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M O N N O
AN ENQUIRY INTO THE SHARE PRICE MOVEMENT: A CASE OF MONNO CERAMIC INDUSTRIES LIMITED
Term Paper FIN 637 Section 1
Monno Ceramic Industries Ltd.
M O N N O
The capital market of Bangladesh has a significant contribution to economic growth, employment creation and poverty alleviation in our country. The success achieved so far by Bangladesh Stock Exchange Market is the result of active cooperation and support of many parties’ like- Government, Bangladesh Bank, issuers, investors and market intermediaries. Currently approximate 350 companies are enlisted in Bangladesh Stock Exchange Commission. The share prices of various companies usually fluctuate from time to time. Various internal and external factors are the reasons behind this fluctuation. The most important factors which influences the share prices are- goodwill and reputation of the company, financial condition of the company, future growth of the company, amount of dividends the company pays each year to its shareholders, industry growth, economic and political stability of the country etc. Among all these factors, financial condition of the company is the most important factor which influences the stock price of the company. In this report we will analyze the financial condition of Monno Ceramic Industries Ltd. which is the top most company in ceramic industry of Bangladesh.
1.1 A Brief History of Monno Ceramic Industries Limited
Monno Ceramic Industries started its journey in Bangladesh on 1981 as a public limited company under the Companies Act 1913. The company went for public issues of share in 1985 and its shares are listed in Dhaka Stock Exchange Ltd. and Chittagong Stock Exchange Ltd. since 1983 and 1985 respectively. Till to date the company has 1,350,000 shares and 8071 shareholders.
is the largest ceramic company in Bangladesh and holds the top position in ceramic industry. It began its journey by producing porcelain dinnerware and
Monno Ceramic Industries Ltd. eventually expanded onto the manufacture of Bone China. The product quality has been immaculate from the very beginning which has been directly reflected by the continuous market demand from local and international consumers. Monno Ceramic’s state of the art technology and creative designs gives it a competitive edge and establishes it as a strong competitor in the porcelain manufacturing world. In order to create top of the range merchandise, Monno Ceramic possesses the most advanced machinery for porcelain production in the country. State of the art technology like isostatic press and Dip Glaze are there to increase efficiency and product quality. After meeting the need of local market successfully, Monno Ceramic is exporting to global market like- USA, Canada, Australia, France, UK, Sweden, New Zealand, Germany, Italy and many other countries. This is also a success indicator of the company. The sales turnover of Monno is Taka 968,613,719 and net income is Taka 5,556,571 for the year 2008. They have also declared 10% dividend for the shareholders. They always strive
Monno Ceramic Industries Ltd.
for protection of their capital as well as to ensure highest return and growth of their They also try to increase their wealth to maximize the benefit of their shareholder.
M O N N assets. O
According to Monno their vision, mission, objectives, corporate focus and Financial Management policy are-
The company sees business as a means to the well being of the shareholders and all other stakeholders, society as well as the national interest as a whole.
The mission of the company is to provide world class quality product to our valid customers, strictly maintain ethical standard, in business operation.
Objectives of the Company:
The company’s objectives are to conduct transparent business operation within the legal and social framework with aims to attain the mission with a quantitative/qualities target in a business operation.
Monno Ceramic Industries Ltd’s vision, there mission and objectives are to emphasis on the continuous development in making value addition to there products for producing the higher end products, to keep well prepared for competitive world market.
Financial Management policy:
All financial policies like investment policy, dividend policy and financing policy is to maximize the value of the organization.
Monno Ceramic Industries Ltd.
2. OBJECTIVE OF THE STUDY
M O N N O
Monno is one of the strong companies enlisted in the stock market. To get an idea about the share price of the company it is needed to analyze the financial situation of the company. It is also needed to find out if there is any hidden discrepancy in the financial statements of the company to get a clear scenario regarding the market price of their share. So the major objectives of this report are• • • • • • To find out the difference between book value and market value of the share price and to identify the possible reasons behind this difference. To find out if there is any specific hidden discrepancy in the existing financial statements of the company. To eliminate the discrepancy by preparing a new financial statement for the company. To get an idea about the financial condition of the company in last six years (20022008). To get an idea about the cash dealings of the company over these years. To compare the firm’s financial status with one of its rival firm through ratio analysis with the justification of balancing between the market price and book value of the shares. • To get an idea about the movement of stock price that can be related to capital structure decision, investment decision, and other rumors related to the firm, which has been done by regression analysis.
Secondary data was collected in the form of balance sheet and income statement from annual report of 20022008. Year-to-year comparisons can highlight trends and point up the need for action. 2002 to June 2008 as the financial year of Monno Ceramic Industries Ltd starts at the month of June. 3. and Bengal Fine Ceramic Ltd.1 Nature and Source of Data: Secondary data have been used to conduct this study. A subjective analysis was also undertaken in order to justify the stock market price. typically years.3 Nature of Analysis: As industry data is not widely available for Bangladesh Ceramics Industry. This report evaluates each company’s financial performance and compares their position against each other.Monno Ceramic Industries Ltd.. 3.3. For this report we have gathered the data on Monno Ceramic for last seven years. METHODOLOGY M O N N O The research was initiated through the gathering of information. Cross-Sectional Analysis 3.2 Period of Data: The period of this project is consecutive five years starting from July. Trend analysis works best with five years of ratios. company ratios are compared over time. . 3. The main sources of information are annual reports of Monno Ceramic Industries Ltd. 1. we had to rely on mainly the two other financial analysis techniques. Trend (Time Series) Analysis 2. 3.1 Trend Analysis In Trend Analysis or Time Series Analysis. Analyzing the six years period’s data will help to get the positive/negative trend of the share price and to come up to a more justified conclusion. collected from Dhaka Stock Exchange Commission and websites of Monno Ceramic Industries Ltd and Bengal Fine Ceramic Ltd.
which is subjective and can’t be measured in monetary value.goodwill. there were some constraints and limitations. reputation etc of the company was also a constraint for this report. Therefore. the comparison was done upto year 2008. M O N N O One of the major limitations is limited access to annual reports of the respective companies. machinery etc as well as intangible fixed asset like. The value estimation of tangible fixed assets like land. Since the most recent report of 2009 was not available. 4.Bengal Fine Ceramic Ltd. building. It was difficult to get the accurate market price of all the fixed assets especially goodwill. Another limitation was to collect the industry averages data as this type of information is not readily available in our stock market. LIMITATION OF THE STUDY During conducting this report. the analysis has compared the data of Monno Ceramic Industries Ltd with only one of the four rival firms of the ceramic industry .Monno Ceramic Industries Ltd. reputation etc. Time constraint was also a limitation. Due to time constraint it wasn’t possible for us to calculate the actual price of all fixed assets. .
