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financial leverage

VIEWS: 6 PAGES: 55

									Table of Contents
   Introduction
     o Leverage
     o Financial Leverage
     o Effects of Financial Leverage
   Objective of Research
   Literature review
   Analysis of Companies
     o Sapphire Group
           Introduction
           Financial Analysis
           Comments
     o Noon Group
              Introduction
              Financial Analysis
              Comments
     o PepsiCo
              Introduction
              Financial Analysis
              Comments
     o Nishat mills limited
              Introduction
              Financial Analysis
              Comments
     o Dawood Hercules
              Introduction
              Financial Analysis
              Comments
   SPSS Data Analysis
   Findings
   Recommendations
Introduction:
Our topic is about Financial Leverage of companies of Pakistan, we have conducted research to find
out the reasons that why the companies go for debt financing. We analyzed companies’ solvency ratios.
We have analyzed final report of selected companies of different sectors, and looked at their balance
sheet and tried to find out the effects of financial leverage on companies business operations.

Leverage:
Leverage is a business term that refers to borrowing. If a business is "leveraged," it means that the
business has borrowed money. If the company has too much borrowing, it may not be able to pay back
all of its debts.

Types of leverage
        Operating leverage
        Financial leverage
        Combined leverage

Financial leverage:
The degree to which an investor or business is utilizing borrowed money. The ability of a company to
earn more on its assets by taking on debt that allows it to buy or invest more in order to grow its
business.

High Leverage:

It is more risky for a company to have a high ratio of financial leverage. Companies that are highly
leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may
also be unable to find new lenders in the future.

Low Leverage:

It is less risky for a company to have a low ratio of financial leverage. With a low leverage companies
can meet its debt obligations and there is an opportunity for it to find new lenders in the future.

Effects of Financial Leverage
One of the best ways in which company increases its profit is through financial leverage. Financial
leverage uses debt instruments so that the anticipated level return on the company's equity would
increase. The level of financial leverage of a certain company is determined by getting the total value
of debt and the equity and the ratio of debt.

There are four positions which show a relationship with the level of financial leverage. First, is the
relation of equity and debt, for instance, the rate of capital. Another is the influences on business
production and cycle of financial leverage. Then the company's industry and branch whole financial
Leverage level. And also the correlation between the current financial leverage ratio of the company
and the middle leverage level. Lastly, the conformity of company's mission and philosophy with the
situation connected to the relation of financial leverage.

The outcome of the financial leverage can also be utilized to boost income and growth however, it is
much common for business industries in the phase of the young and teens. Financial leverage ratio is
relative to variability of profit and contrary to stability. Company's profits with high rate leverage level
differ with the same condition as with the company's profits with lesser leverage level.

Another factor that affects leverage ratio is the company's flexibility, its dynamics and openness that
concerns on the changes and development of technology, possibilities and industry. Companies having
high leverage levels has lower flexible procedure because of the fact that they are more accountable for
all the creditors and sometimes must fill some restrictions and agreements on their investments and
capital use.

Companies with high leverage level usually become less successful due to situation of transforming
environment and the need of taking uncertain decisions. Because of this, they might not able to apply
or utilize growth opportunities or expansion of business.

One more risk of using financial leverage as a tool to increase revenue is the reality that the change
between profits and company's debt remains positive. If the company's profit relative amount to equity
is higher, the debt exceeds the amount of the profit then the effect of leverage is gone and the debt
remains.

It is therefore that the level of financial leverage must have a good understanding of financial or
business management. To determine the return rate upon return of leverage simply calculate the
difference among the rate of interest on assets and debts, then multiply the difference to the relative
amount of liability or debt to the equity and add up the anticipated return on assets.

Industries that are growing fast allocate only little level of than those stably growing company.

In most cases, the effects of financial leverage are used to improve the company's financial condition
and earnings but it should not be accepted as a principle rather it requires comprehensive analysis of
the present condition of the environment.




Objective of research
Objective of this study is to find out the financial leverage of Pakistani companies that why it resorts to
debt financing and not equity only. Our research is based on results that how financial leverage effects
the company’s business operations.



                                        Literature Review
Summary:

This article provides important contributions to the literature and policy debates concerning corporate
governance implications of various ownership patterns. In this paper the aim to close some of these
gaps between fixed-claim holders and dominant shareholders, and develop a conceptual framework that
analyses the effects of possible collusion between concentrated shareholders and fixed claim holders, in
countries with relatively low protection of minority investor.



 This paper also underlines the joint problematic of the existence of private benefits and the one of the
choice of debt are linked in the framework of financial governance. Also want to evidence the
interrelations and balances that result in complementary and shared logics between majority and
minority shareholders. The asymmetry of information between these two groups of actors leads
complex behaviors.



In this paper, the managers and the controlling shareholders elaborate and take the strategic decisions
of the firm and appropriate for themselves a part of the gross economic profit. The concept of private
benefits is associated with the concentration of the power by the dominant shareholders. The
appropriation of a part of the economic cash flow introduces a conflict with outside shareholders who
endure an expropriation. This situation finality is to protect the investors.



Ownership concentration may result in lower efficiency, measured as a ratio of a firm's debt to
investment, and this effect depends on the identity of the largest shareholder.

It provides further support for the case of strong regulatory and capital market

Institutions and effective enforcement of the ‘good corporate governance’ rules, especially concerning
the protection of minority shareholders. So far, most studies of corporate governance problems have
focused on issues related to the consequences of opportunistic behavior of insiders and their opposition
to outside control.



 This article shows that the protection of minority shareholders from the block holders’ opportunism is
as important for enterprise restructuring and development of an efficient system of corporate
governance as protection against entrenched management. In addition, we extend this conclusion to an
environment where debt finance is predominant and equity finance plays a minor role. We demonstrate
that in such an environment, the collusion between dominant owners and financial institutions may lead
to further efficiency distortions.
Summary:
This article discuss the introduction of financial leverage concepts using examples based on accounting
rates of return. This article basically describe about the art and science of Financial Leverage. It
describes the concept of financial leverage in detail.

 The use of financial leverage to impact corporate rates of returns and corporate values is one of the
clear examples in which financial management theory has found its way out of academia and has
become an established technique of financial management in practice. Experience has shown the
impact of financial leverage to be one of the more difficult concepts for beginning students of corporate
financial. Basically many introductory financial management course outlines, the use of financial ratios
to analyze financial statements is presented before the financial leverage module is presented.

In the case of the financial leverage course module, beginning the presentation with a short, self-
contained numerical example serving as the “hook” can bridge the gap between the student’s preferred
cognitive style and the need to present a detailed comprehensive example to explain the full complexity
of the management issue.

Finance educators have developed various approaches to introduce the topic of financial leverage.
Clearly, the dominant approach is to present the student with two sets of sample income statements and
balance sheets. These representative financial statements are structured so that the impact of adding
financial leverage can be clearly seen to increase both the expected level of, and volatility of, equity
returns as measured by EPS or ROE. These examples are also used in various textbooks for finance
students to understand financial Leverage. In some text books to make understanding of financial
leverage, operating leverage is also linked with financial leverage. An admiration and general
understanding of the impact debt financing is also linked with financial leverage.

Author also discussed that it is important, since the idea is to clearly convey that the difference in
shareholder return is based on financial leverage alone. The goal is to demonstrate that something
important is occurring and to capture the attention of the students.


Summing up This article has discussed the qualities of using an updated alternative presentation as
an introductory “hook” for a course module on the topic of financial leverage.
Summary:

This article discussed the importance of financial leverage in the selection of risk management

strategies. These results indicate that risk-management decisions should not be made without

considering the impact of financial leverage. While we consider the importance to financial leverage in

selection of risk-management strategies, risk aversion is also very important. By combining these two
assumptions the company can reduce the set of strategies that merit managerial attention.

The result of these strategies shows that the level of the risk-free return is an important consideration.
Because lower levels of the risk-free return make borrowing a more attractive alternative, this is
especially important when evaluating risk-management strategies that present the decision maker with
a reduced risk for decreased expected return trade-off.

