Financial Performance Analysis of

27th,September- KDS Garments Ltd.

2020

Rafiul Alam
Comilla University
 Internship Report

On

Financial performance Analysis of KDS

Garments Ltd

KDS Garments LTD

Submitted to
Arupa Sarker

Assistant professor

Department of Accounting And Information Systems

Comilla University

Submitted by

Rafiul Alam

ID.11606031

Session: 2015-16

Department of Accounting And Information Systems

Comilla University

Date of Submission: 27th-September-2020

Letter of Transmittal
27th September-2020
Arupa Sarker
Assistant professor
Department of Accounting And Information Systems
Comilla University

Subject: Submission of Internship Report.

Dear Sir,

This is my pleasure to present my internship report entitled Financial Performance Analysis

of KDS Garments LTD.

I have conducted my internship program in KDS Garments LTD, On March 17 to June 17,
2020 with your kind supervision. I have invested my every effort to analyse all the financial
functions performed by KDS Garments LTD.

I believe that the knowledge and experience I gathered during the internship period,
will be much beneficial for me in my future professional life. I will be grateful to you if you
kindly accept this report.

Thanking you for your valuable time and kind supervision.

Sincerely Yours,

............................
Rafiul Alam
ID No: 11606031
Reg No:11606031
Program: BBA
Session:2015-16
Department of Accounting and Information Systems
Comilla University.
 CERTIFICATE OF SUPERVISOR

The report titled “Financial Performance Analysis of KDS Garments Limited” is submitted as
partial requirement of BBA program. This report has been prepared by Rafiul Alam, ID:
11606031, Department of AIS, Comilla University, under my supervision and guidance. This
report is approved and accepted.

I wish him every success in life.

Best regards,

Arupa Sarker
Assistant Professor
Department of Accounting and Information Systems
Comilla University, Comilla.

Internship Certificate
Acknowledgement
It is my pleasure to present my internship report on “Financial Performance Analysis of
KDS Garments Ltd”

I express my deep gratitude to my supervisor Arupa Sarker, Assistant professor,

Department of Accounting And information Systems, Comilla University. Without his
constant supervision, valuable advices and suggestions from time to time, it would not be
possible to complete this report in a right manner. Secondly, the support and compliment that
I have received from Mohammed Hashem, Manager of Commercial Department and
honorable supervisor MD. Abdullah Habib, Senior Executive has increased my motivation,
confidence level and has eased the path of collecting data for the purpose of my research. He
is worthy to mention because he provided me some guidelines that were apparently
impossible to get and took good care of me while doing internship.

I would like to express my earnest gratitude to the Chief Financial Officer (CFO) of KDS
Garments Ltd. Mr Biplob Kanti Banik, FCA for helping me a lot to understand the official
work and preparing the report I am also grateful to the HR of KDS Garments Ltd. for offering
me the Internship training. Finally, I would like to admire the outstanding support that I have
got from all the officers of KDS Garments while conducting research for internship purpose.
 DECLARATION

I, Rafiul Alam , student of BBA, Comilla University, hereby state that the report offered in the name “Financial
Performance Analysis of KDS Garments Limited” Chittagong has been prepared and carried by me under the
supervision of manager, KDS Garments Limited. I also state that no part of this report has been or is being
submitted elsewhere for the award of any degree, diploma or recognition.

……………………………
Rafiul Alam

ID: 11606031

Sesson: 2015-2016
Reg: AIS-11606031
Department of Accounting and Information Systems
Comilla University, Comilla.
 Executive Summary

KDS Garments Ltd. is one of the largest Garments company in Bangladesh, which makes a
significant contribution to the RMG industry of Bangladesh through their quality products, products
variety and strong supply chain management. I had the opportunity to work at Accounts&
Commercial department as an intern for one months. The report is the outcome of one months of
learning and hard work at KDS Garments Ltd.

The foremost objective of this report is the Financial Performance Analysis and Evaluation of KDS
Garments Ltd. In order to focus on the financial performance and evaluation of KDS Garments Ltd,
the study focuses on the financial statement and ratio analysis- Profitability ratio, Liquidity ratio,
Efficiency ratio, Debt Management and market Efficiency ratio. I have selected the last three years
(2016/2017-2018/2019) for my analysis. I have collected data and financial papers of these three
years to prepare this report. The study has been conducted mainly based on primary& secondary
data. Moreover, the study describes the internship experience and objectives of the study. Some
information has also been collected from briefing of manager and discussion with the officers.

