Evaluation Of The Business And Financial Performance Finance Essay

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It was very important to choose my topic carefully, so for this purpose I had to evaluate my interests, strengths and weaknesses. After evaluating myself and considering the options available for I selected topic-8, "An analysis and evaluation of the business and financial performance of an organization over a three year period".

The reason for selecting this topic was that I considered myself good in managerial and analytical skills. My conceptual grip on financial analysis was created during ACCA studies which induced me towards this topic. Topics other than this did not relate with my skills as much as this one so that I intended myself to work on this topic. Factors used to evaluate business performance are those ones which were also used to take investing decisions. Being an active monitor of stock exchange movements, this was a chance for me to evaluate business performance which would definitely help me in future to establish my career in capital markets.

Reason for choosing the organization

My research project was totally based on the selection of company. I found cement industry as one of the major growing industry in the country that's why I decided to select Fauji Cement Company Limited for evaluation. Basic reason for the selection of this company was that most of the directors of this company are retired army officers and my enthusiasm was to know that how these people operate company's affairs. I also wanted to know the planning and decision processes of these people that effect company's revenue. It is one of the top ten companies in cement sector of Pakistan. The cement plant operating in the Fauji Cement is one of the most efficient and best maintained in the Country and has an annual production capacity of 1.165 million tons of cement. Fauji Cement is ISO certified for its Quality & Environment Management Systems and has won number of awards in its category

(http://www.fccl.com.pk/main/index-1.html, n.d.)

(http://www.fccl.com.pk/main/index.html, n.d.)

Project objectives

After deciding the topic and selecting the company, the next step was to define the research objectives. The most important objective of the research is to evaluate the business environment and financial performance of Fauji Cement Company Limited from Financial years 2009 to 2011.

Some others supporting research objectives are as follows:

To determine the general problems that the cement industry of Pakistan is facing and find out the factors that are particularly influenced the Turnover of Fauji Cement Company Limited.

To examine the profitability position of Fauji Cement Company Limited, and to assess its business's ability to generate earnings as compared to its expenses.

To analyze the liquidity position of Fauji Cement Company Limited and to evaluate the firm's ability to pay its short-term debt obligations.

To analyze the capital gearing of Fauji Cement Company Limited, describing the mix of long-term corporate funding provided internally by shareholders to that contributed externally by lenders.

To identify its internal strengths and weaknesses, as well as its external opportunities and threats by using SWOT analysis

Research questions

Another important step in my research was to draft the research questions, which were utilized as a standard phenomenon for the entire project. These questions included:

What approach is needed to accomplish the research project?

What sources should be scrutinized in order to ascertain relevant data?

How to relate collected information with subject matter?

Which skills are required to elaborate, evaluate and analyze business performance?

What is the turnover pattern of the company and the reasons behind its variations?

What is the liquidity position of the company?

What is the profitability of the company?

What is the gearing of the company?

How has the company performed over three years?

What is the company's performance as compared to its competitor?

What are the internal strengths, weaknesses and external opportunities and threats of the company?

How to summarize data into presentable report so that it could be understandable to readers?

What factors should be considered in order to draw conclusion?

What tools should be used for recommendations and suggestions?

Overall research approach

My research and analysis project started with the selection of topic and the company. In order to identify my overall research approach, I set a framework by identifying research objectives. Information pack for OBU available on ACCA website helped me in setting of the framework. Annual reports were required to obtain information about financial ratios. These financial ratios were used to scrutinize annual performance of the company. Mathematical figures extracted by ratio analysis became more meaningful and valuable in substance when these results were examined in the light of business environment and benchmarks set by competitors. Developing an understanding of relevant events and aligning them in my analysis was an epochal aspect. External and internal factors related to non-financial aspects were discussed to evaluate company's performance. SWOT analysis and Five Forces Model were useful to determine the current position of company according to current market affairs. At the end, a conclusion was drawn in which suggestions were discussed for the betterment of company's performance, and these recommendations were provided according to best of my knowledge and skills.