This article addresses the problem of choice among risk-management strategies and applies the
stochastic dominance with risk-free asset (SDRA) criteria to address the choice problem. SDRA
incorporates financial leverage into ordinary stochastic dominance (SD) and can significantly improve
SD discriminatory power. This article gives an indication of the importance of alternative assumptions
about economic behavior in risk-management contexts and gives directions for future work in risk-
management research and education.

Most risk-management tools are designed to control business risks, for example, price hedging and
output insurance. Financial risks are adjusted by varying the proportion of debt funds used to finance
the business. Debt funds "leverage" the return to equity funds by magnifying both positive and negative
returns. Thus, a producer might use risk-management tools to reduce business risk and consequently
reduce expected return.

According to this article, Decision makers who are risk averse and do not willing to take risk, are able
to adjust financial leverage, would choose from the second-degree SDRA efficient set which contained
three of the twenty-three strategies. Each individual decision maker would leverage these strategies
according to their own risk preferences. However, no risk averse decision maker able to make this
leverage adjustment would select a strategy not contained in this set.
Summary:


In this article the writer quantify the effect of financial leverage on stock return volatility in a dynamic
general equilibrium economy with debt and equity claims. The effect of financial leverage is studied
both at a market and a firm level where the firm is exposed to both idiosyncratic and market risk.

They study two different economies. In both economies, the cash flows generated by a firm’s assets are
specified exogenously, have a constant volatility, and are split into an exogenously specified risk less
debt service and a dividend stream to equity holders. They derive the equilibrium prices and dynamics
of all financial claims and identify the economic forces behind the dynamics of stock volatility and
quantify the effect of financial leverage on the dynamics of stock volatility

In the first economy the study is consistent with the assumptions macroeconomic conditions are fixed
and financial leverage is the only driving force behind the dynamics of stock volatility. Financial
leverage generates little variation at the market level where cash flow volatility is low, and significant
variation at the firm level where cash flow volatility is higher. When financial leverage is the only
factor affecting the dynamics of stock volatility, the leverage effect hypothesis holds at the firm level
although stock volatility does not vary enough to be consistent with empirical evidence.

The second economy has a representative more realistic asset prices than in the first economy. The
driving force in this economy is counter-cyclical risk aversion caused by external habit formation in the
representative agent’s preferences. The model is calibrated to several features of empirical asset prices,
including the level and variation of the equity premium, the risk less rate, and the market price of risk.
We simulate the economy and explore the time-series behavior of a firm’s stock returns and volatility
allowing for both debt and equity. The assumptions of the leverage effect hypothesis are not satisfied in
our calibrated economy. Because of the time-variation in risk less rate and market price of risk, the
value of a firm’s assets will have a time-varying volatility and the value of debt contracts will be
exposed to interest rate risk

In an economy that generates time-variation in interest rates and the price of risk, there is significant
variation in stock return volatility at the market and firm level. In such an economy, financial leverage
has little effect on the dynamics of stock return volatility at the market level. Financial leverage
contributes more to the dynamics of stock return volatility for a small firm.

Overall, our analysis provides some support that financial leverage drives the dynamics of stock
volatility at the firm level. This feature is driven by individual risk influencing the firm’s equity value
and not the firm’s debt value. Hence, the firm’s financial leverage can move independent of market
conditions in contrast to our market-wide analysis. Time-varying market conditions are still important
determinants of even firm I’s equity volatility. Given the firm’s debt value is still driven by systematic
interest rate risk, variations in financial leverage are still partially explained by systematic risk which
ultimately feeds into the variation in the firm’s equity volatility.
Summary:


In a financial system where balance sheets are continuously marked to market, asset price changes
show up immediately as changes in net worth, and obtain responses from financial intermediaries who
adjust the size of their balance sheets. Aggregate liquidity can be seen as the rate of change of the
aggregate balance sheet of the financial intermediaries.

The focus in this paper is on the reactions of the financial intermediaries to changes in their net worth,
and the market-wide consequences of such reactions. If financial intermediaries were passive and did
not adjust their balance sheets to changes in net worth, then leverage would fall when total assets rise.
Change in leverage and change in balance sheet size would then be negatively related. The evidence
points to financial intermediaries adjusting their balance sheets actively, and doing so in such a way
that leverage is high during booms and low during recession.

From the point of view of each institution, decision rules that result are readily understandable.
However, there are aggregate consequences of such behavior for the financial system as a whole that
might not be taken into consideration by individual institutions. The discussion focuses on the
intermediaries balance sheets. However, the added insight from discussions is on the way that marking
to market enhances the role of market.

Aggregate liquidity can be understood as the rate of growth of the aggregate financial sector balance
sheet. When asset prices increase, financial intermediaries’ balance sheets generally become stronger,
and–without adjusting asset holdings–their leverage tends to be too low. The financial intermediaries
then hold surplus capital, and they will attempt to find ways in which they can employ their surplus
capital. In analogy with manufacturing firms, we may see the financial system as having “surplus
capacity”. For such surplus capacity to be utilized, the intermediaries must expand their balance sheets.
On the liability side, they take on more short-term debt. On the asset side, they search for potential
borrowers. Aggregate liquidity is intimately tied to how hard the financial intermediaries search for
borrowers.




.
Financial Leverage of Pakistani Companies

We have taken samples of Five Listed Companies of Pakistan, from different sectors. We have used
random sampling technique for the selection of these companies. We have analyzed the Companies
introduction, their financial conditions and financial reports.

Following are the companies we have selected and analyzed for our Project and we have analyzed the
data of previous four years. (2005-2008)




      Sapphire Group
      Noon Pakistan Limited
      Pepsi Co
      Nishat Mills Limited
      Dawood Hercules

                                      Sapphire Textile Limited




       Company Introduction:

       One of the largest manufacturers and exporters of textile products in Pakistan, Sapphire
       technology comes from Europe, Japan and USA. Capitalizing on the region’s principal crop,
       cotton, we source this locally, and augment our offerings by providing imported fiber from the
       world’s best crops. We work with specialized fibers bringing in the newest innovations from
       major fiber and chemical producers, and our manufacturing from yarn to finished fabric is
       performed in our facilities in Pakistan. Synergies are formed with offshore garment
       manufacturing companies. Our products are marketed to the industry's biggest names in Asia,
       Europe, Australia, and North America.

Mission:
To build flexible manufacturing capabilities in the textile industry to cater to the growing and evolving
global demands, keeping a lead position in our business, maintaining our values based on good
business and ethics, and at the same time contributing in the development of the community in which
we work and live in.


Values:
       P eople
       R elationship
       I ntegrity
       D iversity
       E nvironment



Data Collected through Questionnaire

    Sapphire group have two sources of borrowing. That is banks and financing by private investor.
    The rate of interest is both fixed and floating.
    Sapphire group tackle their interest rate fluctuations by using FRA (forward rate agreement)
     and interest rate swap.
    Borrowing is supported by collateral security.
    Sapphire group is also having covenants which help the company to better monitor its business
     decisions.
    Company is meeting its debt requirement through operating profit.
    Company resort to debt financing rather than equity financing because its best cost of capital.
    Company goes for other sources of financing that are bank overdraft, bonds and debentures.
    Company is utilizing its borrowing for long term and short term investment.




                                   Financial Analysis of Company

        Proportions of Debt and Equity of Sapphire textile limited

                        2005            2006                 2007                2008
Shareholder’s           2797.114        3893.928             6018.868            5577.492
Equity
Long term               1174.78         934.54               722.264             446.199
Debt
total                   3971.894        4828.468             6740.95             6023.691
Proportion of           70%             81%                  89%                 93%
Equity
Proportion of        30%                  19%                  11%                  7%
Debt




Graphical representation of Debt and Equity Proportion:



         100%
          90%
          80%
          70%
          60%
                                                                                         Equity
          50%
                                                                                         Debt
          40%
          30%
          20%
          10%
            0%
                      2005            2006           2007            2008




The above table shows that the sapphire textile limited has raised capital by 70% of Equity and 30%
Debt in the year 2005. We have calculated these proportions by taking values of long term debt and
equity from the company’s annual reports.

We have added shareholder equity and debt to get the total. We have taken the total as 100 percent, and
then divided each by total to get the proportion.

