Research & Analysis Report On Pakistan State Oil

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Research & Analysis Report On Pakistan State Oil























By: S.M. Talha Pasha






















ACCA Registration: 1056730






























March 2008


Mentor: Mr. Burhan Uddin Ahmed






Contents

Research & Analysis Report On Pakistan State Oil

................................
................................
............

1






Introduction


The

topic selected for the purpose of this Report is “PAKISTAN STATE OIL”.


There have also been several other reasons, which have encouraged me to choose this particular
topic, which vary from a professional outlook to personal interests. This topic relates
to
acquiring, analysing and interpreting data pertaining to an actual organization, which is gathered
from multiple sources primarily comprising of an organization’s financial statements through the
calculation of financial ratios.


On the personal front i
t has always been my hobby to get the basic knowledge and structure of
working of various companies


THE


COMPANY:


The organisation selected for the project is “Pakistan State Oil”; formerly “State Oil Company
Limited (SOCL)” PSO is the largest oil marke
ting company in Pakistan having a market share of
59% of white oil products and 80% in black oil products. It has ISO 9000:2000 certification. It is
engaged in the import, storage, distribution and marketing of various POL (petroleum, oil and
lubricants) p
roducts including Mogas, HSD, fuel oil, jet fuel, kerosene, LPG, CNG and petro
-
chemicals. Pakistan State Oil has been meeting the country’s fuel needs by merging sound
business sense with national obligation. Pakistan State Oil is the first Pakistani Publi
c sector
Company to become a member of World Economic Forum (WEF). PSO is the winner of Karachi
Stock Exchange top companies award for several years. (www.psopk.com )


The company has market capitalization approximately of Pak. Rs.67 billion. It is the win
ner of
‘Most Preferred Local Company Award’ at the PSHRM graduate employer awards 2007. In
order to maintain quality standards PSO has introduced a total quality management system in its
all operational activities. Consistent conformance to prescribed stan
dards and specifications
across the whole range of activities from receipt, storage, transportation and delivery of products
is the cornerstone of PSO's quality management system.


PSO has extensive storage capacity, almost 81% of the total national storag
e has been kept by
the company that is around 860,000 metric tones per financial year.


(Oil Companies Advisory Committee 2008; PSO Annual Report 2005
-
2008).


The Oil Industry:


The global economy showed signs of moderate growth in FY 2007 after the upswin
g that was
witnesses in FY 2006. The increase in oil demand was mainly due to heavy requirement from
China and India. India has maintained GDP growth rate of around 9% per year. Like wise China
has maintained growth figures around 10%. Higher economic acti
vity is the main factor behind
the forecasted robust oil demand in both regions. The total global oil consumption grew around
4.5% in line with GDP growth of 4.9%.




(PSO annual report 2007)


The Oil Industry in Pakistan:


Pakistan is a country, which is

highly dependent on oil and consumes over 400,000 barrels of oil
per day.29.9% of the country’s primary commercial energy is dependent on it.


The industry consumption of Black Oil registered and increase of 45.2% over the prior year in a
turnaround from
the trend observed in the recent past whereby gas was being encouraged by the
Government of Pakistan as the fuel of first choice for power generation. However, the white oil
registered a decline 2.4% primarily due to slow down in large
-
scale manufacturing
and ever
-
increasing substitution by compressed natural gas (CNG) / liquefied petroleum gas (LPG) in the
automotive sector. (PSO annual report 2007)


In the Oil
-
marketing sector, nine OMCs namely, Pakistan State Oil Company (PSO), Shell
Pakistan Limited (SP
L), Caltex Oil (Pakistan) Limited (COPL), Attock Petroleum Limited
(APL), Total
-
PARCO Pakistan Limited (TPPL), Parco
-
Pearl, Admore Gas Private Limited,
Hascombe Storage Private Limited and Askar Oil Services Private Limited are operating in
Pakistan with a
n overall market share of 63.1 %, 17.2%, 6.3%, 3.9%, 7.5% 0.8%, 1.0% 0.1 %
and 0.06% respectively. Three new oil
-
marketing companies like Bosicor Pakistan Limited,
Overseas Oil Trading Company Limited and Bakri Trading Company Pakistan have also entered
in

the marketing of petroleum products. Pakistan offers good opportunity for establishment of
new OMCs in view of its fast growing petroleum products market (Ministry of petroleum 2008).