Information gathering and business techniques used

(Words : 1295)

Information gathering and sources of information

To accomplish the research objective, it was necessary to get the exact, trustworthy and timely information. The topic and organization which I selected for the research project were very helpful in finding relevant and reliable information

Primary Sources

Company's Employee

Information Gathered

Mr. Omer Ashraf (Chief Financial Officer)

I collected the audited annual reports of last three financial years, and asked questions about company's financial performance. This meeting helped a lot to understand the company's geographical markets and product promotion strategies.

Secondary Source


Information Gathered

World Wide Web

Political and economic factor that influences the company.

Evaluating the trends in cement industry

Determine the strength, weakness, opportunity and threat to the organization

Different articles on cement industry to know the current affair's

Annual Reports

For ratio analysis, I had collected the financial data from company's annual report, for competitor analysis, I got information from competitor company's annual report.

Text Books

From ACCA course books, I refined my concepts regarding the tool and techniques such as SWOT, PEST analysis, etc.

From Student Accountant, I got valuable information about report writing


To collect the abundant and up-to-date information about any developments in cement industry and gather economist reviews on current operations of company

Limitation of information gathering

I conducted interview with key employee of the Fauji Cement Company Limited, but I felt that I could only get limited amount of information, insufficient to form any analysis. So I used this information in combination with information obtained from other sources.

The World Wide Web offered enormous information both reliable and unreliable, so it was a very difficult task to choose the right and relevant data.

As the information collected from the internet, inherited some limitations, it may misrepresent some facts and figures.

Ethical issues

Before commencement of my work, I made the appropriate plans to perform my research work in an ethical manner. During the collection of primary information, I took reasonable care in aspect of anonymity and did not disclose the names of people without their permission. Another ethical issue that I made sure to observe was using information provided by others without acknowledging them, so I made sure that I deal with this adequately I used proper referencing to quote the source from where the information was extracted.

Accounting and business techniques used

Financial statement and ratio analysis

Financial statement analysis can be referred as a process of understanding the risk and profitability of a company by analyzing reported financial information, especially annual and quarterly reports. Putting another way, financial statement analysis is a study about accounting ratios among various items included in the balance sheet. These ratios include asset utilization ratios, profitability ratios, leverage ratios, liquidity ratios, and valuation ratios. Moreover, financial statement analysis is a quantifying method for determining the past, current, and prospective performance of a company.

(http://www.readyratios.com/reference/analysis/financial_statement_analysis.html, n.d.)

Financial ratio analysis is one of the most popular financial analysis techniques for companies and particularly small companies. Ratio analysis provides business owners with information on trends within their own company, often called trend or time-series analysis, and trends within their industry, called industry or cross-sectional analysis.

(Peavler, n.d.)

Limitation of financial statement and ratio analysis

In spite of financial statement analysis being a highly useful tool, it also features some limitations, including comparability of financial data and the need to look beyond ratios. Although comparisons between two companies can provide valuable clues about a company's financial health, alas, the differences between companies' accounting methods make it, sometimes, difficult to compare the data of the two. Besides, many a times, sufficient data are on hand in the form of foot notes to the financial statements so as to restate data to a comparable basis. Or else, the analyst should remember the lack of data comparability before reaching any clear-cut conclusion. However, even with this limitation, comparisons between the key ratios of two companies along with industry averages often propose avenues for further investigation.

(http://www.readyratios.com/reference/analysis/financial_statement_analysis.html, n.d.)

Limitation of ratio analysis, the only limitation is if you use average ratios instead of the ratios of high performance firms in your industry. Ever wonder why you always hear that balance sheets only show historical data? This is why. A balance sheet is a statement of a firm's financial condition at a point in time. So, looking back on a balance sheet, you see historical data. Inflation may have occurred since that data was gathered and the figures may be distorted. Reported values on balance sheets are often different from "real" values. Inflation affects inventory values and depreciation, profits are affected. If you try to compare balance sheet information from two different time periods and inflation has played a role, then there may be distortion in your ratios. You can calculate all the ratios you can find from now until doomsday. Unless you try to find the cause of the numbers you come up with, you are playing a useless game. Ratios are meaningless without comparison against trend data or industry data. Ratios are also meaningless unless you take the limitations listed in this article into account. Very large companies may be composed of different divisions manufacturing different products or offering different services. To make ratio analysis mean something, different industry averages may need to be used for each different division. The ratio analysis, used in this way, will certainly be more accurate than if you tried to do a ratio analysis for this type of large company. Different companies may use different methods to value their inventory. Another issue is depreciation. Different companies use different depreciation methods. The use of different depreciation methods affects companies' financial statements differently and won't lead to valid comparisons. Ratio analysis is based entirely on the data found in business firms' financial statements. If the financial statements for a company are not quite as good as they should be and a company would like better numbers to show up in an annual report, the company may use window dressing to manipulate the data in the financial statements. Bear in mind - this is completely against the concept of financial and business ethics and flies in the face of corporate governance.