We have seen that in the year 2006 the proportion of equity is increased from 70% to 81% and on the
other hand the debt of the company is decreased from 30% to 19%. Where as in 2007 the proportion of
equity is increased from 81% to 89% and proportion of debt is decreased from 19% to 11%.

In 2008 the debt has decreased to 7% and equity has increased to 93%.
        Ratio Analysis of Sapphire Textile Limited

        Debt Equity Ratio:
The Debt to Equity Ratio measures how much money a company should safely be able to borrow over
long periods of time. Debt/equity ratio is equal to long-term debt divided by common shareholders'
equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company
with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the
additional interest that has to be paid out for the debt. It is important to realize that if the ratio is greater
than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily
financed through equity.


Debt Equity Ratio = Long Term Debt/ Shareholder’s Equity


Debt Equity ratio of Sapphire Textile Limited

Ratios         2005                           2006                   2007                   2008
Debt to Equity 0.42                           0.24                   0.12                   0.08


        Graphical representation of Debt-Equity Ratio of Sapphire Textile
        Limited
       0.45

        0.4

       0.35

        0.3
                                                                                            2005
       0.25
                                                                                            2006
        0.2                                                                                 2007

       0.15                                                                                 2008

        0.1

       0.05

         0
                                          Debt to Equity


     The above table is showing solvency ratios of company. We have taken the value from annual
     report. We have calculated the debt to equity ratio of Sapphire textile limited with dividing the
     long term debt by equity. We have seen the results that the debt to equity ratio is decreasing
     every year, like in 2005 debt-equity ratio is 0.42 but it decreased to 0.24 in the year 2006 and
     shows the continuous decrease in 2007 and 2008 that is 0.12 and 0.08 respectively. This shows
     that the company has lesser reliance on debt as a source of financing.


     Debt to Capital Ratio:

     Debt to Capital ratio shows the proportion of a company's debt to its total capital, which
     consists of the sum of its debt and equity combined. The ratio compares a firm's total debt to its
     total capital. The total capital is the amount of available funds that the company can use for
     financing projects and other operations. A high debt-to-capital ratio indicates that a high
     proportion of a company's capital is comprised of debt.


Debt to Capital = Debt/Shareholder’s Equity + Debt

     Debt to Capital ratio of Sapphire Textile Limited

Ratio               2005                  2006                 2007                  2008
Debt to Capital     0.30                  0.19                 0.11                  0.07
Graphical Representation of Debt to Capital ratio of Sapphire Textile
Limited
       0.35

        0.3

       0.25
                                                                              2005
        0.2
                                                                              2006
       0.15                                                                   2007
        0.1                                                                   2008

       0.05

          0
                                     Debt to Capital


      We have calculated the debt to capital ratio of sapphire textile limited with dividing the long
      term debt by the sum of total debt and shareholder’s equity. We have seen the results that the
      debt to capital ratio is decreasing every year like in 2005 debt capital ratio is 0.30 but it
      decreased to 0.19 in the year 2006 and shows the continuous decrease in 2007 and 2008 which
      is 0.11 and 0.07 respectively. This shows that the company has more reliance on capital rather
      than debt.

      Debt to Assets Ratio:

      The debt/asset ratio shows the proportion of a company's assets which are financed through
      debt. If the ratio is less than one, most of the company's assets are financed through equity. If
      the ratio is greater than one, most of the company's assets are financed through debt. Companies
      with high debt/asset ratios are said to be "highly leveraged".

      Debt to Assets Ratio = Debt/Total Assets


Debt to Assets ratio of Sapphire Textile Limited

Ratio              2005                  2006                 2007                   2008
Debt to Assets     0.16                  0.10                 0.06                   0.04


Graphical Representation of Debt to Assets ratio of Sapphire textile
limited
         0.18

         0.16

         0.14

         0.12
                                                                                              2005
          0.1
                                                                                              2006
         0.08                                                                                 2007

         0.06                                                                                 2008

         0.04

         0.02

            0
                                             Debt to Assets



We have calculated the debt to assets ratio of sapphire textile limited with dividing the debt by assets.
We have seen the results that the debt to assets ratio is decreasing every year like in 2005 debt to assets
ratio is 0.16 but it decreased to 0.10 in the year 2006 and shows the continuous decrease in 2007 and
2008 which is 0.06 and 0.04 respectively. This shows that the company is having positive net worth.


       Financial Leverage:
The financial leverage ratio indicates the extent to which the business relies on debt financing. A high
financial leverage ratio indicates possible difficulty in paying interest and principal while obtaining
more funding.

   Financial Leverage = Total Assets /Shareholder’s Equity



Ratio                       2005                  2006                  2007                  2008
Financial Leverage          2.62                  2.37                  1.85                  2.21


Graphical Representation of Financial leverage ratio Sapphire textile
limited
          3


         2.5


          2
                                                                                           2005

         1.5                                                                               2006
                                                                                           2007

          1                                                                                2008


         0.5


          0
                                          Financial Leverage

       The calculation of financial leverage is done with dividing total assets by total shareholder’s
       equity. The financial leverage of the company in the year 2005 is 2.62 and is decreasing to 2.37
       and 1.87 in the years 2006 and 2007 respectively. That shows the company has greater reliance
       on equity till 2007. But in 2008 the leverage ratio is increased to 2.21 because of decrease in
       equity from 6018.868 to 5577.492.

       Comments
       With our analysis of Sapphire textile limited we come to this conclusion that the company is
       overall low leverage company as we have seen company’s reliance is more on equity rather than
       debt. Due to which the debt equity ratio, debt capital ratio and debt to asset ratio of sapphire
       textile limited is decreasing from 2005 to 2008. Whereas the financial leverage ratio has shown
       an increase in 2008 because owner’s equity has shown a decrease in 2008 as compare to 2007
        i-e 6018.868 to 5577.492. Whereas the assets are increasing.




Noon Pakistan Limited
The company was incorporated in 1966, with a paid up capital of Rs.5 million and a total investment of
Rs.18 million. In the private sector, Noon Pakistan Ltd. was the first company in Pakistan to operate a
Spray Dryer for milk powder manufacturing.

The installed capacity of the plant is 72,000 liters/2 shifts. The plant commenced its operation in June
1972 and its products namely; milk powder, butter and cheese are marketed throughout Pakistan under
the brand name of “Nurpur”. Annual sales revenue amounts to Rs.957 million. The total no. of
employees is 200. The company has recently (2004) put up a UHT Tetrapak milk plant.
Mission
Noon is committed to supplying the consumer and our customers with the finest, high-quality products
and to leading the industry in healthy and nutritious products.

Noon supports these goals with a corporate philosophy of adhering to the highest ethical conduct in all
its business dealings, treatment of its employees, and social and environmental policies.

Vision
Our vision at Noon is to be a transformative force in our community and world at large and to serve as
a model of a sustainable business alternative that nurtures social and economic well-being in an
environmentally sensitive manner.

Core Values
   Customers are at the forefront of everything we do.
   Ideas are constantly challenged to develop next generation solutions.
   Business is conducted openly and fairly – but we compete fiercely.
   Team-work is encouraged with individual flair for the best results.
   Tough goals are set – and we enjoy the challenge of beating them.
   Environment – We value preservation of the environment and sustainable organic agriculture.
   Community – We value mutually supportive relationships among members of our local and global
   communities.



       Data analysis of Noon Pakistan limited:

    Noon Pakistan limited is borrowing from banks.
    The rate of interest is floating.
    Noon Pakistan limited tackles their interest rate fluctuations by using FRA (forward rate
     agreement).
    Borrowing is supported by collateral security.
    Noon Pakistan limited is also having covenants which help the company to pay on time for any
     due amount.
    Company is meeting its debt requirement through operating profit.
    Noon Pakistan limited resorts to debt financing rather than equity financing because of finance
     policy of the company.
    Company goes for other sources of financing that is overdraft borrowing.
    Company is utilizing its borrowing for long term and short term investment.
                             Financial Analysis of Company
Debt and Equity proportions of Noon Pakistan Limited

                    2005                2006                2007                2008
Shareholder’s       127514              109018              108758              169836
Equity
Long term           250731              329699              286235              303591
Debt
total               378245              438717              394993              473427
Proportion of       34%                 25%                 28%                 36%
Equity
Proportion of       66%                 75%                 72%                 64%
Debt


Graphical Representation of Debt and Equity proportions of Noon
Pakistan Limited


  80%

  70%

  60%

  50%
                                                                              Equity
  40%
                                                                              Debt
  30%

  20%

  10%

   0%
             2005            2006          2007            2008




The above table shows that the Noon Pakistan limited has raised capital by 34% of Equity and 66%
Debt in the year 2005. We have calculated these proportions by taking values of long term debt and
equity from the company’s annual reports.
We have added shareholder equity and debt to get the total. We have taken the total as 100 percent, and
then divided each by total to get the proportion.

