five years.Two important facts should be kept in mind regarding the performance of the company for the last five years. Firstly, Pakistan has been facing energy crisis and due to that there has been a tremendous increase in the demand of UPS and batteries that power these UPS. Secondly, the number of vehicles on the road have also increased partly due to imports from Japan and China and partly due to the general needs of the people. This increase in demand for vehicles has increased the demand for its complimentary goods which includes batteries as well.

ContentsCC.2 Profit and Loss4CC.3 Balance Sheets5CC.4 Statements of Cash Flows7CC.5 Five Year Growth Rates10CC.6 Common-Size Profit and Loss11CC.7 Common-Size Balance Sheets12CC.8 Trend Index of Selected Accounts(Year 2008=100%)15CC.9 Per Share Results17CC.10 Common-Size Statements of Cash Flows19CC.11 Analysis of Cash Flow Ratios20CC. 12 Short-Term Liquidity Analysis21CC. 13 Common-Size Analysis of Current Assets and Current Liabilities24CC. 18 Capital Structure and Solvency Ratios25CC. 19 Return on Invested Capital Ratios26CC. 20 Asset Utilization Ratios27CC. 21 Analysis of Profit Margin Ratios28CC. 22 Analysis of Depreciation29CC.23 Analysis of Discretionary Expenditure30CC. 28 Market Measures31Conclusion32As an Investor32As a Banker32References33Appendix(Financial Statements of 2012 and Rough Work)34

CC.2 Profit and Loss

By looking at the profit and loss accounts of the company over the last five years we can see that the company has shown a steady increase in sales. But on the other hand its cost of sales has also shown an increasing trend but still the company managed to obtain an increasing gross profit in absolute terms over the last five years. Another important point over here is the gradual increase in the total comprehensive income of the company from 2007 to 2012, which means that despite the increase in the expenses in this time period the management of the company was able to efficiently increase its total income over the years. Lastly, the earning per share value has also shown an increasing trend for the company.CC.3 Balance Sheets

By looking at the balance sheet of the company for the last five years we can safely conclude that the company has continued to increase its total assets over the years. This trend showed a greater increase in 2011 and 2012 which can primarily be attributed to huge changes in the current assets part of the balance sheet.Coming to the equity part of the company, the company increased its authorized share capital from 100,000 to 500,000 in 2011. Apart from that the issued and paid up capital part of the statement also shows a growing trend which points to the fact that the demand of its shares has increased over time. Another important thing that should be noted over here is that the company has continued to increased its reserves as well as the unappropriated profit over the course of five years.All of the previously mentioned things point to the financial stability of the company. But as I examined the liability part of the statement, I noticed that the liabilities have also continued to increase. However, this increase in total liabilities is set off due to the increase in the companys current assets, reserves and profits. Apart from that the company increased its investment not from an increase in the long term debt but by increasing its authorized share in the equity part.CC.4 Statements of Cash Flows

Analysis of statements of cash flow for Atlas battery for the years 2008 till 2012 reveal that operating cash flow from operations in the first two years were fluctuating; cash flow from operations in the first year was quite low as compared to the rest of the years and in 2009 it increased by a great proportion. After these two years there was a noticeable decrease in the cash generated from operations in 2010 after which the company shows a growing and steady source of cash from operations. This low cash from operations can be attributed primarily to large cash outflow from deposits and prepayments in the first year. This simply implies that a large chunk of cash was drained from the changes in working capital of the company. Coming to the net cash used in investing activities, we can see clearly that this value remained negative throughout the time frame of five years. The only difference was the fact that it continued to become more negative in the later years and the value jumped to a more negative side especially in 2009 and 2011. This can be attributed to a huge increase in the outflow from fixed capital expenditure in the subsequent years. This means that the company was expanding and restructuring. Another important value is the huge amount in 2012 of investment acquired. However, the impact of this value was reduced due to an increase in the value of sale proceeds from disposal of investments in the same year.The net cash generated from financing activities depict a fluctuating trend; it had a relatively large negative value in 2009 as compared to a big positive value in 2011 and 2008 respectively. A deeper study of financing activity of Atlas Battery shows that the company continued to give dividends in an increasing trend over the time frame. So, the main reason for the fluctuations in the net cash generated from financing activities is due to changes in short term borrowings of the company.Lastly, by looking at the increase/decrease in cash and cash equivalents for each year, we can see a negative values in 2012 and 2009 respectively. This negative value might indicate to the fact that the company was growing and investing at the same time.CC.5 Five Year Growth Rates

