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Comparative Ratio Analysis of Three Listed Companies Of ICT Sector

August 08, 2012

TABLE OF CONTENT
Title
Letter of Transmittal Acknowledgement Introduction and Rationale of the study Objectives Sources of Data Methodology Findings of the Ratio Analysis Liquidity Ratio Debt Ratio Profitability/Performance Activity Ratio Market Performance Conclusion Bibliography

Page No
3 4 6 6 6 7 8 8 9 10 13 18 19 19

Introduction and Rationale of the study

A widely held view is that the growth of the ICT industry may provide an opportunity for developing countries to leapfrog into the industrialized economy. For example, low-income economies that have a strong human capital base can take advantage of the rapid decline in the cost of computing power and telecommunication over the last decade that has made it possible to deliver IT service from a remote location. This has led to the emergence of offshore/outsourcing industry, the market of which is expected to reach US$252 billion in 2010. (IGC, 2012) There is considerable potential for the development of ICT industries in Bangladesh because of the availability of trained personnel at relatively low wage rates. The present government of Bangladesh envisions creating a Digital Bangladesh by 2021, which critically depends on proper policies as well as infrastructure development for this sector. However, in order to capture significant gains from the growth of the ICT industry worldwide, policy makers and firms both require a clear understanding of its dynamics. While a cheap and abundant human capital base can explain the early stage of software industry development, improved productivity is required to take advantage of emerging opportunities and carve out a niche in the export of outsourced services.

Objectives
This Study will examine the financial statement and analysis its financial prospects in terms of liquidity, debt, company performance, efficiency and the market performance of the market.

Sources of Data
The main data source ids the published annual reports of DAFODILCOM (Daffodil Computers Ltd.), ISNLTD (Information Services Network Ltd.), and BDCOM (BDCOM Online limited) for the year ended 2007, 2008, 2009, 2010 and 2012.

Methodology

The Financial Ratios: I. Liquidity Ratio i) ii) II. Debt Ratio i) ii) III. Debt-to-equity Debt-to-Total Asset Current Ratio Quick Ratio

Profitability/Performance i) ii) iii) iv) Gross Profit Margin Net Profit Margin Return on Asset (ROA) Return on Equity (ROE)

IV.

Activity Ratio i) ii) iii) iv) v) vi) vii) viii) Account Receivables Turnover Average Collection Period Inventory Turnover Inventory Turnover in days Payable Turnover Payable Turnover in Days Operating Cycle Cash Conversion Cycle

V.

Market Performance i) ii) iii) EPS Payout Ratio PE Ratio

Findings of the Ratio Analysis

Liquidity Ratio
In a nutshell, a company's liquidity is its ability to meet its near-term obligations, and it is a major measure of financial health. Liquidity can be measured through several ratios. I. Current ratio

The current ratio is the most basic liquidity test. It signifies a company's ability to meet its shortterm liabilities with its short-term assets. A current ratio greater than or equal to one indicates that current assets should be able to satisfy near-term obligations. A current ratio of less than one may mean the firm has liquidity issues. Current Ratio = (Current Assets) / Current Liabilities Current ratio Company/Years DAFODILCOM ISNLTD BDCOM 2007 2.51 3.12 7.18 2008 1.42 4.96 7.01 2009 1.71 6.11 1.62 2010 1.84 2.87 1.56 2011 2.66 2.09 4.65 Average 2.03 3.83 4.40

Table 1: Current ratio

Among the three companies BDCOM online Ltd. is more liquid then ISNLTD and then DAFODIL.

II.

Quick Ratio

The quick ratio is a tougher test of liquidity than the current ratio. It eliminates certain current assets such as inventory and prepaid expenses that may be more difficult to convert to cash. Like the current ratio, having a quick ratio above one means a company should have little problem with liquidity. The higher the ratio, the more liquid it is, and the better able the company will be to ride out any downturn in its business. Quick Ratio = (Cash + Accounts Receivable + Short-Term or Marketable Securities) / (Current Liabilities) Acid test ratio Company/Years 2007 2008 2009 2010 2011 Average

DAFODILCOM ISNLTD BDCOM

1.97 3.12 6.06

1.37 4.96 5.76

0.81 6.11 1.37

1.22 2.87 1.30

2.20 2.09 4.22

1.51 3.83 3.74

Table 2: Acid test ratio

The quick ratio also behalf like the current ratio. Among the three companies BDCOM online Ltd. is more liquid then ISNLTD and then DAFODIL. One interesting observation is the Current and Quick ratios of all selected year are same, because of null inventories in their operations.