Market Value 370 350 346.95 230.51 230.00 269.51 259. . there must be some reason why this discrepancy happens between book value and market value.26 254.00 301. So.75 250 224.84 212.75 254.00 271. it shows that the market value is always fluctuating with its book value.74 271.84 250.26 270.00 270 250.25 249.75 212.Monno Ceramic Industries Ltd.25 271.18 249.18 Book Value Vs.00 270.75 330 301.95 230 210 190 170 150 2002 2003 2004 2005 2006 2007 2008 Market Price per Share Book Value per Share Figure 1: Comparison between Book Value and Market Value of Monno Ceramic Indutries Ltd.00 224.00 175. 5.74 271.00 175.27 310 290 259. Table 1: The Market price and Book Value per Share for the years 2002-2008 Years Market Price per Share Book Value per Share 2008 2007 2006 2005 2004 2003 2002 346. TRENDS IN MARKET VALUE & BOOK VALUE INDUSTRIES OF MONNO CERAMIC M O N N O If we look at the trend analysis of book value and market value of the Monno shares.27 269.
According to this balance sheet the book value of MCI shares for the day June 30.240.220 267.595.81 79.302. BALANCE SHEET ANALYSIS Balance Sheet is an itemized statement that lists the total assets and the total liabilities of a given business to portray its net worth at a given moment of time.34 5. . Assets = Liabilities + Equity The assets side of the balance sheet is always equal to the total liabilities and equities.78 112.01 114.95 Taka. The amounts shown on a balance sheet are generally the historic cost of items and not their current values.085.34 13.25 45.545.87 184.108.40.2065.07 33.355 Total Liabilities & Share Holders Equity * Source: Annual Report 2008 of Monno Ceramic Indutries Ltd.000.135 Non Current Asset Property.34 17.280 Non-Current Liabilities Long Term Borrowings Deffered Liabilities 103. 346. Reserve & Surplus Proposed Dividends 135.639.388 Share Holders Equity Issued & Paid-up share Capital Revenue.719.500. But in reality we can see that the actual market price on that day was much higher than that.165. whether the funds were raised by the borrowing (liability) or by selling ownership shares (equity).501. It indicates the investment made by the firm in the form of assets and the means by which the assets were financed – that is.75 Taka.00 155.85 11. 2008 should be 224. The above table shows the balance sheet as it was presented in the annual report 2008 of Monno Ceramic Industries Ltd.44 506.687 959.00 453.834.355 Total Assets 959. Deposits & pre payments Cash & Cash Equivalents 296.68 164.00 303.Monno Ceramic Industries Ltd.500.89 541.Plant & Equipment Investment Current Liabilities Cash Credits Long Term Loans Trade & Others Payable Accrued Expenses Unclaimed Dividends Provision For Income Tax Liabilities for other finance 368. Balance sheet can be defined as.03 14. 6.512. Table 2: Balance sheet for Monno Ceramic (2008) based on Book Value Balance Sheet Asset Taka '000 M O N N O Liabilities and Equity Taka '000 Current Asset Inventories Trade & Other recievable Advance.79 10.753.
But according to the time value of money theory the value of money has increased a lot over this last 28 years. • The equity of the company has been severely understated. We are going to try and identify the reasons of this discrepancy. • The financial statements have been prepared under the historical cost concept and fixed assets are stated at cost or revaluation less accumulated depreciation. From this analysis we can come to a conclusion that fixed assets were under priced. . For this analysis we are going to concentrate on the Balance Sheet from the last year (2008).Monno Ceramic Industries Ltd. • The balance sheet does not incorporate any intangible assets. The company calculates its equity from 1981 when Monno was first listed with the Dhaka Stock Exchange. According to time value of money concept. Though there are some assets which were revalued at the middle of their life cycle but they didn’t consider market price or even depreciation was charged on a straight line basis. like goodwill. goodwill that the company is having constant grow in its sales. After a thorough analysis of the of the annual report of the year 2008 we were able to identify the following factors which might have caused the discrepancy between the book value and the market value. It is a testament of their Monno Ceramic Industries Ltd. M O N N O is the largest ceramic company in Bangladesh and holds the top position in ceramic industry. price changes all the time.
000 Taka.123. . We have also changed the Capital and reserves attributable to the Company’s equity holders from 155.03 10.50 13.01 114.Plant & Equipment Property. In doing so we have changed three figures in the original balance sheet: • • • • Property.34 17.302.187.595.78 112.355.87 523.240.68 164. Reserve & Surplus Revenue.113 Total Assets 1.34 5.834. Table 3: Balance sheet for Monno Ceramic (2008) based on Book Value Balance Sheet Asset Taka '000 M O N N O Taka '000 Liabilities and Equity Current Liabilities Cash Credits Long Term Loans Trade & Others Payable Accrued Expenses Unclaimed Dividends Provision For Income Tax Liabilities for other finance Current Asset Inventories Trade & Other recievable Advance.187.145.388 Share Holders Equity Issued & Paid-up share Capital Revenue.Plant & Equipment Goodwill Investment 368. plant and equipment have been changed from 303.85 11.000.03 14.719. Deposits & pre payments Cash & Cash Equivalents 296.000 Taka to 523. 10.000.165.500.545.000 Taka in place of the original balance of 959.780 Total Liabilities & Share Holders Equity 1.Monno Ceramic Industries Ltd.000 Taka.79 10.241.00 617.639.00 468.44 506.085.000 Taka to 319.81 79.00 84.34 319.135 Non Current Asset Property.385.123.07 33.720.645 267.500.25 45.280 Non-Current Liabilities Long Term Borrowings Deffered Liabilities 103.000 Taka.780 After identifying these above listed discrepancies we have tried to adjust the balance sheet to match the market value of stocks.780.145.000.612.512.613. Reserve & Surplus Proposed Dividends 135.89 541.753.000 Taka.501. We added an intangible asset as Goodwill.00 155.123. The total balance after all these adjustment became 1.