Major findings of the report are that KDS Garments Ltd faced exertion in 2018/2019 while
disbursing payments to its suppliers and the situation of inventory days was not satisfactory in
actual period as there was an increasing trend but such is expected to decrease in the forecasting
period and so on. From over all perspective, it can be recommended that they should utilize their
assets properly by investing them in more profitable projects or government securities as they have
to be dependent on external loan to meet liquidity needs. In the face of today’s global competition
with open market operation, KDS Garments Ltd must develop and retain the high achievers and
motivated workforce and equip them with latest skills and technologies
 Table of Contents

Letter of Transmittal…………………………………………………………………………………………….
Certificate of Supervisor………………………………………………………………………………………..
Internship Certificate…………………………………………………………………………………………….
Acknowledgement……………………………………………………………………………………………...
Declaration………………………………………………………………………………………………………
Executive Summary…………………………………………………………………………………………….

Chapter 01 Introduction................................................................................................................................................1
Background..........................................................................................................................................................1
Origin of the report..............................................................................................................................................1
Objectives of the Study........................................................................................................................................2
Rationale of the study..........................................................................................................................................2
Methodology of the Study...................................................................................................................................2
Research Type......................................................................................................................................................3
Choice of the year................................................................................................................................................3
Method of data collection....................................................................................................................................3
Primary Sources................................................................................................................................................3
Secondary Sources............................................................................................................................................3
Data analysis and presentation.............................................................................................................................4
Sample..................................................................................................................................................................4
Limitations of the Study.......................................................................................................................................4

Chapter 02- Overview of Company..............................................................................5Error! Bookmark not defined.

KDS……………………………………………………………………………………………………………..6
At a glance of KDS..............................................................................................................................................7
Vision of KDS Garments Industries Limited.......................................................................................................7

Mission of KDS Garments Industries Limited....................................................................................................7

Core Objectives....................................................................................................................................................8
Our core values....................................................................................................................................................8
List of Companies under KDS Group:.................................................................................................................8
SWOTAnalysis…........
………………………………………………………………………………………………………………………………………………………………….....9

Chapter 03-Theoretical Framework................................................................................Error! Bookmark not defined.

Financial Performance Analysis........................................................................................................................11
Vertical Analysis............................................................................................................................................11
Horizontal Analysis........................................................................................................................................11
 Ratio Analysis...........................................................................................................................................12-14
Efficiency (Asset Management) Ratio:.....................................................................................................14-15
Debt Management Period / Coverage Ratio:.............................................................................................16-17
Profitability Ratio:.....................................................................................................................................18-21

Chapter 04- Projected Financial Statement...........................................................................................................22-25

Assumptions.......................................................................................................................................................27
Calculation:........................................................................................................................................................27

Chapter 05- Ratio Analysis of KDS Garments Ltd..................................................................................................30

Return on Asset..............................................................................................................................................31
Return on Equity.............................................................................................................................................32
Net Profit Margin............................................................................................................................................33
Liquidity Ratio:..................................................................................................................................................34
Current ratio:...................................................................................................................................................34
Cash Ratio:.....................................................................................................................................................35
Quick Ratio:....................................................................................................................................................36
Net working Capital........................................................................................................................................37
Efficiency Ratio:................................................................................................................................................38
Working Capital turnover...............................................................................................................................38
Current Asset Turnover:.................................................................................................................................39
Inventory Turnover ratio:...............................................................................................................................40
Debt Ratio..........................................................................................................................................................40
Debt to Equity Ratio.......................................................................................................................................41
Time Interest Ratio.........................................................................................................................................41
Market Efficiency Ratio.....................................................................................................................................42
Earnings Per Share..........................................................................................................................................43
Price Earnings Ratio.......................................................................................................................................44
Calculation of financial ratios for both actual & forecasting period:................................................................45
Probability and Liquidity Ratio……………………………………………………………………………….46

Chapter 06 Findings and Analysis…………………………………………………………………………..47-

52Error! Bookmark not defined.