Ranking in terms of Liquidity Rank 1 2 3 Current ratio BDCOM ISNLTD DAFODILCOM Acid test ratio ISNLTD BDCOM DAFODILCOM

Table 3: Ranking in terms of Liquidity

Debt Ratio
The debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage, i.e., money borrowed from and/or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on. Total debt to equity ratio Company/Years DAFODILCOM ISNLTD BDCOM 2007 39.00% 24.00% 7.00% 2008 39.00% 14.00% 8.00% 2009 23.00% 7.00% 33.00% 2010 22.00% 20.00% 33.00% 2011 24.00% 31.00% 11.00% Average 29.00% 19.00% 18.00%

Table 4: Total debt to equity ratio

DAFODILCOM have comparatively higher debt portion relative to the equity than other two companies. It might not be normal compared to the industry and which might put the firm under risk but indicate high leverage.

Debt-to-Total Asset Company/Years DAFODILCOM ISNLTD BDCOM 2007 39.91% 32.10% 13.94% 2008 70.47% 20.17% 14.26% 2009 58.42% 16.38% 61.86% 2010 54.42% 34.84% 64.15% 2011 37.59% 47.94% 21.49% Average 52.16% 30.29% 35.14%

Table 5: Debt-to-Total Asset

DAFODILCOM also have comparatively higher debt portion relative to the Assets than other two companies. It seems using more debt compared to the industry and which might put the firm under risk pressure but indicate high leverage. Ranking in terms of high leverage Rank 1 2 3 Total debt to equity ratio DAFODILCOM ISNLTD BDCOM Debt-to-Total Asset DAFODILCOM BDCOM ISNLTD

Table 6: Ranking in terms of high leverage

Profitability/Performance
Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company's bottom line. Profitability measures are important to company managers and owners alike. If a small business has outside investors who have put their own money into the company, the primary owner certainly has to show profitability to those equity investors. (Bernstein & Wild, 2004) I. Gross Profit Margin

The gross profit margin looks at cost of goods sold as a percentage of sales. This ratio looks at how well a company controls the cost of its inventory and the manufacturing of its products and subsequently passes on the costs to its customers. The larger the gross profit margin, the better for the company. The calculation is: Gross Profit/Net Sales = ____%. Both terms of the equation come from the company's income statement. (Ed., 2012)

Gross Profit Margin Company/Years DAFODILCOM ISNLTD BDCOM 2007 19.16% 45.93% 65.35% 2008 19.16% 51.38% 67.03% 2009 19.93% 44.47% 73.94% 2010 18.71% 49.62% 68.38% 2011 21.72% 47.85% 63.16% Average 19.74% 47.85% 67.57%

Table 7: Gross Profit Margin

Higher GPM indicates higher profitability of the firm. Net Profit Margin

II.

When doing a simple profitability ratio analysis, net profit margin is the most often margin ratio used. The net profit margin shows how much of each sales dollar shows up as net income after all expenses are paid. For example, if the net profit margin is 5% that means that 5 cents of every dollar is profit. The net profit margin measures profitability after consideration of all expenses including taxes, interest, and depreciation. The calculation is: Net Income/Net Sales = _____%. Both terms of the equation come from the income statement. (Ed., 2012) Net Profit Margin Company/Years DAFODILCOM ISNLTD BDCOM 2007 4.72% 22.56% 6.87% 2008 4.04% 24.35% 7.84% 2009 6.05% 20.56% 7.76% 2010 6.29% 19.43% 9.46% 2011 12.39% 10.53% 16.29% Average 6.70% 19.49% 9.65%

Table 8: Net Profit Margin

Here also higher NPM indicates higher profitability of the firm. III. Return on Asset (ROA)

The Return on Assets ratio is an important profitability ratio because it measures the efficiency with which the company is managing its investment in assets and using them to generate profit. It measures the amount of profit earned relative to the firm's level of investment in total assets. The return on assets ratio is related to the asset management category of financial ratios. The

calculation for the return on assets ratio is: Net Income/Total Assets = _____%. Net Income is taken from the income statement and total assets are taken from the balance sheet. (Ed., 2012) Return on Asset Company/Years DAFODILCOM ISNLTD BDCOM 2007 3.67% 9.33% 2.96% 2008 3.06% 9.50% 3.42% 2009 5.32% 5.81% 2.81% 2010 4.45% 4.97% 5.04% 2011 5.21% 2.62% 6.02% Average 4.34% 6.45% 4.05%

Table 9: Return on Asset

The higher the percentage, the better the firms asset utilization to earn, because that means the company is doing a good job using its assets to generate sales. IV. Return on Equity (ROE)