We have seen that in the year 2006 the proportion of equity is decreased from 34% to 25% and on the
other hand the debt of the company is increased from 66% to 75%. Where as in 2007 the proportion of
equity is increased from 25% to 28% and proportion of debt is decreased from 75% to 72%.

In 2008 the debt has decreased to 64% and equity has increased to 36%.

Ratio Analysis of Noon Pakistan Limited


        Debt Equity Ratio:
The Debt to Equity Ratio measures how much money a company should safely be able to borrow over
long periods of time. Debt/equity ratio is equal to long-term debt divided by common shareholders'
equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company
with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the
additional interest that has to be paid out for the debt. It is important to realize that if the ratio is greater
than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily
financed through equity.

Debt Equity Ratio = Long Term Debt/ Shareholder’s Equity

Debt Equity Ratio of Noon Pakistan Limited


Ratios         2005                           2006                   2007                   2008
Debt to Equity 0.74                           0.85                   0.65                   0.85



Graphical Representation of Debt-Equity ratio of Noon Pakistan
Limited
 0.9

 0.8

 0.7

 0.6
                                                                                      2005
 0.5
                                                                                      2006
 0.4                                                                                  2007

 0.3                                                                                  2008

 0.2

 0.1

   0
                                     Debt to Equity


The above table is showing solvency ratio of company. We have taken the value from annual report.
We have calculated the debt to equity ratio of Noon Pakistan limited with dividing the long term debt
by equity. We have seen the results that the debt to equity ratio is increased from 2005 to 2006 that is
0.74 to 0.85 but then it is decreased in the year 2007 to 0.65 because of the fluctuations in debt and
equity proportions. Whereas in the year 2008 the debt and equity ratio has increased to 0.85.

Debt to Capital Ratio:
Debt to Capital ratio shows the proportion of a company's debt to its total capital, which consists of the
sum of its debt and equity combined. The ratio compares a firm's total debt to its total capital. The total
capital is the amount of available funds that the company can use for financing projects and other
operations. A high debt-to-capital ratio indicates that a high proportion of a company's capital is
comprised of debt.

Debt to Capital = Debt/Shareholder’s Equity + Debt

Debt to Capital ratio of Noon Pakistan Limited
Ratio                2005                  2006                  2007                  2008
Debt to              0.66                  0.75                  0.72                  0.64
Capital



Graphical Representation of Debt to capital ratio of Noon Pakistan
limited
 0.76

 0.74

 0.72

  0.7
                                                                                     2005
 0.68
                                                                                     2006
 0.66                                                                                2007

 0.64                                                                                2008

 0.62

  0.6

 0.58
                                     Debt to Capital


We have calculated the debt to capital ratio of Noon Pakistan limited with dividing the long term debt
by the sum of total debt and shareholder’s equity. We have seen the results that the debt to capital ratio
is increased from 2005 to 2006 that is 0.66 to 0.75 respectively. As the table shows that debt to capital
ratio is decreasing in 2007 and 2008 that is 0.72 and 0.64 respectively, which shows that the company
has reliance on capital rather than debt.

Debt to Assets Ratio:
The debt/asset ratio shows the proportion of a company's assets which are financed through debt. If the
ratio is less than one, most of the company's assets are financed through equity. If the ratio is greater
than one, most of the company's assets are financed through debt. Companies with high debt/asset
ratios are said to be "highly leveraged".

Debt to Assets Ratio = Debt/Total Assets

Debt to Assets ratio of Noon Pakistan Limited

Ratio                2005                  2006                 2007                  2008
Debt to Assets       0.48                  0.59                 0.52                  0.41




Graphical Representation of Debt to Asset ratio of Noon Pakistan
Limited
 0.7


 0.6


 0.5


 0.4                                                                                  2005
                                                                                      2006
 0.3                                                                                  2007
                                                                                      2008
 0.2


 0.1


   0
                                     Debt to Assets


We have calculated the debt to assets ratio of Noon Pakistan limited with dividing the debt by assets.
We have seen the results that the debt to assets ratio in 2005 is 0.48 and it is increasing in 2006 to 0.59
but it showed a decrease in 2007 to 0.52 and than again decreased in 2008 to 0.41.This shows that the
company is having positive net worth.



Financial Leverage:
The financial leverage ratio indicates the extent to which the business relies on debt financing. A high
financial leverage ratio indicates possible difficulty in paying interest and principal while obtaining
more funding.

Financial Leverage = Total Assets /Shareholder’s Equity

Financial Leverage of Noon Pakistan Limited

Ratio                2005                  2006                  2007                  2008
Financial            4.08                  5.13                  5.08                  4.40
Leverage

Graphical Representation of Financial Leverage of Noon Pakistan
Limited
 6


 5


 4
                                                                                   2005

 3                                                                                 2006
                                                                                   2007

 2                                                                                 2008


 1


 0
                                 Financial Leverage


The calculation of financial leverage is done with dividing total assets by total shareholder’s equity.
The financial leverage of the company in the year 2005 is 4.08 and is increasing to 5.13 in the year
2006. But it is decreasing in 2007 to 5.08 in 2008 the leverage ratio is decreased to 4.40. That shows
the company has greater reliance on equity.




Interest Coverage Ratio:
A calculation of a company's ability to meet its interest payments on outstanding debt. The lower the
interest coverage ratio, the larger the debt burden is on the company, also called interest coverage.

Interest Coverage Ratio = EBIT/Interest Payment

Interest Coverage ratio of Noon Pakistan Limited

Ratio                2005                 2006                 2007                 2008
Interest             3.15                 0.61                 1.5                  2.37
Coverage

Graphical Representation of Interest coverage ratio of Noon Pakistan
Limited:
 3.5


   3


 2.5


   2                                                                                 2005
                                                                                     2006
 1.5                                                                                 2007
                                                                                     2008
   1


 0.5


   0
                                   Interest Coverage


The calculation if interest coverage ratio is done by dividing earning before interest and taxes by the
total interest paid. The interest coverage ratio of Noon Pakistan ltd is high is 2005 which shows that the
firm will have no difficulty in meeting its debt obligations. It showed a decrease in 2006 by 3.15 to
0.61 and than again increased in 2007 and 2008 from 1.5 to 2.37 respectively.




Comment
As a result of our analysis of noon Pakistan limited we can comment that the company has greater
reliance on debt rather than equity the over all equity of the company shows a declining trend and debt
is rising. due to which the company’s debt equity, debt to capital and debt to asset ratio is continuously
increasing. financial leverage of the company is very high which is risky for Noon Pakistan Limited it
also shows that the company is taking more and more debt due to which taking further debt in future
will not be possible.
                                                   PepsiCo




PEPSICO is a world leader in convenient snacks, foods, and beverages. Today, Brand Pepsi is part of a
portfolio of beverage brands that includes carbonated soft drinks, juices and juice drinks, ready-to-
drink teas and coffee drinks, isotonic sports drinks, bottled water and enhanced waters.

Mission
Our mission is to be the world's premier consumer Products Company focused on convenient foods and
beverages. We seek to produce financial rewards to investors as we provide opportunities for growth
and enrichment to our employees, our business partners and the communities in which we operate. And
in everything we do, we strive for honesty, fairness and integrity.


Vision
"PepsiCo's responsibility is to continually improve all aspects of the world in which we operate -
environment, social, economic - creating a better tomorrow than today."
Our vision is put into action through programs and a focus on environmental stewardship, activities to
benefit society, and a commitment to build shareholder value by making PepsiCo a truly sustainable
company.