000.000. Otherwise it may lead to bank rapt. But as MONNO is a very old and established company who is still now coping up with new technology and equipment has managed the situation and has turned back to positive growth. CASH FLOW ANALYSIS Cash flows are the cash receipts and the cash disbursements of the company that is the inflows and outflows of cash.6.000 50. It is an analysis over a period of time revealing the availability.000 Cash and Cash Equivalent at end of year 2002 2003 2004 2005 2006 2007 2008 Figure 2: Cash & Cash Equivalent at the end of the year 2002-2008 By doing the Cash flow we have found that MONNO is going through sufficient cash problem. More simply put the difference between cash in (income) vs. in most businesses.000 20.000. Cash and Cash Equivalent at end of year 60. of cash.000 40. or subject to external forces. cash out (expenses). . especially of businesses that are cyclical in nature. The problem caused because of low volume of sales both in international market and in domestic market.000. an analysis of cash flow is important.000. To overcome the problem Monno has to take rigorous selling campaign. or lack.000 30.000 10. Since money does not flow in and out at an equal rate. Another reason is the interest payment of long term debt used for development and expanding of factory.000.
000.000.000.000 50.000 2001 2002 2003 2004 2005 2006 2007 2008 Non-Current Liabilities Figure 4: Long-term Debt at the end of the year 2002-2008 .000.000.000 100.000.000.000 350.000 200.000 250.000. Non-stop growing of inventories reflects the fact that sales of MONNO are not satisfactory.000 100.000 300.000 2001 2002 2003 2004 2005 2006 2007 2008 Inventories Figure 3: Inventory at the end of the year 2002-2008 The inventory of MONNO is gradually increasing from 2001.000 200.000.000 150.000.000.000.000. As a result inventory is piling up which will increase cost associated with maintenance of inventory.000 50.Inventories: Inventories 400.000 150. Long Term Debt Non-Current Liabilities 250.
000 40.000) (60.000 (20. Additionally MONNO also have taken long term development project to improve its product quality and efficiency. As a result the production process was stopped for few months and also some inventory and raw material were lost for fire. But in recent years Monno is gaining again from bad times. This is for the down fall in sales. Net working Capital Net Working Capital 100. . MONNO is facing problem in generating cash from operating activities.000 80.Long term debt of Monno shows irregular tendency. This is showing the long term investment that MONNO has taken for its development through the years for whicht they have to pay interest. So a large amount of cash had to be paid as interest expenses. Net Cash Provided by Operating Activities This section shows how much cash came into the company and how much went out during the normal course of business. The reason behind cash flow is primarily low volume of sales for aftershock of 9/11.000 60.000) Net Working Capital Figure 5: Net Working Capital at the end of the year 2002-2008 Thousands 2001 2002 2003 2004 2005 2006 2007 2008 Monno is going through cash problems through years and this is very much clear from the graph.000) (40. The export of goods started falling.000 20. Moreover in middle of all these MONNO also suffered from loss of equipment and plant as there were incident of fire in the factory.
000) (60. .000 100.000 (20.000) (40.120.000 60. And the investment was for the development of the product and quality.000) Cash Flows from Operating Activities Thousands 2002 2003 2004 2005 2006 2007 2008 Cash Flows from Operating Activities Figure 6: Trend of Cash Flow from Operating Activities Net fixed investment This section shows how much cash came into the company and how much went out during the normal course of business.000 20.000 80. 180000000 160000000 140000000 120000000 100000000 80000000 60000000 40000000 20000000 0 2002 Cash Flows from Investing Activities 2003 2004 2005 2006 2007 2008 Cash Flows from Investing Activities Figure 7: Trend of Cash Flow from Investment Activities Net investment in the years of MONNO in the analysis shows that in 2003 and 2007 was of most amounts.000 40.000) (80.
It shows the short term solvency position of the firm. the analyst can study the composition of change and determine whether there has been an improvement or deterioration in the firm’s financial condition and performance over time.7. 220.127.116.11 Current Ratio : Current ratio=Current Asset/ Liability Current ratio refers the extent to which current liabilities is covered by the current assets. The analysis of financial ratios involves two types of comparison. Such a comparison gives insight into the relative financial condition and performance of the firm. The current ratio (the ratio of current assets to current liabilities) for the present year could be compared with the current ratio for the previous year-end. • The second method of comparison involves comparing the ratios of one with those of similar firms or with industry averages at the same point in time. Liquidity Ratios • • Short term solvency or liquidity measures the firm’s ability to pay its bills and current liabilities on time. 7. the analyst can compare a present ratio with past and expected future ratios for the same company. In this study various ratio analyses will be done to understand the financial condition of the company and to compare this condition with its rival firm to get a clear picture. the financial analyst usually performs various analyses among which ratio analysis is one of the most important and commonly used methods. It also helps us identify any significant deviations from any applicable industry average (or standard). RATIO ANALYSIS To evaluate a firm’s financial condition and performance. • First. and also the ratio of non-cash assets to current liabilities. When financial ratios are arrayed over a period of years. . It indicates the ease with which non-cash assets can be converted to cash.
Compared to them Monno is in better position. td Bna egl F e in C ra ics e m L ite im d 20 04 20 05 ya er 20 06 20 07 20 08 Figure 8: Trend of Current Liquidity Ratio from 2001-2008 The ratio analysis of the liquidity ratio shows fluctuation through years.6 0 . So Monno is facing liquidity problem. The reason behind the problem is inventory. current liabilities are greater from Current Asset without inventory from 2001 through 2008.1. So. In Cross-section analysis with Bengal Fine Ceramics Limited it is visible that they are also facing same problem.00 for years. For last two years the ratio is below 1.8 0 .2 1 0 . Quick ratio for Monno shows that ratio is below 1. meeting operating expenses will be tough for Monno.2 0 20 01 20 02 20 03 L u ity iq id R tio a Mn o on C ra ic e m In u d strie s L .4 0 . Which means that Monno is having hard time managing short term cost that is current liability is higher than current assets. Inventories are not converting quickly that . 7. And ratio shows fluctuation and also decreasing.6 1 .4 1 . The condition would be better understood by calculating other current ratio.2 Quick Ratio: Quick Ratio=(Current Asset-Inventory)/ Current Liability Quick ratio expresses a company’s ability to repay its current liabilities out of its most liquid assets.00.1 . it is gradually decreasing. So.