The following chart presents a picture of the past, current and future

demand of POL products in
Pakistan (Ministry of Petroleum 2008)


[pic]


The long
-
term petroleum products demand/supply scenario is indicated in the following table:
(Data source Ministry of Petroleum 2008)


|


In million
tones








2003
-
2004




2004
-
05






2010
-
11






2017
-
18








Demand of
Petroleum
Products












14.3








15.0










17.0








19.0












Production from
Local
Refineries








10.3








12.0










11.3








11.8












Surplus
Naphtha /
Motor gasoline








1.3










1.3










0.8










0.8












available for




exports


















Deficit of HSD and
FO


















5.0




5.0










6.5










8.2


















Government of
Pakistan welcomes the establishment of new oil marketing companies in order to
bridge the demand, expand oil infrastructure and create healthy market competition in the
downstream petroleum sector. (Ministry of Petroleum, 2008)


Aims and Objectives:


This


report will focus on


the performance of PSO based mainly on a financial perspective.
This will be achieved primarily by means of ratio analysis.


The main aims of the research project will be:




1. To analyse the financial performance of PSO by compar
ison with historical data using
absolute data and ratios;




2. To analyse and compare the performance of the company with a major competitor.


Information Gathering


For the purpose of the project, data from multiple sources was gathered and utilised. A l
ot of data
was available about the company and the oil sector itself through secondary sources resulting in
no need to collect primary information. However the process of information gathering had to be
structured and focused so as to avoid the dangers of
information overload. The following are the
sources used:


Reports:


The most important data source for the project was the ‘Annual Reports’ of PSO. As a result
three latest Annual Reports that is for the year ended 2005, 2006 and 2007 were taken from a
br
oker at the Karachi Stock Exchange (KSE).


Similarly the competitor’s annual report (2007) was taken from a friend who works there. It was
used to achieve one of the objectives of the research
-

to compare the
organizations

performance
with that of a compet
itor.


Internet:


The Internet was a very useful tool for this project. It provided me with unlimited information
relating to my research. The ‘Google’ search engine was used to get site addresses for the sites
such as those of “The Ministry of Petroleum &

Natural Resources”, “The Oil Companies
Advisory Committee”, “Pakistan State Oil”, “Oil & Gas Regulatory Authority” and many others
in my pursuit of knowledge.


Some sites were invaluable source of information while others
could not offer any relevant inf
ormation.


Analysis


Financial analysis is basically used to compare one piece of information with another that is
based on interrelationship of financial data. Ratios used stand
-
alone confer little meaning but by
comparison with the industry standards giv
es in
-
depth knowledge on the company’s standing
with in the industry.


Although ratio analysis helps comparison of different sized entities, it has some important
limitations that must be considered. Due to the differences in accounting practices, ratios c
an be
misleading. Two otherwise similar companies using different accounting methods can look quite
different. Also care must be taken in comparing data from different industries, as their operating
risk, financial risk or cost structures might be differen
t, distorting the results. That is why
financial analysis is used to compare organisation within the same industry. Furthermore,
management can use certain short
-
term actions to influence their ratios.


Care must also be taken to ensure that the definition

of a ratio is consistent. Some very common
ratios and terms have different definitions for e.g. gearing ratio. Financial ratios fall into five
general categories. (The relevant categories with the formulae for each ratio are given in
appendix 3).


Vertica
l or trend Analysis:


A company’s performance may be compared to prior period performance. However before any
such comparison takes place past results must be rearranged possibly due to change in
accounting policies during the course of the current period.

Past results may also be adjusted for
price changes. This is referred to as trend or vertical analysis. Just because a company’s results in
one year are better than its results in the previous year, it does not mean that this year’s results
are good. It m
ay be that the previous year’s results were particularly poor.


Analysis using absolute data:


We begin our analysis using trends of simple figures. However it should be noted that single
figure on its own has little significance in an analysis, neverthele
ss it can be used to make a
general opinion about the performance of an entity over the years.


The charts and trend lines have been calculated using data entered in to Microsoft Excel.


Sales Revenue:

It can be seen from the chart above that the ‘Sales Revenue’ has been increasing constantly with
the trend line. However in 2004 sales revenue had declined. This was not in line with the trend.
The management explained that the reason for this change was d
ue to the decrease in demand for
Black oil. The performance in 2005 is in line with the trend. Moreover, in 2006 the sales revenue
shot up by 39% from Rs 253,777 million in 2005 to Rs 352,515 million in 2006. The top
management defines the rise due to the
high increase in oil prices in the world.


Profit Before Tax:

It can be seen from the picture that the profit before tax has increased continuously until the year
2006. In 2005 PBT improved by 46.7% to Rs 9191 million from Rs 6,263 million in 2004. This
wa
s mainly due to higher selling prices. The performance in 2006 was in line with this trend.
However, the PBT in the year 2007 decreases heavily even though the sales revenue increased by
16.6%. This is mainly due to the major increase in the oil prices in
the international market and
the government policy to retain the price which adversely affected the cost of production and
thus minimized the percentage of profit margin of the company.


