Assignment on

Financial Statement Analysis

Course Title: Financial Statement Analysis
Course Code: FNB-303

SUBMITTED TO:
Shah Md. Taha Islam
Lecturer
Department of Accounting Information Systems
Jahangirnagar University
Savar, Dhaka-1342

SUBMIITED BY:
Dalia Afrose (Id: 1661)
Noara Fahmida (Id: 1668)
Tanjil Hassan (Id: 1684)
Asif Raihan Chy (Id: 1693)
Md Rakibul Hassan Nahid (Id: 1696)
Md. Mehedi Hasan (Id: 1698)
Aklima Begum (Id: 2440)
8th Batch
Department of Finance & Banking
Jahangirnagar University
Savar, Dhaka-1342

SUBMISSION DATE:
October 31, 2019

Faculty of Business Studies

Department of Finance and Banking
Jahangirnagar University, Savar, Dhaka – 1342
QUESTION 1:
Answer For the given questions:
a. Book value per share for Apex Foods Limited:
= (Total Assets − Total liabilities)/Number of Shares outstanding
= (1,872,182,968 −1,088,613,009)/5,702,400
=137.41
Price per share of Apex Foods Limited:209.40
P/B Ratio for Apex Foods Limited:
=Share Price Per Share/Book Value Per Share
=209.40/137.41
=1.52

Book Value per Share for Agriculture Marketing Company Ltd.:

= (Total Assets − Total liabilities)/Number of Shares outstanding
= (1,431,448,954 − 828,339,465)/8,000,000
=75.39
Price per Share of AMCL:233.30
P/B ratio for AMCL:
=Share Price Per Share/Book Value Per Share
=233.30/75.39
=3.09

b. Why might a firm trade at a P/B greater than 1.0?

A firm might trade at a P/B greater than 1.0 because a P/B ratio of less than 1.0 can indicate that a
stock is undervalued. However, it could also mean something is fundamentally wrong with the
company. As with most ratios, this varies by industry. The P/B ratio also indicates whether you're
paying too much for what would remain if the company went bankrupt immediately. While a ratio
of greater than 1.0 may indicate that a stock is overvalued. Good indication of how the market
values the firm’s assets against earnings.
c. Calculate and interpret price to earnings (P/E) ratio for each firm.
Earnings per share of Apex Foods Ltd : 1.81
Price per Share of Apex Foods Ltd : 209.40
P/E Ratio for Apex Foods Ltd
= Market value Ratio per share / Earnings per share
=209.40 / 1.81
=115.70
Earnings per share for Agricultural Marketing Company Ltd : 6.94
Market price per Share of AMCL : 233.30
P/E ratio for AMCL : 233.30 / 6.94 = 33.62

d. Explain why firms have different P/E ratios.

Firms have different P/E ratios. A stock's price-to-earnings ratio, or P/E ratio, is an expression of
how expensive a stock is relative to the profits generated by the underlying company. Because of
factors such as risk and growth rate, P/E ratios of different companies often vary considerably.

e. Calculate and interpret price to sales (P/S) ratio for each firm.
Sales per share for Apex Foods Ltd.=Total Sales / Total Number of Share
=1,712,436,974/ 5,702,400
=300.30
Market Price per Share: 209.40

P/S ratio for Apex Foods Ltd.=Market Value per Share / Sales per Share
=209.40 / 300.30
=.697
Sales per Share for Agricultural Marketing Company Ltd. =Market Value per Share / Total
Number of Shares
=2,538,528,750 / 8,000,000
=317.32
Market price per Share of AMCL: 233.30

P/S ratio for Agricultural Marketing Company Ltd. = Market Value per Share / Sales per Share
=233.30 / 317.32
=.74

f. How is P/S different from P/E?