Bengal Fine Ceramics Limited 2001 2002 2003 2004 2005 2006 2007 2008 YEARS Figure 9: Trend of Quick Ratio from 2001-2008 Cross section analysis with Bengal shows for few years their ratio was increasing when Monno’s were decreasing. In most recent years ratio shows sign of improve.4 0. 0. .7 0.is the reason for cash or liquidity problem is arising. That means recently Monno is recovering from the situation but slowly. But for recent years both company’s ratio is falling.6 0.2 0. If the situation continues for long Monno will face difficulty paying short term debt and long term debt.1 0 QUICK rATIO Monno Ceramic Industries Ltd.3 0.5 0.
1 times a year. and this is going to hamper performance of monno.1 Inventory Turnover Ratio: Inventory Turnover Ratio= Cost of Gold Sold/Inventory It shows how many times a company’s inventory is sold and repaid over a period. In our case of Monno the highest 3. . Then pressure for liquidity will be lower and short tem loan and long term loan payment will be trouble-free.2 Asset Management Ratios Asset Management ratios measure how efficiently the firm utilizes its assets and inventory. 3. The reason may be for less demand of goods in abroad that is the decrease in sales. Monno must take quick steps to work out this.5 3 2. And this is the reason for the liquidity problem that Monno is facing. This is very poor ratio for any firm. 7.5 2 1. Bengal Fine Ceramics Limited 2001 2002 2003 2004 2005 2006 2007 2008 Figure 10: Trend of Inventory turnover from 2001-2008 The inventory turnover ratio shows a rough approximation each item of inventory is sold out and restocked or turned over.5 1 0.7.5 0 Inventory Turn over Ratio Monno Ceramic Industries Ltd. more over it has fluctuating trend.2. Inventory turnover ratio of Monno is not satisfactory at all.
Monno is in a far better position. Monno Ceramic Industries Ltd. After 9/11 volume of export to world market slowed down and so in domestic market.3 Fixed Asset Turnover: Fixed Asset Turnover=Sales /Total Fixed Asset The Fixed Asset Turnover Ratio measures how effectively the firm uses its plant and equipment to help generate sales. .2 Days Sales Outstanding : Days Sales Outstanding =Account receivables/ (Sales/360) 120 100 80 60 40 20 0 Days Sales Outstanding(DSO) Monno Ceramic Industries Ltd. On average DSO for Bengal is more than 80 days. Compared to Bengal.7.2. Both inventory turnover ratio and DSO together shows that Monno’s sales collection period is well enough from other firms but sell of inventory is slow. They have that stated reason for this situation is shock of 9/11.2. As a result cash collection is improving in recent years. Though the trends is irregular but in recent years in 2007 and 2008 the days are falling. 2001 2002 2003 2004 2005 2006 2007 2008 Years Figure 11: Days Sales Outstanding (DSO) from 2001-2008 On an Average Monno takes 43 days to collect credit sales. That’s why they faced such problem but now they are overcoming the problem. which is a good sign. 7.
equipment and machineries have reached to a higher pick.3 2. at that point of time inflation has reached to double digit in Bangladesh and prices of land building material. total fixed asset of Monno has been understated in the balance sheet that is why fixed asset turnover ratio of monno should be less than what we have now.5 billion taka. 7. From 2001 to 2008 total fixed asset of Monno was around 4 billion taka to 5.5 0 Fixed Assets Turnover Monno Ceramic Industries Ltd. On an average Monno is in better position.4 Total Asset Turnover: Total Asset Turnover= Sales/ Total Asset It measures how effectively a business is using its assets to generate sales.5 2 1.2. It is most useful for capital intensive industry like manufacturing companies like MONNO and Bengal. Bengal Fine Ceramics Limited 2001 2002 2003 2004 2005 2006 2007 2008 Figure 12: Fixed Asset Turnover from 2001-2008 The trend of ratio shows that till 2006 it was fluctuating but from 2007 it is gradually rising. So. .5 1 0. So. When using fixed asset turnover ratio to compare the performance with other firm historical cost and inflation should be in mind as most balance sheet accounts are stated in terms of historical cost and inflation might cause the value of money assets that were purchased in past may be seriously understated.
Figure 13: Total Asset Turnover from 2001-2008 This Ratio shows turnover of all of the firm assets. But to become more efficient Monno should increase its sales. meaning generating higher volume of business given its investment in total asset. Rigorous selling policy should be taken to improve sales and to improve the turnover. The trend shows that Monno is getting out of bad times gradually.5 1 value of ratio 1.5 2 Bengal Fine Ceramics Limited Monno Ceramic Industries Ltd. . The trend is changing over years but at recent years it is gaining.Total Asset Turnover 2008 2007 2006 2005 2004 2003 2002 2001 Year 0 0.
3 0 . From 2001 to 2004 the debt ratio was smaller compared to the following years. borrowing directly from financial institutions.7 Value of Ratio 0 .1 Debt Ratio: Debt Ratio= Total Asset/ Total Debt In debt financing. But after 2004 the ratio increased to over 60%. And debt ratio was around 20%.5 0 . So the borrowers are on pressure.3 Debt Management Ratio: 7. td Bn a egl F e in C ra ic e m s L ite im d 20 05 Ya er 20 07 Figure 14: Debt Ratio from 2001-2008 The Debt ratio measures the percentage of firm’s assets financed by the creditors.4 0 .7.8 0 .6 0 . money has been collected through notes. The debt was taken to improve the . Some advantages of higher debt are. which means that Monno has taken Long term debt and so 60% of total asset of Monno are financed by debt from other institutions. bonds. One of the major disadvantages is sufficient cash flow is needed to repay the debt.1 0 20 01 20 03 D tR eb atio Mn o on C ra ic e m In u d strie sL . 0 .3.2 0 . (a) It helps to start or expand a business (b) Tax advantages can be gained.