(Peavler, n.d.)

SWOT analysis and Limitation of SWOT analysis

SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues. SWOT stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors. Opportunities and threats are external factors.

(http://marketingteacher.com/lesson-store/lesson-swot.html, n.d.)

The most important of which are the lack of considering uncertain and two sided factors, lack of prioritization of the factors and strategies and too many extractable strategies.

(http://wiki.answers.com/Q/What_are_the_advantages_and_disadvantages_of_SWOT#ixzz1mWLVJZBz, n.d.)

Porter Five Forces Analysis and its Limitations

The intensity of competition in an industry is rooted in its underlying economic structure and goes well beyond the behavior of current competitors. The state of competition depends on five basic competitive forces shown below. These factors affect the elasticity of the demand curve, though some affect the long run vs. the short run. That is, potential entrants affect the long run demand curve in that they may change the industry structure from being more like an oligopoly versus perfect competition

Threat of new entrants

Bargaining power of buyers

Threat of substitute products of services

Bargaining power of suppliers

Rivalry among existing firms

(http://www.efalken.com/banking/worddoc/Porter.html, n.d.)

Limitations of Porter Five Forces Analysis

It is important to be aware that this model, though a powerful structure for discussion, has its limitations. For example, it provides a good framework for analysis but does not really consider issues around implementing changes to reposition for strategic advantage. It is also, because of its simplification of complex relationships, apparently linear in structure whereas much competition is more in the form of networks and clusters

(http://eu.wiley.com/legacy/wileychi/innovate/website/pages/atoz/fiveforcesmodel.htm, n.d.)

Analysis, Conclusion and Recommendation ( Words : 3983 )

Brief Introduction of Fauji Cement Company Limited (FCCL)

A longtime leader in the cement manufacturing industry, Fauji Cement Company, headquartered in Islamabad, operates a cement plant at Jhang Bahtar, Tehsil Fateh Jang, and District Attock in the province of Punjab. The cement plant operating in the Fauji Cement is one of the most efficient and best maintained in the country and has an annual production capacity of 1.165 million tons of cement. The quality port land cement produced at this plant is the best in the Country and is preferred the construction of highways, bridges, commercial and industrial complexes, residential homes, and a myriad of other structures needing speedy strengthening bond, fundamental to Pakistan's economic vitality and quality of life.

(http://www.rozee.pk/company-details.php?compid=9800, n.d.)

Ratio Analysis

Turnover Analysis

The turnover performance of the company shows declining trend over the three periods decreased by Rs 572 million from 2009 to 2011. In FY10 the turnover is decline by 28% from Rs.5315 million in FY09 to Rs 3808 million in FY10, but in the next FY11, there is slight increase in the sales turnover by 25% to Rs 4743 million. Over the three years the sales turnover has fallen by 11%, from Rs 5315 million in FY09 to Rs 4743 million in FY11, which depicts that the growth in sales turnover in FY11 is not sufficient to compensate the loss of growth in FY10

In FY10, there was a decrease in capacity utilization. In the last year capacity utilization of 2008-09 was 100.09% but in FY2009-10 it has been decreased by 96.06%. In the next year this capacity utilization falls further by 93%. This fall in production was due to shortage of natural gas and electrical power supply. FCCL's performance in meeting the local demand was not up to the mark. There was a decline in domestic dispatches by 11.74 % and 20% in FY10 and FY11 respectively. Overall domestic dispatches in industry in FY10 were increased by 14.63% but in FY11 there was a declining trend in the domestic dispatches by 7%. This was due to massive cut on the public sector developments by the government. On the other hand, the export of FCCL was marvelous in both FY10 and FY 11. There was an increase in export dispatches by 21% in FY10 and 37% inFY11. If we take a glance over the proportion of the local demand in total revenue, the local demand contributed majorly. In FY09 the proportion of the local demand was 83%, in FY10 it was decrease by 75% and in FY11 domestic sales were further decreased by 67%. In FY10, the local dispatches comprised 70% and in FY11 it was 58% of the total cement dispatches. The declining trend in the local dispatches is an alarming situation.