Working Capital:

Working Capital represents the short
-
term liquidity
of the company. PSO’s working capital
seems to be very volatile. It drives from Rs 7,970 million in 2005 to Rs 10.978 million in 2006
an increase of 37.7%, then to Rs 11,127 million in 2007 a minor increase of 1.36%. It indicates a
better ability to meet o
utgoing and unexpected bills therefore taking the pressure off from cash
flow. The improvement shows that the company has adequate resources to meet its working
capital requirements as well as to meet its daily expenses. However, the management should take

care not to invest too much of its resources into current assets.


In order to get a better understanding we will undertake ratio analysis.


Ratio Analysis:


Please note that Appendix 3 provides a definition of all the ratios used in the analysis while
Ap
pendix 4 gives the relevant ratios.


Profitability Ratios:


Gross Profit Margin:


The gross profit margin helps analysing the gross earnings over sales volume.


The gross profit margin of PSO has fallen continuously over the period. It has fallen from 6.47
%
in 2005 to 5.77% in 2006 a decrease of 10.81%, then to 3.51% in 2007, a decrease of 39.24%.
This is due to increase in oil prices in international market which increased the cost of production
of the company and hence decreased the profitability margin.


Net Profit Margin

This ratio is particularly important as it indicates the degree of control the company has in
controlling costs.


It has followed a similar trend to that of the gross profit margin. It has fallen by 14.08% from
4.40% in 2005 to 3.78% in
2006 and then by 39.81% to 2.27% in 2007. In 2005 this fall is
because of the increase in the distribution and marketing expenses of the company by Rs 134,524
million an increase of 6% while the margin in 2006 has fallen due to heavy increase in provision
for doubtful debts expense by Rs 7 million, an increase of 70% from previous year which shows
that the management has failed to recover its debts from its receivables. The net profit margin in
the financial year 2007 decreased because of the increased depr
eciation charged for the period
due to some new fixed assets purchased during the period. There is also an increase in
distribution and marketing expenses which ultimately decrease the net profit margin in 2007.


Return On Capital Employed:

This ratio is t
he key ratio for shareholder’s because it tells them that how much profits the
company has generated on their capital and how much return they can expect on their
investments from the company. The ratio is measured by comparing the profit earned by an
orga
nisation with the funds made available to them by the shareholder’s. As capital employed
consists of equity investment and long
-
term debt, the profit figure should consist of Profit before
Interest and Tax. The ROCE of PSO rose by 1.97 % to 48.73% in 2006
from 47.79% in 2005. It
then fell by 30.14% in 2007 to 34.04%. This is due to the decrease in earnings per share from Rs
43.87 in 2006 to Rs 27.34 in 2007.


There is one major drawback of ROCE that can completely distort this ratio, i.e. the value of the
c
apital employed is the historical depreciated cost of the assets at which they are maintained in
the books. This is most likely to be undervalued and so the capital employed figure might be
unrealistically low giving an inflated ROCE. This may also have co
ntributed to the huge increase
in 2005.


Return on Shareholders Equity:

Return on Shareholder’s equity measures the profit on shareholder’s equity after taking the
effects of interest and tax.


The ROE of PSO has followed in line with the ROCE. It rose to
36.15% in 2006 from 32.24% in
2005; an increase by 12.15%, then it decreased by 38.05% to 22.40% in 2007. In 2006 the
company made a net profit of Rs 7,524 million which resulted in high return given by the
company to its shareholder’s, while in 2007 the c
ompany made a profit of Rs 4,689 a decrease of
37.67% which resulted in low return given to shareholder’s by the company.


Liquidity Ratios:


Current Ratio:

The current ratio measures the adequacy of current assets over current liabilities. It shows
whethe
r the company has enough resources to meet its short term liabilities. Normally the rule of
thumb is of a current ratio of 2:1; however it varies from business to business.


The ratio for PSO shows a small decline in its trend. It fell in 2006 by 0.80% to
1.23 from 1.24 in
2005 and then in 2007 by 1.36% to 1.22. This shows that the management have sufficient control
over the company’s working capital management.


The current liabilities had risen by 43.62% due to significant increase in trade creditors of R
s
11,024 million, while the current assets increased by 42.47% mainly due to increase in stock
-
in
trade and trade debtors by Rs 7,585 and 4,924 million respectively in 2006.


Quick Ratio:

It is also known as the acid test ratio. It is a variant of current
ratio, the only difference being that
stock is excluded in quick ratio. The rule of thumb is 1:1.


The ratio shows a small ascent in its trend, in 2006 it raised by 3.20% to 0.63 from 0.62 in 2005
and then by 1.03% to 0.64 in 2007. The ratio shows that the

company’s funds are heavily
blocked in stock which adversely affects the cash flows of the company.


The reason for low ratio is that current assets included nearly 50% of stock. The management
should try to reduce stock holding in order to improve cash f
lows.


Efficiency ratios:


Inventory Turnover:


The inventory turnover measures the number of times the stock is sold in a year.

