Acknowledgments

By the grace of the almighty, “The Living Legends” have

been able to complete the project assigned to them by the
instructor of Business Finance. It really has been a pleasure
doing this project as it helped us a lot with a provision of an
exposure that would not have been possible anyway else.
We therefore thank our instructor Madam Naheed who
guided us in this regard and was available to us for any kind
of inquiries or problems confronted by us. But above all we
thank the almighty for enabling us to achieve our task within
time.

Sincerely,
The Living Legends
BBA BATCH 4
 Abstract
This analytical report is about the financial situation of the
fauji fertilizer limited, the largest manufacturers of fertilizer
in Pakistan. They are one of the top companies of the
country with a massive share in the market of urea. This
analysis would certainly help us in knowing the current
financial status of the company as we have done a time
series analysis for the last two years.
 Company profile

With a vision to acquire self - sufficiency in fertilizer

production in the country, FFC was incorporated in 1978 as a
private limited company. This was a joint venture between
Fauji Foundation (a leading charitable trust in Pakistan) and
Haldor Topsoe A/S of Denmark.

The initial authorized capital of the company was 813.9

Million Rupees. The present share capital of the company
stands at Rs. 3.0 Billion. Additionally, FFC has Rs. 1.0 Billion
stakes in the subsidiary Fauji Fertilizer Bin Qasim Limited
(formerly FFC-Jordan Fertilizer Company Limited).

FFC commenced commercial production of urea in 1982 with

annual capacity of 570,000 metric tons.

• Through De-Bottle Necking (DBN) program, the

production capacity of the existing plant increased to
695,000 metric tons per year.

• Production capacity was enhanced by establishing a

second plant in 1993 with annual capacity of 635,000
metric tons of urea.

• FFC participated as a major shareholder in a new

DAPS/Urea manufacturing complex with participation of
major international/national institutions. The new
company Fauji Fertilizer Bin Qasim Limited (formerly
FFC-Jordan Fertilizer Company Limited) commenced
commercial production with effect from January 01,
2000. The facility is designed to produce 551,000
metric tons of urea and 445,500 metric tons of DAP.
 • This excellent performance was due to hard work and
dedication of all employees and the progressive
approach and support from the top management.

• In the year 2002, FFC acquired ex Pak Saudi Fertilizers

Limited (PSFL) Urea Plant situated at Mirpur Mathelo,
District Ghotki from National Fertilizer Corporation
(NFC) through privatization process of the Government
of Pakistan.

This acquisition at Rs. 8,151 million represents one of the

largest industrial sector transactions in Pakistan
 Company’s brand name is “SONA” under the umbrella
of the Fauji fertilizer company that is abbreviated as
given.

The company introduced its product under the name of

“SONA UREA” in 1982 as the first plant was underway as far
as the production is concerned; the company and brand
name had already been registered when the company
entered the business in 1978.
At first, the company had put all its efforts in the production
of urea as there was a definite need for the urea production
in the country because of the high demand and
consumption.
Talking about the current situation and the future
prospective, the company has been one of the leading
Organizations of the country for a long time now and the
brand name are very well established.
 Ratio Analysis
In this section of the report, we will calculate and analyze
some financial ratios for the company for the last two years
in order to see exactly in which direction the company is
moving. It will tell us about the financial status of the
company at present as well as it would serve the purpose of
knowing if it is moving forward or not.

Liquidity Ratios:

Liquidity ratios tell us about the firm’s ability to satisfy its

short-term obligations as they come due. Now we will
analyze a few of the liquidity ratios regarding the company.

A) Current ratio

Year 2005 2006

C.R 0.91 0.90

• Now we can see that the figure has decreased in the

current ratio when compared to the year 2005.
• It’s a band trend for a manufacturing firm like Fauji
Fertilizer Company.
• We can see from the financial statements of the
company that both the current assets and the current
liabilities have decreased but the assets have decreased
comparatively more causing a decreasing trend in the
current ratio.
• One of the major reasons for the problem seems to be
lower short term investments.
B) Quick ratio
Year 2005 2006

Q.R 0.69 0.61

• The above comparison shows that the quick ratio has

decreased as the company ended the year 2006.
• It is not a healthy sign for the company.
• Now it has already been discussed that the company’
current assets have decreased comparatively. The
financial statements show that the firm’s inventory has
increased. That has caused the quick ratio figure to fall
a bit.
• Hence the firm’s overall ability to satisfy the short –
term obligations is decreasing which is not good at all.

Activity Ratios:
Activity ratios measure the speed with which various
accounts of the company are converted into sales or cash-
inflows or outflows. For this firm, following are a few
activity ratios.

