Research project on Financial Leverage

Table of Contents Introduction ○

Leverage

○

Financial Leverage

○

Effects of Financial Leverage

Objective of Research Literature review Analysis of Companies ○

Sapphire Group ➢

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○

○

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Introduction ➢ Financial Analysis ➢ Comments Noon Group ➢ Introduction ➢ Financial Analysis ➢ Comments PepsiCo ➢ Introduction ➢ Financial Analysis ➢ Comments Nishat mills limited ➢ Introduction ➢ Financial Analysis ➢ Comments Dawood Hercules ➢ Introduction ➢ Financial Analysis ➢ Comments

SPSS Data Analysis Findings Recommendations

Introduction:

Our topic is about Financial Financial Leverage Leverage of companies companies of Pakistan, Pakistan, we have conducted research research to find out the reasons reasons that why the companies companies go for debt financing. financing. We analyzed analyzed companies’ solvency 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 investor or business 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 risk of bankruptcy bankruptcy if they are unable to make payments make payments on their debt 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 Leverage level. level. And also the correlation correlation between the current current financial 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 ou t 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 minori minority ty shareh sharehold olders ers.. The asymme asymmetry try of inform informati ation on betwee between n these these two groups groups of actors actors leads 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 benef benefits its is associ associate ated d with with the concent concentrat ration ion of the power power by the domina dominant nt shareh sharehold olders ers.. 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 protection of minority shareholders. shareholders. So far, most studies of corporate 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 import important ant for enterp enterpri rise se restru restructu cturin ring g and develop developmen mentt of an effici efficient ent system system of corpor corporate ate 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 accoun ting rates of return. This article basically basically describe about the art and science science of Financial 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 examples in which financial financial management management theory has found its its way out of academia and has become an established technique of financial management in practice. Experience has shown the impact impact of financi financial al levera leverage ge to be one of the more diffic difficult ult concepts concepts for beginnin beginning g student studentss 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, selfcontained numerical example serving as the “hook” can bridge the gap between the student’s preferred cogni cogniti tive ve styl stylee and the the need need to pres presen entt a deta detail iled ed comp compre rehe hens nsiv ivee examp example le to expla explain in the the full 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 balance sheets. sheets. These representati representative ve financial financial statements statements are structured structured so that the impact of adding financial financial leverage can be clearly clearly seen to increase both the expected level of, and volatility volatility of, equity equity returns as measured by EPS or ROE. These examples are also used in various textbooks for finance students students to understand understand financial Leverage. Leverage. In some text books to make understandi understanding ng of financial levera leverage, ge, operat operating ing levera leverage ge is also also linked linked with with financi financial al levera leverage. ge. An admira admirati tion on and genera generall 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 strateg str ategies ies.. The These se res result ultss ind indicat icatee tha thatt ris risk-m k-mana anagem gement ent deci decisio sions ns sho should uld not be mad madee wit without hout considering the impact of financial leverage. While we consider the importance to financial leverage in selection of risk-management strategies, risk risk aversion is also very important. 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. Thiss art Thi articl iclee add addres resses ses the pro proble blem m of choi choice ce amo among ng ris risk-m k-manag anageme ement nt str strate ategie giess and app applie liess the stochastic stoch astic dominance with risk risk-free -free asset (SDRA) criteria to addres addresss the choic choicee probl problem. em. 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 riskmanagement 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 busi busines ness. s. Deb Debtt fun funds ds "le "levera verage" ge" the ret return urn to equ equity ity funds by mag magnif nifyin ying g bot both h posi positiv tivee 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 co ntained 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 driving force in this economy is counter-cycl counter-cyclical ical risk aversion aversion caused by external external habit formation 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 vo latility 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 From the point point of view view of each each instit instituti ution, on, decisio decision n rules rules that that result result are readil readily y unders understan tandabl dable. e. However, there are aggregate consequences of such behavior for the financial system as a whole that might might not be taken taken into into consid considera eratio tion n by indivi individual dual instit instituti utions ons.. The discus discussio sion n focuse focusess 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 Aggregate liquidity liquidity can be understood as the rate of growth of the aggregate aggregate financial 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.