Chapter 07 Conclusions& Recommendation:............................................................................................................53

Bibliography..............................................................................................................................................................58
 1

Chapter 01

Introduction

KDS Garments LTD.

 1

Background
Financial analysis is a structural and logical way to present overall financial
performance of financial institution. It also helps to evaluate and ease decision
making process for business operation. Business stakeholders try to concentrate
to get overall business overview from profitability, liquidity, assets
management and solvency ratio analysis. Financial Analysis is a tool for
stakeholders for taking decision.

Every graduate student from the business discipline has to participate in the
internship program and complete it with the determination of learning how to
do work practically after achieving theoretical knowledge as a business student.
It is a perfect chance for every student to gather practical understanding of the
theoretical knowledge that we have gained in our four years’ undergraduate life.
A study research should be done for putting the knowledge in practical manner.
I have done my internship in the Commercial Department of KDS Garments
Ltd.

Origin of the report

Internship program is designed for the student of Bachelor of Business Administration
Program (BBA) of Comilla University on completion of the course to acquire experience
on the practical application with the theoretical knowledge.
This report was done during my internship period in KDS to fulfill the
requirement of the course under the supervision of Arupa Sarker, Assistant
professor, Comilla University,Department Of Accounting And Information Systems
.
The topic was selected with proper guidance of the supervisor.

The Topic of the report is Financial Performance Analysis of

KDS Garments Limited.
 2

Objectives of the Study

The main objective of the study is to evaluating financial Performance analyses of KDS
garments especially in its Accounts Section. To achieve the main objective, the study has
covered the following specific of objectives:

 To get an overall idea about the financial performance of the respective

organization.

 To understand the working capital management (credit management, liquidity

position, speedy recovery of cash) of the respective organization.
 To compare the ratios of KDS Garments Ltd. with the ratios of significant competitors
to evaluate the performance in the market
 To show the comparative picture of the performance of KDS Garments with two
main competitors in the Industry.

 To identify the strengths and weaknesses of the respective organization &

determine the competitor analysis of the respective organizations.
 To relate the theoretical learnings with the real life situation.
 Finally, to make some recommendations and suitable conclusions regarding
financial performance of KDS Garments Ltd.

Rationale of the study

The aim of this internship program is to connect practical knowledge with theoretical
knowledge. It is proved that internship is an effective program after 4thyear BBA academic
life. Internship program enables a student to gain first hand exposure of working in real
world. Internships provide a nice learning curve for students with little experience of the
professional world.

Methodology of the Study

 3

This report is the reflection of one-month internship program in KDS Garments Ltd. All
companies are facing tremendous competition from each other as competitors is increasing as
well as changing buyers demand. So the employees remain very busy to gain a competitive
advantage over competitors. As an intern, I had to collect data and information from that
busy corporate environment. Information collected to furnish this report is both from primary
and secondary sources.

Research Type
This is a descriptive research which briefly reveals the overall activities of the company. This
internship report has been prepared based on the information provided extracted from
different sources collected by using a specific methodology.

Choice of the year

I have selected the last three years (2016/2017-2018/2019) for my analysis. I have collected
data and financial papers of these three years to prepare this report.

Method of data collection

To make this report presentable and effective, the necessary information has been
collected from two sources:
• Primary Sources
• Secondary Sources

Primary Sources

This report has been prepared on the basis of experience gathered during the period of
internship. To make this report more presentable required different primary data.
Primary data were collected:
 By consulting with the company supervisors
 From the experience of practical deskwork.
 From the Briefing of manager of Accounts dept. And CFO of KDS
 Close observation of the several tasks by different department’s officers.

Secondary Sources
 4

Secondary data were collected from:

 Annual report of KDS Garments Ltd.
 Online data from Different websites such as KDS website and educational technology
website COURSE HERO and SCRIBD.
 Relevant file study as provided by the officers concerned.
 Several articles related to Financial Analysis
 Working papers

 Selected Books

Data analysis and presentation

Qualitative and Quantitative both type of research is conducted to analyses the primary and
secondary data. Besides, Different charts and Graphs are used to present the data. Microsoft
Word and Microsoft Excel are used for the purpose of analysis and reporting.

Sample

KDS garments industries Ltd.

