Financial Ratio analysis

Financial Accounting

Submitted to: Mam Saiqa

Submitted by:
Ayeza Iftikhar, Tehreem Imran, Moeez Nadeem, Faizan
Ahmed, Usman , Jabbar, Ali,
RATIO ANALYSIS OF LAST SIX YEARS
UNILEVER PAKISTAN FOODS LIMITED
Summary of Business Performance 
The directors present Unilever Pakistan Foods Limited’s (UPFL) Annual Report together with audited financial statements for the year ended
December 31, 2018. 
Business Review: 
Company’s Principal Activities The Company manufactures and sells consumer and commercial food products under the brand names
of Rafhan, Knorr, Energile, Glaxose-D and Food Solutions. In 2018, the business grew by 10.7%, mainly led by volume growth. Growth was broad
based, both within the Knorr and Rafhan portfolios. 
The key growth drivers in 2018 were: Knorr: Growth was led by the noodles and sauces categories. Noodles grew on the back of building brand
equity and consumption in urban areas with successful campaigns like Knorr Boriyat Busters, along with enhancing penetration in rural areas. Sauces
growth was driven by building excitement via a new thematic campaign along with product and pack changes. 
Rafhan: Corn oil grew on the back of new format launches and desserts was driven by consistent communication and on shelf excitement via
promotions. 
Gross margin remained constant at 45% due to difficult operating environment. Advertising and promotion were in line with business plans. EPS
grew by 25.6% versus last year. 
 LIQUIDITY RATIO:

Liquidity ratios tell us about the company’s short term debt paying ability, or the company’s short term
financial situation or the company’s short term solvency.

The two basic measures liquidity ratio are as follows:

• Current ratio

• Quick (acid-test) ratio

➢ Current ratio:

The current ratio is a liquidity ratio that measures whether a firm has enough resources to meet its short-term
obligations. It compares a firm's current assets to its current liabilities, and is expressed as follows: The current ratio is
an indication of a firm's liquidity.

formula for calculations

Current ratio = current assets ÷ current liabilities

Current ratio =3059468/3873498

=0.79
Current 2018 2017 2016 2015 2014 2013
ratio

Times 0.79 0.54 0.94 0.90 0.61 0.68

Interpretation:
In 2018 , to pay off current liabilities of .1 the company has Current Assets of .0.79 ,which means that the
company is not capable of paying its current liabilities ,when they fall due. And in recent years the companys
ratio is fluctuating sometimes it will be increase or decreases but it is not acceptable. Because its current
assets is less than 1, so it shows that company has not willing to pay its current liabilities. And it is not
acceptable.
QUICK OR ACID TEST RATIO:

In finance, the quick ratio, also known as the acid-test ratio is a type of liquidity ratio, which measures the ability of a
company to use its near cash or quick assets to extinguish or retire its current liabilities immediately.

Acid test ratio = current assets -inventory/ Current Liabilities

Acid test ratio = 3059468-963034/3873498
=0.54

Quick ratio 2018 2017 2016 2015 2014 2013

Times 0.54 0.27 0.57 0.52 0.28 0.35

Interpretation:

● In 2018, to pay off Current Liabilities of Rs.1, the company has quick assets of Rs,0.54, which means
the company has not capable of paying its current liabilities with its Quick Assets, when they fall due .

● And in other recent years the comapnys quick ratio is changing but it is below the Rs.1, so the
company,s position is not favorable and acceptable. So company has not able to pay its liabilities.

Activity Ratios
Activity ratios are a category of financial ratios that measure a firm's ability to convert different accounts within
its balance sheets into cash or sales. Activity ratios measure the efficiency of a firm based on its use of its
assets, or other similar balance sheet items and are important in determining whether a company's management
is doing a good enough job of generating revenues and cash from its resources.

● Activity ratios are also known as efficiency ratios.

There are four types of activity ratio:

● Inventory turnover
● Average collection period
● Average payment period
● Total assets turnover
 Inventory turnover ratio:
Inventory turnover measures the liquidity of a firm’s inventory.

Formula:
Inventory turnover = cost of goods sold/Inventory
= 6539088/985287
=6.636
=365/6.636
Days = 55.00
Ratios for six years:
Ratios Unit 2018 2017 2016 2015 2014 2013

Inventory
turnover
Days 55 61 66 70 59 61
ratio

Interpretation:
● The resulting turnover is meaningful only when it is compared with other firms in same industry. In
2018, the firm is making the inventory (6.636) times per years. The inventory 55.00 days (365/6.636) in
the UNILEVERS company has on hand. And the number of days is decrease, in 2018. Which means that
the firm has good efficiency in market.

Average collection period ratio:

The average collection period, or average age of accounts receivable, is useful in evaluating credit and
collection policies.

