Health care COLGATE-PALMOLIVE (PAKISTAN) LIMITED - Analysis of Financial Statements Financial Year 2005 - Financial Year 2009
Colgate-Palmolive (Pakistan) Limited is a Pakistan-based company engaged in the manufacture and sale of detergents, surface care and oral care products. Formerly it was known as National Detergents Limited. Later it was incorporated in 1977 and is based in Karachi, Pakistan.
The Company witnessed more than 50% increase in sales from Rs 7.1 billion to Rs 11.2 billion which could not have been achieved without the relentless efforts of the Sales and Marketing employees who came up with new ideas to both push the product and pull the customers. It is evident from the huge selling and distribution costs that the Company incurred in Year 2009 as well as trade discounts which were made available to the distributors.
Impressively, the Company was able to reduce the percentage of sales devoted to selling, general and administrative costs from 15.75% in year 2008 to 13.62% in 2009. Side by side, cost of sales rose sharply due to high raw material and packaging costs. Hence increase in Gross profit was found to be merely 28%; as compared to 56% increase in sales from FY 08 TO FY 09. There was a downfall in profit margin from 9.52% to 6.71%. This can be attributed to a decrease in other operating income as well as increase in mark up payments as the Company had arranged short term borrowings of Rs 912 million in 2009 compared to 837 million in 2008.
As far as ROA is concerned, it has been consistently falling since 2006. From this we can infer, that the Management is inefficient in allocating its resources and is thereby generating comparably less earnings. Similarly.ROE also shows a declining trend which means that shareholders' money is not being invested wisely and has led to lower profits this year as well.
After a stagnant liquidity position from 2007 to 2008, there was indeed an impressive indicator of increased liquidity in the year 2009. Cash flow stood at around 1025 million in FY'09 as compared to 593 million in FY'08. Cash was 37% of total current assets in 2009 compared to its 27% proportion in 2008. On the current assets side, receivables and inventory increased and on current liabilities side, short term borrowings had been repaid. In short, current ratio showed that the company has improved its ability to pay off short term obligations. It can efficiently turn its product into cash.
Compared to prior years, Year 2009 has shown a positive trend with as low as almost 46 days of inventory turnover compared to 65 days in 2008.Hence there was efficiency observed in selling stocks and thereby avoiding warehousing and obsolescence costs of the inventory. DSO had also risen in 2009 showing that the credit policy was not very stringent letting receivables remain outstanding for longer period. This does not seem favourable for the Company. Owing to lower inventory turnover, operating cycle fell from 74 to 57 days. Asset turnover rose from 2.27in 2008 to 2.84 in 2009 depicting that the management is efficient in using assets to generate sales by charging low profit margins. On the other hand, return on assets as mentioned above declined because of huge selling, distribution and administrative expenses which led to lower net profit. As far as sales to equity is concerned, there has been a prominent upsurge and has managed to be highest in these 5 years due to both increased sales and equity in the year 2009 compared to prior years.
The debt to asset ratio has fallen in the past 5 years from 0.381 in 2005 to 0.315 in 2009.This implies that the proportion of debt in its capital structure is quite low relative to the assets it possesses. Fortunately, the trend of debt to equity ratio for Colgate Palmolive Limited (Pakistan) has been falling, from which we can deduce that lower amount of debt and comparatively greater amount of equity is being used to finance assets. Hence low level of debt implies less chance of volatile earnings. Long term debt to equity ratio has more than halved from 15.75in 2005 to 6.20 in 2009.Hence Company's reliance on debts especially long term debt has fallen as compared to financing through equity. Unfortunately the ability to cover interest has sharply declined from 52 times in 2008 to 24 times in 2009 which is primarily due to large financing and selling, distribution and administrative costs.
EPS over the 5 year period has increased from 13 in 2005 to 31 in 2009. This year it has jumped from 28 in FY 08 to 31 in FY 09 mainly due to greater earnings before taxation which has resulted due to increased sales volume. Book value per share in FY'09 has also risen due to greater stock holders' equity with the same number of outstanding shares as that in FY'08. Market Value, though higher than book value per share has fallen drastically by nearly 55% from 2008 to 2009. As a result, P/E ratio too fell sharply which further depicts that the investors are willing to pay Rs 8.92 presently in FY'09 as compared to Rs 21.97 in FY'08 for Rs 1 of current earnings.
FUTURE PROSPECTS:
The company has been able to generate huge amount of sales and will manage to increase through its wise decision to spend more on selling and distribution as well as advertising costs in order to create excessive demand of its products. It has been successfully financing its assets through equity instead of debt which means that it would not have to face large fluctuations in earnings in the near future. However, the worrying part for the Company and Management is that it has to closely monitor its receivables and design their credit policy in such a way that they recover their receivables quickly.
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COLGATE PALMOLIVE - CONSOLIDATED RATIOS
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2005 2006 2007 2008 2009
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Rupees in '000
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LIQUIDITY
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Current Ratio 2.01 1.91 2.14 2.14 2.52
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ASSET MANAGEMENT
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Inventory Turnover 61.83 61.96 62.66 64.67 45.93
Days Sales Outstanding 7.79 7.71 8.75 9.11 11.08
Operating Cycle 69.62 69.67 71.41 73.78 57.01
Total Asset Turnover 2.55 2.37 2.24 2.27 2.84
Sales/Equity 4.12 3.85 3.48 3.33 4.14
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DEBT MANAGEMENT
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Debt to Asset Ratio 0.381 0.385 0.356 0.318 0.315
Debt to Equity Ratio 0.62 0.63 0.55 0.47 0.46
Long Term Debt to Equity 15.75 8.67 7.32 7.59 6.20
Times Interest Earned 33.16 58.81 61.58 52.37 24.45
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PROFITABILITY
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Gross Profit Margin 27.00 32.27 31.67 29.40 24.16
Profit Margin 7.73 9.97 10.19 9.52 6.71
Return on Assets 19.70 23.63 22.82 21.65 19.03
Return on Equity 31.84 38.40 35.43 31.72 27.77
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MARKET VALUE
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Book Value 77.81 106.21 111.66 112.07 113.04
EPS 12.68 20.88 25.32 28.44 31.40
Average Market Price 194.25 346 470 624.79 280.00
Price/Earnings 15.32 16.57 18.56 21.97 8.92
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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