Saad Ratio Analysis

Ratio analysis of textile
Industry in Bangladesh
Table of Contents
Executive Summary i
Introduction. 1
Trend Analysis 1: Apex Spinning & Knitting Mills Ltd. 1
Comparative Analysis: Apex Spinning 6
Trend Analysis 2: Anlima Yarn Dyeing Ltd. 8
Comparative Anlysis: Anlima Yarn 10
Trend Analysis 3: Malek Spinning Mills Ltd. . 13
Comparative Analysis: Malek Spinning 16
Trend Analysis 4: Rahim Textiles Mills Ltd. .. 17
Comparative Analysis: Rahim Textiles 20
Trend Analysis 5: Square Textiles Ltd. ..23
Horizontal Analysis26
Vertical Analysis..28
Summary & Conclusion ..30
Executive Summary
Financial ratio is one of the mostly used financial tools to evaluate a companys financial
performance. In this report we have used various financial ratios to examine strengths and
weaknesses of some of the textile companies in our country. Later in this report horizontal
analysis and vertical analysis have also been incorporated to have a better insight into
financial performance. Industry evaluation has also been done taking the average of the five
companies selected for this report.
Textiles industry is one of the pivotal industries in the context of Bangladeshs economy.
Each year it helps to strengthen the economy through extensive export operations. So, for the
betterment of the countrys economy it is of utmost importance that companies in that
particular sector maintain a sound financial performance. Otherwise if those companies
cripple it would have an immensely negative impact on our countrys overall financial health.
Keeping these issues in mind we have tried to shed light on various aspects of financial
situation of a company using various ratio analysis and later horizontal and vertical analysis.
Our ratio analysis has revealed various aspects of strengths and weaknesses of various
companies. Apex Knitting has shown its strength in asset utilization but suffered from
comparatively higher COGS. Anlima Yarn suffers a bit with respect to liquidity ratios and has
a bit low ROA. However it managed to yield better ROE through comparatively heavy debt
financing. Malek Spinning had serious problem in cash management although recovered a bit
in 2011 and they show high dependence on equity financing. Rahim Textiles again suffers a
bit from liquidity problem and shows relatively high dependence on equity financing. Square
Textiles maintains relatively steady level of financial performance. To some extent it lacks
those concerning issues that should alarm the management about disconcerting inefficiency
or mismanagement.
In the last part we tried to provide some recommendations based on our findings regarding
various financial performance issues. Some company needs to check whether their high
expenditure on COGS is justifiable or not, few needs to consider whether they are over-
utilizing their assets or human resources or not, and few needs to develop a more efficient
cash management strategy. Along with those one or two company may give a second thought
regarding their financing strategy, whether they should maintaining heavy dependence on
1
equity financing or should try to have some financial leverage by using a bit more debt
financing.
As stated earlier textiles industry remains at the center of the countrys economy so sound
financial analysis is extremely crucial in order to pinpoint problem areas and rectify them
whenever needed. This would help the industry to grow further in future.
2
Introduction
A financial ratio is a relative magnitude of two selected numerical values taken from an
enterprise's financial statements. Often used in accounting, there are many standard ratios
used to try to evaluate the overall financial condition of a corporation or other organization.
Financial ratios may be used by managers within a firm, by current and potential shareholders
of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the
strengths and weaknesses in various companies. If shares in a company are traded in a
financial market, the market price of the shares is used in certain financial ratios.
In this report we have focused on four main categories of financial ratios:
Liquidity Ratios
Profitability Ratios
Activity Ratios
Solvency Ratios
The industry we picked is the textile industry. The names of companies used in the report are:
Apex Spinning Mills Ltd.
Anlima Yarn Dyeing Ltd.
Malek Spinning Mills Ltd.
Rahim Textiles Mills Ltd.
Square Textiles Ltd.
We have used both trend analysis and comparative analysis to evaluate the financial situation
of the above mentioned companies. Below are the findings of our research.
Trend Analysis: Apex Spinning & Knitting Mills Ltd.
Liquidity Ratios
Current Ratio
Current Ratio of Apex Spinning & Knitting Mills Ltd is just over 1 and hasnt deviated much
over the three years. It means that the company holds sufficient current assets that can be
liquidated to meet its current obligation. The figures also imply that only a small portion of
the current assets have been financed by long term debt and the rest by current liabilities.
Current assets havent piled up in the last years as ratios are just over 1.
1
Over the years the ratio hasnt shown much movement and that indicates that the companys
policies pertaining to liquidity have been pretty stable in last three years.
Acid-test Ratio
Acid-test ratio is similar to current ratio except of the fact that the former one doesnt
consider inventory in the calculation. So it basically considers the part of current assets that
can be almost readily liquidated whenever needed. As the figures are below 1 the company
cant meet all of its current obligations without relying on inventories.
Over the three years this particular ratio hasnt changed much which indicates consistency in
company policy regarding liquidity management.
Net Profit Margin Ratio
The ratio show is an indicator of companys profitability and efficiency in expense