(Annual Reports, FCCL, 2010, 2011)

During FY10, due to adverse economic condition the overall cement sector performance was sluggish.

(Times, 2010)

During FY11, cement consumption declined by 8.24% as compared to last year. It was an alarming situation for the cement industry. Cement dispatches for FY11 has reflected the lowest capacity utilization of the industry at 76.12% in past eight years. In FY11 total dispatches declined by 6.68% to 21.97 million tons, down from 23.55 million tons in FY10. Low consumption of the cement reflects the low GDP of the economy. Cement industry has been experiencing huge losses due to high cost of production, declining exports and decrease in local demand.

(Today, 2011)

From the table given below, the competitor company, Attock Cement Pakistan Limited (ACPL) has successfully maintained the level of turnover in difficult economic environment over the three periods. Attock Cement Pakistan Limited has focused to increase market share in domestic markets as well as export markets. Moreover, through efficient sales mix, the competitor company was able to outperform the FCCL. The use of waste heat recovery system, refused derived fuel and captive power project helped the company to achieve maximum volumetric production.

(Annual Reports, ACPLL, 2010, 2011)





Fauji Cement Company limited




Attock Cement Pakistan limited




(Figures are taken from Financial Statements)


Profit before Tax

FCCL was enjoying the smart profit before tax till FY09. But in FY10, there was a sharp decline in the profit by 77% from Rs 1422 million in FY09 to Rs 324 million in FY10. However in the very next financial year, FCCL tried to recover from this decreasing trend and was able to increase its profit by 50%, to Rs 488 million. This increase was not enough to recover the loss from the previous year. Over the three years, profits declined by Rs 934 million, down by 66%.

In FY10, the main cause of decline in profit was the decrease in cement prices. The profit from operations was decreased from Rs 1646 million to Rs 366 million delineating a decrease of 78%. During the same year the rise of 234% in travel and entertainment expense, from Rs 703 thousand in FY09 to Rs 2,351 thousand, was appeared to be efforts of the company to gain more from the opportunities existed in the market. There was a significant decrease in export freight to Rs 1,101 thousand in FY10 as compared to last year Rs 8,758 thousand, down by 87 % was seemed that by increasing the exports, the company has adopted the efficient policies to reduce the cost of export freight. At the end of the FY10, despite the increase of short-term and long-term debts therefore the effects of interest cost of these loans were not evident on the finance cost. In FY11, profit has increased as compared to the last year. The increase in profits was due to the increase in selling price of the cement. The prices of the cement in the FY11 increased operating profits by 62% from Rs 366 million in FY10 to Rs 592 million. Travel and entertainment further rose by 493%, to Rs 13,953 thousand as compared to previous year from Rs 2,351 thousand, owing to the greater focus on availing the opportunities globally and explore the export market as local market share has been declining. The effect of short and long term loans on the finance cost was prominently seen in this year by the increase to Rs 104 million as compared to the last year Rs 41 million, which was an increase of 154%.

(Annual Reports, FCCL, 2010, 2011)

The massive increase in travel and entertainment expenses of the company was caused after curtailment of export of the cement to India by almost 80%, the cement industry was seeking alternative markets for the exports. After exploring other markets, like Sri Lanka, South Africa, Namibia, Oman and Mauritius, cement manufacturers have started export to these countries.