Limitations of the Study

Due to some limitations it’s really tough to prepare report as intended though I have given
utmost effort to prepare this report properly. Such are as follows:

 The main constrain of the study was insufficiency of information which was required
for the study.
 Strict management policy to share information to external people expect government
authority.
 Large scale investigation was not possible due to Time Constrain.
 The functions and activities of KDS Garments Limited are too vast, so they change
their strategy frequently. As a result, it was not possible to collect all updated
information.
 Using various terminology or jargon words is sometimes difficult to understand which
could otherwise be incorporated sufficiently in preparing the report.
 Because of security issue, they don’t allow me access to ERP system. As a result, I
have to depend on the data provided by the officers.
 5

 Data sources are also limited

Chapter 02

Overview of Company
 6

KDS Group is a Bangladeshi one of the largest and most renowned businesses and

industrial conglomerates, founded by Mr. Khalilur Rahman in 1983. The head-quarter of this
group is located in Chittagong. The Group is mainly based in Chittagong. It also has wide-
ranging business operations in Dhaka. KDS has overseas offices and agencies in India, Hong
Kong, Europe, and North America.

KDS group is a renowned group in the world’s fashion market. KDS has made its mark in the
readymade garments manufacturing in Bangladesh being the pioneer and one of the largest
in the country. KDS Garments Industries Ltd. is a private limited company. It has a positive
contribution to the economy of Bangladesh. They are the largest export oriented garments
manufacturing company in Bangladesh. They believe in quality and time and highly
emphasized in maintaining a concerted harmony in its working process and its environment.
(KDS Group Website)
 7

KDS Garments Ltd

At a glance of KDS

 Current yearly sales of $106 million.

 7000 full time employees.
 Production capacity of 40 million pieces per year.
 Plan to increase production capacity by 70% by 2020.
 VENDOR EXCELLENCE AWARD - 2004 from Charming Shoppes.
 Vertically integrated with textile, accessories, washing, prints and embroidery.
 Major Buyers: 100% export oriented garments industries of our country.
 Nature of Business: Manufacturer and 100% Export of Readymade Garments
Accessories.
 Raw outrival Import: USA, UK, Singapore, Taiwan, Hong Kong, Korea, China,
Indonesia, India and Pakistan.
 Bankers: HSBC Bank, National Bank Ltd. Social Investment Bank Ltd.
 Insurance Companies: Pragati Insurance Companies Ltd.

Vision of KDS Garments Industries Limited

“To become a globally preferred supplier of apparel solutions upholding our social
responsibility”

Mission of KDS Garments Industries Limited

 Delighting our customers.

 Sustain performance.
 Achieving excellence in process and technology.
Building culture of cost consciousness.
 Leveraging through competent people.
 Leadership through innovation.
 Trust in new product design.
- Course Hero (KDS Garments Overview)
 8

Core Objectives

 Keep factory technically and socially compliant.

 Achieve yearly sales target with minimum specified margin/CM.
 Produce and ship good quality goods on time every time.
 Develop their people.

Our core values

 Lead through service excellence.

 Maximum resource utilization.
 Maintain global presence & standards economically.
 Nurture intelligence for growth of human capital.

List of Companies under KDS Group

KDS Garment Industries Limited Allied Express Shipping Ltd

KDS Hi-Tec Garments BD Ltd
KY Steel Limited
KYCR Coils Industries Limited
KDS logistics Ltd (KDSLL)
KDS Apparels Limited
HN Garments Limited
KDS Textile Mills Limited
SKYS Securities
National Bank Limited
Rahman CNG Co Limited
KY Tinplate Company Limited
KDS Fashion Limited
KDS Spinning Mills Limited
KIY Steel Limited