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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 larges largestt manufa manufactu cturer rerss and exporte exporters rs of texti textile le produc products ts in Pakist Pakistan, an, Sapphi Sapphire re 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 per perfo form rmed ed in our our faci facili liti ties es in Paki Pakist stan an.. Syne Synerg rgie iess are are form formed ed with with offs offsho hore re garme garment nt 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 o f 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 Equity

2797.114

3893.928

6018.868

5577.492

Long term Debt

1174.78

934.54

722.264

446.199

total

3971.894

4828.468

6740.95

6023.691

Proportion of Equity

70%

81%

89%

93%

Proportion of Debt

30%

19%

11%

7%

Graphical representation of Debt and Equity Proportion:

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. equity. Typically the data from the prior fiscal prior fiscal year is 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, rates, due to the additional interest that has to be paid 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 .2 4

0 .1 2

0.08

Graphical representation of Debt-Equity Ratio of Sapphire Textile Limited

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-equit debt-equity y ratio is 0.42 but it decreased 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. capital. The total capital is the amount of available funds that the company can use for financing projects and other operations. operations. A high debt-to-cap debt-to-capital ital ratio indicates 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 Graphical Representat Representation ion of Debt to Capital Capital ratio of Sapphire Sapphire Textile Textile Limited

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 debt/asset ratio shows the proportion of a company's company's assets which are financed through debt. debt. If the ratio is less than one, most of the company's assets are financed through equity. equity. If

the the rati ratio o is grea greate terr than than one, one, most most of the the comp compan any' y'ss asse assets ts are are fina finance nced d thro throug ugh h debt 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 .1 0

0 .0 6

0.04

Graphical Representation of Debt to Assets ratio of Sapphire textile limited

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 / 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 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 analysis of Sapphire Sapphire textile limited we come to this conclusion 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 sapphire textile limited is decreasing decreasing from 2005 to 2008. Whereas the financial 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. 5577.492 . Whereas the assets are increasing.

Noon Pakistan Limited The company was incorporated incorporated in 1966, with a paid up capital of Rs.5 million million and a total investment 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 h as 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 eq uity 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


127514

109018

108758

169836

Long term Debt

250731

329699

286235

303591

total

378245

438717

394993

473427


34%

25%

28%

36%

Proportion of Debt

66%

75%

72%

64%

Graphical Representation Representation of Debt and Equity proportions of Noon Pakistan Limited

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. equity. Typically the data from the prior fiscal prior fiscal year is 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, rates, due to the additional interest that has to be paid 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 of Noon Pakistan Limited

Ratios

2005

2006

2007

2008

Debt to Equity

0.74

0.85

0.65

0.85

Graphi Grap hica call Repr Repres esen enta tati tion on of Debt Debt-E -Equ quit ity y rati ratio o of Noon Noon Paki Pakist stan an Limited The above table is showing solvency solvency ratio of company. 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. capital. The total capital is the amount of available available funds that the company can use for financing projects and other operations. operations. A high debt-to-capital ratio indicates that a high proportion of a company's capital is comprised of debt.


Debt to Capital ratio of Noon Pakistan Limited Ratio

2005

2006

2007

2008

Debt to Capital

0.66

0.75

0.72

0.64

Graphical Representation Representation of Debt to capital ratio of Noon Pakistan limited 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 company's assets which are financed through debt. 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 Representation of Debt to Asset ratio of Noon Pakistan Limited 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 = Total Assets /Shareholder’s /Shareholder’s Equity Financial Leverage of Noon Pakistan Limited Ratio

2005

2006

2007

2008

Financial Leverage

4.08

5.13

5.08

4.40

Graphi Grap hica call Repr Repres esen enta tati tion on of Fina Financ ncia iall Le Leve vera rage ge of Noon Noon Paki Pakist stan an Limited 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 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 interest payments on outstanding debt. debt. The lower the interest coverage ratio, ratio, the larger the debt burden is on the company, company, also called interest coverage. coverage.

Interest Coverage Ratio = EBIT/Interest 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 Representation of Interest coverage ratio of Noon Pakistan Limited: The calculation calculation if interest interest coverage ratio is done by dividing earning earning before before interest 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 result of our analysis of noon Pakistan Pakistan limited limited we can comment 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 taking more and more debt due to which taking further further debt in future 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-todrink teas and coffee drinks, isotonic sports drinks, bottled water an d 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, honesty, fairness and integrity. 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." today." Our vision is put into action through programs and a focus on environmental stewardship, activities to benefit benefit society society, and a commitment commitment to build shareholder shareholder value by making PepsiCo PepsiCo a truly truly sustainabl sustainablee 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. PepsiC PepsiCo o is also also having having covenan covenants ts but such such covenan covenants ts do not effect effect compan companies ies’’ busine business ss decisio decisions ns because because the decisio decision n are not based based on single single condition condition,, compan company y have to take take decisions on collective basis. Company is meeting its debt requirement other than operating profit. PepsiCo PepsiCo resorts resorts to debt financing rather than equity equity financing financing because companies’ 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


14320

15447

17325

12203

Long term Debt

2313

2550

4203

7858

total

16633

17997

21528

20061


86%

86%

80%

61%

Proportion of Debt

14%

14%

20%

39%

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. equity. Typically the data from the prior fiscal prior fiscal year is 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, rates, due to the additional interest that has to be paid 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 of PepsiCo