A) Inventory turnover

Year 2005 2006

I.T (times) 47.47 27.31

I.T (days) 08 12

• We can see that the inventor turnover has decreased.

• That is a bad trend as the company is now turning the
inventory into finished goods less frequently as
compared to the year 2005.
 • The cost of goods sold has decreased as compared to
inventory.
• So the firm is getting less efficient in its production
operations.

B) Total asset turnover

Year 2005 2006

T.A.T 0.90 1.09

• The total asset turnover is on the rise when we

compare the figures in this ratio for the last two years.
• It’s a positive trend and is in the good of the company.
• The financial statements suggest that the sales have
increased and the assets have decreased that resulted
in this rising figure.
• The increase in total assets turnover depicts an efficient
financial management.

Debt Ratios:
Debt ratios indicate the amount or the percentage of other
people’s money being used to generate profits. We will now
discuss the two debt ratios with respect to the company we
have selected.

A) Inventory turnover

Year 2005 2006

D.R 56% 52%

• We can see that the percentage has decreased.

 • It indicates a bad trend as the financial leverage of the
company falls with the decrease in the percentage of
creditor’s financed proportion.
• It indicates the company has lost its credibility for
attracting investments to some extent.
• The company’s assets have decreased.

B) Times interest earned ratio

Year 2005 2006

T.I.E.R 21.12 12.50

• As we can see that the trend is a decreasing one when

we compare the calculated ratio for the last two years.
• It is a bad trend for the firm.
• The decreasing trend shows that the firm is loosing its
ability to make the contractual interest payments.
• It is perhaps because of the decrease in the company’s
earnings.

Profitability Ratios:

Profitability ratios help in evaluating the firm’s profits with

respect to a given level of sales, a certain level of assets, or
the owner’s investment. We will discuss six ratios in this
regard with respect to the company.

A) Gross profit margin

Year 2005 2006

G.P.M 36.06% 32.42%

 • The gross profit margin has decreased.
• It depicts a bad trend for the firm.
• In this case both the sales and the gross profit have
increased but the sales have increased comparatively
more.
• Cost of goods sold has also increased but not as much
as the sales have done.

B) Operating profit margin

Year 2005 2006

O.P.M 28.31% 23.32%

• The ratio has a decreased figure when compared with

the last year.
• It definitely is a bad trend for the firm.
• We can see from the financial statements that both the
operating profit and sales have increased but sales
have increased rather more.
• A reason for the decreasing figure may be the effect of
rising expenses.

C) Net profit margin

Year 2005 2006

N.P.M 19.22% 15.48%

• The net profit margin ratio has decreased from last

year.
• That is not a good sign for the firm.
• The sales have increased.
• The reason for the debacle may be that the earning
available for the common stock has decreased.
• Initiatives have to be taken to remove the downfall.
 D) Earning per share
Year 2005 2006

E.P.S (pre tax) 14.62 14.16

E.P.S (after tax) 9.92 9.39

• Earning per share has decreased from what it was last

year.
• It’s a bad situation for the company.
• The reason for this also would be the decrease in the
earning available for the common stock.

E) Return on total assets

Year 2005 2006

R.O.A 25.36% 25.47%

• Return on assets has increased.

• It’s a healthy sign for the company.
• The decrease in both the earning available for common
stock and total assets has contributed in the positive
outcome.
• Even though both have decreased

F) Return on Common stock equity

Year 2005 2006

R.O.E 39.36% 35.78%

 • The return on common stock equity has decreased from
last year.
• That definitely is not a good trend.
• From the financial statements we have learned that the
common stock equity is the same as it was last year
but the earning available for common stock has
decreased which resulted in the above situation.

Market Ratios:

Market ratios relate a firm’s market value as measured by its

current share price, to certain accounting values. We will
discuss two market ratios for the selected firm.

A) Price/ earning ratio

Year 2005 2006

P/E. R 13.80 11.23

• The figure has decreased from last year.

• It’s a bad trend for the firm
• Both the market price per share of common stock and
the earning per share have decreased.
• The market price per share has decreased more that
has caused the above situation.

B) Book ratio

Year 2005 2006

B.R 13.89 10.70

• The book value has decreased.