The Return on Equity ratio is perhaps the most important of all the financial ratios to investors in the company. It measures the return on the money the investors have put into the company. This is the ratio potential investors look at when deciding whether or not to invest in the company. The calculation is: Net Income/Stockholder's Equity = _____%. Net income comes from the income statement and stockholder's equity comes from the balance sheet. (Ed., 2012) Return on Equity Company/Years DAFODILCOM ISNLTD BDCOM 2007 5.11% 11.56% 3.17% 2008 3.70% 10.84% 3.71% 2009 5.65% 6.23% 3.74% 2010 5.44% 5.96% 6.69% 2011 6.45% 3.42% 6.68% Average 5.27% 7.60% 4.80%

Table 10: Return on Equity

In general, the higher the percentage, the better earning capability against its equity, with some exceptions, as it shows that the company is doing a good job using the investors' money. Ranking in terms of Profitability & Performance Rank 1 2 3 Gross Profit Margin BDCOM ISNLTD DAFODILCOM Net Profit Margin ISNLTD DAFODILCOM BDCOM Return on Asset ISNLTD BDCOM DAFODILCOM Return on Equity ISNLTD BDCOM DAFODILCOM

Table 11: Ranking in terms of Profitability & Performance

Activity Ratio
Activity ratios measure company sales per another asset accountthe most common asset accounts used are accounts receivable, inventory, and total assets. Activity ratios measure the efficiency of the company in using its resources. Since most companies invest heavily in accounts receivable or inventory, these accounts are used in the denominator of the most popular activity ratios. (Editor, 2012) I. Account Receivables Turnover

Accounts receivable is the total amount of money due to a company for products or services sold on an open credit account. The accounts receivable turnover shows how quickly a company collects what is owed to it. (Ed., 2012)

Total Credit Sales Accounts Receivable Turnover = Accounts Receivable

Receivable Turnover Company/Years DAFODILCOM ISNLTD BDCOM 2007 5.32 1.00 2.11 2008 3.84 0.90 2.18 2009 5.82 0.92 2.40 2010 22.66 0.73 3.33 2011 11.26 0.63 3.21 Average 9.78 0.84 2.65

Table 12: Receivable Turnover

The higher the receivable turnover indicates quicker chance of receivable collection. II. Average Collection Period

This indicates the collection period in days of the receivables of credit sales. Average Collection Period Company/Years DAFODILCOM ISNLTD 2007 67.69 358.39 2008 93.67 398.53 2009 61.81 389.84 2010 15.89 492.87 2011 31.98 569.13 Average 54.21 441.75

BDCOM

170.42

165.31

149.81

108.10

112.18

141.16

Table 13: Average Collection Period

The lower the collection period indicates quicker receivable collection. III. Inventory Turnover

For a company to be profitable, it must be able to manage its inventory, because it is money invested that does not earn a return. The best measure of inventory utilization is the inventory turnover ratio (aka inventory utilization ratio), which is the total annual sales or the cost of goods sold divided by the cost of inventory. (Bernstein & Wild, 2004)

Total Annual Sales or Cost of Goods Sold Inventory Turnover = Inventory Cost

Using the cost of goods sold in the numerator is a more accurate indicator of inventory turnover, and allows a more direct comparison with other companies, since different companies would have different markups to the sale price, which would overstate the actual inventory turnover. (IGC, 2012) Inventory Turnover Company/Years DAFODILCOM ISNLTD BDCOM 5.91 2007 5.14 2008 44.62 4.51 2009 4.49 5.90 2010 6.28 8.39 2011 4.74 8.73 Average 13.06 6.69

Table 14: Inventory Turnover

The higher turnover indicates the maximum utilization of inventory efficiently. (ISNLTD do not have any inventory for operation) IV. Inventory Turnover in days

The lower turnover in days indicates the maximum utilization of inventory efficiently. Inventory Turnover (Days)

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Company/Years DAFODILCOM ISNLTD BDCOM

2007 70.08 60.87

2008 8.07 79.87

2009 80.17 61.01

2010 57.28 42.88

2011 75.95 41.23

Average 58.31 57.17

Table 15: Inventory Turnover (Days)

(ISNLTD do not have any inventory for operation) V. Payable Turnover

A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers and dividing it by the average accounts payable amount during the same period.

(Ed., 2012) Payable Turnover Company/Years DAFODILCOM ISNLTD BDCOM 2007 36.95 8.27 2008 32.62 6.14 2009 41.98 1.54 2010 27.69 4.01 2011 33.40 4.76 Average 34.53 4.94

Table 16: Payable Turnover

The lower payable turnover allows the firm to get the maximum advantage of credit purchase. (ISNLTD do not have any credit purchase/ payables) VI. Payable Turnover in Days Payable Turnover (Days) Company/Years DAFODILCOM ISNLTD BDCOM 2007 9.74 43.55 2008 11.03 58.67 2009 8.57 233.25 2010 13.00 89.70 2011 10.78 75.65 Average 10.63 100.16

Table 17: Payable Turnover (Days)

The higher payable turnover days allow the firm to get the maximum advantage of credit purchase.