management as compares net profit with net sales. The ratio increased a bit in the year 2010
but dipped in 2011. If we look at the income statement figures then we will see that in 2010
companys net profit increased a bit even though there was a decrease in sales. However, in
2011 just the opposite happened; sales increased while net profit plummeted.
So clearly the company hasnt been equally efficient in managing its expense throughout the
three years. Either there was a problem associated with COGS or the company may had to
bear a bit too much operating expenses. But to see the whole picture we have to look into the
following ratio. But so far we can state that in the year 2010 company managed its expenses
in a much more efficient manner than in 2011.
Gross profit Margin Ratio
This ratio shows the relationship between gross profit and sales and helps us pinpoint the
problem associated with expense management. However, gross profit margin ratio shows
almost the same trend like that of net profit margin ratio. So, to pinpoint the problem area we
have showed both operating expenses and COGS as a percentage of sales and it revealed that
COGS/Sales percentage increased a bit in 2011 while operating expense/sales percentage
decreased. But due to large volume involved with COGS that small increase in the percentage
lead lower net profit margin ratio and gross profit margin ratio.
Now the company needs to check whether they are using superior raw materials in the
production process or just paying higher price for average quality raw materials. If they are
purchasing higher quality raw materials then they to be more efficient in other areas such as
operational expenses in order to boost their profitability.
2
Return on Assets
Return on assets refers to companys ability to generate net profit utilizing its assets. Unlike
asset turnover this ratio isnt exceptionally high which means even though the company was
able to generate huge amount of sales utilizing its assets it also had to bear huge expenses and
that had a big impact on its net profit. As we saw earlier the companys COGS consumes a
substantial portion of its sales and it may have caused the ROA figure to remain at such level.
However, interestingly unlike asset turnover ratio ROA hasnt increased in the year 2011 and
reduced instead. The main reason is that in that year even though both sales and assets
increased net profit did mainly not due to relatively high COGS. As we stated earlier the
company needs to check whether they are using raw materials of superior quality or they are
just paying high prices for an average quality raw material.
Return on Common Stock Equity
This ration shows how efficient the company has been in utilizing its common equity to
generate net income. The pattern of this ratio of Apex Spinning corresponds to that of ROA;
increased slightly in 2010 and dropped in 2011. The figures have been pretty stable over the
years. For a better understanding of the changes underlying in ROA and ROE we need to
conduct DuPont analysis which is presented below.
DuPont Analysis
DuPont analysis shows ROE as a multiplication of three ratios a) Net profit margin b) Assets
turnover ratio c) Equity multiplier. Judging all these three ratios we can have a better insight
into ROE.
The analysis reveals that equity multiplier has been relatively stable over the years. Net profit
margin among increased slightly among the three which caused a slight increase of ROE in
the year 2010. In 2011 even though both asset turnover ratio and equity multiplier increased
those were nullified by a decrease in net profit margin ratio which has brought down ROE
figure slightly in that particular year. As we have discussed earlier simultaneous increase in
Asset turnover ratio and decrease in Net Profit Margin ratio was caused by relatively high
COGS in 2011.
ROA can also been shown as a multiplication of Asset Turnover Ratio and Net Profit Margin.
ROA of Apex Spinning has followed a similar pattern of that of ROE and in this case as well
Net Profit Margin was main cause behind the deviations.
EPS
The higher the ratio the better is for the company as it indicates better profitability of the
entity. EPS has increased slightly in 2010 and again dipped a bit 2011. The number of
common stock outstanding was constant over the last few years and hence the deviation was
caused by the change in Net Profit of the company.
3
Dividend Payout Ratio
This ratio expresses the amount of cash dividend paid as a percentage of net profit. Apex
Spinning has consistently paid out a very high percentage of its net income as dividends.
Shareholders of the company should be mighty pleased with this kind of payout ratio. The
drawback is that the company will be left with very low amount of retained earnings which
may in turn hinder companys ability to reinvest in business or expansion. The company
needs to keep in mind its growth potential and future needs for investment.
P/E Ratio
Extremely high P/E ratio in 2009 indicates that the company was highly overvalued in that
particular year. Even though EPS was very low in 2009 market price of companys stock was
much higher. However, the valuation came down to normal level in the latter years.
Activity Ratios
Receivables Turnover Ratio
The ratio has increased a bit in the year 2011 which means in that year the company showed
better efficiency in collecting its receivables compared to previous years. The better
efficiency may be a result of more stringent receivables policy or simply more efficiency in
collecting its outstanding receivables.
Inventory Turnover Ratio
This ratio has increased steadily over the years though not by much. Higher inventory
turnover ratio implies efficiency in inventory management. Because an increase in this ratio
can be caused either of the two events; increase of COGS given inventory remains relatively
constant or decrease of inventory given COGS remains relatively constant. So in the former
case the company has to make sure that its inventory doesnt much even if there is an increase
in production and the latter case the company has to make sure that it reduces its current level
of inventories while production remains relatively constant. So we can see from the
discussion is either of the cases the company has to show improved efficiency regarding
inventory management.
In case of Apex Spinning both of the events took place. In year 2010 the company managed
to lower down its inventory level while COGS remained relatively constant and in 2011 even
though both COGS and inventory increased the change in inventory was much less compared
to that of COGS.
Asset Turnover Ratio
Asset turnover ratio indicates a companys efficiency in converting its assets in sales. Apex
Spinning Mills ratio increased substantially in the year 2011 mainly due to high increase in
sales. The ratio is also close to 200% in all the years which is quite exceptional. All these data
4
reflect the companys superiority in asset management policy and practices. However, the
company needs to be very cautious about the fact that whether it is over-utilizing its assets or
not. If that is the case then its machineries and equipment may deteriorate a lot faster forcing