Ratios

2005

2006

2007

2008

Debt to Equity

0.161

0.165

0.24

0.21

Graphical Representation Representation of debt to equity ratio of PepsiCo

We have taken the value from annual report. report. We have calculated calculated the debt to equity ratio of Pepsi 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 of PepsiCo

Ratio

2005

2006

2007

2008

Debt to Capital

0.14

0.14

0.20

0.39

Graphical Representation Representation of Debt to Capital ratio of PepsiCo

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 company's assets which are financed through debt. 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 Representation of Debt to assets ratio of PepsiCo


Financial Leverage = Total Assets /Shareholder’s /Shareholder’s Equity Financial Leverage of PepsiCo

Ratio

2005

2006

2007

2008

Financial Leverage

2.21

1.93

1.99

2.94

Graphical Representation Representation of Financial Leverage ratio of PepsiCo 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 interest payments on outstanding debt. debt. The lower the interest coverage ratio, ratio, the larger the debt burden is on the company, company, also called interest coverage. coverage. Interest Coverage Ratio = EBIT/Interest Payment

Interest Coverage ratio of PepsiCo

Ratio

2005

2006

2007

2008

Interest Coverage

23.13

26.94

32.01

21.07

Graphical Representation Representation of Interest Coverage Ratio of PepsiCo

The calculation calculation if interest interest coverage ratio is done by dividing earning earning before before interest 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 respectively.. This shows that the firm is not having difficulty 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. co mpany.

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 Company tackles tackles their interest interest rate fluctuations fluctuations by using FRA (forward (forward rate agreement) 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 Company goes for other sources of financing financing that are overdraft overdraft borrowing, promissory promissory notes, bonds, debentures and discounting of export bills etc. Company is utilizing its borrowing only for production or working cap ital.

Financial Analysis of Nishat Mills Limited 2005

2006

2007

2008


16563.14

32935.5

49269.2

35452.7

Long term Debt

2858.16

3015.38

1773.82

1047.79

total

19421.30

35950.58

51043.02

36500.5


86%

92%

97%

98%

Proportion of Debt

14%

08%

03%

02%

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. equity. Typically the data from the prior fiscal prior fiscal year is 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, rates, due to the additional interest that has to be paid 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 of Nishat Mills Limited Ratio

2005

2006

2007

2008

Debt to Equity

0.17

0.09

0.03

0.02

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

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 of Nishat Mills Limited

Ratio

2005

2006

2007

208

Debt to Capital

0.14

0.08

0.03

0.02

Graphi Grap hica call Repr Repres esen enta tati tion on of Debt Debt to Capit apital al rati ratio o of Nish Nishat at Mill Millss Limited

We have calculated calculated the debt to capital ratio of Nishat Mills 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 company's assets which are financed through debt. 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 of Nishat Mills Limited

Ratio

2005

2006

2007

2008

Debt to Assets

0.13

0.09

0.04

0.02

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

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 = Total Assets /Shareholder’s /Shareholder’s Equity Financial Leverage of Nishat Mills Limited Ratio

2005

2006

2007

2008

Financial Leverage

1.26

0.94

0.79

1.06

Graphical Representation Representation of Financial Leverage Ratio of Nishat Mills Limited

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 interest payments on outstanding debt. debt. The lower the interest coverage ratio, ratio, the larger the debt burden is on the company, company, also called interest coverage. coverage.

Interest Coverage Ratio = EBIT/Interest EBIT/Interest Payment Interest Coverage ratio of Nishat Mills Limited

Ratio

2005

2006

2007

2008

Interest Coverage

4.9

2.6

2.5

7.4

Graphical Representation Representation of Interest Coverage Ratio of Nishat Mills Limited

The calculation calculation if interest interest coverage ratio is done by dividing earning earning before before interest 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 centur century y ago. ago. The Group Group owns owns compani companies es rangin ranging g from from fertil fertilize izer, r, textil textiles, es, busine business ss and financ finance. e. Through its diverse businesses, the Dawood Group of Companies delivers some of the top brands and the highest quality services. services. Most of the Group Companies consistently consistently ranks amongst the top 25 companies of KSE. The Group comprises of the following companies. Dawood Hercules Chemicals Dawood Lawrencepur Central Insurance Company Inbox Business Technologies Elixir Securities     

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 tons of urea urea per annum. annum. Also, Also, it made made the manufa manufactu cturin ring g facili facilitie tiess more more energy energy efficien efficientt 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 Refo Reform rmer er Harps Harps Asse Assemb mbli lies es and and conve convent ntio iona nall inst instru rume ment ntat atio ion n (wit (with h Dist Distri ribu bute ted d Contr Control ol 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 o f 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