• Its not a healthy trend for the firm.
 • Both the market price of share and the book value has
decreased but market price/ share has decreased more.
Conclusion

If we conclude all the ratios to see where the company is at

the end of year 2006, we see that the current assets of the
company have decreased as well as the short term
investments. The firm is loosing its ability to satisfy its short
term obligations. The inventory turnover has become slower
as compared to last year hence the efficiency is lacking in
the operations. Although the sales have increased its effect
has been cancelled out by the increase in expenses. The
earning available for common stock has decreased resulting
in low net profit margin and the earning per share. The debt
ratio has decreased and the financial leverage of the
company has decreased. Hence the company is not
attracting as much investments as it should. Collectively we
can say that the company has not performed desirably in the
year 2006 and initiatives have to be taken.
APPENDIX
CALCULATED RATIOS

Ratios 2005 2006

Current ratio 0.91 0.90
Quick ratio 0.69 0.61
Inventory turnover(times) 47.47 29.31
Inventory turnover(days) 08 12
Total assets turnover 0.90 1.09
Debt ratio 56% 52%
Interest earned ratio 21.12 12.50
Gross profit margin 36.06% 32.42%
Operating profit margin 28.31% 23.32%
Net profit margin 19.22% 15.48%
Earning per share(pre tax) 14.62 14.16
Earning per share(aft tax) 9.92 9.39
Return on total assets 25.36% 25.47%
Return on Common stock 39.36% 35.78%
Price earning ratio 13.80 11.23
Market book ratio 13.89 10.70

Graphical Representation
 1
0.9
0.8
0.7
0.6
current ratio
0.5
quick ratio
0.4
0.3
0.2
0.1
0
2005 2006

FIGURE 1.1

50
45
40
35
30
Inventory turnover
25
Total assets turnover
20
15
10
5
0
2005 2006

FIGURE 1.2
debt ratio

57%

56%

55%

54%
debt ratio
53%

52%

51%

50%
2005 2006

FIGURE 1.3
45.00%
40.00%
35.00%
30.00%
25.00% 2005
20.00% 2006
15.00%
10.00%
5.00%
0.00%
gross profit operating net profit return on return on
margin profit margin total CS equity
margin assets

FIGURE 1.4

16

14

12

10
price earning ratio
8
market ratio
6

0
2005 2006

FIGURE 1.5
 Fauji Fertilizer Company Limited
Balance sheet
At December 31, 2006

2006 2005
(Rs. ‘000) (Rs. ‘000)
SHARE CAPITAL AND RESERVES

Share Capital 4,934,742 4,934,742

Capital reserve 160,000 160,000
Revenue reserves 7,861,801 7,346,166

NON CURRENT LIABILITIES 1,193,750 981,078

DEFERRED TAXATION 2,396,000 2,401,000

CURRENT LIABILITES
Trade and other payables 4,025,926 6,737,803
Interest and mark – up accrued 134,039 81,644
Short term borrowings 4,531,090 2,504,963
Current portion of long term:
-Financing 887,327 1,845,658
-Murabaha - 41,667
Taxation 1,305,606 1,414,418
-------------------- ----------------
10,883,988 12,626,153

CONTINGENCIES & COMMITMENTS

-------------------- ----------------
27,430,281 28,449,139
-------------------- ----------------
 2006 2005
(Rs. ‘000) (Rs. ‘000)

PROPERTY, PLANT AND EQUIPMENT 9,607,957 9,184,727

GOODWILL 1,569,234 1,673,849

LONG TERM INVESTMENT 6,409,382 6,058,006

LONG TERM LOANS & ADVANCES 76,647 64,545

LONG TERM DEPOSITS & PREPAYMENTS 2,474 3,435

CURRENT ASSETS

Stores, spares and loose tools 2,202,053 2,154,318

Stock in trade 952,905 560,472
Trade debts 961,427 695,713
Loans and advances 95,245 116,810
Deposits and prepayments 25,488 26,097
Other receivables 1,451,390 579,802
Short term investments 2,452,850 6,195,252
Cash and bank balance 1,623,229 1,172,113

------------------ -----------------
9,764,587 11,464,577

------------------ -----------------
27,430,281 28,449,139
------------------
-----------------
 Fauji Fertilizer Company Limited
Profit and Loss Account
For the year ended December 31, 2006

2006 2005
(Rs. ‘000) (Rs. ‘000)

Sales 29,950,873 25,481,121

Cost of sales 20,242,194 16,293,642

GROSS PROFIT 9,708,679 9,187,479

Distribution cost 2,746,782 2,371,208

Finance cost 517,362 325,999

Other expenses 735,331 715,891
------------------- -----------------
5,709,204 5,774,381

Other income 1,275,940 1,439,955

NET PROFIT BEFORE TAXATION 6,985,144 7,214,336

Provision for taxation 2,349,000 2,317,000

------------------- -----------------
NET PROFIT AFTER TAXATION 4,636,144 4,897,336
------------------- -----------------