the company to invest in those areas much earlier than anticipated.
Cash Conversion Cycle
The ratio is a combination of three ratios DSO, DIH and DPO. It represents the amount of
time needed for a company to have cash back in hand. The lower the ratio the better it is for
the company as it would imply efficiency in managing payables, receivables and inventories.
CCC of Apex Spinning has reduced dramatically over the last three years. Reduced DIH and
DSO and increased DPO was the reason behind. This event definitely indicates efficiency in
those above mentioned areas but at the same time the company needs to check whether they
are missing out any potential buyers or not whom they could avail with a less stringent credit
policy.
Solvency Ratios
Debt to Total Assets Ratio
Like equity multiplier this ratio is also a measure of a companys financial leverage. Higher
ratio indicates more reliance on debt financing and vice versa.
Times Interest Earned
This ratio shows how easily a company can pay its debt obligations. A company relying
heavily on debt financing should have sufficient income to pay its creditors. As for Apex
Spinning this ratio has increased a bit over the years. Interestingly both net income before
interest and tax and interest expense followed a downward trend in all those years.
Furthermore, high debt to asset ratio and equity multiplier ratio in 2011 indicate companys
more reliance on debt financing in 2011. Yet TIE ratio kept increasing. So this may indicate
firms efficiency in utilizing debt financing, they have been able pursue debt financing at a
comparatively lower cost.
Equity Multiplier
This ratio shows the companys financing strategy. The higher the ratio the more is the usage
of debt financing applied by the company. The trend implies that companys reliance on debt
financing was a bit lower in 2010 but it rose again in 2011.
Comparative Analysis: Apex Spinning & Knitting Mills Ltd.
Liquidity Ratios
Current Ratio
Current ratio of Apex Spinning is a bit lower than that of the industry which implies that the
company hardly lets its current assets to pile up comparing to the industry. Also at the same
5
time it makes sure that it has enough current assets in hand to liquidate and meet its current
obligations.
Acid-test Ratio
Acid-test ratio of the company is also lower than the industry average value. So, we can say
that unlike the industry the company cant meet its current obligations without liquidating its
inventories.
Net profit margin ratio
Companys net profit margin ratio is considerably lower than that of the industry average. So
clearly the company has to bear comparatively more expenses compared to other companies
in the market. We need to look at gross profit margin ratio in order to specify which cost
component is causing this event.
Gross profit margin ratio
Companys gross profit margin ratio is lower than the industry average as well but not as low
as net profit margin ratio is. So, we can now state that COGS is the main reason behind
companys comparatively low net profit margin ratio. Other costs such as administrative and
selling overhead also play a role at it but not as significant as COGS does. Now the company
needs to check out whether they are purchasing superior quality product or are they just
paying high prices for an average quality raw material.
This ratio is considerably higher than the industry average value. So clearly it indicates that
the company is a lot efficient compared to other players in the market when it comes to the
question of utilizing assets to generate sales. However, the company does need to make sure
that they are not over-utilizing their assets, let it be human resources or machineries.
Underpaid but efficient employees can leave the company for better opportunity so they
shouldnt let that happen. Over-use of machineries can force them to reinvest in non-current
way before the anticipated period.
ROA
Companys return on assets is a bit lower than the industry average value. To pinpoint the
problem we need to look at the DuPont Analysis presented later.
ROE
Like ROA, companys ROE figure is also lower than the industry average value. Now lets
have a look at the DuPont analysis to figure out the main reason behind this.
DuPont Analysis
6
Like we said earlier ROE is a multiplication of Net Profit Margin, Asset Turnover Ratio and
Equity Multiplier. Among the three ratios only Net Profit Margin is lower than the industry
average. So we can state that companys poor expense management is reason behind lower
ROE.
ROA can be described as a multiplication of Asset Turnover Ratio and Net Profit Margin.
Like in the case of ROE here also Net Profit Margin was the cause behind lower ROA. So
again expense management issues have caused the company to suffer from a lower ROA
despite showing lot efficiency in asset utilization.
EPS
EPS is a bit higher than the industry average even though the companys net profit margin
ratio was poor. This might happen if the company is heavily reliant debt financing. Solvency
ratios will enable us to determine whether it is the case or not. But at present we can state that
higher EPS enhance companys image among shareholders.
This ratio is considerably higher than the industry average referring to the fact that the
company is paying a lot dividend to its shareholders compared to other companies in the
market. So, this information is likely to make shareholders happy. But the drawback is that
the company will have lower retained earnings to make new and re-investments.
P-E Ratio
Interestingly companys P-E ratio is ratio is lot lower that the industry average even though it
has comparatively higher EPS and dividend payout ratio. So, this indicates undervaluation of
the company in the market.
Activity Ratios
Companys receivable turnover ratio is a bit higher than the industry average which indicates
efficiency in collecting receivables.
Inventory turnover ratio is higher as well and again it implies efficiency in inventory
utilization that contributes into COGS.
CCC is lot lower than the industry average which indicates superior efficiency in managing
accounts receivables, payables and inventories. It has resulted due to lower DIH, DSO and
slightly higher DPO. However, the company needs to make sure that they arent losing any
customers due to strict receivables collection policy and credit terms.
7
Solvency Ratios
Company uses more debt financing than the average industry and it explains how the firm
managed to yield an above industry average EPS even though it suffered from lower Net
Profit Margin. More reliance on debt financing gives a firm financial leverage.
TIE Ratio
TIE ratio is slightly less than the industry average. Company needs to be cautious in this
regard as they are more dependent on debt financing.
Equity Multiplier
As the company is more dependent on debt financing quite expectedly its equity multiplier is
a bit higher than the industry average due to comparatively lower amount of equity.
Trend Analysis: Malek Spinning Mills Ltd
Liquidity Ratios
Current Ratio
Current Ratio of Maled Spinning Mills Ltd. is just above 1 and hasnt deviated much over the