Al-Arafah Islami Bank Limited Northern Insurance Limited

Progoti Insurance Limited

 9

S W 0 T
Strengths Weakness Opportunities Threats

 Strong Brand 1.Unavailable of raw 1.With the help of 1.lower entry barriers
recognition materials of Garments further increase of rise-intensive
productivity & quality, competition with many
and at Local Area.
can minimize cost and new competitors.
nomination maximize profit and
with foreign 2.Power Supply is export value. 2.Unfavorable volatility
retailer erratic. of foreign currency to
2.Govt. is Providing BDT exchange rate may
 Fast delivery cash incentive 4% and
3.Absence of research have negative impact on
system and 1 and development 1% to 100% export
the cost structure and
stop trim oriented Garments.
department. profitability
solution.
3.Provide Customs
 Availability 4.Lack of synergies Bond to individual 3.Changes in interest
of cheaper between government Institutions under the rates and banking
support institutions and control of govt. policies may result in an
labor.
increase in financial
 Geographicall practical market
expenses which may
y situated at 1.With the help of have an adverse impact
an ideal further increase of in the profitability
location. productivity & quality,
1.Unavailable of raw
 Automated can minimize cost and
materials of Garments maximize profit and 4.lower entry barriers
production at Local Area. export value. rise-intensive
process lead competition with many
to economies 2.Power Supply is 2.Govt. is Providing new competitors.
cash incentive 4% and
of scale with erratic.
1% to 100% export 5.Unfavorable volatility
a large scale oriented Garments. of foreign currency to
of output. 3.Absence of research
BDT exchange rate may
 Demand and development 3.Provide Customs have negative impact on
department. Bond to individual
driven Institutions under the
the cost structure and
industry. profitability
4.Lack of synergies control of govt.
 Strong Brand between government 6.Changes in interest
recognition support institutions and rates and banking
and practical market policies may result in an
nomination increase in financial
with foreign expenses which may
have an adverse impact
retailer in the profitability
 Fast delivery
system
andstop trim
 10

Chapter 03

Theoretical Framework
 11

Financial Performance Analysis

Financial analysis is a structural and logical way to present overall financial performance of
an institution. It’s also helpful for evaluation and decision making for business operation. In
financial analysis process, ratio analysis is the most dominant and logical structure to help
business stakeholders. Under the financial ratio analysis process, there are few categories to
identical area of any institution.

Here I have analysed the data in three different categories and they are:

1. Horizontal Analysis
2. Vertical Analysis
3. Ratio Analysis

Vertical Analysis

This type of financial analysis involves looking at various components of the income
statement and dividing them by revenue to express them as a percentage. For this exercise to
be most effective, the results should be benchmarked against other companies in the same
industry to see how well the company is performing.

This process is also sometimes called a common-sized income statement as it allows an

analyst to compare companies of different sizes by evaluating their margins instead of their
dollars.

Horizontal Analysis

Horizontal analysis involves taking several years of financial data and comparing them to
each other to determine a growth rate. This will help an analyst determine if a company is
growing or declining and identify important trends.

When building financial models, there will typically be at least three years of historical
financial information and five years of forecasted information.
(Financial Performance Analysis-A Case Study -Amalendu Bhunia)
 12

Ratio Analysis

Ratio analysis is the most common method of financial statement analysis. Past or historical
information are used for this purpose with some assumptions and some adjustments are made
to project future performance.

Some commonly used and widely accepted ratios are calculated below:

 Profitability or Return on Investment Ratios

 Liquidity Ratios
 Efficiency Ratios
 Debt Management Ratios
 Market efficiency Ratio

Liquidity Ratio

A liquidity ratio is a financial ratio that indicates whether a company's current assets will be
sufficient to meet the company's obligations when they become due. This is a type of
financial analysis that focuses on the balance sheet, particularly, a company’s ability to meet
short-term obligations (those due in less than a year). (My Accounting course)
Common examples of liquidity analysis include:

 Current ratio
 Acid test
 Cash ratio
 Net working capital

a) Current Ratio
Liquidity performance measures the ability to meet financial obligations as they become due
and is crucial to the sustained viability of any organization. So organization should maintain
enough liquidity and also operates effectively in their business activity. Current ratio is one of
the most fundamental liquidity ratios. It measures the ability of a business to repay current
 13

liabilities with current assets. A current ratio of 1 or more means that current assets are more
than current liabilities and the company should not face any liquidity problem. While a
current ratio below 1 indicates poor financial health. A current ratio below 1 is usually not a
good sign.

Current ratio =

b) Acid Test Ratio

The quick ratio or acid test ratio is a liquidity ratio that measures the ability of a company to
pay its current liabilities when they come due with only quick assets. Quick assets are current
assets that can be converted to cash within 90 days or in the short-term. The acid-test ratio
uses a firm’s balance sheet data as an indicator of whether it has sufficient short-term assets
to cover its short-term liabilities.