Generally higher the figure better will be the turnover. However too much of an increase can
lead to overtrading.


The figure f
ell by 3.22% to 36.58 in 2006 from 37.80 in 2005, followed by another decline of
12.60% to 31.98 in 2007. The fall is mainly due to increase in number of times the stock is sold
and increase in sales volume by 38.90% in 2006, then a further increase in sal
es volume by
16.60% in 2007.


Average Collection Period (in days):

The average collection period measures the efficiency of the company to recover its debts. If the
company is able to recover or pay off its debts within a reasonable time, this will be a si
gn of
effective control over its debts. However, if the company is not able to recover its debts within a
reasonable time, this could be result in cash flow problems.


The collection period rose by 22.92% from 11.66 in 2005 to 14.34 in 2006, then a minor d
ecline
by 1% to 14.195 2007. This is due to much more generous credit terms being offered to
customers in order to secure a higher market in the oil industry. Although the collection period
has risen it is still within reasonable levels.


Creditors Turnove
r (in days):

The average payment period shows a mixed trend. It initially increased by 0.95% from 47.36 in
2005 to 47.81 in 2006, then it fell by 6.27% to 44.81 in 2007. The average creditors turn over is
not as good as the average collection period. This
is due to initially small short fall in cash and
bank balance by 1.20% in 2006 which further increased by 19.83% in 2007.


Asset Utilisation:

Total Asset Turnover Ratio:


The ratio measures the efficiency of the company to utilize the assets to generate sa
les.


This ratio shows incline in its trend. It rose by 4.63% to 4.25 in 2006 from 4.06 in 2005, and then
followed a further increase of 10.08% to 4.68 in 2007.


The increase is mainly due to effective utilization of assets by the company’s management.


In
vestment Ratios:

Earning Per Share (EPS):


The earning per share calculates the net earnings of the company over total number of shares
issued. It helps in measuring the performance of the company. A company must be

able to sustain its earnings in order to

pay dividends and re
-
invest in the business to achieve
future growth. Thus EPS is a measure of growth.

The EPS of PSO rose from 32.98 in 2005 to 43.87 in 2006 but it then descended to 27.34, an
initial increase of 33.04% and finally a decrease of 37.67% r
espectively. This was basically due
to first increase in profit after tax of 34.04% in 2006 while PAT was decrease in 2007 by
37.67%. However, share capital remained the same in both years.


Leverage Ratio:

Interest Coverage:

The interest coverage measures

the number of times the interest can be paid against PBIT. The
rule of thumb is 3:1.

The interest cover for PSO fell from 2005 to 2006 by 25.20 to 12.74, a decrease of almost 50%.
After that it further falls by 46.12% to 6.86 in 2007. This is mainly due t
o increase in PBIT by
20.59% but the interest payable was increased by 138.50% which resulted in a major decline in
interest cover for the year 2006. In 2007 interest cover follows the similar trend. The PBIT
decreased by 29.42% but again the interest paya
ble increased by 30.98%. The company has
taken the short term borrowings during the period which were increased by 18.5%.


Debt / Equity Ratio:

It is also known as the gearing ratio. Rule of thumb is that if the gearing ratio is more than 50% it
is highly
geared. The higher the gearing, the greater there is risk that little will be left for the
shareholders in terms of dividends and capital at winding up.


The ratio shows incline in its trend. It initially increased by 20.06% to 2.14% in 2006 from 1.785
in
2005, and then further increased by 7.88% to 2.30% in 2007.


Horizontal Analysis:

In order to set up an independent yardstick of the company’s performance it is compared with the
performance of another equivalent company for the same period.


The comparato
r selected here for the purpose of horizontal analysis is SPL, which is the second
most leading company in oil sector of Pakistan, but there is a near monopoly of PSO with over
all market share of 63.1% as compared to SPL’s of 17.2%.


















































PSO











SHELL









Difference







Gross Profit Margin (%)


























3.51










4.67





-
33.24%











Net Profit Margin (%)




























2.27










1.01





55.33%











Return on Capital
Employed






















34.04








12.14





64.3%













Return on Shareholders
Equity


















22.40










9.47





57.7%













Current Ratio




































1.22










1.02





16.23%











Quick Ratio






































0.64










0.60





6.25%













Inventory Turnover






























31.98








27.69





-
27.69%











Average Collection Period
(Days)
















14.19








14.53





0.73%













Asset Utilisation
































4.68










3.93





15.85%











Earning Per Share






























27.34








12.90





52.81%











Interest Coverage
































6.86










1.28





81.34%











Debt / Equity




































2.30










2.04





11.17%













From the data it can be seen that PSO’s performance is better then Shell.




1) The greater GP margin and NP margin shows that PSO has better control over its costs of
production and other operating costs.