three years. Low values for the current or quick ratios (values less than 1) indicate that a firm
may have difficulty meeting current obligations. Low values, however, do not indicate a
critical problem. If it has good long-term prospects, it may be able to borrow against those
prospects to meet current obligations.
Acid-test Ratio
consider inventory in the calculation. As the figures are below 1 the company cant meet all
of its current obligations without relying on inventories.
Net Profit Margin Ratio The ratio increased a bit in the year 2010 but dipped in 2011. As It
is greater than industry average, it shows the company has been equally efficient in managing
its expense throughout the three years.
8
Gross profit margin ratio kept increasing throughout the three years indicating. It is good for
the company in one sense that it is managing is COGS in an efficient way but at the same
time it needs to make sure that they are purchasing quality raw materials. Otherwise low
quality raw materials may result in low quality finished products which in turn would
negatively affect the sales figures and profitability of the company.
Return on Assets
Malek Spinning Mills asset turnover ratio increased gradually and slightly over the years.
However, there is significant increase in sales. Also, the ratio is considerably below 100% in
all the years which is somewhat low in comparison with its sales. It seems that the company
isnt considering asset turnover with current significance. They are investing for long term
profitability. The increasing rates and profits suggest accordingly so.
The pattern of this ratio of Malek Spinning Mills corresponds to that of ROA; increased in
2011. For a better understanding of the changes underlying in ROA and ROE we need to
conduct DuPont analysis which is presented below.
DuPont Analysis
figure slightly in that particular year
EPS
entity. EPS was low in 2009 increased significantly in 2010. The number of common stock
outstanding was constant over the last few years and hence the deviation was caused by the
change in Net Profit of the company.
Malek Spinning Mills has paid out a very high percentage of its net income as dividends in
2010. Shareholders of the company should be mighty pleased with this kind of payout ratio.
The drawback is that the company will be left with very low amount of retained earnings
which may in turn hinder companys ability to reinvest in business or expansion. The
company needs to keep in mind its growth potential and future needs for investment.
9
Activity Ratios
turnover ratio implies efficiency in inventory management. In case of Malek Spinning Mills
remained almost steady over last three years.
Malek Spinnings asset turnover ratio increased gradually and slightly over the years.
However, there is significant increase in sales. Also, the ratio is slightly below industry
average in all the years which is somewhat low in comparison with its sales. It seems that the
company isnt considering asset turnover with current significance. They are investing for
long term profitability.
CCC of Malek Spinning Mills Ltd. has increased over the last three years. This event
definitely indicates efficiency in those above mentioned areas but at the same time the
company needs to check whether they are missing out any potential buyers or not whom they
could avail with a less stringent credit policy.
Solvency Ratios
As for Malek Spinning Mills Ltd. this ratio has increased a bit over the years. Interestingly
both net income before interest and tax and interest expense followed a downward trend in all
those years. So this may indicate firms efficiency in utilizing debt financing, they have been
able pursue debt financing at a comparatively lower cost.
10
Equity Multiplier
financing was a bit higher in 2010 but dipped in 2011.
Comparative Analysis: Malek Spinning Mills Ltd.
Liquidity Ratios
Current Ratio
Current ratio of Malek Spinning Mills Ltd. is a bit lower than that of the industry which
implies that the company hardly lets its current assets to pile up comparing to the industry.
Also at the same time it makes sure that it has enough current assets in hand to liquidate and
meet its current obligations.
Acid-test Ratio
inventories.
Companys gross profit margin ratio is higher than the industry average.At present it seems
like they have been able to purchase raw materials at a bit lower cost than other competitors
without compromising much in the quality as the ratio isnt considerably higher than the
industry average. But still the company needs to keep an eye open for any deterioration in the
quality of raw materials purchased. Otherwise it will affect sales and profit figures.
This ratio is considerably lower than the industry average value. So clearly it indicates that
the company is not efficient compared to other players in the market when it comes to the
question of utilizing assets to generate sales.
11
ROA
ROE
DuPont Analysis
EPS
EPS is higher than the industry average even though the companys net profit margin ratio
was poor. This might happen if the company is heavily reliant debt financing. Solvency ratios
will enable us to determine whether it is the case or not. But at present we can state that
P-E Ratio
Activity Ratios
12
Solvency Ratios
TIE Ratio
Equity Multiplier
a bit higher than the industry average due to comparatively lower amount of equity
Trend Analysis: Rahim Textiles Ltd.
Liquidity Ratios
Current Ratio
Current Ratio of Rahim Textiles Ltd. is just below 1 and hasnt deviated much over the three
years. Low values for the current or quick ratios (values less than 1) indicate that a firm may
have difficulty meeting current obligations. Low values, however, do not indicate a critical
problem. If it has good long-term prospects, it may be able to borrow against those prospects
to meet current obligations.
Acid-test Ratio
consider inventory in the calculation. As the figures are below 1 the company cant meet all
of its current obligations without relying on inventories.
13
The ratio increased a bit in the year 2009 but dipped in 2010. As It is lower than industry
average, it shows the company hasnt been equally efficient in managing its expense
throughout the three years. Either there was a problem associated with COGS or the company
may had to bear a bit too much operating expenses. But to see the whole picture we have to
look into the following ratio.
time it needs to make sure that they are purchasing quality raw materials. Otherwise low
quality raw materials may result in low quality finished products which in turn would
Return on Assets
Rahim Textiles asset turnover ratio increased gradually and slightly over the years. However,
there is significant increase in sales. Also, the ratio is considerably below 100% in all the
years which is somewhat low in comparison with its sales. It seems that the company isnt
considering asset turnover with current significance. They are investing for long term
The pattern of this ratio of Rahim Textiles corresponds to that of ROA; increased in 2011. For
a better understanding of the changes underlying in ROA and ROE we need to conduct
DuPont analysis which is presented below.
DuPont Analysis
figure slightly in that particular year
EPS