The PE-ratio and the PS-ratio are important indicators for stock investors. The PE-ratio is the share
price divided by earnings per share. The PE-ratio indicates how a stock is valued and can be used
to compare stocks.
When calculating the PE ratio, earnings per share are usually estimated by a forecast for the current
year. A PE-ratio of 10 means that the price of the stock is 10 times the forecasted earnings per
share and that the earnings per share is 10% of the share price.
The PS-ratio is the stock price divided by sales (revenue) per share. The PS-ratio gives information
about the valuation for a company's shares. You cannot calculate the PE-ratio for companies that
makes a loss, in companies with losses you can calculate the PS-ratio instead. When calculating
the PS-ratio, the sales per share are usually projected for the current year. A PS-ratio of 5 means
that the stock price is 5 times greater than the sales per share.
PE-ratio = share price / earnings per share
PS-ratio = share price / sales per share (revenue per share)

g. Using the method of comparable, estimate a value for selected companies (determine value
for one company).
We will attempt to value National Tea Company Ltd using the method of comparable. National
Tea Company Ltd. and two firms that produce similar type products. All of them are from Food &
Allied industry. The price to sales (P/S),price to earnings (P/E), and price to book (P/B) ratios for
Apex Foods Ltd. and Agricultural Marketing Company Ltd. are based on their market Value in
June 2018.National Tea Company Ltd. is valued by applying the average of Multiples for the
comparison firms to NTC Ltd sales, earning, and book values. The three multiples give three
different valuations for NTC Ltd. a bit awkward. So, the valuations are averaged to give a value.
 Tittle Sales Earnings Book Value Market Value P/S P/E P/B

Apex Foods 1,712,436,97 10,321,34 783,569,95 1,194,082,56 .69 115.7 1.5

Ltd 4 4 9 0 7 0 2
Agricultura 2,538,528,75 55,520,00 603,109,48 1,866,400,00 .74 33.62 3.0
l Marketing 0 0 9 0 9
Company
Ltd
National 1,143,639,59 10,307,71 783,569,95 ? ? ? ?
Tea 3 6 9
Company
Ltd.

Applying comparable Firms multiples to National Tea Company Ltd.

Tittle Average Multiple for NTC Ltd's Number NTC Ltd's
Comparables Valuation
Sales .72 × 1,143,639,593 = 823,420,507
Earnings 74.66 × 10,307,716 = 769,574,077
Book Value 2.31 × 783,569,959 = 1,706,096,605
Average Valuation 1,649,545,595

h. Asset based valuation can be applied for the Foods &Allied industry.
Asset-based valuation is a form of valuation in business that focuses on the value of a company’s
assets or the fair market value of its total assets after deducting liabilities. Assets are evaluated,
and the fair market value is obtained. The asset-based approach uses the value of assets to calculate
a business entity valuation.
Asset- based valuation is not without drawbacks. For applying asset-based valuation some
difficulties should be faced. They are given below:
 Assets listed on the balance sheet may not be traded often, so market values may not be
readily available.
 Market values if available, might not be efficient measures of intrinsic value if markets for
the assets are imperfect.
 Market value, if available, may not represent the value in the particular use to which the
asset is put in the firm. One might establish either the current replacement price for an asset
 or its current selling price, but neither of them may be indicative of its value in a particular
going concern.
 The omitted assets must be identified for their market value to be determine. The very term
intangible asset indicates a difficulty in measuring value. Accountant list intangible assets
on the balance sheet only when they have been purchased in the market. Because only then
is an objective market valuation available.
 Even if individual assets can be valued, the sum of the market values of all identified assets
may not be equal to the value of the assets in total.

i. Apply the valuation technologies that you have learned in your FSA 303 course to
estimate a value for a selected company. (Hints: Pretend that you are sitting at the
beginning of 2014. Use a required return of 10 %.)

Continuing Value for Apex Foods Limited estimated below:

Tittle 2013-14 2014-15 2015-16 2016-17 2017-18
EPS 1.56 (2.32) 14.88 2.99
DPS 2.0 2.0 2.0 2.0
BPS 98.56 98.12 93.8 106.68 107.67
ROCE 1.58% -2.36℅ 15.86% 2.80%
RE (10%) -8.3% -12.13% 5.50 -7.68
Discount Rate 1.10 1.21 1.331 1.46
(1.10)
PV of Re -7.55 -10.02 4.13 -5.25
Total PV of -18.69
RE
Continuing -76.8
Value (CV)
Present Value -52.46
of CV
Value per 27.41
Share
CV= -7.68/.10
=-76.8
PV of CV= -76.8/1.4641
= -52.46
j. What explains the difference between cash flow from operations and earnings? Identify
the accruals from the financial statements prepared by the selected company for the year
2017-2018.
Difference between cash flow from operations and earnings given below:
Cash flow and earnings are two different accounting concepts, featuring the time difference
between cash movements and business transactions. A cash flow may not be reported as earnings
unless it happens at the same time as a sale or expense transaction. On the other hand, earnings
may be non-cash accounting income.
Accruals from financial statement prepared by the selected company for the year 2017-18 given
below:
Apex Foods Limited