The growth rate of sales per share of Atlas Battery over the five years show that its sales have been increasing by almost 10 percent which in practical terms is quite good. Net Income per share growth rate of the company over the 5 year period is also a positive figure which indicates that the company is enjoying increasing rates of profits every preceding year. The dividend and Equity per share over a 5 years period also shows has a positive value of nearly 10 percent and 14 percent respectively.. This means that the firm payment of dividends in increasing every year at a good rate which is very attractive for investors and its equity is also increasing at a decent rate.CC.6 Common-Size Profit and Loss

The common size is created by taking the averages of each of the component of the profit and loss statements and then dividing it by the total sales of the year.By looking at the statement we can see that there is no big fluctuations in either the costs or the profits of the company over the five years. The cost of sales took nearly 83 to 85 percent of the total sales. The gross profit of Atlas Battery relative to sales was highest in the year 2012 and 2009. From 2010 onwards the company continued to maintain a steady and growing profit from operations.Profit after taxation of the company also showed a growing trend over the last five years. In case of total comprehensive income, we can notice that the income relative to sales fell a bit between 2008 to 2009, however after this the company was able to increase its total comprehensive income in the later years.CC.7 Common-Size Balance Sheets

The common size balance sheets help us analyze and interpret the portion each component of the sheet contributes to the sum of total assets or total liabilities and equity.Looking at the table we can see that non-current assets contribute to about 40 percent of the total assets except for the years 2009 and 2010. In these two years the portion of non-current assets to total assets rose to nearly 50 percent. This was mainly due to increases in property, plant and equipment of Atlas Battery.In current assets portion of the company, the main item that contributed to its value was stock in trade which remained around 30 percent for the company. Apart from that the company also increased its investments part of the current assets tremendously over the years.Coming to the equity and liability part, the most prominent thing that one can notice here is the increase in the total equity as part of the total equity and liability. This is mainly due to the increases brought by the company in the ratio of its unappropriated profit over the years. The ratios of other components in equity part remained mostly same.In the current liability part of the statement, the component that showed the most fluctuating figures was the value of short term borrowings which meant that the company was constantly taking as well as giving back its short term loans. In 2011 short term borrowing contributed to more than half of the total liabilities as a ratio of total assets and liabilities. However this ratio was brought down in 2012 which indicates that the management of the company is trying to get rid of borrowings.CC.8 Trend Index of Selected Accounts(Year 2008=100%)

For the purpose of observing the trend of the few selected accounts from Balance Sheet and Income Statement I considered the values of year 2008 as base year values.The most important value in this table is of sales. The table shows if we keep the 2008 value of sales as the base than the value of sales increased by nearly 270 percent in 2012. This is mainly because of an increase in the demand of battery due to energy crisis and an increased number of vehicles on the road. Sales of the company increased, but at the same time the cost of sales of the company also increased by nearly the same percentage, which means that the company wasnt able to manage and bring down its production cost.Another important value is of working capital of the company, which increased by a huge amount of nearly 450 percent over the past five years. This again points to the fact that the company has been facing an increase in the demands and keeping this in mind the company has increased its working capital continuously.An interesting portion of this analysis is the value in the column of finance cost. It can be seen from the table that the company was able to decrease its finance cost to nearly half in 2010. However, after that the company must have increased its borrowing due to which its finance cost continued to increase in the next two years.Apart from that the values of total assets as well as total liabilities showed a small decrease in 2009 but after that they continued to increase at a steady rate. Finally, the total comprehensive income for the company also shows an increasing trend. Overall, all of the components have increased in the last five years. To conclude, it is safe to say that in the last five years the company has been on its road of expansion in sales as well as capital.CC.9 Per Share Results