(Ahmed, 2009)

From the table below, by comparing the performance of Attock Cement Pakistan Limited with Fauji Cement Company Limited, the competitor company has also experienced the downward trend in the last three periods. Despite of achieving greater production target, Attock Cement has also suffered from the declining trend of operating profits. However, the competitor company was able to manage its operating expenses, there was Rs 600 million in FY09 decreasing down by 18% to Rs 492 million in FY10. This showed efficient policies and techniques adopted by the competitor. In FY11, due to sharp increase in inflation, the operating expenses have increased by Rs 180 million, up by 37%.

Profit before Tax (Rs)




Fauji Cement Company limited




Attock Cement Pakistan limited




(Annual Reports)

Profit before Tax

Gross Profit Margin (%)

The gross profit percentage in FY09 was 31.75%, which declined significantly by 13.54% in FY10. In the next financial year, the regaining of the gross profit percentage has seen and improved to 17.35%.

The decrease in profits in FY10 was due to the decline in cement prices as mentioned earlier. The cement prices rose in the next year, and the company successfully took advantage from that increase and recovered its gross profit. In FY11, there was sharp increase in the fuel consumed cost from the last year 2010 Rs 1,338 million to Rs 1,917 million in FY11, which was an increase of 43%. The rising electricity tariff and increase in prices of coal in international market have affected the profit margins of the Company. Due to fragile market condition, most of the time company was unable to pass on the impact of raising prices to end user. FCCL is also continuously declining its production level due to shortage of electric power supply and gas curtailment, made the company unable to achieve economies of scale. There was an addition of new cement plant during the year 2011 with a production capacity 7560 TPD in order to achieve the economies of scale. Through this plant containing state of the art technology, company will be able to achieve greater profit margins. (Director Report, Financial Statements)

During FY10, the adverse impact of drop in sales turnover affected the total gross profit of the sector by decrease of 49% year-on-year (YoY). This decline also affected the gross margin which became 17% compared to the last year's 29%. On per-tone-basis, in FY10 retention prices were lowered by 21% YoY and gross profit lowered by 53%YoY.

(Times, 2010)

A leading cement producer, Tariq Saigol said that most of the industry is bearing losses due to massive increase in costs. The prices of the fuels were at their historic highs and making record. The increase in electricity rates are also getting unbearable for all the industries.

(Ahmed, 2011)

The trend of gross profit of the competitor company, Attock Cement is also declining continuously, evident from the table below. This decline is not as sharp as FCCL has during the three years. Over the three periods, the gross profit percentage of Attock Cement Pakistan Limited has decreased by 36%, from 31.83% in FY09 to 20.23% in FY11, whereas this percentage of Fauji Cement Company Limited has declined from 31.75% in FY09 to 17.35% in FY11, down by 45%. The main reason was that Attock Cement has an ability to absorb the rising prices of the raw material effectively due to high production capacity and by achieving economies of scale.

Gross Profit




Fauji Cement Company limited




Attock Cement Pakistan limited




(Annual Report)

Gross Profit

Fixed Asset Turnover (Times)

The fixed assets turnover of FCCL is experiencing declining trend. The company's property, plant and equipment in FY10 were increased by 27% from Rs 18,777 million in FY09 to Rs 23,819 million but net sales in the same year were decreased by 28% from Rs 5,314 million in FY09 to Rs 3,808 million in FY10. This decrease was due to decrease in the cement prices of the cement, locally as well as globally. Therefore the selling price per bag has decreased. In order to win the customers the gross profit margins was declined from 31.75% in FY09 to 13.54% in FY10. However, FCCL didn't get the expected response from the market, therefore the production despatches has decreased to 96.06% as compared to previous year 100.09%. In FY 11, the fixed assets turnover has increased a bit from 0.16 times in FY10 to 0.18 times in FY11, due to the increase in net sales by 24.6% from Rs 3,808 million in FY10 to Rs 4,743 million, in FY11 by increasing the property, plant and equipment by 12%, from Rs 23,819 million in FY10 to Rs 26,658 million in FY11. The increase in net sales was due to improvement in cement price levels.

(Annual Reports, FCCL, 2010, 2011)

Tariq Saigol, a competent cement producer said in his interview that main problem for the cement industry is that its cost of production is higher than the sales in the domestic market. He further added that it is not possible to increase cement prices under current economic scenario.