2018 2017

Trade Receivable 24,577,415 62,374,483

Advance, Deposits & 45,804,763 39,858,786

Prepayments

Deferred Tax Liabilities 38,752,739 24,272,437

Trade Payables 64,708,622 104,521,999

Agricultural Marketing Company LTD.

Accounts Receivable 135,256,478 140,563,639

Advance, deposit & 278,642,609 236,574,747
prepayments
Deferred tax payable 13,322,594 14,575,865

Accounts payable 3,093,348 1,981,959

Income tax payable 51,697,868 34,911,028
QUESTION 2
Analysis of profitability: The Coca-Cola Company
a. Calculations of RNOA and NBC:
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛ℎ 𝐼𝑛𝑐𝑜𝑚𝑒 (𝑂𝐼)
Return on Net Operating Assets (RNOA) =𝐴𝑣𝑒. 𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑠𝑠𝑒𝑡𝑠(𝑁𝑂𝐴)
6121
=22905 × 100

=26.72%
𝑁𝑒𝑡 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (𝑁𝐹𝐸)
Net Borrowing Cost (NBC) =𝐴𝑣𝑒. 𝑁𝑒𝑡 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑂𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛 (𝑁𝐹𝑂)
140
= × 100
3573

=3.91%
b. Calculations of FLEV:
𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑂𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛 (𝐹𝑂)
Financial Leverage (FLEV) =𝐴𝑣𝑒.𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 𝐸𝑞𝑢𝑖𝑡𝑦 (𝐶𝑆𝐸)
3573
=19332

= .1848
c. Calculations of ROCE:
Return on Common Equity (ROCE)= RNOA+ [FLEV×(RNOA-NBC]
= 26.72%+ [.1848× (26.72-3.91)
= 30.93
d. Calculations of PM, ATO and Showing RNOA= PM×ATO:
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝑂𝐼)
Profit Margin (PM) = 𝑆𝐴𝑙𝑒𝑠
6121
=28857 × 100

= 21.21%
𝑆𝑎𝑙𝑒𝑠
Assets Turnover =𝐴𝑣𝑒. 𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑠𝑠𝑒𝑡𝑠(𝑁𝑂𝐴)

28857
= 22905

= 1.26
 RNOA= PM×AT =21.21% ×1.26

= 26.72%

e. Calculations of GM, OPM, OPM Ratio:

𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛
Gross Margin Ratio = 𝑠𝑎𝑙𝑒𝑠

18451
= 28857 × 100

= 63.94%
𝑂𝑝𝑒𝑎𝑟𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒( 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥)
Operating Profit Margin Ratio (OPMR)= × 100
𝑆𝑎𝑙𝑒𝑠

5453
= 28857 × 100

=18.90

𝑝𝑒𝑟𝑎𝑡𝑖𝑏𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 (𝑂𝐼)

Operating Profit Margin = × 100
𝑆𝑎𝑙𝑒𝑎

6121
= 28857 × 100

= 21.21%

QUESTION 3
A critical evaluation of different financial statement analysis techniques:
Financial statement analysis is often reported to senior management and the board of directors.
They use this information of the Financial Statement Analysis as input in the decision-making
process. The Financial Statement Analysis is also used by external parties, such as investors and
supervisory bodies to gain insight into organizations. There are several Financial Statement
Analysis methods and techniques that can be used to analyses a balance sheet and a profit and loss
account.