5 2 1. And for that an amount interest expense will have to be beard by the company. . The other firm also shows very poor performance in the TIE ratio. Bengal Fine Ceramic s Limited -0. Monno’s interest is covered on average 1. which indicates Bengal suffered from huge loss in 2007. And the development project is being implemented through years. can decline before these earnings are unable to cover annual interest costs. As interest is paid with pretax dollars.5 Year Figure 15: Times Interest Earned Ratio from 2001-2008 The TIE ratio measures the extent to which a firm’s earnings before interest and taxes (EBIT).5 ratio 1 0. 7. For low sales earning is going down.2 Times Interest Earning Ratio (TIE): TIE (Times Interest Earned Ratio)= EBIT/Interest 3 2. In 2007 TIE became negative.3.technology and efficiency of the company.2 times which is very poor and again refers to the fact that Monno is suffering from sales and cash management. the firm’s ability to pay current interest is not affected by taxes. also called net operating income.5 0 Times Interest Earned Ratio Monno Ceramic Industrie s Ltd.5 2001 2002 2003 2004 2005 2006 2007 2008 -1 -1.
Bengal Fine Ceramics Limited 20 20 20 20 20 -0.7. since Monno incurred a loss in 2007.06 0. which is a very unsatisfactory performance by the industry. and asset management on operating results.1 Net Profit Margin On Sales: Net Profit Margin on Sales= Net Income/ Sales Profitability ratios show the effect of liquidity.08 -0. In case of Monno. debt management.1 20 -0.04 0. The ratio is negative.02 Ratio 0 20 20 Net Profit Margin On Sales Monno Ceramic Industries Ltd. But the recent year ratio shows positive value. So. .02 01 02 03 04 05 06 07 08 Year Figure 16: Net Profit Margin on Sales from 2001-2008 This ratio gives profit per dollar sale or profit per taka sale in our case. 7.04 -0.06 -0.4 Profitability Ratios: Profitability ratio shows the combined effects of liquidity management. It measures how much the firm is earning compared to its sales and how the assets and equity are being utilized to generate sales. 0. profit per taka is very poor through years and in last year (2007) they did not profit at all. asset management and debt management on operating result. Bengal Ceramic’s position is even worse than Monno. Monno is turning back from loss and gaining profit.4.
it is the after tax earnings generated by total asset. .1 -0.2 because of negative income.7. In 2007 Net Income was negative. But it increased to positive amount at 2008. The ratio was decreasing from 2002 to 2004.06 -0.4.04 values of Ratio 0. Bengal Fine Ceramics Limited 01 02 03 04 05 06 07 20 20 20 20 20 20 20 20 08 Year Figure 17: Return on Asset from 2001-2008 The trend shows that MONNO’s ratio was stable initially but from 2003 it is gradually decreasing and in 2007 it turned in to negative.08 -0. better the profitability and financial position of the firm.02 0 -0. But then eventually became negative in 2007.2 Return on Assets(ROA): Return on Asset=Net Income/Asset It gives idea about the overall return on investment earned by the firm.04 -0. so the ratio also became negative.02 -0.06 0.4. 0. Higher the ROE. In 2006 ROE became almost -0.14 ROA Monno Ceramic Industries Ltd. Compared to Bengal ceramics Monno is in a superior position. As net income went down ROE also went down. 7. But again in 2008 it gained positive value.3 Return on Equity (ROE): It measures the rate of return earned on common stockholders’ equity.12 -0. But still is need to be increased to sustain in long run.
1 -0 5 .2 Ya e rs Figure 18: Return on Equity from 2001-2008 7.1 0 .2 -0 5 .4 P/E Ratio: P/E = Market Price/ Earnings Per Share P/E ratio shows the taka amount investors will pay for 1 taka of current earnings.1 -0 . Bengal Fine Ceramics Limited Ratio 2001 2002 2003 2004 2005 2006 2007 2008 Year Figure 19: P/E Ratio from 2001-2008 .1 0 5 .0 -0 . td Bna egl F e in C ra ics e m L ite im d Ratio -0 5 . The most significant indicator of ratio analysis shows how the investors in the stock market perceive the company.0 5 .0 0 1 2 3 4 5 6 7 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 R E O Mn o on C ra ic e m In u d strie s L .4. 100 80 60 40 20 0 -20 -40 -60 -80 -100 -120 P/E Ratio 2 0 0 8 Monno Ceramic Industries Ltd.
4. P/E ratios are higher for firms with high growth prospects and lower for riskier firms. Again in 2008 it increased to a higher value of all time. The negative value in 2007 appeared in ratio because of negative income of 2007. As Monno’s ratio is higher than Bengal. so Monno is less risky than Bengal. this proves the goodwill of Monno Ceramic. td Bna egl F e in C ra ics e m L ite im d 5 6 7 0 0 2 2 0 2 0 3 0 0 2 0 2 0 2 0 2 0 Ya er Figure 20: M/B Ratio from 2001-2008 2 0 2 0 0 -2 0 0 0 4 0 0 8 .Monno’s PIE gradually increased from 2002 to 2004 and the fall to negative in 2007. But from 2006 it increased to a very high level in 2008. In spite of the continuing down fall of income and loss in 2007 M/B shows the fluctuating but increasing trend. There were fluctuations in the trend from 2002 to 2007. 7. 10 80 10 60 10 40 10 20 Ratio 10 00 80 0 60 0 40 0 20 0 0 1 M V lu /B a e Mn o on C ra ic e m In u d strie s L . Others thing held constant.5 M/B value: M/B Value = Market Price/(Equity/Share) This gives another indication of how investors regard company. M/B value shows feature of Monno Ceramic.