2) The low ROCE and ROE implies that Shell Paki
stan Limited has low profit and therefore
they give a low return to their shareholder’s. One more reason could be that financial charges are
proportionally greater part of the company’s expenses, than long
-
term debt from part of capital.
Also PSO has more
effectively used their assets to produce sales.


However it must be kept in mind that PSO due to its huge size has possible advantages of
Economies of Scale as well as better bargaining power and near monopoly control over the
market.


Conclusion


The rese
arch and analysis project on Pakistan State Oil draws at an end. It has been compiled in
relation with the stated aims and objectives and the data has been gathered from multiple sources
and presented in accordance with International Financial Reporting St
andards where possible
and ratios have been calculated on the data to analyse the financial position of Pakistan State Oil.
These ratios comprise of profitability, liquidity, efficiency, investor and gearing ratios. These
also consist of absolute data.


Fr
om the sales revenue and profit before tax data it can be seen that sales revenue has been
constantly increasing but the profit before tax in the last year decreased. This is basically due to
the rise in international oil prices and Pakistan’s Government p
olicy to retain the oil prices in
Pakistan. The high ROCE and ROE implies that PSO has good future in Pakistan and promises
to give future returns to its members.


Strengths:
-








Creating a Positive Image In Pakistan








The world is approaching tow
ards CSR and Corporate Environmental reporting. PSO has
also adopted the Corporate Social Responsibility (CSR) approach, which requires corporations to
think also for the social welfare of your surroundings. PSO in all its outlets across the country
dispen
se environmental efficient fuel which plays a vital role in reduction of exhaust emissions
that result in less pollution. Recently, PSO has adopted a water tool developed by World
business Council for social development. PSO by fulfilling the requirements
of these approaches
creating the positive image in Pakistan for all other companies and gaining peoples trusts. (PSO
annual report 2007)








Market presence.








PSO is a brand name in Pakistan and is currently the market leader with over 63% market
capitalization.








Information Technology








PSO in its pursuit to achieve par excellence performance, PSO has implemented SAP in 2005
to operate at higher operating efficiencies through real
-
time and online system. The
implementation of SAP module

COPA offering capability for profitability analysis is also being
implemented. This COPA offers the opportunity of multi
-
dimensional analysis of cost and
revenues leading to informed and timely decision making. In communication, GPRS technology
is being u
sed to connect retail outlets with PSO head office. Communication facilities were
improved by installing video conferencing facility between five remote location and PSO head
office. (PSO annual report 2007)








Effective Management








PSO has numbe
r of qualified key personnel. The management of PSO have the ability to
control all its expenditures and utilize all its resources in most efficient and cost effective
manner, giving the PSO a lead in market. (www.psopk.com, PSO annual report 2007)








Quality Products and Control








In order to satisfy customer’s needs PSO ensures the highest quality of products and services.
For this purpose PSO has introduced total quality management system in its operational
activities. PSO drives to improve its
quality control system. In FY 2007, the company has
introduced Kerosene Detection Test for quality testing of Mogas and HSD at its retail outlets.
This test helps monitor adulteration of dyed Kerosene and has improved the company’s image
among its customer
s with on
-
spot checking of fuel at retail outlets, industrial consumer sites and
other PSO facilities. (www.psopk.com , PSO annual report 2007)




Weaknesses:
-








Low Interest Cover








PSO is currently bearing high ratio of interest on its short te
rm borrowings. The company’s
interest cover has drastically decreased in last two years. This is because PSO has increased its
short term borrowings during the last year and fulfilling its all working capital requirements
through short term debts.




Great
er Creditors Payment Period








PSO’s past record shows the average creditors’ payment period of around 46 days. Although
PSO is treating as short term borrowing free of interest, but is however loosing out early
payment discounts.




Opportunities:
-








Increase In Demand For Petroleum / Diesel








PSO is currently facing high demand of petroleum, diesel and its other lubricants. This is due
to increase in popularity of car financing schemes resulting in more cars on the road thereby
boosting dema
nd for fuel. Also the energy crises in Pakistan has resulted in businesses from
corporations to retail outlets, and high income families installing fuel consuming power
generators on their premises for uninterrupted supply of electricity which has again dr
iven up the
demand for fuel.








Other Forms Of Fuel








Compresses natural gas (CNG) is a cheaper substitute to petroleum gaining popularity all
over Pakistan. PSO has capitalized on this opportunity by installing CNG pumps in its petrol
stations.




Threats:
-








Increase In Oil Prices








PSO and other OMC’s are currently facing heavy increase in oil prices in international
markets. Although the Government of Pakistan has retain its policy for oil prices but it is a big
threat to PSO and all
other OMC’s (Ministry of petroleum)








Fuel Alternatives








Billions of dollars are pumped into researching cheaper and cleaner alternatives to gasoline,
diesel and fuels. With some working prototypes already in the experimental stage, example the
solar powered vehicles.


