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INSTITUTE OF BUSINESS MANAGEMENT
REPORT ON FINANCING STRATEGY OF PSO
SUBJECT
Advanced Financial Management
SUBMITTED TO:
Sir Muhammad Ali Sheikh
SUBMITTED BY:
Muhammad Danish Mujtaba
(2009-1-03-10115)
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BRIEF INTRODUCTION TO PSO
PSO came into being in the mid-1970s when the Government of Pakistan amalgamated three
Oil Marketing Companies: Esso Eastern, Pakistan National Oil (PNO) and Dawood Petroleum
as part of its Nationalization Plan.
From 1999 to 2004, PSO had undergone radical changes, both internal and external and has
emerged with a new look and as a market leader with a long term vision. The company is the
only public sector entity in Pakistan that has been competing effectively with three foreign
multinationals, Shell, Caltex and Total.
PSO is currently enjoying over 73% share of Black Oil market and 59% share of White Oil
market. It is engaged in import, storage, distribution and marketing of various POL products
including mages, high speed diesel (HSD), fuel oil, jet fuel, kerosene, liquefied petroleum gas(LPG), compressed natural gas (CNG) and petrochemicals. PSO also enjoys around 35% market
participation in lubricants and is blending/marketing Castrol brands, in addition to a wide array
of its own.
It is considered as one of the most successful mergers in the history of Pakistan. The company
has retail coverage of over 3,800 outlets, representing 80% participation in total industry
network. The company has been the winner ofKarachi Stock Exchange Top Companies Award
for many years and is a member of World Economic Forum.
PSO serves a wide range of customers throughout Pakistan including retail, industrial, aviation,and marine and government/defense sectors. PSO has been meeting the countrys fuel needs
by merging sound business sense with national obligation.
Pakistan state oil has come to this stage after 25 years of development and continuous
improvement. The companys development started from 1974 when the federal government
took over the management of PNO (Pakistan National Oil) and DPO (Dawood Petroleum
Limited) and renamed into POCL (Pakistan Oil Company Limited) under the marketing of
petroleum Products (Federal Control) Act 1974
The government then incorporated Petroleum Storage Development Corporation PSDC.
Name of PSDC changed to State Oil Company Limited (1976). The government then merged
PNO and POCL into SOCL and named it as Pakistan State Oil Company Limited.
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FINANCIAL STATEMENTS OF PSO
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PSO VERTICAL ANALYSIS
In 2007, 82.09% is cost of products sold of the sales and net sales are 85.07%of the sales which
results in 2.98% gross profit. All the operating expenses accounts 1.46% of the sales and finance
cost is 0.28% of sales with net profit of 1.14%.
While in 2008 sales dropped along with cost of products sold with 79.77% and net profit
increased because decrease in finance cost and decrease in cost of products sold. The decrease
in finance cost shows that the company has paid its short term borrowings.
Now in 2009 net profit is negative which shows loss by -0.93% it is probably because significant
increase in cost of products sold also in increase in finance cost and operating cost because
company has incurred short term borrowings.
In 2010 cost of products sold and operating cost both decreased which resulted in an increase
of net profit by 1.03%.
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In 2007, 16.36 % are fixed assets with major portion of 10.89% of property and plant. While
83.60% are current assets which include 39.55%of inventory and 18.20% of trade debts.
While shareholders equity consists of 28.02% and long term liability consists of 3.28% which
shows that company has no long term debts and is mostly financed by shareholders and
current liabilities are 84.75% which are more than current assets.
In 2008 companys fixed assets are decreasing with increase in current assets due to more
inventories in stock and increase in trade debts. This year sales are made on credit.
Shareholders equity has decreased with increase in trade payables.
In 2009, fixed assets increased and current assets decreased. The decrease in current assets is
due to decrease in inventories in stock but the company has extended its credit policy instead
of tightening it.
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PSO HORIZONTAL ANALYSIS
While analyzing horizontally the company has decreased non current assets and as increase in
current assets significantly because the company has loosed its credit policy and inventories
stock has increased. While there is increase in current liabilities due to increase in short term
borrowings and trade payables. And shareholders equity is decreasing and it shows that
company is mostly financed with short term borrowings.
If we move from 2007 to 2009 the sales are increasing with increase in cost of products sold.
But in 2008 the companys net profit is high due to decrease in cost of products sold and
decrease in operating costs.