Formula:
Average collection period ratio= Accounts receivable/ (Annual sales/365)
=509288/ (11898430/365)
Days= 15
Ratios for six years:

Ratios Unit 2018 2017 2016 2015 2014 2013

 Average
collection
period Days 15 13 10 9 9 9

Interpretation:
● The average collection period is meaningful only relation to firm credit terms. The average collection period of
the UNILEVERS company is less than 30-days credit terms to customers, in 2018 the average collection period of
15-days may indicate a good managed collection department. But the comparison of previous years the
collection period is not better in 2018.

AVERAGE PAYMENT PERIOD :

The average amount of time needed to pay accounts payable is calculated by this ratio.

The formula is:

Account payable/ annual purchases per day

2867577 / 17736 = 164 days
Annual purchases= annual purchases/ 365.
= 6539088 x 0.95 / 365 = 17736

But in financial statement of income it is not clearly has given the annual purchases, ordinally, purchases are
estimated as given percentage of cost of good sold.

here as we are discussing the ratios of UNILEVERS the average payment ratio they have in last six years are:

Creditor ratio for 2018:

Ratios Unit 2018 2017 2016 2015 2014 2013

Average
payment
Days 164 168 165 187 175 132
period

Interpretations:
● The figure is meaningful only in relation to the average credit terms extended to the firm. If UNILEVERS
company’s suppliers have extended on average, 30 day credit terms, this company will lose creditors
 because they take too long period to pay its bills. In almost all years the company has payment period
up to 100 days.
● This could adversely affect the firm’s credit standings.
● its credit payment ratio increased in every year but if we compare 2018 year with others it is good as
compare to last 3 years.
● overall payment period is poor.

TOTAL ASSET TURNOVER

Total asset turnover indicates the efficiency with which the firm uses its assets to generate sales.

The formula is:

Total asset turnover= sales / total assets.

Calculation for 2018= 11898430 / 5938972 = 2
This means that the company how many times the company turnover its assets.

Here we are discussing the total asset turnover ratio of UNILEVERS of the last six years.

Ratios Unit 2018 2017 2016 2015 2014 2013

Total
asset
times 2 3 2 2 2 3
turnover

Interpretations:
● As we know the firm’s total assets turnover must be higher, it shows the more efficiently its assets
have been used. This measure is probably of greatest interest because it indicate whether the firm’s
operations have been financially efficient.
● UNILEVERS total asset turnover reflects a decline in the efficiency of total asset utilization between
2017 and 2013. although in 2017 and in 2013 it increases its level of efficiency. overall this company
has good asset turnover.

PROFATIBILTY RATIOS:

Profitability ratios measure the efficiency with which your company turns business activity into profits. Profit
margins assess your ability to turn revenue into profits.
A higher number indicates greater efficiency in creating profits.Compare the profit margin of your business
with others in your industry and the industry as a whole.
Gross profit margin

Gross profit margin = Sales – C.G.S/Sales

Gross profit margin of 2018: 11898430 – 6539088 / 11898430 =0.45

times or 45 %
Ratios Unit 2018 2017 2016 2015 2014 2013
Gross
profit % 45.04 44.98 44.39 44.71 43.15 41.78
margin

Interpretation:

Gross profit margin is increasing from year to year. A higher gross profit margin indicates that a company can
make a
reasonable profit on sales, as long as it keeps overhead costs in control. Investors tend to pay more for a
company with higher gross profit.

Gross profit margin above 20% is considered high. These guidelines vary widely by industry and company size,
and can be impacted by a variety of other factors.

Operating profit margin :

Operating profit margin = Operating profit(EBIT) / SALES

Operating profit in 2018 : 2561391 / 11898430 = 22.82
Ratios Unit 2018 2017 2016 2015 2014 2013

Operating
profit
% 22.82 19.54 20.45 20.88 22.59 21.84
margin

Interpretation
● Company is demonstrating increasing trend of the operating income margin from 2017-18 .It means
that the company is improving the efficiency of controlling their overall costs. Higher operating income
margin also means less financial risk for a company and ability to pay its fixed costs, such as interest
expenses.
● A decline in operating profit margin means there is decline in sales.
● In 2018 the 22.82% profit margin shows that the company is making
 ● enough money from its ongoing operations to pay for its variable
● costs as well as its fixed costs.

Net profit margin(NET PROFIT TO SALES)

Net profit margin = EBIT / SALES

Net profit margin for 2018: 1,731,570/11,898,430 = 14.55

Ratios Unit 2018 2017 2016 2015 2014 2013

Net profit
margin
% 14.55 12.62 13.48 14.38 15.05 14.44

INTERPRETATION:
● NET PROFIT MARGIN is fluctuating in above years.
● As from 2014 to 2017 the net profit margin was declining. It means
● that the company’s performance and profatibility levels were
● declined.
● IN 2018 the net profit margin is 14.55. it is considered an average
● ratio. It is better as compare to previous year.