entity. EPS was high in 2009dropped significantly in 2010. The number of common stock
14
outstanding was constant over the last few years and hence the deviation was caused by the
change in Net Profit of the company.
Rahim Textiles has paid out a very high percentage of its net income as dividends in 2010.
Shareholders of the company should be mighty pleased with this kind of payout ratio. The
drawback is that the company will be left with very low amount of retained earnings which
may in turn hinder companys ability to reinvest in business or expansion. The company
needs to keep in mind its growth potential and future needs for investment.
Activity Ratios
turnover ratio implies efficiency in inventory management. In case of Rahim Textilesit
remained almost steady over last three years.
Rahim Textiles asset turnover ratio increased gradually and slightly over the years. However,
there is significant increase in sales. Also, the ratio is slightly below industry average in all
the years which is somewhat low in comparison with its sales. It seems that the company isnt
profitability.
CCC of Rahim Textiles Ltd. has increased over the last three years. This event definitely
indicates efficiency in those above mentioned areas but at the same time the company needs
to check whether they are missing out any potential buyers or not whom they could avail with
a less stringent credit policy.
Solvency Ratios
15
As for Rahim Textiles Ltd. this ratio has increased a bit over the years. Interestingly both net
income before interest and tax and interest expense followed a downward trend in all those
years. So this may indicate firms efficiency in utilizing debt financing, they have been able
pursue debt financing at a comparatively lower cost.
Equity Multiplier
financing was a bit higher in 2010 but dipped in 2011.
Comparative Analysis: Rahim Textiles Ltd.
Liquidity Ratios
Current Ratio
Current ratio of Rahim Textiles Ltd. is a bit lower than that of the industry which implies that
the company hardly lets its current assets to pile up comparing to the industry. Also at the
same time it makes sure that it has enough current assets in hand to liquidate and meet its
current obligations.
Acid-test Ratio
inventories.
Companys gross profit margin ratio is higher than the industry average.At present it seems
like they have been able to purchase raw materials at a bit lower cost than other competitors
without compromising much in the quality as the ratio isnt considerably higher than the
industry average. But still the company needs to keep an eye open for any deterioration in the
quality of raw materials purchased. Otherwise it will affect sales and profit figures.
16
This ratio is considerably lower than the industry average value. So clearly it indicates that
the company is not efficient compared to other players in the market when it comes to the
question of utilizing assets to generate sales.
ROA
ROE
DuPont Analysis
EPS
EPS is higher than the industry average even though the companys net profit margin ratio
was poor. This might happen if the company is heavily reliant debt financing. Solvency ratios
will enable us to determine whether it is the case or not. But at present we can state that
P-E Ratio
Activity Ratios
17
Solvency Ratios
TIE Ratio
Equity Multiplier
a bit higher than the industry average due to comparatively lower amount of equity.
Trend Analysis: Square Textiles Ltd.
Liquidity Ratios
Current Ratio
Square Textiles Ltd has a current ratio slightly over 1 and has minor deviation over the three
years (maintaining centrality around 1.47). It implies that to meet its current requirement, the
company holds sufficient current assets that can be liquidated. The figures also imply that a
small segment of the current assets have been financed by long term debt and the rest by
current liabilities. Current assets havent piled up in the last years as ratios are just over 1.
Over the years the ratio hasnt shown considerable movement indicating the companys
policies pertaining to liquidity being stable in last three years.
Acid-test Ratio
As the figures show, they are scattered near around 1, the company is capable of meeting
most of its current obligations. It doesnt have to rely exceedingly on inventories.
The ratio has changed slightly over the 2010 & 2011. This indicates few changes in company
policy regarding liquidity management over that period.
18
The ratio increased greatly in 2010 but dipped slightly in 2011. If we look at the income
statement figures then we will see that companys net profit increased accordingly with its
sales over 2010 & 2011.
Increasing figures with big volumes in consecutive years indicate that the company has been
greatly efficient in managing its expense. The operating expense was maintained in
accordance with COGS. Only a slight dip in 2011 would indicate that the company ran a bit
more efficiently in 2010 than 2011. But this doesnt change the fact that companys
production and management are proficient in comparison to market.
time it needs to make sure that they are purchasing quality raw materials. Otherwise law
quality raw materials may result in law quality finished products which in turn would
Square Textiles asset turnover ratio increased gradually and slightly over the years. However,
there is significant increase in sales. Also, the ratio is considerably below 100% in all the
years which is somewhat low in comparison with its sales. It seems that the company isnt
Return on Assets
Return on assets refers to companys ability to generate net profit utilizing its assets. The
significantly increasing figures over the years indicate that company is well capable of doing
so. Though a companys COGS consume a substantial portion of its sales, in this case it
couldnt affect ROA as the figures were increasing in considerable amount.
The ROA decreased slightly in 2011 though. This may indicate that in that year even though
both sales and assets increased net profit did not mainly due to relatively high COGS.
However, the consistent rates suggest successful maintenance of the companys raw material
management according to cash & COGS.
The pattern of this ratio of Apex Spinning corresponds to that of ROA; increased significantly
in 2010 and dropped minuscule in 2011. The figures have been pretty stable over the years.
This shows the company has been efficient in utilizing its common equity to generate net
income.
DuPont Analysis
19
The equity multiplier of Square Textiles Ltd. has been relatively stable over the years. Net
profit margin increased slightly among the three which caused a significant increase of ROA
in the year 2010. In 2011 even though both asset turnover ratio and equity multiplier
increased the ROA figure slightly decreased in that particular year. This may be due to
decreased asset allocation/ inventory allocation for other purposes.
EPS
EPS has increased vastly in 2010 and then dipped a bit 2011. However, regardless of
increase, the figures are considerably low, indicating average profitability on the rise towards
betterment. The number of common stock outstanding decreased significantly over the last
few years and hence the deviation was caused by the change in Net Profit of the company.