Looking at the per share values of the company, we can see that the sales per share of the company has shown an increasing trend from 2008 till 2012 and it increased significantly in 2011. This great increase can be contributed to a large increase in the number of sales in that particular year.Net income per share also shows an increasing trend which indicates that though the company has been able to increase sales but at the same time it has also been able to generate an increasing net income per share too.Dividends paid per share also increased over the years, however it remained constant in 2010 and 2011 respectively. The reason for this is that even though average shares outstanding increased but the company decided to give out more dividend in 2011 due to which the ratio of divided to share remained the same in these two years.The book value per share depicts the value of a share of the common stock which as we can see from the table showed an increasing trend. Lastly coming to the average shares outstanding of Atlas Battery, we can say that the company has continued to issue new shares after 2009. CC.10 Common-Size Statements of Cash Flows

From common size of cash flow we can see what each cash flow contribute as a percentage of all the positive cash flows in the given year. From the analysis of this table we can see that net operating cash flows before working capital is the main contributor of common size cash flow. Further analysis show that income tax paid takes a huge portion of outflow from the company.The important thing to be noted here is that the company has been able to maintain a steady level of outflow in the form of dividend. Apart from that there are minor fluctuations in cash generated from operations over the last five years of the company.CC.11 Analysis of Cash Flow Ratios

The cash flow adequacy ratio provides insight into whether Atlas Battery generates sufficient cash from operations to cover capital expenditures, investments in inventories, and cash dividends. This ratio for Atlas Battery is nearly 0.8, which indicates that funds generated from operations are insufficient to cover capital expenditures, investments in inventories and cash dividends. Furthermore, the company should get external financing to cover its cash flow adequacy ratio. But we have to keep in mind that this is the combined average for the five years and the case might be different if we look at these ratios in each separate year.The cash reinvestment ratio provides insight into the amount of cash retained and reinvested into the company for both asset replacement and growth. This ratio is negative for the company in 2008 which is because of the negative cash provided by the operations in that year. Secondly, this ratio was highest in 2009 and 2012 mainly due to a high cash from the operations of the company.Coming to the industrial average in this table, we can see that the adequacy ratio as well as the cash reinvestment ratio of Atlas Battery has remained above that of the average of the company for all the years except 2008. This points to the fact that the company has performed better than most of the companies in the same industry.CC. 12 Short-Term Liquidity Analysis

The current ratio of the company is above the average requirement. Secondly, this ratio is increasing constantly over the years which means that the increase in its current assets is greater than its increase in current liabilities. Apart from that the values in each respective year is greater than the current ratio of the industry, which points towards the better average performance of the company as compared to other companies in the same industry.The asset test ratio also show improvement over the years and depict an increasing trend. Furthermore, the acid test ratio of the company was slightly lower than the average in first four years of the analysis but in the latest year the company was able to bring the ratio above the average value of the industry. One reason for this increase is the fact that the sales of the company has grown more as compared to the increases in stock in trade, which means that the company has started a better stock and inventory management.Coming to the accounts receivable turnover ratios of the company, these ratios show an increasing trend which indicates an efficient business operation or that the company is perusing a tighter credit policy in each subsequent year. Furthermore, it is safe to assume after looking at the trend of the accounts receivable turnover that the company is efficiently using its assets. Secondly, the turnover of Atlas Battery is better than the average of the industry which means that company is more efficient in dealing with its debtors.The inventory turnover also shows a favorable value for the company partly because its value is showing an increasing trend and partly because each year value is bigger than the value of the average of the industry. This means that not only the company in question is selling more but over the years it has been able to increase the number of sales turn in a year.The days sales in receivables show a decreasing trend in general which means that the company is becoming more successful in collecting revue after a credit sale has been made. Since the value is becoming smaller it means that the company takes fewer days to collect its accounts receivables. Furthermore, the company is performing much better in this case when we compare its year values with average of the industry.Days sales in inventory are also decreasing which means that the company is managing its inventory much better and it takes lesser time for the company to turn its inventory. But more important is that the value of each year is lesser than the average of the industry. Apart from that the value of conversion period is also decreasing in the span of the last five years.Cash to current assets and cash to current liabilities show the liquidity of the company keeping cash as the base. In both the cases the percentages are increasing over time which indicates that the company is holding a larger percentage of cash in each subsequent year. Besides this increase the companies percentage is also greater than the average of the industry.The working capital of the company has been constantly increasing over the last five years which means that company has been keeping a check on its current assets and also it indicates that the company is investing as well as growing.The average net trade cycle decreased in 2009 but after that it started to increase steadily. Lastly cash provided by operations to average current liabilities have shown a fluctuating trend, negative in first year and then increasing substantially in the next year. CC. 13 Common-Size Analysis of Current Assets and Current Liabilities