The two most common types of financial statement analysis are:

Horizontal & Vertical analysis
Ratio analysis
Horizontal & Vertical analysis
Financial Statement Analysis: Horizontal analysis
A horizontal analysis consists of a two-year comparison of financial data with other years. This
type of financial analysis is also known as trend analysis. The horizontal analysis is often expressed
in monetary terms (currency) and percentages. Comparisons of currency amounts provide analysts
with an insight into aspects that might contribute significantly to the profitability or the financial
position of the organization. An example of a horizontal analysis in currency: In 2011, an
organization turned over two million more than in the previous year. This increased turnover
appears to be a very positive development. This is true, however, when the analysis is examined
more closely, it shows that the procurement costs of goods and services have increased by 2.5
million. The wonderful picture of an additional turnover of 2 million is at once adjusted to a less
positive picture.
A horizontal analysis expressed as a percentage, provides more insight and feeling about the
significance of an increase or decrease. An example of a horizontal analysis expressed as a
percentage is a representation of an increase in turnover of 1 million on revenues of 2 million in
the previous year. This is an increase of 50%, which is a remarkable growth in turnover for an
organization. However, if the increase is compared with a turnover of 20 million in the previous
year, then the increase will amount to 5%, which represents a normal growth of an organization.
Expressing an analysis as a percentage provides a much better insight into the increase than when
expressed as a currency.
Financial Statement Analysis: Vertical Analysis
A vertical analysis consists of a representation of standard headings on a financial statement that
are expressed as percentage of those headings. In a vertical analysis both the assets and liabilities
are considered equal to 100%. Some examples of headings are: equity, short-term and long-term
liabilities. These are expressed as a percentage of the total assets. By doing this every year, insight
will be created into the change in the distribution of total assets. A vertical analysis is also often
used to compare companies with one another in the form of benchmarking. Because the headings
occur in any given organization, this makes it easy to compare organizations.
For example, borrowed capital compared to the total assets A vertical analysis can also be applied
to the profit and loss accounts. By representing the standard heading as a percentage of the total
turnover of that year, it is easy to obtain insight into the division of each currency with the different
costs, expenditures and profit. This makes it possible to compare the successive years to identify
certain trends.
Ratio analysis
Ratios, a ratio between two quantities, are used to represent relationships between various figures
on a balance sheet, profit and loss account or other accounting records. Ratios always represent a
ratio of one figure related to another. The four most common ratios are:
Profitability ratio & profitability
Profitability ratio & profitability measure the results of an organization’s day-to-day management
or overall performance and effectiveness of management.
Some of the most commonly used profitability ratios are: gross profit ratio, net profit ratio,
operating ratio and return on equity capital, return on capital employed ratio, dividends yield ratio
and e
So, it can be said that these are the financial statement analysis techniques.

QUESTION 4
Explanation regarding the question no. 4 has given below:
The return on common equity, or ROCE, is defined as the amount of profit or net income a
company earns per investment dollar. The investment dollars differ in that it only accounts for
common shareholders. This is often beneficial because it allows companies and investors alike to
see what sort of return the voting shareholders are getting if preferred and other types of shares are
not counted.
Return on common equity is a measure of how well a company uses its investment dollars to
generate profits. Often times, it is more important to a shareholder than return on investment (ROI).
It also tells common stock investors how effectively their capital is being reinvested. Generally, a
company with high return on equity (ROE) is more successful in generating cash internally.
Investors are always looking for companies with high and growing returns on common equity;
however, not all high ROE companies make good investments. Instead, the better benchmark is to
compare a company’s return on common equity with its industry average. In conclusion, the higher
the ratio, the better the company.
In the analysis of ROCE, it broke down inti its drivers. And it works in 3 level. I first level it
analyses the effects of financial leverage and operation leverage. Then in second, the effects of
profit margin and asset turnovers on operating profitability. In third level the analysis proceeds
individual margin of profit margin, asset turnover and net borrowing cost.
Explanation of the measurement how they drive ROCE:
I. Profit margin made up a positive effect on the ROCE
II. Net borrowing cost (NBC) affect the ROCE negatively
III. The affection of operating leverage (OLLEV), it depends on the spread of it.
IV. Spread can affect the ROCE both positively or negatively
V. Financial leverage affects the ROCE with the measurement of spread.
VI. Asset turnover affects the ROCE positively.