Over the three years, the Dividend payout ratio of Square Textiles Ltd. has decreased
significantly. This indicates that the company has high amount of retained earnings & plans
on reinvestment. However, the decreasing trend may displease potential shareholders, as they
invest into those reinvestments without any significant return. To maintain consistent input of
shareholders, the company should increase this payout ratio past business expansion. This
will ensure market growth and future investment possibilities.
P/E Ratio
According to the tremendously high P/E ratio in 2009, the company was highly overvalued in
that particular year. Though EPS was very low in 2009 market price of companys stock was
much higher. The evaluation descended to typical in the years following.
Activity Ratios
The ratio has increased sequentially in minuscule figures. This means that the company
improved its performance in collecting receivables over the years. This increased efficiency
supposedly is a plausible result of consistent stringent receivables policy or simply more
efficiency in collecting its outstanding receivables.
This ratio has decreased moderately from 2009 to 2010, then rose slightly in the following
year. The ratio is considerably low. This indicates consistent inefficiency in inventory
management.
In case of Square Textiles Ltd., over the years the inventory and COGS didnt have any
collaborated platform for efficient inventory management. Neither the COGS did increase nor
the inventory remained relatively constant, or vice versa. And the inconsistency of the figures
over the years shows that the company policy on inventory management wasnt successfully
operational. However, increased figures in 2011 may indicate induced efficiency measures.
20
CCC of Square Textiles has reduced increased significantly in 2010, then decreased vastly in
2011. In 2010, DIH and DSO increased and DPO decreased, resulting into increase in CCC.
In the following year, the scenario was opposite. This indicates the company being more
efficient in managing payables, receivables & inventories in 2011 than 2010.
Solvency Ratios
Like equity multiplier this ratio is also a measure of a companys financial leverage. It rose
slightly in 2010 and dipped in 2011 indicating consistency in financial strategy.
In case of Square Textiles Ltd., the ratio rose greatly in 2010 and decreased significantly in
2011. Both net income before interest and tax and interest expense followed an upward trend
in all those years. Furthermore, high debt to asset ratio and equity multiplier ratio in 2010
indicate companys more reliance on debt financing in 2010. Consequently TIE ratio kept
increasing. But it fall in 2011. This indicates firms higher efficiency in utilizing debt
financing in 2010 than 2011. They have been able pursue debt financing at a comparatively
lower cost.
Equity Multiplier
financing was a bit higher in 2010 but it lessened again in 2011.
Comparative Analysis: Square Textiles Ltd.
Liquidity Ratios
Current Ratio
Square Textiles have a current ratio that is slightly lower than the industry average indicating
to the fact that the company hasnt allowed its current assets to pile up a lot.
Acid-test Ratio
Acid-test ratio is also lower than the industry average. So these two ratios imply the
companys efficiency in current asset management. At the same time the company managed
to maintain an average acid-test ratio that is more than 1, so they do not need to rely upon
their inventories to meet their current obligation.
Net profit margin ratio is higher than the industry average and that is a sign of efficient
management of company expenses. Its also not likely the company is over-using its assets or
workforce as there is no big gap between the industry average and the company average. So
21
most likely the company can reap the whole benefit of an increased net profit margin with
worrying about the drawbacks.
Gross profit margin ratio is also higher than the industry average and most likely this has a
significant role to play behind increased net profit margin. At present it seems like they have
been able to purchase raw materials at a bit lower cost than other competitors without
compromising much in the quality as the ratio isnt considerably higher than the industry
average. But still the company needs to keep an eye open for any deterioration in the quality
of raw materials purchased. Otherwise it will affect sales and profit figures.
Asset turnover ratio is also higher than the industry indicating to the fact that the company
has been able to generate more sales per tk worth of asset. So this shows better utilization of
companys assets. They just need to make sure that they are not over-using machineries
otherwise they may have to make unplanned investment due to early deterioration.
Return on Assets
Return on assets of Square Textiles is slightly higher than the industry average and this again
means more efficiency and better utilization of companys assets. In DuPont analysis we will
have a closer look at the reasons behind this slightly above average ROA.
ROE also shows a better than industry average figure. However, figure here is a bit better
than the ROA and increased used of debt financing can be reason for that. Lets have a look at
DuPont analysis for further investigation.
DuPont Analysis
All three components of the analysis: Net Profit Margin, Assets Turnover Ratio and Equity
Multiplier are better than the industry average. Higher equity multiplier could be reason for
better ROE compared to ROA. So clearly the company is utilizing and managing its assets
well.
As far as ROA is concerned we need to look at two components: Net Profit Margin Ratio and
Assets Turnover Ratio. Both of them are higher than the industry average value. This again
points at more efficiency policies and practices.
EPS
EPS is slightly higher than the industry average and it was expected as the company
experienced better than average profitability and also relies a bit more on debt financing.
Increased EPS should enhance company image.
Dividend payout ratio is also higher than the industry average. So, Square Textiles have been
paying its shareholders comparatively more dividends than the industry. Its certainly is a
good news for the shareholders and may have a role to play in the market price of company
share.
22
P/E Ratio
Surprisingly P-E ratio is way below than the industry average even it has higher than average
EPS and dividend payout ratio. So, all these information refers to the fact that shares of
Square Textiles are a lot undervalued. If the market works in a somewhat efficient manner
than its share price is likely to go up in near future.
Activity Ratios
Unlike profitability ratios receivables turnover ratio doesnt reflect companys efficiency. Its
slightly lower than the industry average. However, it shouldnt be an issue for the company if
a less stringent collection and credit policy allow them to retain and attract customers.
Inventory turnover ratio is again slightly lower than the industry average. But the difference
isnt large enough to sound an alarm.
CCC is also slightly higher than the industry average. Here is an interesting event going on.
Companys DSO is a bit higher than the industry average, however much of that impact has
been nullified due to a higher than industry average DPO. So the firm is late in receiving
money from its customers but at the same they paying their suppliers a lot later. So, basically
they arent doing a bad job in managing their cash conversion cycle.
Solvency Ratios
As the firm relies a bit more on debt financing its debt to total assets ratio is a bit higher than
the industry average. This should give the company a tax shield and financial leverage.
This ratio is important in the companys aspect as they are a bit more reliant on debt
financing. They are doing a good job here as the ratio is higher than the average. So most
likely they are earning enough income to pay for their interest expenses.
Equity Multiplier
Like debt to total assets ratio equity multiplier is also a bit higher than the industry average
due to more use of debt financing.
Analysis on Horizontal Statements
We have considered 2009 as the base year in all the calculation and analysis so that we can
observe year to year growth of different sectors of the companies and industry.
Income Statement
23
Apex Spinning & Knitting Mills Ltd.
Even though both sales and gross profit decreased in the year 2010 net income in that year
was more than that of the previous year. The only reason that we observe from the horizontal
statement is that the company managed to pay a lot less income tax in the year 2010 which
enabled them to maintain a better net income figure.
Figures in 2011 are equally interesting, the company managed to yield 35% more revenue but
most of it was wiped out due to higher COGS resulting in only 7% increase in gross profit.
Even that 7% was nullified due to a higher administrative & selling overhead. The company
still managed to yield a better net income before tax figure compared to 2009 as they
managed to curb their interest expenses and this resulted in a net income figure that is higher
than 2009 but slightly lower than 2010.
Figures are exceptionally for the company in the year 2010 and 2011 compared to the figures
of 2009. The company managed a better performance in almost every department. They even
managed to have lower interest expense in 2011 compared to 2009. The main reason might be
in the interest expense, even though the managed double the profit figures their interest
expense wasnt much in 2010 and in 2011 it in fact went down. So might have resulted in
healthy net income figures in 2010 and in 2011.
Malek Spinning suffered a lot in 2010 as all the sales and profitability figures are lower than
2009. Things could have been a bit worse if they hadnt managed substantial increase in other
income segment. In 2011 even though they managed to yield higher sales the effect was
wiped out due to high COGS and administrative and selling expenses. So the company
definitely needs to focus on their expense management issues.
The company suffered a lot due to high interest expense in 2010. Even after managing better
sales figures they had to accept 81% decrease in net income in 2010 owing to high interest
expense and administrative expense. In 2011 the net income figure was a bit better though it
was due to higher sales and a lot higher other income figures. They still had to pay a lot
interest expense compared to that of 2009.
The company doubled their net income figure in 2010 mainly due to higher sales figure,
much higher gross profit and lower interest expense. So clearly they did a much better job in
2010. Things were pretty much same in 2011, better sales figures, higher gross margin
eventually resulting in higher net income compared to 2009.
Textile Industry
Industry as a whole managed to yield better net income in both 2010 and 2011 compared to
2009. Higher sales, higher gross profit, comparatively managed interest expense and lower
tax expense were the reasons behind the increase in net income for the year 2010 and 2011.
24
Balance Sheet
Companys total current assets decreased in 2010 even though cash and other receivables rose
sharply. Cash figure was a lot high 2011 as well so it indicates the company isnt utilizing its
cash properly and missing out on short term investment opportunities. Quite surprisingly the
company significantly reduced it long term obligations over the years. However it still had
more debt in 2011 due to heavy influence on current liabilities. Even though this would give
the company a bit of leverage we must admit that Its quite a risky strategy the company has
taken.
Accounts receivables of the company rose sharply in 2010 and in 2011 which may be a result
of huge credit sales compared to 2009. Still it shows lack of efficiency in managing
receivables. This company has also reduced its dependence on long term debt and increased
its dependence on short term debt obligations over the three years. Equity has been kept at a
steady level.
The company shows some serious inefficiency in cash management as its cash figures rose
extremely high in 2010. It has been brought down a lot in 2011 still it was much higher
compared to 2009. Furthermore the company changed its financing policy twice in the last
three years. In 2010 it showed heavy reliance on equity financing and almost halved its debt
obligations. Just the opposite happened in 2011, reduced equity considerably and doubled the
debt financing compared to that of 2009. They have dramatically changed their policies and
practices from 2010 to 2011.
This company also shows a bit cash management issues as cash figure just shot up in 2011.
They are certainly missing out some short term investment opportunities. Other than that the
rest of figures have been kept quite steady over the past three years.