And simultaneously the sale has gone down. And this can be seen in ratios too. SUMMERY FROM RATIO ANALYSIS: • Liquidity Ratios shows that Monno is facing harsh liquidity problem after 9/11. They are selling goods with discounted price to increase sale.8. The debt ratio shows huge amount of debt compared to asset and TIE shows that the payment ability is not in good condition. According to Monno they have taken various steps to increase sale. But still the market value of shares has not gone down at the rate if income. At some time it becomes negative. P/E ratio shows that in spite of low earning price was high but it became negative in 2007 as income was negative but M/B shows the image of the company has not been that much affected for the low trend if income generation. Profitability Ratios gives the idea about the income condition of Monno. It is showing that cash collection period is good but as sale has gone down inventory is increasing.1 and quick ratio is 0. In turns this could be dangerous leading the risk of being bankrupt. Total asset turn over and current asset turnover is also supporting that huge amount of current asset of Monno is making situation worse. Asset Management Ratios demonstrate the low turn of inventory problem which has arisen for the low volume of sale. For this situation Monno must have taken some short term loan to solve short run liquidity problem.4 which is to poor for any company. Current ratio is on average 1. Monno has taken development project to improve technology and quality of product for few years. • . To overcome the situation Monno must increase volume of sale or have to let go some of its assets. The trend is showing gradually decreasing income level. • • Debt Management Ratio illustrate that Monno is just in the limit line of paying debt.
) GENERAL INDEX) RETURN-RISK AND MARKET (DSE The return on any stock traded in a financial market is composed of two parts.004188745 1.173874329 1. part. and market (DSEGEN) the time data series were gathered and calculated the historical monthly returns of 72 months (6years) using data from July. return from the stock is the part of the return that investors predict or expected. LTD.475490196 -0. Stock Price of 1st day of Current Month – Stock Price of 1st day of Previous Month Stock Price of 1st day of Previous Month Market Return Statistics Mean Median Standard Deviation Sample Variance Kurtosis Skew ness Minimum Maximum Sum Count Largest(1) Smallest(1) Confidence Level (95. Ltd. This return depends on the information investors have about the stock. SECURITY (MONNO CERAMIC IND.010610738 0.000770883 Table 4: Return-Risk of Monno Ceramic and DSE General Market Index .129903229) (0.198714344 0.614106406 (0.0%) 0. 2008. or risky.981580775 1.9.491238452 72 0. Monthly returns were calculated using the closing price of the first trading day of the month using the following formula.0%) 0. daily stock price of Monno Ceramics Ind. 2002 till June. To determine the risk and return of Monno Ceramic Industries Ltd. and it is based on the market’s understanding today of the important factors that will influence the stock in the coming year. or expected.475490196 0.000478289 Monno Ceramics Return Statistics Mean Median Standard Deviation Sample Variance Kurtosis Skew ness Minimum Maximum Sum Count Largest(1) Smallest(1) Confidence Level(95.104313497 0. the normal.173874329 -0.004489636) 0.020711645 0.009525677 (0. Firstly.198714344) 0.224770642) 0.010881306 5.248709366 (0. The second part of the return on the stock is the uncertain. First.685848747 72 0.064720518 0. and DSE General Index (DGEN) were obtained. This is the portion that comes from unexpected information revealed during the year.224770642 0. Along with that the risk free rate is considered as 5% as of the approximate rate of Bangladesh Treasury Bill for 364 days.
here beta is 0. which is positive. so the security tends to move in the same direction as the market. has higher risk compared to the average risk or market risk.43%.2146.47%. has a higher level of risk as measured by standard deviation. while the market (DSEGEN) expected monthly return (estimated through time series analysis) is 2. But here we can see that Monno Ceramic Ind. According to the principle of risk-return trade-off. All points along the CML have superior risk-return profiles to any portfolio on the efficient frontier. compare to its level of return.43% of yearly expected return) and standard deviation is 10.07% (24. is 0.85% of yearly expected return) and standard deviation is 6.The expected monthly return of Monno Ceramic Ltd. which in this case is 0. Low levels of uncertainty (low risk) are associated with low potential returns. Ltd. One can prove that the CML is the optimal CAL and that its equation is . with ratio of standard deviation of Monno ceramic and market the systematic risk. All of these portfolios represent the highest possible Sharpe ratio. Capital market line CML is a line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio. of Monno Security and Market. The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return.00233. Additions of cash or leverage with the risk-free asset in combination with the market portfolio are on the Capital Market Line. However. whereas high levels of uncertainty (high risk) are associated with high potential returns. beta (β) is calculated. potential return rises with an increase in risk. the covariance of the security and market is 0. By multiplying Correlation. Ltd. Hence. Just the special case of the market portfolio with zero cash weighting is on the efficient frontier.5576.95% (11. but the tendency is not perfect. If we divide the covariance with the product of two standard deviations we find the correlation. This tells us that the security of Monno Ceramic has a fairly strong tendency to move with the overall market. When the market portfolio is combined with the risk-free asset. it can be said that Monno Ceramic Ind. the result is the Capital Market Line.
. where beta is exposure to changes in value of the Market.85%.5576 = 19. therefore the security expected return is 16. 5% Beta 0.07%.85% per unit of systematic risk. beta (β) 0. and the y-axis represents the expected return. The relationship between β and required return is plotted on the securities market line (SML) which shows expected return as a function of β.85%.557 1.Securities market line The relationship between systematic risk and expected return in financial market.07%-5%)/ 0.85%. The intercept is the nominal risk-free rate available for the market.0 Figure 21: Security Market Line (SML) The reward to return ratio for Monno Ceramic is (16. while the slope is E(Rm − Rf). Expected Return 24. The x-axis represents the systematic risk (beta). The equation of the SML is thus: Here. The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. we already calculated market return of DSEGEN is 24. is usually called the security market line (SML). The securities market line can be regarded as representing a single-factor model of the asset price.5576. in other words Monno has a risk premium of 19. risk free return 5%. The market risk premium is determined from the slope of the SML.
Then. a regression analysis was performed using market excess return as independent (explanatory) variable and company excess return as dependent variable that is to be explained by regression. i. for 6 years. Risk-free rate of 5% is assumed to be constant for whole period for keeping the analysis simple.10. The small beta suggests that this security carries less systematic risk.e. Ltd. R square (R²) represents the strength of the regression equation. The . i. The slope coefficient of Monno Ceramic security has positive beta. excess return) can be explained by the independent variable (market excess return). This upward-sloping regression line on the diagram above is drawn to minimize the sum of all the squared deviations around it and this line called security characteristic line best fits the data in the scatter diagram. REGRESSION ANALYSIS Market Excess Return was estimated by deducting risk-free rate from the estimated monthly expected return of DSE general index and company excess return was obtained by subtracting the risk-free rate from the monthly expected returns of Monno Ceramic Ind. Ltd. it moves on average in the same direction as the market (DSEGEN). SCL of Monno Ceramic has very high positive intercept. how much of the total deviation in the dependent variable (Monno Ceramics Ind.e.