Values
Our Values & Philosophy are a reflection of the socially and environmentally responsible company we
aspire to be. They are the foundation for every business decision we make


       Data Collected from Questionnaire

      PepsiCo is borrowing from banks and private institutions.
      The rate of interest is both fixed and floating.
      PepsiCo tackles their interest rate fluctuations by using interest rate swap.
      Borrowing is supported by collateral security.
   PepsiCo is also having covenants but such covenants do not effect companies’ business
    decisions because the decision are not based on single condition, company have to take
    decisions on collective basis.
   Company is meeting its debt requirement other than operating profit.
   PepsiCo resorts to debt financing rather than equity financing because companies’ working
    capital requirements are huge.
   Company goes for other sources of financing that is overdraft borrowing.
   Company is utilizing its borrowing for long term and short term investment.



Debt and Equity Proportions of Debt and Equity of PepsiCo

                  2005               2006               2007               2008
Shareholder’s     14320              15447              17325              12203
Equity
Long term         2313               2550               4203               7858
Debt
total             16633              17997              21528              20061
Proportion of     86%                86%                80%                61%
Equity
Proportion of     14%                14%                20%                39%
Debt




 90%

 80%

 70%

 60%

 50%                                                                     Equity

 40%                                                                     Debt

 30%

 20%

 10%

  0%
           2005           2006          2007           2008
The above table shows that the Pepsi Co has raised capital by 86% of Equity and 14% Debt in the year
2005 and 2006. We have calculated these proportions by taking values of long term debt and equity
from the company’s annual reports.

We have added shareholder equity and debt to get the total. We have taken the total as 100 percent, and
then divided each by total to get the proportion.

Where as in 2007 the proportion of equity is decreased from 86% to 80% and proportion of debt is
increased from 14% to 20%.

In 2008 the debt has increased to 39% and equity has decreased to 61%.

Ratio Analysis of PepsiCo
Debt Equity Ratio:
The Debt to Equity Ratio measures how much money a company should safely be able to borrow over
long periods of time. Debt/equity ratio is equal to long-term debt divided by common shareholders'
equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company
with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the
additional interest that has to be paid out for the debt. It is important to realize that if the ratio is greater
than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily
financed through equity.

Debt Equity Ratio = Long Term Debt/ Shareholder’s Equity


Debt Equity ratio of PepsiCo


Ratios         2005                           2006                   2007                   2008
Debt to Equity 0.161                          0.165                  0.24                   0.21
Graphical Representation of debt to equity ratio of PepsiCo

  0.3


 0.25


  0.2
                                                                                      2005

 0.15                                                                                 2006
                                                                                      2007

  0.1                                                                                 2008


 0.05


    0
                                      Debt to Equity


We have taken the value from annual report. We have calculated the debt to equity ratio of Pepsi Co
with dividing the long term debt by equity. We have seen the results that the debt to equity ratio is
increased from 2005 to 2006 that is 0.161 to 0.165 which again increased in 2007 to 0.24 but then it is
decreased in the year 2008 to 0.21 because of the fluctuations in debt and equity proportions.

Debt to Capital Ratio:
Debt to Capital ratio shows the proportion of a company's debt to its total capital, which consists of the
sum of its debt and equity combined. The ratio compares a firm's total debt to its total capital. The total
capital is the amount of available funds that the company can use for financing projects and other
operations. A high debt-to-capital ratio indicates that a high proportion of a company's capital is
comprised of debt.

Debt to Capital = Debt/Shareholder’s Equity + Debt

Debt to Capital ratio of PepsiCo


Ratio                2005                   2006                 2007                  2008
Debt to              0.14                   0.14                 0.20                  0.39
Capital
Graphical Representation of Debt to Capital ratio of PepsiCo

 0.45

  0.4

 0.35

  0.3
                                                                                    2005
 0.25
                                                                                    2006
  0.2                                                                               2007

 0.15                                                                               2008

  0.1

 0.05

    0
                                     Debt to Capital


We have calculated the debt to capital ratio of Pepsi Co with dividing the long term debt by the sum of
total debt and shareholder’s equity. We have seen the results that the debt to capital ratio is constant
from 2005 to 2006 that is 0.14. As the table shows that debt to capital ratio is increasing in 2007 and
2008 that is 0.20 and 0.39 respectively, which shows that the company has reliance on capital rather
than debt.



Debt to Assets Ratio:
The debt/asset ratio shows the proportion of a company's assets which are financed through debt. If the
ratio is less than one, most of the company's assets are financed through equity. If the ratio is greater
than one, most of the company's assets are financed through debt. Companies with high debt/asset
ratios are said to be "highly leveraged".

Debt to Assets Ratio = Debt/Total Assets

Debt to Assets ratio of PepsiCo


Ratio                2005                  2006                 2007                 2008
Debt to Assets       0.07                  0.085                0.121                0.21
Graphical Representation of Debt to assets ratio of PepsiCo

 0.25



  0.2



 0.15                                                                               2005
                                                                                    2006
                                                                                    2007
  0.1
                                                                                    2008


 0.05



    0
                                     Debt to Assets




Financial Leverage:
The financial leverage ratio indicates the extent to which the business relies on debt financing. A high
financial leverage ratio indicates possible difficulty in paying interest and principal while obtaining
more funding.

Financial Leverage = Total Assets /Shareholder’s Equity

Financial Leverage of PepsiCo


Ratio                2005                  2006                2007                  2008
Financial            2.21                  1.93                1.99                  2.94
Leverage
Graphical Representation of Financial Leverage ratio of PepsiCo

 3.5


   3


 2.5


   2                                                                               2005
                                                                                   2006
 1.5                                                                               2007
                                                                                   2008
   1


 0.5


   0
                                  Financial Leverage


The calculation of financial leverage is done with dividing total assets by total shareholder’s equity.
The financial leverage of the company in the year 2005 is 2.21 and is decreased to 1.93 in the year
2006, and also showed the increasing trend in 2007 and 2008 that is 1.99 and 2.94 respectively.



Interest Coverage Ratio:
A calculation of a company's ability to meet its interest payments on outstanding debt. The lower the
interest coverage ratio, the larger the debt burden is on the company, also called interest coverage.

Interest Coverage Ratio = EBIT/Interest Payment

Interest Coverage ratio of PepsiCo




Ratio                2005                 2006                 2007                 2008
Interest             23.13                26.94                32.01                21.07
Coverage
Graphical Representation of Interest Coverage Ratio of PepsiCo

 35


 30


 25


 20                                                                                2005
                                                                                   2006
 15                                                                                2007
                                                                                   2008
 10


  5


  0
                                  Interest Coverage




The calculation if interest coverage ratio is done by dividing earning before interest and taxes by the
total interest paid. The interest coverage ratio of PepsiCo is rising from 2005 to 2007 that is 23.13,
26.94 and 32.01 respectively. This shows that the firm is not having difficulty in meeting its debt
obligations. Whereas it decreased in 2008 to 21.07.

Comments:
After our analysis of PepsiCo we can comment that this company has more reliance on equity up till
2006 and after this company’s borrowings start to increase due to which the debt equity ratio, debt to
capital and debt to assets increased in 2007 and 2008. Financial leverage of the company is showing
increasing trend due to decrease in owner’s equity. If the company tend to do more debt financing it
will be risky for the company and will affect further borrowing capacity of Pepsi Co.
                                     Nishat Mills Limited




Company introduction:

Nishat has grown from a cotton export house into the premier business group of Pakistan with 5 listed
companies, concentrating on 4 core business; Textiles, Cement, Banking and Power Generation. Today
Nishat is considered to be at par with multinationals operating locally in terms of its quality products
and management skills.
The Group's principal activity is to manufacture spins, combs, weaves, bleaches, dyes, prints, stitches,
buys and sells textiles. It deals in yarn, linen, cloth and other goods and fabrics made from raw cotton,
synthetic fibre and cloth. The Group's plants are located at Faisalabad, Sheikhupura, Lahore and Feroze
Watwan.