EARNINGS PER SHARE (EPS):

Earnings per share = Company’s profit/outstanding shares

EPS FOR 2018: 1,731,570/6,36,99 =274.48

Ratios Unit 2018 2017 2016 2015 2014 2013

Earnings
per share
% 238.29 193.39 101.49 135.31 274.09 280.03
INTERPRETATION:
● EPS is increasing from year to year it means that company is generating a significant dividend for
investors.
● The figure(274.48) represents the amount earned on behalf of each outstanding share of common
stock
● It is closely watched by the investing public and is considered an important indicator of
● corporate success.
● The result is assigned a rating of 1 to 99, with 99 being best. An EPS Rating of 99 indicates
● that a company's profit growth has exceeded 99% of all publicly traded companies.
● A higher EPS means that a company is profitable enough to pay out more money to its
● shareholders. For example, a company might increase its dividend as earnings increase over
● time.
● Investors typically compare the EPS of two companies within the same industry to get a sense of how
the company is performing relative to its peers.

Market ratio: (dividend cover ratio)

Dividend cover ratio = earnings per share/dividend per share

Dividend cover ratio of 2018 : 274.48/ 280.08 =0.98

Ratios Unit 2018 2017 2016 2015 2014 2013

Price
/earnings
Time 25.96 27.22 28.44 29.96 47.01 57.42
ratio

Interpretation:
This ratio is decreasing from year to year. A low Dividend Cover ratio suggests that the company is paying out
a large proportion of its earnings as dividends.

In 2014-15 the dividend coverage ratio is greater than 1, it indicates that the earnings generated by the
company are enough to serve shareholders with their dividends. As a rule of thumb, a DCR above 2 is
considered good (AS IN 2014,15,17)

But in 2016-18 it is unfavorable as it is less than 1 so the company must make effort to increase this ratio.

Dividend payout ratio:

The dividend payout ratio is a financial term used to measure the percentage of net income that a company
pays to its shareholders in the form of dividends. The payout ratio is important because it tells investors how
much of the company's profits are being given back to shareholders.

Dividend payout ratio : cash dividend / EPS

Dividend payout ratio of 2018 : 280.08/ 274.48 = 1.02

Ratios Unit 2018 2017 2016 2015 2014 2013

Dividend
payout
% 1.02 0.93 1.79 0.76 0.50 0.56
ratio

Interpretation:

● This ratio was increasing from 2014-16 and then decline in 2017,increase in 2018. All the ratio are
positive.
● Payout ratios in 2016 and 2018 was high it means the company is expected to distribute more than half
of its earnings as dividends,which implies less retained earnings.
● If a company has a dividend payout ratio grater than 1 then this means that the company is paying out
more to its shareholders than earnings coming in. This is typically not a good recipe for the company's
financial health; it can be a sign that the dividend payment will be cut in the future.

Capital structure ratio:

Interest coverage ratio= EBIT/ interest expense

Ratios Unit 2018 2017 2016 2015 2014 2013

Interest
leverage
Time 0.33 0.01 0.00 0.05 0.04 0.05
ratio

2561391/ 69675= 0.33

Interpretations:
The lower the interest coverage ratio, the higher the company's debt burden and the greater the possibility of
bankruptcy or default. this company’s lower ICR means less earnings are available to meet interest payments and
that the business is more vulnerable to increases in interest rates. When this company's interest coverage ratio is
only 1.5 or lower in year 16 and 17 , its ability to meet interest expenses may be questionable. An interest coverage
ratio below 1.0 indicates the business is having difficulties generating the cash necessary to pay its interest
obligations (i.e. interest payments exceed its earnings (EBIT)).
A higher ratio indicates a better financial health as it means that the company is more capable to meeting its interest
obligations from operating earnings. On the other hand, a high ICR may suggest a company is "too safe" and is
neglecting opportunities to magnify earnings through leverage. so this firms ratio is good in year 2018 which is
3.3%.

FINANCIAL leverage ratio=

average total assets= 424212.286
average equity= 318314
financial levagre ratio= 424212.286/318314=0.33

Ratios Unit 2018 2017 2016 2015 2014 2013

Financial
coverage
Time 46.91 135.66 180.74 101.01 167.32 470.92
ratio

Interpretation
this ratio should be low as possible, a company with low financial leverage ratio is good health. so this company’s should
increase its total assets, this rstio tells us that how many assets are working efficiently by using equity. so overall
condition of the firm is questionable.