Ratio analysis of Siemens (Pakistan) Engineering Company Limited

Project on Ratio Analysis of Siemens (Pakistan)

Engineering Company Limited

Submitted to:
Ms Sarwat

Submitted by:
Anum Tariq

Major:
BBA (semester3)

Course Title:
Accounting

Date:
November 30, 2010

Ratio analysis of Siemens (Pakistan) Engineering Company Limited

Siemens (Pakistan) Engineering Company Limited

The Siemens Pakistan Engineering Company Ltd. was founded in 1953 as a private company, and in 1963, the company was reorganized as a public limited company. Siemens first office in Pakistan was opened in 1922.Siemens is actively involved in university education in Pakistan. In 1997, the company set up a program to award gold medals to the best engineering students at Pakistani universities. For 87 years, Siemens has been active in Pakistan, where it holds leading positions in the three application fields: Energy Environmental Care Industry & Public Infrastructures and Healthcare.

Siemens is the countrys No. 1 supplier of high-voltage grid stations, switchgear products and systems, power distribution and power transformers, and network consultancy. The company has also built a new 220kV Power Transformer factory, and is poised to meet the demand in this sector nationally and in the region. With a workforce of 1,400 employees, Siemens is one of the most important employers in the country and the largest employer of engineering graduates in the country. Directly and indirectly Siemens provides employment to more than 4000 persons across the country. Siemens enjoys a leading position in Pakistan in the areas of Power Generation, Power Transmission and Distribution, Automation and Control, Industrial and Infrastructure Solutions, Medical Solutions, Transportation and Information Technology Solutions. The company is among the top 25 companies of the country and has won several awards including the prestigious CSR award from the employers federation of Pakistan Siemens was the O&M partner for the electric power utility in Karachi and worked to overhaul the aging system. This contract was however terminated, allegedly due to non-cooperation and inability to stabilize the current system. Siemens Top rankings in Karachi Stock Exchange is the true testament of our leading position and also a living example of their vision which is To remain market leader and technology pace setter in the engineering and electronics industry by utilizing the high-tech engineering expertise of the Siemens Group worldwide. To maintain our strong and prominent local presence. Rationale to opt for this company: I opt for this company because its the market leader in the world of technology and has been working in Pakistan since many years and helping brilliant graduates students to work with them its financial statements is easily available everywhere.

Ratio analysis of Siemens (Pakistan) Engineering Company Limited

Liquidity Ratios
Current Ratio
2008: Current assets/ Current liabilities =21148339/18381034 =1.15:1

2007: Current ratio= current assets/ Current liabilities =14484573/12115914 =1.19:1

Interpretation: The current ratio of both the years i.e. 2007 and 2008 have not declined but shows a very healthy condition of company.At 1.15 and 1.19 both of these ratios look quite healthy in absolute terms but for the future the company should have more assets so they can pay off their liabilities easily. But if the company continues in this condition then there is a chance of decline.

Quick Ratio:
2008 (Current assets inventory)/current liabilities Current assets inventory = 21148339-4588682

Ratio analysis of Siemens (Pakistan) Engineering Company Limited

=16559657 Quick Ratio=16559657/18,381,034 =0.90:1 2007: = (Current assets inventory)/current liabilities = (14,484,573-3,166,741) =11317832 Quick Ratio=11317832/12115914 =0.93:1

Interpretation: The quick ratio of both the years i.e.2008 and 2007 shows a poor condition of company as the ratios interprets that the assets that the company generate to earn profit is very less .the present condition shows that despite of having less ratio in 2007 company has not changed its trends so in 2008 they get more less quick ratio and if the company remains in this condition they will have a loss and will not be able to pay off its liabilities.

Ratio analysis of Siemens (Pakistan) Engineering Company Limited

Leverage Ratios

Debt to Total Assets Ratio

2008 Total debt/assets 18,487,125/24,775,382 0.75:1

2007: Total debt/assets 12,229,594/17,581,016 =0.70:1 Interpretation: The debt to equity ratio of both the years i.e.2008 and 2007 shows a healthier condition of company as the business assets are more than the total debt of company so the ratios 0.75:1 and 0.70:1 shows satisfactory condition the present ratio shows that that the company assets and debts both has been increased which makes its condition stable. But for long run the company has to increase its assets and decrease its debts to run itself smoothly.

Debt to Equity Ratio:

2008: Total debt/total stake holders equity Total stake holders equity=share capital + reserves =200000+3647218 =3847218

Ratio analysis of Siemens (Pakistan) Engineering Company Limited

Equity= 18,487,125/3847218 =4.8:1 2007: Total debt/total stake holders equity Total stake holders equity=share capital + reserves =200000+2,647,218 =2847218 Debt to Equity=12,229,594/2847218 =4.3:1 Interpretation: The higher the debt to equity ratio the riskier the investment. This is because loan interest should be paid before any dividends are paid to stake holders. The debt to equity ratio for both the years i.e.2008 and 2007 shows a satisfactory condition. The ratios 4.8:1 and 4.3:1 are not showing decline but if the company runs in the same ways then it will not be able to make investments and pay off its debts and become bankrupt.