Mission statement
To provide quality products to customers and explore new markets to promote/expand sales of the
Company through good governance and foster a sound and dynamic team, so as to achieve optimum
prices of products of the company for sustainable and equitable growth and prosperity of the company.

Vision

To transform the Company into a modern and dynamic yarn, cloth and processed cloth and finished
product manufacturing Company with highly professionals and fully equipped to play a meaningful
role on sustainable basis in the economy of Pakistan.
To transform the Company into a modern and dynamic power generating
Company with highly professionals and fully equipped to play a meaningful role on sustainable basis in
the economy of Pakistan.


Data collected from questionnaire

    Nishat Mills limited is borrowing from banks.
    The rate of interest on borrowing is both fixed and floating.
    Company tackles their interest rate fluctuations by using FRA (forward rate agreement) and
     interest rate swap.
    Borrowing is supported by collateral security.
    Company is having covenants but it does not effect its business decisions.
    Nishat Mills limited is meeting its debt requirement from operating profit.
    Company resorts to debt financing rather than equity financing because of timing difference of
     cash inflow.
    Company goes for other sources of financing that are overdraft borrowing, promissory notes,
     bonds, debentures and discounting of export bills etc.
    Company is utilizing its borrowing only for production or working capital.

                     Financial Analysis of Nishat Mills Limited
                     2005                 2006                 2007                 2008
Shareholder’s        16563.14             32935.5              49269.2              35452.7
Equity
Long term Debt       2858.16              3015.38              1773.82              1047.79
total                19421.30             35950.58             51043.02             36500.5
Proportion of        86%                  92%                  97%                  98%
Equity
Proportion of Debt   14%                  08%                  03%                  02%




  100%
   90%
   80%
   70%
   60%
                                                                                  Equity
   50%
                                                                                  Debt
   40%
   30%
   20%
   10%
    0%
              2005              2006          2007            2008

The above table shows that the Nishat Mills Limited has raised capital by 86% of Equity and 14% Debt
in the year 2005 and 92% and 8% in the year 2006. We have calculated these proportions by taking
values of long term debt and equity from the company’s annual reports.

We have added shareholder equity and debt to get the total. We have taken the total as 100 percent, and
then divided each by total to get the proportion.
Where as in 2007 the proportion of equity is increased from 92% to 97% and proportion of debt is
decreased from 8% to 3%.

In 2008 the debt has decreased to 2% and equity has increased to 98%.




Ratio Analysis of Nishat Mills Limited
Debt Equity Ratio:
The Debt to Equity Ratio measures how much money a company should safely be able to borrow over
long periods of time. Debt/equity ratio is equal to long-term debt divided by common shareholders'
equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company
with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the
additional interest that has to be paid out for the debt. It is important to realize that if the ratio is greater
than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily
financed through equity.

Debt Equity Ratio = Long Term Debt/ Shareholder’s Equity

Debt Equity ratio of Nishat Mills Limited

Ratio          2005                           2006                   2007                   2008
Debt to Equity 0.17                           0.09                   0.03                   0.02



Graphical Representation of Debt to Equity Ratio of Nishat Mills
Limited
 0.18

 0.16

 0.14

 0.12
                                                                                      2005
  0.1
                                                                                      2006
 0.08                                                                                 2007

 0.06                                                                                 2008

 0.04

 0.02

    0
                                      Debt to Equity


We have taken the value from annual report. We have calculated the debt to equity ratio of Nishat Mills
Limited with dividing the long term debt by equity. We have seen the results that the debt to equity
ratio is continuously decreasing in all years that is in 2006 it decrease from 0.17 to 0.09 and in the year
2007 it decreased to 0.03 whereas in the year 2008 the debt equity ratio is only 0.02.

Debt to Capital Ratio:
Debt to Capital ratio shows the proportion of a company's debt to its total capital, which consists of the
sum of its debt and equity combined. The ratio compares a firm's total debt to its total capital. The total
capital is the amount of available funds that the company can use for financing projects and other
operations. A high debt-to-capital ratio indicates that a high proportion of a company's capital is
comprised of debt.

Debt to Capital = Debt/Shareholder’s Equity + Debt

Debt to Capital ratio of Nishat Mills Limited

Ratio                2005                   2006                 2007                  208
Debt to              0.14                   0.08                 0.03                  0.02
Capital

Graphical Representation of Debt to Capital ratio of Nishat Mills
Limited
 0.16

 0.14

 0.12

  0.1
                                                                                     2005

 0.08                                                                                2006
                                                                                     2007
 0.06
                                                                                     2008
 0.04

 0.02

    0
                                     Debt to Capital



We have calculated the debt to capital ratio of Nishat Mills Limited with dividing the long term debt by
the sum of total debt and shareholder’s equity. We have seen the results that the debt to capital ratio is
decreasing from 2005 to 2006 that is 0.14 and 0.08 respectively. As the table shows that debt to capital
ratio is still decreasing in 2007 and 2008 that is 0.03 and 0.02 respectively, which shows that the
company has reliance on capital rather than debt.

Debt to Assets Ratio
The debt/asset ratio shows the proportion of a company's assets which are financed through debt. If the
ratio is less than one, most of the company's assets are financed through equity. If the ratio is greater
than one, most of the company's assets are financed through debt. Companies with high debt/asset
ratios are said to be "highly leveraged".

Debt to Assets Ratio = Debt/Total Assets

Debt to Assets ratio of Nishat Mills Limited


Ratio                2005                  2006                 2007                  2008
Debt to Assets       0.13                  0.09                 0.04                  0.02


Graphical Representation of Debt to assets ratio of Nishat Mills Limited
 0.14


 0.12


  0.1


 0.08                                                                                  2005
                                                                                       2006
 0.06                                                                                  2007
                                                                                       2008
 0.04


 0.02


    0
                                      Debt to Assets



We have calculated the debt to assets ratio of Nishat Mills Limited with dividing the debt by assets. We
have seen the results that the debt to assets ratio in 2005 is 0.13 and it is decreasing in 2006 to 0.09. In
2007 and 2008 the Debt to Asset ratio has decreased to 0.04 and 0.02 respectively



Financial Leverage:
The financial leverage ratio indicates the extent to which the business relies on debt financing. A high
financial leverage ratio indicates possible difficulty in paying interest and principal while obtaining
more funding.

Financial Leverage = Total Assets /Shareholder’s Equity

Financial Leverage of Nishat Mills Limited

Ratio                 2005                  2006                  2007                  2008
Financial             1.26                  0.94                  0.79                  1.06
Leverage

Graphical Representation of Financial Leverage Ratio of Nishat Mills
Limited
 1.4


 1.2


   1


 0.8                                                                               2005
                                                                                   2006
 0.6                                                                               2007
                                                                                   2008
 0.4


 0.2


   0
                                  Financial Leverage




The calculation of financial leverage is done with dividing total assets by total shareholder’s equity.
The financial leverage of the company in the year 2005 is 1.26 and is decreased to 0.94 in the year
2006, and also showed the decreasing trend in 2007 and 2008 that is 0.79 and 1.06 respectively.

Interest Coverage Ratio:
A calculation of a company's ability to meet its interest payments on outstanding debt. The lower the
interest coverage ratio, the larger the debt burden is on the company, also called interest coverage.

Interest Coverage Ratio = EBIT/Interest Payment

Interest Coverage ratio of Nishat Mills Limited


Ratio                2005                 2006                 2007                 2008
Interest             4.9                  2.6                  2.5                  7.4
Coverage


Graphical Representation of Interest Coverage Ratio of Nishat Mills
Limited
 8

 7

 6

 5
                                                                                    2005

 4                                                                                  2006
                                                                                    2007
 3
                                                                                    2008
 2

 1

 0
                                  Interest Coverage



The calculation if interest coverage ratio is done by dividing earning before interest and taxes by the
total interest paid. The interest coverage ratio of Nish at Textile Limited is falling from 2005 to 2007
that is 4.9,2.6 and 2.5 respectively. Whereas it increased in 2008 to 7.4. Which shows that the firm is
not having difficulty in meeting its debt obligations.