(Ahmed, 2011)

From the table given below, fixed asset turnover of Attock Company is much high as compared to FCCL, but they are also experiencing the declining trend continuously. Attock Cement Pakistan Limited has earned high turnover by using the fixed assets Rs 5,396 million as compared to Fauji Cement Company Limited's fixed assets Rs 26,658 million, which were 5 times greater. Through an effective sales mix, the competitor company, maximize its sales revenue greater than the FCCL by using comparatively less fixed assets.

Fixed Asset Turnover




Fauji Cement Company limited




Attock Cement Pakistan limited




(Figures are taken from Financial Statements)

Fixed Asset Turnover

Current Ratio

In order to meet its short term liabilities the current ratio should be at least 1. FCCL's current ratio throughout the period was less than 1. In FY10, the decrease in current ratio by 22%, from 0.81% last year to 0.63% in FY10, was mainly due to the increase in current liability by Rs 1357 million, up by 52% as compared to the increase in current assets by Rs 417 million, up by 25%. On further investigation the rise in current liabilities was due to the rise in the accrued markup by RS 254 million, up by 267% and current portion of long term liabilities by Rs 746 million, up by 230%. The increase in markup accrued and current portion of long term financing was due to the increase in long term financing from Rs 6,224 million in FY09 to Rs 11,909 million was due to the finance required for the construction of the new plant. In the next FY11, company improved its current ratio by 41%. This increase was mainly due to the increase in current assets by Rs 2,721 million, up by 131% as compared to the current liabilities by Rs 1,400 million up by 35%. The sudden increase in current assets was caused by the increase in stocks by Rs 397 million, which was a significant increase of 413%. The stock in trade is considered to be the least liquid asset. The increase in stock was due to decline in local demand as government has not spending on the public development programs, results in piling up of stocks. The increase in cash and bank balance to Rs 979 million as compared to previous year balance Rs 192 million, which is a positive sign for the company to meet its short-term liabilities.

(Annual Reports, FCCL, 2010, 2011)

As compared to its competitor Attock Cement Pakistan Limited, FCCL is not at safe edge. Attock cement Pakistan Limited has been maintained its liquidity quite efficiently above 1. The decrease in current ratio in FY11 was due to the decrease in cash and bank balances and short term investments. The competitor company has invested in waste heat recovery system and other fuel generating projects, which helped Attock Cement Pakistan Limited to balance its energy.

Fauji Cement Company limited (Rs)




Current Assets




Current Liabilities
















(Annual Reports)

Current Ratio




Fauji Cement Company limited




Attock Cement Pakistan limited




(Annual Reports)

Current Ratio

Debt: Equity Ratio

FCCL has increased its gearing continuously over the last three years. In the FY10, the increase of long term finance by 91%, from Rs 6,224 million last year to Rs 11,909 million in FY10, was the main cause of the increase in the proportion of debt. This increase in debt was due to the finance required for the construction of a new line 7560 TPD cement plant. In the FY11, the debt to equity ratio is at stable position. The shareholders might be dissatisfied from the performance of the company and feel reluctant to invest further in the company.

(Annual Reports, FCCL, 2010, 2011)

According to spokesman of APCMA, the continuous losses to cement industry are unbearable and might endanger the servicing of Rs 132 billion in loans the cement sector owes to the banking sector.

(Today, 2011)

From the table given below, Attock Cement Pakistan Limited has totally depending on the equity from the last two years. Attock Cement Pakistan Limited has reduced its dependence on debt in those conditions where cement sector were facing losses. FCCL should benchmark its debt dependence with the Attock Cement Pakistan Limited.

Debt: Equity Ratio




Fauji Cement Company Limited




Attock Cement Pakistan Limited




(Annual Reports)

Debt Equity Ratio

SWOT Analysis


Fauji cement has installed a German technology plant that ameliorates its clinker production by 7200 tons per day raising the total capacity from 1.1 billion tons to 2.2 billion tons. Moreover, the plant is coal efficient as it replaces 170 tons coal per day.

(Nation, 2011)

United Nations Environment Program (UNEP) has certified Fauji cement Ltd under contribution to "Plant the Planet: Billion Tree Campaign", as the company stands firm over environmental issues. Moody International has awarded the company, for maintenance of up to date and effective environmental systems, ISO 14001 status.