Long term debt to Equity Ratio:

2008: Long term debt/total stake holders equity =106,091/3847218 =0.03:1 2007: Long term debt/total stake holders equity =113,680/2847218 =0.03:1

Ratio analysis of Siemens (Pakistan) Engineering Company Limited

Interpretation: The higher the long term debt to equity ratio the riskier the investment. The ratios of both the years i.e. 0/03:1 and 0.03:1 are same which shows the company has not increased its long term debts and equity too much and has been running at the same path. The ratios shows that that the share holders funds are 100% more than its long term debts and has the ability to pay off and make further investments.

Interest Earned Ratio:

2008: Profit before interest and tax/interest charged 2,691,173/126970 =2.1:1 2007: Profit before interest and tax/interest charged = 2,022,635/316939 =6.38:1 Interpretation: This ratio measures the extent to which interests payments are covered by profits. Both the years ratios shows that company can comfortably meet the interest payments on their profits which are gained from different operations however the 2008 ratio is relatively more less than 2007 which shows a slight decline so for the long run I would like to suggest that the company should have more and more profit so that they will have profit not only before the payment of taxes but also after the payments.

Ratio analysis of Siemens (Pakistan) Engineering Company Limited

Activity Ratios
Inventory Turnover:
2008 Sales/Inventory of finished goods =26,880,742/4, 5,886,828*100 =5.85 times 2007: Sales/Inventory of finished goods =21,901,752/3,166,741 =6.91 times Interpretation: The inventory turnover shows that whether a company is carrying an excessive amount of stock or has excessive sales in comparison to the previous year or not. The 2007 ratio is quite good but in 2008 the inventory turnover gets lower that means in 2008 inventories are not handled efficiently. So now for future I would like to suggest that the company should manage it properly so the cash tied to inventories get free and can be used to generate multiple profits.

Fixed Assets Turnover:

Sales/Fixed Assets =26,880,742 /3,627,043 =7.41:1 2007: Sales/Fixed Assets =21,901,752/ 3,096,443

Ratio analysis of Siemens (Pakistan) Engineering Company Limited

=7.07:1 Interpretation: The fixed assets turnover shows that whether a company s fixed assets is being utilized properly or not sales should be according to their assets value because assets contribute to increase sales and earn profits. In 2007 the ratio is 7:01:1 and in 2008 the ratio is 7.41:1 there is a slight difference which shows company is utilizing its assets properly.

Total Assets Turnover:

2008: Sales/Total assets =26,880,742/24,775,382
=1.08:1

2007: Sales/Total assets 21,901,752/17,581,016 =1.24:1 Interpretation: The total assets turnover shows that whether a company s total assets is being utilized properly or not sales should be according to their assets value because assets contribute to increase sales and earn profits. In 2007 the ratio is 1:24:1 and in 2008 the ratio is 1.08:1 there is a slight difference which shows company should utilize its assets properly.

Account Receivable Turnover:

2008: Sales/Account receivable =26,880,742/13152418 =2.04:1

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2007: Sales/Account receivable =21,901,752/8005924 =2.74:1 Interpretation: Account receivable turnover shows what time is required by company to collect its credit sales. In 2007 its2.74:1 and in 2008 its 2.04:1 there is a decrease in ratio which shows a slight decrease and the company should work on this pattern.

Average Collection Period:

2008: Account receivable/Total credit sales (13152418/26,880,742)*365 =178 days 2007: (21,901,752/2847218)*365 =280 days Interpretation: The current average collection period which is 178 days is less than the previous year the reasons for this may b the company is making more credit sales in order to finish their inventory. The period needs to be tied up in order to improve average collection period.

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Profitability Ratios:

Gross Profit Margin

2008: (Sales-cost)/sales (4,013,861/ 26,880,742)*100 =15% 2007: (Sales-cost)/sales =3,218,529/21,901,752 =1.5% Interpretation: The shows that whether the company has the ability to cover operating expenses and lead a profit after it or not. The percentage of 2007 shows that the company has not been able to achieve higher profit which may include a number of factors. But in 2008 15% shows that the company has achieved a higher profit which may includes an effective purchasing strategy.