9355.24

9273.14

18889.33

17382.66

Long term Debt

-

-

6500

6302.5

total

9355.24

9273.14

25389.33

23685.16


100%

100%

74%

73%

Proportion of Debt

0%

0%

25%

26%

Graphical Representation Representation of Debt and Equity proportions of Dawood Hercules

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. equity. Typically the data from the prior fiscal prior fiscal year is 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, rates, due to the additional interest that has to be paid 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 of Dawood Hercules Ratios

2005

2006

2007

2008

Debt to Equity

-

-

0.34

0.36

Graphical Representation Representation of Debt to Equity ratio of Dawood Hercules

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 ratio in 2005 2005 and 2006 the company company had not borrowed borrowed any debt and has total total relian reliance ce on equity. 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 of Dawood Hercules Ratio

2005

2006

2007

2008

Debt to Capital

-

-

0.25

0.26

Graphical Representation of Debt to Capital Ratio of Dawood Hercules

We have calculated calculated the debt to capital ratio of Dawood Hercules 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 decreasing from 2005 to 2006 is nil as the company’s total reliance 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 company's assets which are financed through debt. 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 of Dawood Hercules Ratio

2005

2006

2007

2008

Debt to Assets

-

-

0.22

0.24

Graphical Representation Representation of Debt to Assets ratio of Dawood Hercules

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 assets ratio is increasing 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 = Total Assets /Shareholder’s /Shareholder’s Equity Financial Leverage of Dawood Hercules Ratio

2005

2006

2007

2008

Financial Leverage

1.36

1.74

1.5

1.47

Graphi Grap hica call Repr Repres esen enta tati tion on of Fina Financ ncia iall Le Leve vera rage ge rati ratio o of Dawo Dawood od Hercules

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 interest payments on outstanding debt. debt. The lower the interest coverage ratio, ratio, the larger the debt burden is on the company, company, also called interest coverage. coverage. Interest Coverage Ratio = EBIT/Interest Payment

Interest Coverage ratio of Dawood Hercules Ratio

2005

2006

2007

2008

Interest Coverage

3.87

1.81

1.36

2.82

Graphi Grap hica call Repr Repres esen enta tati tion on of Inte Intere rest st Cover overag agee rati ratio o of Dawo Dawood od Hercules

The calculation calculation if interest interest coverage ratio is done by dividing earning earning before before interest 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

Banks Combination of banks and financing by any private investor Total

Frequency 2

Percent 40.0

Valid Percent 40.0

3

60.0

60.0

5

100.0

100.0

Cumulative Percent 40.0

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% 4 0% is for banks only. only.

What is the rate of interest?

Valid

Floating Both fixed and floating Total

Frequen cy 1

Percent 20.0

Valid Percent 20.0

Cumulativ e Percent 20.0

4

80.0

80.0

100.0

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

FRA Interest rate swap FRA and Interest rate swap Total

Frequ queency Percent ent 1 20.0

Valid Percent 20.0


3

60.0

60.0

80.0

1

20.0

20.0

100.0

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? Frequ requen ency cy Perce ercent nt Valid yes

5

100.0

Valid Percent

Cumulative Percent

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 yes

Frequ requen ency cy Perce ercent nt 5 100.0

Valid Percent 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

Provide discipline Timely payments No direct effect No effect Total

Valid Percent

Cumulative Percent

Frequ queency

Percent

2

40.0

40.0

40.0

1

20.0

20.0

60.0

1

20.0

20.0

80.0

1 5

20.0 100.0

20.0 100.0

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? Frequen uency Valid

Operating profit Any other Total

Percent

Valid Percent

Cumulative Percent

4

80.0

80.0

80.0

1 5

20.0 100.0

20.0 100.0

100.0

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

Why you resort to debt financing why not equity only?

Valid

Best cost of capital Working capital requirement Timing difference of cash flows as per company policy Total

Frequenc y

Valid Percent

Cumulative Percent

Percent

2

40.0

40.0

40.0

1

20.0

20.0

60.0

1

20.0

20.0

80.0

1

20.0

20.0

100.0

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? Freq Freque uenc ncy y Perc Percen entt Valid

Bonds and debentures Overdraft borrowings Both bonds and debentures

Valid Percent

Cumulative Percent

1

20.0

20.0

20.0

2

40.0

40.0

60.0

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?

Valid

Both short term and long term investment For any other purpose Total

Frequen cy

Valid Percent

Cumulativ e Percent

Percent

4

80.0

80.0

80.0

1

20.0

20.0

100.0

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 agree

Frequenc ency

Perc ercent

5

100.0

Valid Percent

Cumulative Percent

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 hav ing 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 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 risk of bankruptcy bankruptcy if they are unable to make payments make payments on their debt 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.

Research project on Financial Leverage

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