(http://www.fccl.com.pk/main/index-7.html, n.d.)

In the cement industry major volume leaders, in stock market Karachi, according to topline sector analyst are three companies including Fauji cement with 31.2 million shares gaining Rs 0.3.

(Times, 2012)

The company has installed a refuse derived fuel system at a cost of Rs 320 million, reducing 300-400 tons of garbage to produce cheap power for the company's production needs.

(Recorder, 2011)

The company despite high debt amounts has sound cash flows to support its leverage, with better interest coverage ratios.

(IGI, 2008)


Fauji cement has high financial risk involved as it is heavily geared with debt rising from Rs 325 million to Rs 1 billion in one year.

(Recorder, 2011)

The company has failed expand its local demand base while certain competitors like Lucky cement have maintained domestic volume health.

(Annual Reports, FCCL, 2010)


APCMA has estimated that if in land freight subsidy of 50% is provided by the government exports would raise by 36%.

(Times, n.d.)

In the 2011-2012 fiscal budgets the federal excise duty was reduced from Rs 700 per ton to Rs 500 per ton, special excise duty was abolished and general sales tax reduced by 1%. Such amendments reduced pressures on price by Rs 30 per bag.

(Shahzad, 2012)

Cement exports to Afghanistan comprise for 50% of total cement exports for the country. Moreover, the prices of cement exports to Afghanistan have increased by 25% ensuring sustainability of producers.

(APP, 2012)

Local cement dispatches have escalated by 8% for 9MFY12 with improvement in north region demand. In Mar-12 the dispatches increased to 2.55 m tons a growth of 15%.

(Markets, 2012)


The cement manufacturers in north zone face the problems of high transportation costs. The costs of export freight are escalating due to rising diesel costs and locational distance from sea port in the south.

(Tribune, 2012)

India is an attractive market for Pakistani cement manufacturers but the imposition of non-tariff barriers by the rival government deprives the sector of prospective opportunities.

(Rizvi, 2012)

Inflationary pressures on the construction materials discourage construction and development sector growth, having dire consequences for the cement industry. For instance, price of 1000 bricks is Rs 7000 rising from Rs 4200 in 10/11.

(Tribune, 2012)

Currently the cement sector operates at 70% of capacity utilization unable to pass high production costs to consumers or reap the benefits economies of scale.

(Times, 2012)

Porter Five Forces Analysis

Threat of New Entrants/Barrier to Entry:

High capital Requirements:

Cement sector requires huge investment for plants, for which leverage injection of cash is needed. Resultantly new entrants will be dissuaded.

Economies of Scale:

By producing on large scales with new and large capacity production lines has made the new entry much difficult in this sector. Like acquisition of new plant with largest capacity by FCCL which is the first German plant in Pakistan which created a barrier for new entrants.

Distribution Channels:

Massive floods which disrupted all the distribution channels including supply of key raw materials such as coal and limestone and the cement which could not be transported over to the market place for sales.

(Khan, 2011)

Consequently new entrants of cement sector are deterred.

Government Regulations:

Government policies also play a vital role for creating barriers in cement sector. Two years back Government of Pakistan (GOP) agreed to share transportation cost from mils to sea port. Which boosted the exports but it is regrettable that promised support was not provided. Owing to this situation threat become much less from new arrivals in this sector.

The overall threat of new entrants is low.

Threat of Substitute:

At present, there is no substitute for cement.

Bargaining Power of Customer:

Cement buyers possesses high bargaining power as most of them purchase in bulk by availing discounts. Little differentiation of product also increases their power to influence as they can easily switch from one supplier to another. While the household users of the cement has no bargaining power as rates are fixed and controlled by industry cartelization. This force is of medium strength in this sector.

Bargaining Power of Supplier:

Bargaining power of suppliers mainly depends upon the raw material availability in any sector. FCCL's main raw materials are lime stone and clay which are used in dry process. These are easily available in Pakistan, hence suppliers are unable to exert pressures .FCCL has shifted to alternate fuel system called Refused derived fuel (RDF) along with other market leaders which made the suppliers of fuel less influential.