Again cash management is a problem in 2011. Increased dependence on debt financing more
compared to equity financing. Both current and long term debt financing have been relied
upon.
Textile Industry
Industry as a whole cash management seems to be a problem that needs addressing. More
reliance on equity financing has been observed in 2010 and quite the opposite has been seen
in 2011. Accounts payable has been exploited a bit in 2011 among the alternatives of current
liabilities. Other figures have been relatively stable.
25
Analysis on Vertical Statements
Income Statement
COGS percentage is highest and as a result gross profit percentage is lowest among all the
firms. So the company needs to check whether they are getting superior quality raw materials
or not and if they are purchasing superior quality raw materials then how much value its
adding to the company.
Except of Anlima Yarn administrative and selling overhead is a bit higher for the
company.They need to check whether they are overstaffed or not. Also need to see for
redundant machineries if any.
COGS and gross profit percentage is pretty similar to the rest of the companies if not a bit
higher. However they suffer from high administrative and selling costs which affected its
profitability.
COGS and gross profit percentage are pretty much similar to the rest of the companies,
however in 2011 the company suffers from much reduced gross profit margin due to high
COGS.
Selling and administrative expenses have been kept in check compared to its competitors.
Gross profit percentage, administrative and selling overhead percentage is pretty much
similar to the other companies in the industry. However, the company suffers from lower net
profit percentage due comparatively higher interest expense.
The company managed to yield better gross profit percentage and net profit percentage in
2010 and in 2011 mainly due to lower COGS and slightly lower administrative costs. If the
company can deliver quality products retaining and attracting customers then reduced COGS
shouldnt be a concerning issue.
Balance Sheet
Lower percentage of cash cancelled out the effect of higher percentage of accounts
receivables resulting in current assets level that is pretty much similar to industry average
except of 2010.
The company has been comparatively more reliant debt financing and less reliant on equity
financing compared to other companies.
26
The company holds substantially high percentage of fixed assets which is lot higher than
other companies. Current asset portion is comparatively lower.
They have been interested in debt financing compared to equity financing.
Asset segregation is similar to other firms or to the industry average. However the company
showed exceptionally high reliance on equity financing in 2010. That tendency was curbed a
bit in 2011 still it was much higher than what other companies follow.
Current asset portion is lot smaller and fixed assets comprise most of its assets value. The
company is much reliant on debt financing and a lot less on equity financing.
Figures of Square Textiles dont deviate much from the industry average. Both current assets
and fixed assets somewhat corresponds to that of industry average. Financing strategy also
somewhat aligns with the industry policy on average except in 2010 when the company
showed a bit more reliance on debt financing.
Conclusion
We have reached the end of the report. Based on our findings we can afford to make few
recommendations regarding the financial performance of the companies.
Apex Spinning should be have a look at its COGS and try to improve its gross profit
margin ratio.
Anlima Yarn should address its liquidity issues and focus on better utilization of its
assets.
Malek Spinning should develop better cash management strategy and can afford to
use more debt financing.
Rahim Textiles can also afford to have more debt financing and should look out for
ways to curb its expenses to boost net profit margin ratio.
Square Textiles should maintain most of its ongoing policies and no need to take any
radical steps as at present they are going pretty smoothly.
Bibliography
27
Ann Masters, Harold R. Wallace, 2012. Personal Development for Life and Work. 10th ed. s.l.:Cengage
Learning.
Cliff Ricketts, John Ricketts, 2010. Leadership: Personal Development and Career Success. s.l.:Cengage
Learning.
Diana Whitney, Amanda Trosten-Bloom, Kae Rader, 2010. Appreciative Leadership: Focus on What
Works to Drive Winning Performance and Build a Thriving Organization. s.l.:McGraw Hill Professional.
Dr David J Pauleen, Professor G E Gorman, 2012. Personal Knowledge Management: Individual,