17007788 t Stat -0.13582517 Upper 95. According to theory.64) is not significant.522679685 0.029307905 0.100269654 0.065754467 0.regression output displays that R² is about 10%. However.814244433 Table . The p-value of the t-statistic .0% -0.81424443 3 Lower 95. there is no evidence to reject theory.015026775 0.006728555 Lower 95% -0.793042816 P-value 0.65577634 MS 0. Since Significance of F=0. which indicates that about 10% of the total variation in Monno Ceramics excess return can be explained by the regression line.01502677 5 0.011114585 0.590021873 0.52 which is greater than the cut-off value of 0.029307905 0.475 which also represents the beta coefficient or beta risk.05 which suggests that the low value of t-stat (-0.087416363 0.Regression between Market Excess Return and Security Excess Return Slope (coefficient of independent variable) of the regression equation is 0. but the negative value of intercept from this regression output being insignificant does not contradict theory.642450024 2.00714 which is negative.801088173 Significance F 0.80 is significant which indicates a good fit of the regression equation and we are confident about the regression equation. SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 0. the intercept is expected to be of zero value. the p-value of the t-statistic is 0.0% 0. The intercept value of the regression equation is -0.007140565 0. Thus this negative intercept is not statistically significant. i.475034802 Standard Error 0.091808953 72 ANOVA df Regression Residual Total 1 70 71 SS 0. then it can be concluded that the F value of 7.008428884 F 7.065754467 0.006728555 which is less than the cut-off value of 0.05.e.006728555 Coefficients Intercept X Variable 1 -0.316653839 0.13582517 Upper 95% 0.
475%.475 is valid. and individual stocks are ranked according to how much they deviate from the market. the market has a beta of 1. Monno Ceramics Ind. Monno Ceramics is only about a little more than half as volatile as the DSE general index. Therefore. Hence. 3 – 2.0.475 is significant.793) is significant and thus the slope of 0. excess return will increase by 0.006 which is less than 0. Thus.5 as expected and it can be concluded that the beta of 0. it can be stated that if market risk premium (DSEGEN excess return) increases by 1%.05 which suggests that the t-statistic (2. If a stock moves less than the market.is 0. Monno Ceramics is a lower risk stock as ß=0.475 which is less than the average risk or market ß of 1. Beta is a measure of a stock's volatility in relation to the market. the stock's beta is less than 1. Ltd. This positive value of beta falls within the range of beta 0. . By definition. A stock that swings more than the market over time has a beta above 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns. low-beta stocks pose less risk but also lower returns.0.
investment decision. Then the independent variable is created with “0” for all the days before the selected date and “1” for all the days after the specific date. Regression analysis is performed in this section to explain stock price movement with the use of dummy variables.Stock price movement can be related to various company specific decisions and issues such as dividend decision. capital structure decision. the slope coefficient of the independent variable investigated. Firstly. one factor or issue is selected such as issuance of large amount of long-term debt on a specific date of a year. is examined and the significance of the t-statistic is . inflation. etc. GDP growth. natural calamities. stock price may also change due to change in macroeconomic variables or factors affecting all the firms operating in a nation’s economy such as change in political government. Then after running the simple regression. Then the daily stock price of one month before that date is taken and one month after that date is taken which is the dependent variable.
928 82 5158.033149 8 0.76926 Upper 95% 186.4063 9. thus it implies that t-stat is statistically significant.0% 174.07761 2.95372 4.95698 81 Significan ce F 0. Investors believed in the advantages of change in government after a long period of political unrest. In other words.81488 6 34 The effect of 1/11 and change in government.107070 11.11. strikes and violence in the country.9535 Regression Residual Total 1 32 33 Coefficien ts Intercept X Variable 1 180.03 is positive which provides empirical evidence that investors reacted positively to the change in government. the results provide statistical evidence that that the factor ‘change in government’ is relevant and has substantial effect on stock price of Monno Ceramic’s security.0% 186.9535 3 139.307 13 MS 691. The slope coefficient of 9. The new caretaker government came into power on 11th January 2007 and the uncertainty in the nation’s political situation was a common macroeconomic factor affecting all companies in the stock exchanges of Bangladesh. Ltd.134129 Adjusted R Square Standard Error Observations ANOVA df SS 691.05.42 278 17.5915 3 F 4.307 13 Lower 95.3897 2 0.42 278 17.389 72 0.882 35 Standard Error 1.053E2. The regression output displays the t-statistic is 2. stock price of Monno Ceramics Ind.76926 Upper 95. is examined through simple dummy regression analysis.366236 R Square 0.23 which has p-value less than 0.05950 61.0382 3 4466.22643 34 0.03314 98 t Stat P-value Lower 95% 174. CHANGE IN GOVERNMENT (CARE TAKER GOVERNMENT) SUMMARY OUTPUT Regression Statistics Multiple R 0. .
05.064 3 55.4609 96.57577 6 10.58638 R 1 0.12.43 which has p-value is not less than 0.58 29 18.0% 242. EFFECT OF NATURAL CALAMITIES (CYCLONE SIDR) SUMMARY OUTPUT Regression Statistics 0.58 29 18. The slope coefficient of -24.7755 Upper 95. In other words.2899 F Significanc eF 5.627 6 31.44545E09 5 0.7755 232.185 0 Lower 95.40 244 Standard Error 4.98 is . This macroeconomic factor effect on all companies was examined to find any relation to stock price movement. which caused massive loss of lives.0% 232.3595 -7. The regression output displays the t-statistic is -7.44545E09 -31.185 0 MS 6361.7268 41 The unprecedented flood and cyclone Sidr incurred on 17th November 2007.508 22 10849.88824E2.5523 48 5. thus it implies that t-stat is statistically insignificant.76575 Multiple R R Square Adjusted Square Standard Error Observation s ANOVA df SS 6361. ruined properties and left a great deal of economic reconstruction for both the private and public sectors.9803 3.89 42 115.605 Intercept 3 X Variable 1 24.4357 22 4487.894 Regression Residual Total 1 39 40 Coeffici ents 237.6276 t Stat P-value Lower 95% Upper 95% 242. the results provide no statistical evidence that that the cyclone factor is irrelevant to movement in stock price of Monno Ceramic.