VII.

Operating Cycle

The time between the purchases of an asset and its sale, or the sale of a product made from the asset. Most companies desire short operating cycles because it creates cash flow to cover the company's liabilities. Operating Cycle Company/Years DAFODILCOM ISNLTD BDCOM 2007 138.75 232.13 2008 101.85 246.28 2009 143.10 211.66 2010 73.97 151.58 2011 108.98 153.98 Average 113.33 199.13

Table 18: Operating Cycle

A long operating cycle often necessitates borrowing and thereby reduces profitability. VIII. Cash Conversion Cycle

A metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties, also known as "cash cycle." (Bernstein & Wild, 2004) Calculated as:

Where: DIO represents days inventory outstanding DSO represents days sales outstanding DPO represents days payable outstanding Cash Conversion Cycle Company/Years 2007 2008 2009 2010 2011 Average

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DAFODILCOM ISNLTD BDCOM

127.22 358.39 261.60

85.52 398.53 260.15

153.38 389.84 -644.94

72.98 492.87 -34.32

118.15 569.13 36.86

111.45 441.75 -24.13

Table 19: Cash Conversion Cycle

The lower the cash conversion cycles the more the firm efficient in liquating its asset. Ranking in terms of activity ratios
Account Receivables Rank Turnover Inventory Average Collection Period Inventory Turnover Turnover in days Payable Turnover Payable Turnover in Days Cash Conversion Cycle

Operating Cycle

1 2 3

DAFODILCOM BDCOM

DAFODILCOM BDCOM

DAFODILCOM BDCOM

BDCOM DAFODILCOM

BDCOM DAFODILCOM

BDCOM DAFODILCOM

DAFODILCOM BDCOM

BDCOM DAFODILCOM

ISNLTD

ISNLTD

ISNLTD

Table 20: Ranking in terms of activity ratios

Market Performance
I. EPS

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. Calculated as:

Company/Years DAFODILCOM ISNLTD BDCOM

2007 0.69 1.08 0.67

EPS 2008 2009 0.47 0.70 1.22 1.18 0.92 0.86


Table 21: EPS

2010 0.63 1.05 0.61

2011 0.94 0.55 0.51

Average 0.69 1.02 0.71

II. Payout Ratio The amount of earnings paid out in dividends to shareholders. Investors can use the payout ratio to determine what companies are doing with their earnings. Calculated as:

Company/Years DAFODILCOM ISNLTD BDCOM

2007 1.84 0.90 0.00

Payout Ratio 2008 2009 0.03 0.53 0.32 0.42 0.00 0.00
Table 22: Payout Ratio

2010 0.01 0.00 0.00

2011 0.00 0.00 0.53

Average 0.48 0.33 0.11

Mostly depend in the company policy III. PE Ratio The P/E looks at the relationship between the stock price and the companys earnings. The P/E is the most popular metric of stock analysis, although it is far from the only one you should consider. P/E = Stock Price / EPS PE Ratio 2008 2009 25.50 18.65 14.75 20.34 20.65 20.93
Table 23: PE Ratio

Company/Years DAFODILCOM ISNLTD BDCOM

2007 26.13 15.28 32.84

2010 22.22 20.95 28.69

2011 14.89 49.09 34.80

Average 21.48 24.08 27.58

Ranking in terms of Market performance Rank 1 2 3 EPS ISNLTD BDCOM DAFODILCOM Payout BDCOM ISNLTD DAFODILCOM P/E BDCOM ISNLTD DAFODILCOM

Table 24: Ranking in terms of Market performance

Conclusion

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It is to be concluded for this study that, this is a very difficult to make decision about any of the firms performance and the measurement tools, because all the formulas and functions are applied to attain an specific requirement of the firm as the part of the firms financial strategy. So, the qualitative information will also need to understand the purpose of the firm to use any of the tools to measure their performance. Finally it could be recommended that, the importance of the ratio analysis depends on the stakeholders specific need and the situational requirements.

Bibliography
Bernstein, J. A., & Wild, J. J. (2004). Analysis of Financial Statements (5th ed.). New Delhi: Tata McGrawHill. Ed., F. (2012). Financial Ratios. Retrieved 8 2012, 01, from about.com: http://stocks.about.com/od/evaluatingstocks/a/pe.htm Editor. (2012). Free Dictionary. Retrieved 8 2012, 01, from The Free Dictionary: http://financialdictionary.thefreedictionary.com/ IGC. (2012). The ICT Sector in Bangladesh. Retrieved 08 2012, 01, from International Growth Center: http://www.theigc.org/article/ict-sector-bangladesh-analysis-firm-capabilities