From the above financial analysis it can be concluded that PSO does have a promising future in
Pakistan ahead of it.


Appendices


Appendix 1: Balance Sheets


[pic]


Appendix 2: Profit and Loss Account


[pic]


Appendix 3: Ratio Defi
nitions


Profitability
Ratios






































































(a) Gross Profit Margin
=







































Gross profit ÷ Net sales x
100






































(b) Operating Profit Margin
=



































Operating Profit ÷ Net sales x
100


































(c) Return on Capital Employed
=

































PBIT ÷ Capital Employed x
100






































(d) Return on Equity
=











































PAT ÷ Shareholder's Equity x
100

















































































































Liquidity
Ratios




























































(a) Current Ratio
=













































Current assets ÷ Current
liabilities
































(b)


Quick Ratio
=















































Current assets
-

stock in trade) ÷
Current Liabilities



























































































Efficiency ( Turnover Ratios
)














































(a) Inventory turnover (in days)
=































Stock in Trade ÷ Cost of Goods Sold
x 365


























(b) Debtor Collection Period (in
Trade receivable ÷ Net sales x
days) =

























365


































(c) Creditors payment period (in
days) =

























Trade creditors ÷ Cost of Goods
Sold x 365







































































































Asset
utilisation


























































(a) Total Asset Turnover Ratio
=

































Net Sales


÷


Total
Assets























































































































Shareholders Investment
Ratios














































(a) Earning per Share (of Rs.10)
=































Profit After Tax ÷ ( Issued Share
Capital ÷ 10 )

































































































Long
-
Term Solvency
Ratios


















































(a) Interest Cover
=













































PBIT ÷ Interest
Payable












































(b) Debt / equity ratio
=







































Total Debts ÷ (Total equity + Long
Term Liabilities)
















|


Appendix 4: Ratios





























































2007









2006







2005









% change
in 2007

% change in
2006









































































































































Profitability
Ratios





































































































(a) Gross Profit Margin
=

































3.51









5.77







6.47









-
39.24%









-
10.81%









(b) Operating Profit Margin
=





























2.27









3.78







4.40









-
39.81%









-
14.08%









(c) Return on Capital Employed
=



























34.04







48.73





47.79







-
30.14%









1.97%











(d) Return on Equity
=





































22.40







36.15





32.24







-
38.05%









12.15%



















































































































































Liquidity
Ratios









































































































(a) Current Ratio
=







































1.22









1.23







1.24









-
1.36%











-
0.80%











(b)


Quick Ratio
=









































0.64









0.63







0.62









1.03%











3.20%



















































































































































Efficiency ( Turnover Ratios
)



























































































(a) Inventory turnover (in days)
=

























31.98







36.58





37.80







-
12.60%









-
3.22%











(b) Debtor Collection Period (in
days) =



















14.195







14.34





11.66







-
1.00%











22.92%











(c) Creditors payment period (in
days) =



















44.81







47.81





47.36







-
6.27%











0.95%



















































































































































Asset
Utilisation








































































































(a) Total Asset Turnover Ratio
=



























4.68









4.25







4.06









10.08%











4.63%



















































































































































Shareholders Investment
Ratios



























































































(a) Earning per Share (of Rs.10)
=

























27.34







43.87





32.98







-
37.67%









33.04%



















































































































































Long
-
Term Solvency
Ratios































































































(a) Interest Cover
=







































6.86









12.74





25.20







-
46.12%









-
49.44%









(b) Debt / equity ratio
=

































2.30









2.14







1.78









7.88%











20.06%















Appendix 5: Ratio Calculation using Excel formulas

|
The Key Skills Statement


1450 Word


Preparing
for Meetings


In accordance with the guidelines, three meetings were held with my mentor, Mr. Burhan Uddin
Ahmed who is also Assistant Manager at Anjum Asim Shahid Rahman Chartered Accountants, a
member firm of Grant Thornton International. Mr Burhan is a
qualified Chartered Certified
Accountant. Planning of all three meetings before hand had ensured their smooth running, and
enable maximum to be achieved in the shortest time.


The first meeting was scheduled at the office on 04th January 2008 at 6 p.m. I h
ad already short
listed two topics, no.8 and no.17 for the purpose of the project. I decided to consult with Mr.
Burhan before taking the final decision. After making enquiries and consulting the internet, I
came to the conclusion that ample secondary info
rmation was available for topic no. 8, however
primary information would be required for topics no. 17. I also jotted down the reasons for
choosing the selected topics and company, in case if he enquired them. I proposed a completion
date of mid March.