Comments
After studying the balance sheet of Nishat Textile Mill we conclude that the over all leverage of the
company is low as the major source of the raising capital is owners equity and Nishat Textile Mill have
less reliance on debt and the company have capacity to pay off it debts 7.4 times.
                                      The Dawood Group




The Dawood Group, a distinguished and trusted name in Pakistan, traces its origins back to almost a
century ago. The Group owns companies ranging from fertilizer, textiles, business and finance.
Through its diverse businesses, the Dawood Group of Companies delivers some of the top brands and
the highest quality services. Most of the Group Companies consistently ranks amongst the top 25
companies of KSE. The Group comprises of the following companies.


         l Insurance Company



Dawood Hercules

Dawood Hercules Chemicals Limited was incorporated as a public limited company on 17th April
1968, as a joint venture between Dawood Group of Industries and Hercules Inc. USA. It was the first
private sector venture in Pakistan to receive a loan from the World Bank and was the largest
ammonia/urea plant in country at that time. Initially the plant's capacity was 345,000 metric tons of
urea per annum. The plant was revamped in 1989 / 1991 to enhance the capacity to 445,500 metric tons
of urea per annum. Also, it made the manufacturing facilities more energy efficient and environment
friendly. In recent years, Dawood Hercules has made a colossal investment to incorporate the latest
technology; the most significant are the construction of new Prilling tower in a record time; the tallest
industrial structure in Pakistan, replacement of Primary Waste Heat Exchanger. Primary Reformer
Harps Assemblies and conventional instrumentation (with Distributed Control System).Dawood
Hercules has the privilege of becoming the first fertilizer manufacturing company to obtain ISO-
9000:2000 certification.

Vision & Mission

• To excel in the fertilizer and allied business at national and international level by maintaining highest
standards of product quality thereby playing our role in the development of the country's economy and
adding value to the shareholders' investment.
• To offer consistent dividends to the shareholders.
• To chalk out a plan to improve production techniques and quality standards.
• To provide career grooming opportunities to the talented professionals.
• To become a good corporate citizen.
• To develop long-term relationship with the employees.
• To create high performing Organizational Environment in which ideas are generated and nurtured.
• To inculcate honest and ethical behavior.
• To create safe, healthy environment and friendly atmosphere for the employees.
• To improve quality of life for the employees.
• To make the farmer community prosper.




Data collected from Questionnaire of dawood Hercules:

      Dawood Hercules is borrowing from both banks and private institutions.
      The rate of interest on borrowing is both fixed and floating.
      Dawood Hercules tackles their interest rate fluctuations by using interest rate swap.
      Borrowing is supported by collateral security.
      Dawood Hercules is having covenants which provide discipline.
      Dawood Hercules is meeting its debt requirement from operating profit.
      Company resorts to debt financing rather than equity financing to get optimal cost of capital.
      Dawood Hercules goes for other sources of financing that are bonds and debentures.
      Company is utilizing its borrowing for long term and short term investment.


Debt and Equity Proportions of Dawood Hercules


                    2005                  2006                  2007                 2008
Shareholder’s       9355.24               9273.14               18889.33             17382.66
Equity
Long term           -                     -                     6500                 6302.5
Debt
total               9355.24               9273.14               25389.33             23685.16
Proportion of       100%                  100%                  74%                  73%
Equity
Proportion of       0%                    0%                    25%                  26%
Debt
Graphical Representation of Debt and Equity proportions of Dawood Hercules


  100%

   90%

   80%

   70%

   60%
                                                                                  Equity
   50%
                                                                                  Debt
   40%

   30%

   20%

   10%

    0%
             2005         2006        2007         2008




The above table shows that the Dawood Hercules has raised capital 100% of Equity in 2005 and 2006
and has not taken any debt. We have calculated these proportions by taking values of long term debt
and equity from the company’s annual reports.

We have added shareholder equity and debt to get the total. We have taken the total as 100 percent, and
then divided each by total to get the proportion.

Where as in 2007 the proportion of equity is decreased from 100% to 74% and proportion of debt is
increased to 25%

In 2008 the debt has increased to 26% and equity has decreased to 73%.




                          Ratio Analysis of Dawood Hercules
Debt Equity Ratio:
The Debt to Equity Ratio measures how much money a company should safely be able to borrow over
long periods of time. Debt/equity ratio is equal to long-term debt divided by common shareholders'
equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company
with a higher debt/equity ratio may be riskier, especially in times of rising interest rates, due to the
additional interest that has to be paid out for the debt. It is important to realize that if the ratio is greater
than 1, the majority of assets are financed through debt. If it is smaller than 1, assets are primarily
financed through equity.

Debt Equity Ratio = Long Term Debt/ Shareholder’s Equity

Debt Equity ratio of Dawood Hercules

Ratios         2005                           2006                   2007                   2008
Debt to Equity -                              -                      0.34                   0.36

Graphical Representation of Debt to Equity ratio of Dawood Hercules


  0.4

 0.35

  0.3

 0.25
                                                                                           2005

  0.2                                                                                      2006
                                                                                           2007
 0.15
                                                                                           2008
  0.1

 0.05

    0
                                        Debt to Equity


We have taken the value from annual report. We have calculated the debt to equity ratio of Dawood
Hercules with dividing the long term debt by equity. We have seen the results that the debt to equity
ratio in 2005 and 2006 the company had not borrowed any debt and has total reliance on equity.
Whereas in 2007 and 2008 the company have 25% and 26% debt borrowing due to which the debt and
equity ratio of Dawood Hercules have continuously increased from nil to 0.34 and 0.36 respectively.
Debt to Capital Ratio:
Debt to Capital ratio shows the proportion of a company's debt to its total capital, which consists of the
sum of its debt and equity combined. The ratio compares a firm's total debt to its total capital. The total
capital is the amount of available funds that the company can use for financing projects and other
operations. A high debt-to-capital ratio indicates that a high proportion of a company's capital is
comprised of debt.

Debt to Capital = Debt/Shareholder’s Equity + Debt

Debt to Capital ratio of Dawood Hercules

Ratio                2005                  2006                  2007                  2008
Debt to              -                     -                     0.25                  0.26
Capital

Graphical Representation of Debt to Capital Ratio of Dawood Hercules

  0.3


 0.25


  0.2
                                                                                      2005

 0.15                                                                                 2006
                                                                                      2007

  0.1                                                                                 2008


 0.05


    0
                                     Debt to Capital



We have calculated the debt to capital ratio of Dawood Hercules with dividing the long term debt by
the sum of total debt and shareholder’s equity. We have seen the result that the debt to capital ratio is
decreasing from 2005 to 2006 is nil as the company’s total reliance is on capital rather than debt. As the
table shows that debt to capital ratio is increasing in 2007 and 2008 that is 0.25 and 0.26 respectively,
Debt to Assets Ratio:
The debt/asset ratio shows the proportion of a company's assets which are financed through debt. If the
ratio is less than one, most of the company's assets are financed through equity. If the ratio is greater
than one, most of the company's assets are financed through debt. Companies with high debt/asset
ratios are said to be "highly leveraged".

Debt to Assets Ratio = Debt/Total Assets



Debt to Assets ratio of Dawood Hercules

Ratio                2005                  2006                 2007                 2008
Debt to Assets       -                     -                    0.22                 0.24




Graphical Representation of Debt to Assets ratio of Dawood Hercules


  0.3


 0.25


  0.2
                                                                                    2005

 0.15                                                                               2006
                                                                                    2007

  0.1                                                                               2008


 0.05


    0
                                     Debt to Assets


We have calculated the debt to assets ratio of Dawood Hercules with dividing the debt by assets. We
have seen the results that the debt to assets ratio is increasing in 2007 and 2008 that is 0.22 and 0.24
respectively. where as the copmany has no long term debt in 2005 nad 2006 due to which the debt
equity ratio for both years is nil.
Financial Leverage:
The financial leverage ratio indicates the extent to which the business relies on debt financing. A high
financial leverage ratio indicates possible difficulty in paying interest and principal while obtaining
more funding.