Rivalry and Competition:

FCCL is a cartel member with other leaders under the umbrella of APCMA (All Pakistan Cement Manufacturers Association).Cartelization resulted in price hike and has limited the competition in cement sector (The Nation.com). Although GOP is taking some measures to break it but these are not substantial. Which is preventing rivalry but the presence of strong and efficient units have kept the level of competition high, among the cement industry. Moreover, the decrease in overall demand and an increase in fuel costs will further intensify the competition through curtailment of industry margins.

(Times, 2009)

(Khan, 2011)

Conclusion and Recommendations

The reported position of the current ratio remained less than 1 in consecutive three financial years. Low current ratio means that company's current assets have not increased in the proportion of current liabilities. Therefore, Fauji Cement Company limited should invest more in current assets; increase cash and bank balance, increase liquid asset so that company would be able to pay its current liabilities when it would be required. Moreover, company should as well try to reduce the stock turnover days and take other appropriate measurements to improve its current position.

Fauji cement has maintained its gearing position to acceptable level. Therefore, this would be beneficial for the company's future prospects. As the company is neither committed with any high finance cost nor any long term liabilities concern. Company has as well the advantage to raise debt from the financial institution if required for the future investment. Above all new investor would also attract by observing debt-equity ratio because investors are risk averse, and company has the low risk for the future.

The turnover reported by the Fauji Cement Company limited has fluctuated trend. As turnover of the company substantially reduced in FY10 as compare to FY09 and in FY11, company reported recovery but still not matched with the turnover reported in FY09. The reason of reduction in turnover is the reduction in capacity utilization, shortage of electricity and the prices. Therefore, Fauji Cement Company limited should improve the efficiency of its marketing staff, improve the quality of its cement produced and increase the budget of advertisement so that company makes its position in the tough competitive market.

The overall profitability of Fauji Cement Company limited has faced a decline trend. In FY10, Company's profit substantially decreased as compare to FY09. However, in FY11, company has improved its performance and reported an increase in profits but is still unable to compensate the downfall faced in profitability. The reasons behind the reduction of profitability are the distribution cost, travelling and entertainment expense, which has significantly increased the cost. Moreover, decrease on sale volume has negative impact on the profitability threatening the company's market standing and competitors gaining edge over the Fauji Cement Company limited. Therefore, it is important for the Fauji Cement Company limited to increase its market share and increase its distribution network to gain the marketability and competitive position in the industry. Fauji cement should as well try to reduce the overheads' cost which is directly or indirectly attributable to the product, further implement cost reducing techniques on its business which ultimately beneficial for the enhancement of the company's profitability.

Fauji cement has installed a German technology plant that ameliorates its clinker production by 7200 tons per day, which is coal efficient as it replaces 170 tons coal per day. Fauji Cement Company is certified as "Plant the Planet: Billion Tree Campaign." The company has installed a refuse derived fuel system to produce cheap power for the company's production needs. However, the company has failed to expand its local demand like certain competitors has expended. In land freight subsidy, special excise duty and general sales tax reduction given to the industry by government would increase the growth of the cement industry. Even cement exports to Afghanistan are as well an opportunity for the cement industry. But still some threats like the imposition of non-tariff barriers by the rival government, inflationary pressures on the construction materials, the Pak Rupee devaluation and high transportation costs have seriously affected the growth and export of the cement industry.

Huge investment for plants for which leverage injection of cash is needed, by producing on large scales with new and large-capacity production lines, massive floods, which disrupted all the distribution channels, even cement, which could not be transported over to the market place for sales and government policies also play a vital role for creating barriers in the cement sector. Moreover, at present, there is no substitute for cement. Cement buyers possess the high bargaining power even little differentiation of product also increases their power to influence. FCCL's main raw materials are lime stone and clay, which are used in the dry process. These are easily available in Pakistan; hence suppliers are unable to exert pressures. FCCL is a cartel member with other leaders, and cartelization resulted in price hike and has limited the competition in the cement sector. Sri Lanka, Afghanistan and Pakistan's own flood affected areas are the potential markets for the cement industry. This would significantly secure the business revenue hence profitability. Therefore, Fauji Cement Company limited should take adequate steps to avail its share of profitability.