Organizational and Social Perspectives. s.l.:Gower Publishing, Ltd..
Gravells, A., 2010. Delivering Employability Skills in the Lifelong Learning Sector. s.l.:SAGE.
Heather E. Canary, Robert D. McPhee, 2010. Communication and Organizational Knowledge:

Contemporary Issues for Theory and Practice. s.l.:Routledge.
John McLeod, McLeod John McLeod Julia, 2014. Personal and Professional Development for
Counsellors, Psychotherapists and Mental Health Practitioners. s.l.:McGraw-Hill Education (UK).
Newton, S., 2012. The Professional's Guide to Business Development: How to Win Business in the
Professional Services. s.l.:Kogan Page Publishers.
Robert K. Throop, Marion B. Castellucci, 2010. Reaching Your Potential: Personal and Professional
Development. 4th ed. s.l.:Cengage Learning.
Ulrich D. Holzbaur, Laetus Lategan , Karin Dyason, 2012. Seven Imperatives for Success in Research.
s.l.:AFRICAN SUN MeDIA.
28

Saad Ratio Analysis

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Saad Ratio Analysis

Uploaded by

Copyright:

Available Formats

Ratio analysis of textile

In this report we have focused on four main categories of financial ratios:

Apex Spinning Mills Ltd.

Anlima Yarn Dyeing Ltd.

Malek Spinning Mills Ltd.

Rahim Textiles Mills Ltd.

Square Textiles Ltd.

Trend Analysis: Apex Spinning & Knitting Mills Ltd.

Net Profit Margin Ratio

The ratio show is an indicator of companys profitability and efficiency in expense

Gross profit Margin Ratio

Return on Common Stock Equity

Receivables Turnover Ratio

Inventory Turnover Ratio

Asset Turnover Ratio

Cash Conversion Cycle

Debt to Total Assets Ratio

Times Interest Earned

Comparative Analysis: Apex Spinning & Knitting Mills Ltd.

Net profit margin ratio

Gross profit margin ratio

Asset Turnover Ratio

Dividend Payout Ratio

Receivables Turnover Ratio

Inventory Turnover Ratio

Cash Conversion Cycle

Debt to Total Assets Ratio

Trend Analysis: Malek Spinning Mills Ltd

Return on Common Stock Equity

Dividend Payout Ratio

Receivables Turnover Ratio

Inventory Turnover Ratio

Asset Turnover Ratio

Debt to Total Assets Ratio

Times Interest Earned

Comparative Analysis: Malek Spinning Mills Ltd.

Net profit margin ratio

Gross profit margin ratio

Asset Turnover Ratio

Dividend Payout Ratio

Receivables Turnover Ratio

Inventory Turnover Ratio

Debt to Total Assets Ratio

Trend Analysis: Rahim Textiles Ltd.

Net Profit Margin Ratio

Gross profit Margin Ratio

Return on Common Stock Equity

Dividend Payout Ratio

Receivables Turnover Ratio

Inventory Turnover Ratio

Asset Turnover Ratio

Debt to Total Assets Ratio

Comparative Analysis: Rahim Textiles Ltd.

Net profit margin ratio

Gross profit margin ratio

Asset Turnover Ratio

Dividend Payout Ratio

Receivables Turnover Ratio

Inventory Turnover Ratio

Cash Conversion Cycle

Debt to Total Assets Ratio

Trend Analysis: Square Textiles Ltd.

Dividend Payout Ratio

Comparative Analysis: Square Textiles Ltd.