Operating Profit Margin

2008: Earnings before interest and taxes/sales = (2,691,173/26,880,742)*100 =10.01% 2007: Earnings before interest and taxes/sales (2,022,635/ 21,901,752)*100

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=9.235% Interpretation: The ratios for both the years shows that the profits without having any concern with interest and taxes is fairly good .2007 ratio shows less % as compare to 2008 which shows that the company is generating more profits than the previous year. So for the long run also I would like to suggest that the company should have more and more profit so that they will have enough profit not only before the payment of taxes but also after the payment

Net Profit Margin:

2008: (Net income/sales)*100 = (1,679,068/ 26,880,742)*100 =62.46% 2007: (Net income/sales)*100 = (2,481,322/21,901,752)*100 =11.32% Interpretation: The net profit margin shows that whether the company is able to get profit after paying taxes or not. The ratios for both the year shows that the company has the not been declined and has been able to maintain its position not only in 2008 but 2007 also. Despite of the fact that the ratio is quite lower in 2007 the company has covered the expenses by its sales and reduces the cost of goods which results in higher income.

Return on Total Assets:

Net income/total assets =1,679,068/24,775,382

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=0.07:1 2007: Net income/total assets =2,481,322/17,581,016 =0.14:1 Interpretation: This ratio shows whether the company has gain much profit as compare to the assets which are generated. The ratios for both the year a show that the income is lower than the assets generated this includes many factors may be the company have not made enough sales or the expenses may be higher.2008 ratio is lower than 2007 which shows that the company is declining. For future run the company should have multiple sales and fewer expenses.

Return on Stakeholders equity(ROE):

2008: Net income/total stake holders equity = (1,679,068/3847218)*100 =44% 2007: Net income/total stake holders equity

= (2,481,322/2847218)*100
=87% Interpretation: This ratio shows whether the company has gain much profit as compare to the investments which are made by share holders .in 2007 87%shows a healthy condition its just because the company has higher income but less equity so it was generating multiple profits out of less investments but in 2008 the 44% shows that the equity becomes larger and investments becomes lower which results in less%.

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Earnings per Share:

2008: Net income/No of shares of common stock outstanding =1,679,068/200,000 =8.395 2007: Net income/ of shares of common stock outstanding =2,481,322/200,000 =12.41 Interpretation: In 2007 the company has higher ratio which shows that it is the best investment from the stake holders perspective. In 2008 the ratio becomes less which shows that the company is moving towards decline so for the future long run I would like to suggest that the company should follow the previous year trends in order to gain high profit.

Price-Earnings Ratio:
2008: Market price per share/EPS =10/8.395 =1.191 2007: Market price/EPS =10/12.41 =0.81 Interpretation:

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Growth Ratios

Sales:
(Current sales-previous sales)/current sales*100 = (26,880,742- 21,901,752)/ 26,880,742*100 =18.52% Interpretation: The higher the sales percentage, the higher the profit generated through it. The ratio 18.25% does not show a satisfactory result so in future run the company has to increase its sales and decrease the cost to gain more profit and thus results in higher%

Net Income:
(Current income-previous income)/current income *100 (1,679,068- 983,694)/ 1,679,068*100 =-47.7% Interpretation: The higher the net income percentage, the higher the profit generated by the company. the ratio 47.7% show a satisfactory result but in future run the company has to increase its sales and decrease the expenses i.e. interest and taxes to gain more profit.

EPS:
= (8.395-12.41)/8.395*100 =49%

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Interpretation: Higher EPS percentage shows that the company is giving more profit to investors. If the companys EPS is higher than it is becomes best investment from the stake holders perspective, this company has 49% which shows a satisfactory condition but if in future they gain more net incomes and sales then automatically their investments become higher.

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Conclusions
Although the company has not managed to increase its gross profit over the period but has managed an increase in net profit by decreasing its business expenses in 2008.In summary the ratios indicate a strong internal control on costs of goods and good management of capital as compare to 2007.The return on shares is also quite attractive for investors or the existing share holders and the assets are also larger than the previous year which leads to a strong financial position. Sales are the major strength of this company which leads to a larger net income. Overall company is doing well and is being able to maintain its position.

Suggestions

Analyzing the above mentioned ratios I would like to give following suggestions to company:

For the future run it is compulsory for Siemens (Pakistan) Engineering Company Limited
to manage its liabilities properly as they are increasing and their growth rate is much higher than its assets .so if the company wants to remain a market leader its important for it to increase its LIQUIDITY RATIOS to such extent that no company can compete with it.

In the same way if assets are larger than liabilities, the company should utilize them
properly. At present the company sales is getting low so may be the reason behind is that the company is not utilizing its fixed assets properly which results in the decline of sales.

Company should decrease its production cost in order to have high gross profit(GP).At
present company is generating it high but for future they has to decrease it more in order to have higher PBIT and higher PROFITABILITY RATIOS.

Company should decrease its financial and income tax expenses to have so that the
company will have profit not only before the expenses i.e. PBIT but also after payments

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i.e. NET INCOME. Obviously the higher the net income the higher the EARNINGS PER SHARE i.e. EPS.

And if the EPS is higher than the investor would like to invest in it more and more which
results in larger SHARE CAPITAL. At present the companys capital is good but for the long run they should make it more and more. For this the company should maintain its EPS and make it more attractive for investors.