Financial ratios analysis (FY 08-09)
Fixed Line Telecommunication sector
Miss Asiya Shirazi
Introduction to Business Finance
Table of Contents
Pak Datacom Limited
Worldcall Telecom Limited
Pakistan Telecommunication Company Limited
Year 2009 for Pak Datacom proved much better than the previous year as the company posted a higher EPS of PKR 20.64 against PKR 14.53 last fiscal year. Total assets also increased in the year 2009 to PKR 1001 million from PKR 833 million. The overall condition and standing of the company has improved from 2008 to 2009. The major strength has been in utilization of funds in the proper and efficient approach. The profit for the company has increased to for more than 40 percent during the year. The company has not only performed well as compared to its previous year but also stand out from its industry and competitors.
The current ratio improved from 1.65 in 2008 to 1.75 in 2009. The current assets increased by 25.4% where as the current liabilities increased by 18.5%. This resulted in a much improved liquidity position of Pak Datacom, as now Rs. 1.75 to cover its Re. 1 liability. Pak Datacom has managed to keep a higher current ratio than the industry averages (1.16). Improved current ratio in 2009 was primarily because of increase in short term investments and cash and bank balances. Short term investments and cash and bank balances increased by 142% and 54% respectively. In current liabilities customer deposits grew by 41.6%, provision for taxation increased by 78.89% while the trade creditors decreased by 5.5%. The quick ratio also improved in year 2009 to 1.36 from 1.23 in year 2008. This shows that Pak Datacom is allocating most of its current assets in very highly liquid assets, which could easily converted into cash. From a creditors point of view Pak datacom improved liquidity is a healthy sign, and the risk of nonpayment of dues is significantly reduced. Comparing the quick ratio with the industry is also higher showing that the Pak datacom is more liquid than its competitors. From a view point of the management the higher the liquidity ratios, better it is. Pak Datacom’s both current ratio and quick ratio are greater than the industry averages illustrating that the management has greater capacity to pay their liabilities than the industry. From a view of shareholder, higher investment in liquid assets would lead to lower investment in revenue generating assets. This means that Pak datacom would generate lesser profits and would be a negative signal to the shareholders wealth.
Pak datacom decreased their average collection period significantly from 90 to 35 days in 2009. This shows that the management has more efficiently converted the credit sales into cash. Improving efficiency ratios such as average collection period depicts, management is improving its efficiency during the operations of the business. The average collection period among the industry is 55 days for 2009. This means that Pak Datacom is receiving cash from sales quicker than most competitors in the industry. From a view point of creditor, the lesser the average collection period, higher would be the cash flow, and lesser would be the risk of default of Pak datacom. Asset turnover increased during year 2009 to 1.04 from 0.829 indicating the Pak datacom is efficiently utilizing its assets to generate revenues. Industry averages is much lower than that of Pak datacom. One reason for low average industry of asset turnover is the poor financial performance of the entire sector. Most of the companies in the telecom sector are experiencing shrinkage in margins due high competition in the industry. Thus most telecom companies are recording lesser revenues and subsequently having lower Asset turnovers. From a creditor view point Pak datacom asset turnover of 1.04 is considered to be on the lower side. This...
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