Financial Leverage = Total Assets /Shareholder’s Equity

Financial Leverage of Dawood Hercules

Ratio                2005                 2006                 2007                  2008
Financial            1.36                 1.74                 1.5                   1.47
Leverage



Graphical Representation of Financial Leverage ratio of Dawood
Hercules


   2

 1.8

 1.6

 1.4

 1.2                                                                                2005

   1                                                                                2006
                                                                                    2007
 0.8
                                                                                    2008
 0.6

 0.4

 0.2

   0
                                  Financial Leverage


The calculation of financial leverage is done with dividing total assets by total shareholder’s equity.
The financial leverage of the company in the year 2005 is 1.36 and is increased to 1.74 in the year
2006, and also showed the decreasing trend in 2007 and 2008 that is 1.5 and 1.47 respectively.
Interest Coverage Ratio:
A calculation of a company's ability to meet its interest payments on outstanding debt. The lower the
interest coverage ratio, the larger the debt burden is on the company, also called interest coverage.

Interest Coverage Ratio = EBIT/Interest Payment

Interest Coverage ratio of Dawood Hercules



Ratio                2005                  2006                2007                  2008
Interest             3.87                  1.81                1.36                  2.82
Coverage

Graphical Representation of Interest Coverage ratio of Dawood
Hercules

 4.5

   4

 3.5

   3
                                                                                    2005
 2.5
                                                                                    2006
   2                                                                                2007

 1.5                                                                                2008

   1

 0.5

   0
                                   Interest Coverage


The calculation if interest coverage ratio is done by dividing earning before interest and taxes by the
total interest paid. The interest coverage ratio of Dawood Hercules is falling from 2005 to 2007 that is
3.87, 1.81and 1.36 respectively. Whereas it increased in 2008 to 2.82. This shows that the firm is not
having difficulty in meeting its debt obligations
Comments
Dawood Hercules is a low leverage firm as the company is not doing any sort of debt borowwing in
2005 and 2006 and only took 26% debt in 2008 .Due to which the Debt to Equity, Debt to Capital and
Debt to asset ratio are showing a declining trend. The interest coverage ratio of Dawood Hercules is
continuously increasing which means that the company will have no problem in meeting its debt
obligation.

                       Data analysis by using SPSS technique


Frequency table:

We have calculated frequencies of each question by entering data into SPSS sheets. These frequencies
are showing following information.



                     What are your sources of borrowing?

                                                           Valid   Cumulative
                              Frequency       Percent     Percent   Percent
Valid          Banks                  2           40.0        40.0       40.0
               Combination
               of banks and
               financing by               3       60.0        60.0        100.0
               any private
               investor
               Total                      5     100.0        100.0


According to this table source of borrowing is mostly done by combination of both banks and financing
by any private investors. As the 60 % goes to the 2nd option and 40% is for banks only.


                          What is the rate of interest?

                              Frequen                     Valid    Cumulativ
                                 cy       Percent        Percent   e Percent
Valid          Floating             1         20.0            20.0       20.0
               Both fixed
               and                    4        80.0          80.0       100.0
               floating
               Total                      5      100.0          100.0

Rate of interest for most of the companies is both fixed and floating. And only one company is paying
interest on floating rate.



               How you tackle the interest rate fluctuations?

                                                           Valid     Cumulative
                           Frequency Percent              Percent     Percent
Valid         FRA                  1    20.0                  20.0         20.0
              Interest
                                      3         60.0          60.0         80.0
              rate swap
              FRA and
              Interest                1         20.0          20.0        100.0
              rate swap
              Total                   5        100.0         100.0

There are three ways to tackle interest rate fluctuations. Mostly companies are using interest rate swap
for this purpose as the 60% is showing in the table. While one company is using only FRA and one is
combination of FRA and interest rate swap.


        Is the borrowing supported by collateral security?

                                               Valid      Cumulative
                Frequency Percent             Percent      Percent
Valid yes                  5      100.0           100.0          100.0

The percentage of borrowing supported by collateral security is 100% because all the companies have
borrowings backed by securities.



Do you have any covenants?

                                               Valid       Cumulative
                Frequency Percent             Percent       Percent
Valid yes               5   100.0                100.0           100.0

Covenants are the restrictions on borrowing and all the companies have covenants that restrict their
borrowings.
If yes then how they effect your business decisions?

                                                        Valid        Cumulative
                          Frequency     Percent        Percent        Percent
Valid        Provide
                                    2         40.0           40.0            40.0
             discipline
             Timely
                                    1         20.0           20.0            60.0
             payments
             No direct
                                    1         20.0           20.0            80.0
             effect
             No effect              1       20.0             20.0           100.0
             Total                  5      100.0            100.0

40% of spss analysis shows that most of he companies think that covenants have positive effects on
their business operations as they help to maintain discipline and make timely payment. And some of the
companies say that there is no effect of covenants on their business decisions.


How you meet your debt requirement?

                                                       Valid        Cumulative
                          Frequency Percent           Percent        Percent
Valid       Operating
                                    4     80.0              80.0            80.0
            profit
            Any other               1     20.0           20.0              100.0
            Total                   5    100.0          100.0


Almost all the companies meet their debt requirement through operating profit.


            Why you resort to debt financing why not equity only?

                                Frequenc                      Valid       Cumulative
                                    y         Percent        Percent       Percent
Valid          Best cost of
                                          2          40.0          40.0            40.0
               capital
               Working
               capital                    1          20.0          20.0            60.0
               requirement
               Timing
               difference
                                          1          20.0          20.0            80.0
               of cash
               flows
               as per
                                          1          20.0          20.0          100.0
               company
                   policy
                   Total                           5      100.0         100.0

Companies go for debt financing because they think it provides best cost of capital and also meet their
working capital requirements. Another reason for debt financing is to fill time gap between cash
inflows and outflows.




Do you go for other sources of financing?

                                                                     Valid        Cumulative
                                     Frequency Percent              Percent        Percent
 Valid             Bonds and
                                                  1       20.0            20.0              20.0
                   debentures
                   Overdraft
                                                  2       40.0            40.0              60.0
                   borrowings
                   Both bonds
                   and
                   debentures
                                                  2       40.0            40.0             100.0
                   and
                   overdraft
                   bowings
                   Total                          5      100.0           100.0

Companies don’t only rely on debt financing they also go for other sources like bonds, debentures and
overdraft borrowings.



                         How company utilizes its borrowings?

                                    Frequen                        Valid         Cumulativ
                                       cy         Percent         Percent        e Percent
 Valid            Both short
                  term and
                                              4         80.0             80.0            80.0
                  long term
                  investment
                  For any
                  other                       1         20.0             20.0           100.0
                  purpose
                  Total                       5        100.0           100.0


The companies utilize their borrowings for the purpose of short term and long term investment.
Do you think financial sector reforms have improved the efficiency of the financial leverage?

                                            Valid      Cumulative
                 Frequency Percent         Percent      Percent
Valid agree                 5     100.0        100.0          100.0

All the companies agree that financial reforms have improved the efficiency of the financial leverage.


                                              Findings

 After conducting this overall research we can conclude that most of the companies in Pakistan are low
leveraged that means that their greater reliance is on equity as a source of financing rather then debt
due to which they have many benefits.

It is less risky for a company to have a low ratio of financial leverage. With a low leverage companies
can meet its debt obligations and there is an opportunity for it to find new lenders in the future.
Companies with low leverage can easily expand their business they can buy new assets which enhance
companies production capacity.

Companies that are not in equity market, debt financing allows a firm to raise capital without having to
sell shares to investors


                                          Recommendations:

The companies with high leverage don’t have capacity to borrow more funds whereas the low leverage
companies can borrow funds at the time they need.
Any time companies use debt financing, they are running the risk of bankruptcy. The more debt
financing it uses, the higher the risk of bankruptcy. If you don’t make loan payments on time, you can
ruin your credit rating and make borrowing in the future difficult or impossible.
Company can do both debt and equity financing but the proportion of debt should be lower than
proportion of equity so that the leverage ratio would be lower and it is beneficial for the company to
pay off its debt.



It is more risky for a company to have a high ratio of financial leverage. Companies that are highly
leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may
also be unable to find new lenders in the future.
In short what is best; debt or equity financing? It depends on the situation. Your financial capital,
potential investors, credit standing, business plan, tax situation, the tax situation of your investors, and
the type of business you plan to start all have an impact on that decision.

								
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