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FINANCIAL ANALYSIS (BALANCE SHEET)
2008% 2009% 2010%
ASSETS
Non-current assets
Property, plant and equipment 100 (93.65) (85.45)
Intangibles 100 (68.28) (34.36)
Long-term Investment 100 (79.73) (74.76)
Long-term loans, advancement and
receivables
100 (84.94) (66.54)
Long-term deposits and prepayments 100 5.76 59.23
Deferred tax 100 1135 -
100 31.17 (79.07)
Current Assets
Stores, Spare parts and loose tools 100 (96.83) (98.32)
Stock-in-trade 100 (62.26) (93.97)
Trade debts 100 137.46 246.56
Loans and Advances 100 5.50 3.47
Deposits and short-trm prepayments 100 37.46 (91.52)
Other recievables 100 (81.67) (92.83)
Taxation-net 100 - -
Cash and Bank balances 100 (95.51) (58.90)
100 19.69 66.88
Net Assets in Bangladesh 100 - -
Total Assets 100 20.70 59.11
EQUITY AND LIABILITIES
Equity
Share capital 100 0 0
Reserves 100 (65.49) (94.43)
100 (67.40) (94.74)
Non-current Liabilities
Long-term deposits 100 2.41 13.64
Retirement and other service benefits 100 6.28 19.92
100 4.94 17.75
Current Liabilities
Trade and other Payables 100 35.84 92.48Provisions 100 (94.82) (94.82)
Accured interest/ mark-up 100 155.30 51.52
Short-term borrowing 100 69.62 18.40
Total equity and Liabilties 100 20.70 59.11
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0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
2008 2009 2010
Return On Asset
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
2008 2009 2010
Return On Equity
PSO RATIO CALCULATION AND GRAPHS FOR THE YEAR
2008,2009,2010
1. PROFITABILITY RATIOS
ROA2008 = 15421663 = 0.1213
127110000
ROA2009= (466479) = -0.0030
153421643
ROA2010= 18931606 =0.0936
202247741
PSOs ROA was high due to high total assets but it
decreased in 2009 due to negative income but
increased slightly in 2010
ROE2008= 14053795 = 0.4538
30965054
ROE2009= 6698535= -0.3209
20870785
ROE2010= 9049596 = 0.3084
29336058
PSO return on equity which measures the income
available to shareholders increases but in 2009 due
to negative net income it decreased significantly and
kept on decreasing in 2010.
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0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2008 2009 2010
Return On Capital
0
2
4
6
8
10
12
14
16
18
2008 2009 2010
Invetory Turnover
ROC2008 =15421663 = 0.4849
31799652
ROC2009= (466479) = -0.0214
21725503
ROC2010 = 18931606 = 0.6251
30284534
PSOs ROC increased due to increase in
shareholders equity and long term debts kept on
increasing even in 2010.
2. EFFICIENCY RATIOS
INVENTORY TURNOVER2008 = 465254907 = 15.73
29562055
INVENTORY TURNOVER2009 = 609685478 = 9.77
62360067
INVENTORY TURNOVER2010 = 713591707 = 17.53
40698209
PSOs inventory turnover has decreased in 2009 it
increased 17 times up again in 2010.
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0
5
10
15
20
25
30
35
40
2008 2009 2010
Receivable
Turnover
0
1
2
3
4
5
6
7
2008 2009 2010
Assets Turnover
RECEIVABLE TURNOVER2008= 495278533 = 36.41
13599966
RECEIVABLE TURNOVER2009= 612695589 = 18.07
33904728
RECEIVABLE TURNOVER2010= 742757951 =9.22
80509830
PSOs receivable turnover was very high in 2008
but gradually it decreases due to poor credit policy.
ASSETS TURNOVER2008= 495278533 =6.62
74737315
ASSETS TURNOVER2009 = 612695589 =4.82
127110020
ASSETS TURNOVER2010= 742757951 = 4.84
153421643
PSOs assets turnover ratio was good in 2008 but it
decreased and kept on decreasing in 2009 and 2010 due to increase in assets and decrease in
sales.
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0
2
4
6
8
10
12
14
16
18
2008 2009 2010
Times Interest
Earned Ratio
0
5
10
15
20
2008 2009 2010
Cash Coverage
Ratio
TIME INTEREST EARNED RATIO2008= 22450992=16.41
1367898
TIME INTEREST EARNED RATIO2009 = -5576658 = -0.894
6232056
TIME INTEREST EARNED RATIO2010=21233413 = 2.14
9882010
PSO up to 2008 was able to cover its interest
payments more than 15 times but in 2009 due to
negative profit it was unable to cover it. In 2010 it
was able to cover a small amount of interest
obligation by earning.
CASH COVERAGE RATIO2008= 23570129 =17.23
1367898
CASH COVERAGE RATIO2009 = (4434960) = -0.711
6232056
CASH COVERAGE RATIO2010= 22371050 =2.263
9882010
At fist in 2008 PSOs cash coverage ratio was high,
however in 2009 and 2010 due to addition of
depreciation the ratio decreased drastically.
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0
0.05
0.1
0.15
0.2
2008 2009 2010
NET WORKING
CAPITAL TO TOTALASSETS RATIO
0
0.5
1
1.5
2
2.5
3
3.5
4
2008 2009 2010
Current Ratio
Current
Ratio
4. LIQUIDITY
NCTA* RATIO2008= 22142472 =0.1741%
127110020
NCTA*RATIO2009= 8666404 =0.0564%
153421643
NCTA* RATIO2010= 23297692 =0.1151%
202247741
(*Net Working Capital To Total Assets)
It shows that they arent sufficiently used.
CURRENT RATIO2008 = 115878692 = 1.236
93736220
CURRENT RATIO2009= 138689524 = 1.066
130023120
CURRENT RATIO2010= 193373148 = 1.136
170075456
The ratio is good and PSO can successfully pay its
current liabilities against its current assets if
liquidated
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0
0.5
1
1.5
2
2.5
3
3.5
4
2008 2009 2010
Quick Ratio
0
0.5
1
1.5
2
2.5
3
3.5
4
2008 2009 2010
Cash Ratio
QUICK RATIO2008 = 36923368 =0.393
93736220
QUICK RATIO2009= 83392948 =0.641
130023120
QUICK RATIO2010 = 119279130 = 0.701
170075456
The quick ratio is fluctuating and is low because it
holds its stock in the form of petrol.
CASH RATIO2008 = 3018640 =0.03
93736220
CASH RATIO2009 = 2883118 =0.221
130023120
CASH RATIO2010 = 1778056 = 0.0104
170075456
PSOs cash ratio is high as borrowing on current and
long term liability.