Le
arning from the experience from the first meeting, which was subject to interruptions I
decided to schedule the subsequent meeting at my mentor’s residence on a Sunday. The second
meeting was held on 10th February at 2 p.m. with Mr. Burhan’s permission. I
had already
emailed him a rough draft of my report, including the information gathered and the ratios, which
had been calculated the previous evening, so he would have time to review it. I later telephoned
him to confirm the meeting for the next day.


It w
as decided to hold the last meeting in a group so as to see how effective the presentation is
and also to check the thoroughness of my report in form of question answers from my peers. It
was scheduled to be held on a Saturday 22nd March at 2 p.m. at the o
ffice. A projector had been
arranged beforehand and was set up by the office assistant. I had numerously rehearsed my
presentation and had recorded it in order to review it later to address my problems.


Questioning


Questioning is a crucial constituent of

effective communication based on any medium. It
enhances comprehension, seeks clarification and pools opinions. There are two basic types of
questions:








Open question such as; What…? Who…? Where…? They invite a broad response and can
be broken in to






















1. Probing questions, which require explanations.






















2. Leading questions, which aim to suggest or get a specific reply.








Closed question which limit the response to certain choices like ‘Yes or No.


Questionin
g formed a significant part of the communication, which took place at all the
meetings. It was a tool used by my mentor to develop my ideas, structure my thought and to help
me decide upon the topic for the report. His open and closed question related to t
he information
collection required for “Effect of Corporate governance within an organisation” enabled me to
form a clear idea of the low probability of obtaining relevant information due to reasons such as
high reliability on primary source of information

and thus highlighted the difficulties attached
with topic no. 17.


The question answer section, which took place at the final meeting, thoroughly tested my
knowledge and helped me face up to my communication problems.


However questioning was not a one
-
wa
y process. Open questions at my part enabled me to gain
a better understanding of the scope of work to be carried out.


Listening


As communication is a two way process it requires a transmitter as well as a receiver. Listening
is about decoding and receiv
ing information and forms a fundamental part of effective
communication.


Each communication process is open to noise and distortion. Distortion relates to the coding and
decoding of data and occurs when the meaning of a communication is lost. Noise relate
s to:








Physical noise, e.g. ringing mobile;








Technical noise, failure of the communication medium;








Social noise, related to perception of the parties involved;








Psychological noise, relating to peoples emotion.


During paper F1 “Ac
countant in Business” I had learned 4 vitals of effective listening.








Listen Critically;








Show interest;








Avoid distractions and interruptions, and








Maintain silence.


The first meeting held was open to frequent physical noise in fo
rm of interruption form various
staff and students as well as frequent ringing of Mr. Burhan’s mobile. Another problem during
the first meeting was on my behalf of being an impatient listener, interrupting anytime I did not
agree with Mr. Burhan’s views.


Lessons were learnt from this meeting and other meeting were timed so as to avoid interruptions.
I also became more patient and listened carefully to what my mentor had to say. This led to more
effective communication and it was a point well learnt for my
presentation in which I did not
allow any question until the end of the presentation.


The importance of listening could be concluded from the fact that some of the question asked
had already been explained via the presentation given but had not listened e
ffectively. People do
have a natural attentive curve, which is high at the beginning and the end but sloping off in the
middle.


Assessment of the Presentation


The presentation took place in front of my mentor and fellow peers.


I had rehearsed my present
ation numerous times and had even made a recording of my rehearsal
so that I could review it for any mistake. Before the final meeting I rehearsed the presentation in
front of my uncle, who being “Masters in Mass Communications” was able to help me over my

communication problems.


Before starting the meeting, I distributed handouts consisting of the ratios I had calculated. This
proved to be very useful as the listeners could refer to the figures as I discussed about them.


The meeting progressed as schedul
ed and I started giving my presentation. During the
introduction process it became quite obvious that most of my peers did not have prior knowledge
about PSO and so they took a keen interest in the topic, which helped me to proceed with my
presentation smo
othly.


I delivered my presentation confidently and did not allow anyone to interrupt me. This led to
clarity in the flow of information and minimised the effects of distortion.


The question and answer section followed went quite well except for the quest
ion laid by a few
members of the audience who were more interested in PSO’s history and asset base rather then
its performance. Also some of them continuously asked question whose answers I had already
given, or had explained the facts in the presentation
but those people were not paying attention.
This aggravated me, however in future I would try to keep my composure.


The following two pages are an outline of my presentation.


Outline of Presentation


Delivered on March 22, 2008

At Anjum Asim Shahid Rahma
n Chartered Accountants


INTRODUCTION



CHART 1: Title of project, reasons I chose the topic, and an outline of the project




Title:




“An analysis of the financial situation of Pakistan State Oil”




Reasons for Choice of Title:


The Reason for choosing

this topic can be attributed to my status as an ACCA Finalist, enabling
me to test my financial analysis skills and provide sound reasoning. Therefore I decided to base
my project on this topic.