.negative which provides no empirical evidence that investors reacted positively to the natural calamities.
271 50.713 million.42536 7.01267E-11 50 Monno Ceramic Industries Ltd. The regression output disclose a t-statistic of 8.27929053 Upper 95% 246. NEWS OF INVESTMENT DECISION SUMMARY OUTPUT Regression Statistics Multiple R 0.0% 224.279 Upper 95.6115 Adjusted R Square 0.69350 P-value 3.2715864 50.088 80.4283 F 75.value of t stat is less than 0.57872 Observations ANOVA Df Regression Residual Total 1 48 49 Coefficie nts Intercept X Variable 1 235.188 Standard Error 5.088 80. . 161.557 87298.52362 t Stat 43.6034 Standard Error 26.7820 R Square 0.406 SS 53389. informed to public and investors about finalizing the development project of BMRE programme for Unit-2 on 30th June 2002 and this internal company related factor was investigated through dummy regression.13. BMRE project comprised of establishing new world class machinery from Germany and Japan. so co-efficient of the slope is statistically significant at 5% level.533 Lower 95. The total cost of the proposed BMRE has been estimated at Tk.18 65.57686 Significance F 2.6306 706.69 with positive which indicates that t-stat is statistically significant.0% 246.05.630 33908. This provides evidence that huge investment in different projects is relevant for stock price movement of Monno Ceramic.34829 8.77173E-40 2.01267E-11 Lower 95% 224.5338 MS 53389. P.
035582 392 41 0.6062 Upper 95. The negative slope coefficient -8.57 provides no empirical evidence that investors believe in the advantages of debt financing.75298E50 0.14 CAPITAL STRUCTURE DECISION (DEBT FINANCING) SUMMARY OUTPUT Regression Statistics 0.97 72 16.541 8 -0.2827 618 F 4.1009483 R 76 0.9772 Lower 95% Upper 95% 280.5739578 X Variable 1 95 Standard Error 2.98 91 0.47958 9 t Stat 92.6062 Lower 95.17 with negative which indicates that tstat is statistically insignificant which provides no statistical evidence that capital structure decision is relevant and affects stock price movement.0795423 85 12.171610 824 P-value 3. took a long-term bank loan of BDT 134.97606912 9 3.3177237 Multiple R R Square Adjusted Square Standard Error Observations ANOVA df SS 793.603594 Regression Residual Total 1 42 43 Coefficient s 274. . This internal company related factor was studied and the regression output disclose a t-statistic of -2.7158935 7 Significa nce F 0.0% 280.972384 58 44 Monno Ceramic Industries Ltd.94820186 1 1 7067.39810 836 2.0355823 92 -16.989 1 MS 793. The term loan was taken for implementation of the BMRE program for development of Unit-2 of the company.0% 268.6035 941 168.5418 268.98315 Intercept 79 8.42 million from Sonali Bank for 10 years with 34 quarterly installments on 1st March 2003.87599 5 7861.
0624E-34 6. This provides evidence that the successful launch of BMRE project is relevant for stock price movement of Monno Ceramic.444378 SS 58029.58769 8.792429 R Square 0.29904 MS 58029.15 881.6279437 Adjusted R Square 0.69 94. which indicates that t-stat is statistically significant. NEWS OF FINALIZATION OF BMRE PROGRAMME SUMMARY OUTPUT Regression Statistics Multiple R 0.05 p value.113128 P-value 1.81173 9.5957 F 65. has launched the BMRE project in 2003 to reduce the production cost and will keep competitive in the international market.11 with less than 0.13 56.64 Intercept X Variable 1 Upper 95% 310.6184038 Standard Error 29.3811 Standard Error 6. However.2337 92411.25 Monno Ceramic Industries Ltd.0% 283.6905E-10 t Stat 43. they have successfully completed the project.822854 Significance F 6.64 Upper 95. in March 2008.0% 310.90789 75.13 56.6905E-10 Lower 95% 283. The regression output disclose a t-statistic of 8.15.1474 34382.69 94.691678 Observations 41 ANOVA df Regression Residual Total 1 39 40 Coefficient s 296.25 Lower 95. .
Monno’s stock is less than half as volatile as the DSE general index. . FINDINGS FROM REGRESSION All these positive indicators represent sources of good news for the company which provides justification for the increasing trend in stock price of Monno Ceramic Industries Ltd. in Dhaka Stock Exchange.475%. Monno Ceramic has a moderate expected return and abit high standard deviation compared to that of the market (DSE general index).475. the covariance of the security and market is 0. which is less than the average risk or market ß of 1. but the tendency is not perfect. Hence. so the security tends to move in the same direction as the market. findings prove that investors react positively in new investment and that the capital structure decision is irrelevant to stock price. it can be stated that if market risk premium (DSE excess return) increases by 1%. Similarly. Monno Ceramic’s excess return will increase by 0. it has a positive correlation with market.00233. The security of Monno Ceramic has a fairly strong tendency to move with the overall market. Change in government and takeover of care taker government in 2007 is relevant to stock price movement and investors reacted positively to this factor. Therefore. Simple regression of dummy variables reveals that the stock price of Monno Ceramic Industries Ltd. Monno Ceramics has a lower risk stock as ß=0.16. which is positive. changes with different variables.
• The security of Monno Ceramic has a fairly strong tendency to move with the overall market. which is less than the average risk or market ß of 1. • • • • The balance sheet of the company understates fixed asset value and equity value. Unfortunately the company.475. Though. suffered a loss during the last year which greatly affected its cash flow. . but the tendency is not perfect. We chose Bengal Fine Ceramic Ltd. • Monno Ceramics has a lower risk stock as ß=0. Monno Ceramic Industries Ltd. the company has a high company specific or unsystematic risk. FINDINGS AND CONCLUSION We undertook this study to review the movement of share price depending on the company internal as well as the macro-economic factors. We found that Monno Ceramic is doing mostly better than Bengal Fine Ceramics. In doing so these are the things we were able to identify. The company financial statement does not take into consideration their goodwill in the financial market. as out standard of comparison while performing cross-sectional analysis of financial ratios.. it has a positive correlation with market.17. as they do not incorporate time value of money theory.
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