The table shows that a large portion of current assets was contributed by investments in 2012 and 2011, but before that it only contributed a small portion to current assets in 2010 and 2009 whereas in 2008 there was no investment at all. Another variation was in deposits and prepayments which had a huge value of almost 11 percent in 2008 but it decreased sharply in the next year and continued to decrease in later years. This means that the company is now focusing more on prompt and upfront payments. However, the main contributor in current assets were the inventories which consumed more than half of the current assets.Trade and other payables and short term borrowings as a percentage of the total current liabilities were the main component of current liabilities of the company. Both showed a varying percentage in the last five years. However, in the last three years the company has continued to increase its short term borrowings which means that the company is relying more on borrowings in short term.CC. 18 Capital Structure and Solvency Ratios

Total debt to equity ratio was the highest in the first year of analysis after which the ratio dropped and then showed a fluctuating trend. But the plus point to the company is that its values are lesser than that of industry on an average. The total debt ratio of the company has been fairly low as compared to that of the industry.Atlas battery has no long term debt, which points to the fact that the company relies solely on its earnings, short term borrowings and finance from issuance of stocks. The fixed assets to equity of the company is also lower than that of the industry. Furthermore, it was even below 1 which meant that some of the fixed ratio were financed by liabilities which is not a good sign for the company. The current liability to total liability ratio if lower is better and in this case the company has been able to maintain this ratio to almost 0.80 and its ratios are lesser than that of the industry in all of the years.Earnings to fixed charges show the amount of earnings available to pay the fixed charges and in this case this value shows an increasing trend till 2010 after which is decreased.. The last ratio cash flows from operations to fixed charges which shows a fluctuating trend and even a negative value in 2008. However in later years this values has remained above industrial average.CC. 19 Return on Invested Capital Ratios

Return on assets in all of the years has remained positive and have stayed above industrial average which means that the company is utilizing its assets efficiently. This return decreased initially in 2009 but after that it showed a sign of good and healthy recovery. The return on common equity has not only remained positive but has also shown an increasing trend over the years. A further analysis in the disaggregation of return on common equity shows that the main reason for the increase in the return is the steady increase in total asset turn over which means that the company is not only increasing sales but is efficiently using its assets for this purpose.Return on long term debt and equity also remained above industry average for Atlas Battery. Lastly, the growth rate of equity shows an increasing trend. This indicates that the company will continue its growth in sales and earnings.CC. 20 Asset Utilization Ratios

Sales to cash and equivalents have shown an improvement from 2008 till 2012 which a sharp dip in 2011 which was due to smaller cash in bank. However, sales to cash and equivalents remained higher than the average of the industry in 3 out of 5 years. Sales to receivables show an increasing trend which points to improvement in cash collections from debtors. Sales to inventories have not only improved but have remained higher than the average of the industry in all of the past five years.Sales to working capital have decreased over time which means that company is trying to better utilize its assets. However this ratio has remained well above the average of the industry which means that the company should improve its asset utilization rate and work on using its idle assets.Sales to fixed assets and sales to total assets both have shown signs of improvement over the years. Furthermore they have remained above the industrial average as well.Lastly, before coming to sales to short term liabilities it is better to remind that the company has not taken any long term loans and relies on its short term borrowings, internal finances and equity finances. So, the increase in this ratio was expected. Nevertheless, the company should work on improving this ratio in the future.CC. 21 Analysis of Profit Margin Ratios