Project Proposed:




Pakistan State Oil, the largest Oil
Marketing Company in Pakistan and distributor of all kinds of
oil lubricants, enjoying a market share of 59% of white oil products and 80% in black oil
products. The company is listed on all the stock exchanges in Pakistan. Its main competitor being
Shell
Pakistan Limited also the distributor of oil lubricants in Pakistan and all over the world.


RESEARCH CARRIED OUT




CHART 2: Research methods used and their use.




Research Methods:


All possible variants for Research have been considered. The primary so
urce of information for
any company is its Annual report. Secondary sources of information have also been referred too.
My friends working in PSO were also the source for me to get useful information. Internet has
been used to find information about the se
ctor. Newspaper is also a viable source for getting any
new information relating to the company.




Methods Applied:


Research was largely confined to Annual Report and Internet. Annual Report of PSO was
referred extensively due to the nature of the topic.

In addition, SPL’s accounts, available on its
website, were referred to compute the required ratios.


ANALYSIS



CHART 3: Vertical Analysis




Vertical Analysis:


Five categories of ratios have been computed for this purpose. The ratios have been


categor
ised as follows:


|Profitability




































|Liquidity
















|Efficiency














|Asset
Utilization






|

|Gross Profit Margin (%)


























|3.51






















|4.67




















|
-
33.24%
















|

|Net Profit Margin
(%)




























|2.27






















|1.01




















|55.33%


















|

|Return on Capital
Employed
























|34.04




















|12.14




















|64.3%


















|

|Return on Shareholders’
Equity




















|22.40




















|9.47




















|57.7%


















|

|Current Ratio




































|1.22






















|1.02




















|16.23%


















|

|Quick Ratio






































|0.64






















|0.60




















|6.25%


















|

|Inventory Turnover
































|31.98




















|
27.69




















|
-
27.69%
















|

|Average Collection Period
(Days)


















|14.19




















|14.53




















|0.73%


















|

|Asset Utilisation
































|4.68






















|3.93




















|15.85%


















|

|Earnings Per
Share
































|27.34




















|12.90




















|52.81%


















|

|Interest Coverage
































|6.86






















|1.28




















|81.34%


















|

|Debt / Equity




































|2.30






















|2.04




















|11.17%


















|


CONCLUSIONS REACHED



CHART 5: Main Conclusion


Conclusion:


I would like to conclude this presentation with the corporate appraisal of the company using
SWOT analysis shown below.


|Strengths
























































|Weaknesses
















































|

|Brand Image






















































|Low Interest Cover








































|

|Information Technology










































|Greater Creditor Payment
Days






























|

|Quality Products and Control




































|


























































|

|Opportunities




















































|Threats




















































|

|Increase In Demand Oil Lubricants
































|Increase In Oil
Prices




































|

|Other Forms Of Fuel














































|Fuel Alternatives










































|


Self
-
Assessment of Interaction

The communication process consists of sender relaying a message to a receiver via a
communication channels and receives confirmation of it through feedback i.e. recipients
reaction. The message may consist of i
nformation, ideas, attitudes and desired actions. The
channel may take the form of conversation, letter, computers etc. and depends on factors such as
urgency, permanency, complexity, sensitivity and cost. A communication process may be
vulnerable to disto
rtion at the sender and recipients end and noise in the environment.


The interaction with my mentor during the meeting was quite effective. We were both able to
decode each other’s message properly thus we were able communicate our views to each other
and

I was able to draw up my project accordingly. Perhaps one of the reasons for effective
communication was the informality, which was present thus enabling us to communicate freely
without the manager
-
staff status quo. Another reason for success might have
been using the
appropriate medium of communication be it face to face talks or the presentation. However it is
important to mention that an element of noise was present in our first meeting, in form of
interruptions by the staff and the persistent ringing
of Mr. Burhan’s phone. In order to make the
interaction more effective for next meetings steps were taken such as agreeing for meeting
during the weekends as well as to switch of our mobile phones during the meeting.


The interaction with the peer group wa
s not quite effective. Perhaps one of the reasons was that I
was unable to generate the interest of some of them on the topic in hand as they seemed to be
more interesting in PSO’s asset base. As a result of this I had to repeat things several times. Also
I refused to answer questions when I though it was diverting away from the topic. However I
later realised that I was wrong and later politely turned down the questions.


Bibliography






• Annual Report (2005), Pakistan State Oil.





• Annual Report (20
06), Pakistan State Oil Co. Ltd.





• Annual Report (2007), Pakistan State Oil.





• Ministry of Petroleum Government of Pakistan.







http://www.mpnr.gov.pk





• Oil Companies Advisory Committee, PSO.









http://www.ocac.org.pk/pso.html








ht
tp://www.google.com






• http://www.wikipedia.org






• http://www.yahoo.com