The gross profit margin of Atlas Battery continued to fluctuate between 14 and 16 percent in the last 5 years. Considering the economic conditions of the country and the financial as well as energy crisis, this margin is very good. Furthermore, the industrial average were just around 10 percent which means that the company was able to enjoy good profits.The operating profit margin also showed a fluctuating trend which is primarily attributed to the conditions of the country, however since the economy is improving from the last quarter of 2011, the financial situation of most of the companies in the automobile business have improved. The net profit margin of Atlas Battery was way better than the average of the industry and it has also shown an increasing trend. CC. 22 Analysis of Depreciation

The analysis of depreciations as a percentage of gross plant assets show that the company has been able to decrease this percentage. However, we have to keep in mind that this has not affected the net profit margins of the company.The annual depreciation expense as a percentage of gross plant have remained constant for most of the years expect 2010 in which it decreased because the company had sold some of its depreciable assets. Lastly, annual depreciation as a percentage of sales value show an increasing trend, which means that annual deprecation is increasing at a much higher rate than that of sales. Furthermore, it might also mean that the assets, especially equipments and machinery of the company is getting old and hence they incur more depreciation expense.CC.23 Analysis of Discretionary Expenditure

Maintenance and repair have continued to increase over the years for the company, which points to the fact that the company is growing and employing more factors of production. Atlas Battery has also increased its advertising expenses which means that it has opened its target market and is spending more to promote its brand. Maintenance and repairs to sales and well as maintenance and repairs to plant have shown a fluctuating trend over the last five years. They increased initially but due to more sales of the company and more assets being employed they have decreased in the later years. Lastly the relationship of advertising and sales show that advertising has resulted in more sales of the company. This ratio has remained constant expect in 2009.CC. 28 Market Measures

The average share prices of the company has increased over the years with a small decrease in 2009. Price to earnings ratio for Atlas Battery dropped in 2009 but after that it remained stable. Furthermore, this ratio has been very close to the average of the industry which means that the company is doing an average business. The Price to book ratio is also very much below the average value of the industry showing that the stock is very much undervalued compared to other firms. The earning yield have continued to increase over the last five years and is much higher than average of the industry even at its lowest value. Dividend payout ratio has shown some fluctuations but overall it shows a decreasing trend.

ConclusionAs an Investor

After the analysis of all the ratios calculated, I have reached a conclusion that investing in the company can be an option because compared to other industries it has managed its assets quite well. Also the increasing trend of ROCE and return on long term debt and equity has shown a growth and is also above the industrial average which makes it a better option for investing.The financial leverage index has remained above 1 and also above the industrial average for all the analyzed years shows that a proper debt management is taking place. The only thing not good about the firm was its P/E ratio which showed a downward trend showing that firm growth prospects as slowing down but keeping all other good aspects in mind I will invest in the company. As a Banker

I would definitely give loan to Atlas battery. This is due to a number of reasons. Firstly, the company has shown an increasing number of sales over the years. The company is very stable and has good profit margins. Secondly, its financial position is very strong, both from debt as well as assets point of view. Apart from that it has no long term loans and the company analysis show that it is efficient in returning short term loans. Thirdly, the market analysis depict that the company share prices are increasing over the years and that it has a good dividend as well as earnings ratio. Lastly, the profitability and the solvency ratio are in favor of this company both in terms of industrial average in terms of historical perspective. All in all the company has good future growth and profit prospective, thus I will be in favor of lending loan to Atlas Battery.References

http://www.atlasbattery.com.pk/http://www.brecorder.com/http://www.atlasbattery.com.pk/about_us/financial_statment.phphttp://www.brecorder.com/market-data/karachi-stocks/

Appendix(Financial Statements of 2012 and Rough Work)

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