Acid test/ Quick ratio =

c) Working Capital

Working capital, also known as net working capital (NWC), is the difference between a
company’s current assets, such as cash, accounts receivable (customers’ unpaid bills) and
inventories of raw materials and finished goods, and its current liabilities, such as accounts
 14

payable. Working capital is a measure of a company's liquidity, operational efficiency and its
short-term financial health. If a company has substantial working capital, then it should have
the potential to invest and grow. If a company's current assets do not exceed its current
liabilities, then it may have trouble growing or paying back creditors, or even go bankrupt.

Net Working Capital = (Current Assets – Current Liabilities)

Efficiency (Asset Management) Ratio

These ratios attempt to find out how effectively the business is converting inventories into
sales and sales into cash, or how it is utilizing its fixed assets and working capital, etc. The
efficiency ratio is typically used to analyze how well a company uses its assets and liabilities
internally. An efficiency ratio can calculate the turnover of receivables, the repayment of
liabilities, the quantity and usage of equity, and the general use of inventory and machinery.
This ratio can also be used to track and analyze the performance of commercial and
investment banks.
- (By Will Kenton Investopedia).
Key activity ratios are:

1)Inventory Turnover

Inventory turnover is a ratio showing how many times a company has sold and replaced
inventory during a given period. A company can then divide the days in the period by the
inventory turnover formula to calculate the days it takes to sell the inventory on hand.
Calculating inventory turnover can help businesses make better decisions on pricing,
manufacturing, marketing and purchasing new inventory.

Inventory Turnover ratio = Cost of Goods Sold ÷ Average Inventories

2)Total Asset Turnover Ratio

The asset turnover ratio measures the value of a company's sales or revenues relative to the
value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with
 15

which a company is using its assets to generate revenue. The higher the asset turnover ratio,
the more efficient a company. Conversely, if a company has a low asset turnover ratio, it
indicates it is not efficiently using its assets to generate sales.

Total Asset Turnover Ratio: Net Sales ÷ Total Assets

3)Sales to Fixed Assets (or Fixed Assets Turnover) Ratio

This ratio shows how well the fixed assets are being used to generate sales in the business.
The ratio is important in case of manufacturing concerns because sales are produced not only
by use of current assets but also by amount invested in fixed assets. The higher is the ratio,
the better is the performance. On the other hand, a low ratio indicates that fixed assets are not
being efficiently utilized.

Fixed asset Turnover Ratio= Net Sales ÷ Net Fixed Asset

4)Sales to Capital Employed (or Capital Turnover) Ratio

This ratio shows the efficiency of capital employed in the business by computing how many
times capital employed is turned-over in a stated period. The ratio is ascertained as follows:

The higher the ratio, the greater are the profits. A low capital turnover ratio should be taken
to mean that sufficient sales are not being made and profits are lower.
 16

Debt Management Period / Coverage Ratio

Coverage ratios are supplementary to solvency and liquidity ratios and measure the risk
inherent in lending to the business in long-term. They include EBIDTA coverage ratio, debt
coverage ratio, interest coverage ratio (also known as times interest earned), fixed charge
coverage ratio, etc.

1.Debt Ratio
Debt ratio is a measure of a business’s financial risk, the risk that the business’ total assets
may not be sufficient to pay off its debts and interest thereon. Since not being able to pay off
debts and interest payments may result in a business being wound up, debt ratio is a critical
indicator of long-term financial sustainability of a business.

Debt ratio=

2.Debt Equity Ratio

The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its
shareholder equity. These numbers are available on the balance sheet of a company’s
financial statements. The ratio is used to evaluate a company's financial leverage. The D/E
ratio is an important metric used in corporate finance. It is a measure of the degree to which a
 17

company is financing its operations through debt versus wholly-owned funds. More
specifically, it reflects the ability of shareholder equity to cover all outstanding debts in the
event of a business downturn. The debt-to-equity ratio is a particular type of gearing ratio.
Debt to Equity Ratio is a ratio that describes the ratio of debt and equity in corporate funding
and shows the ability of the company's own capital to meet its obligations. The greater this
ratio means the company's ability to pay interest is getting better, and the opportunity to get a
loan is also higher
-(Sawir, 2014).

Debt Equity ratio =

A lower debt to equity ratio usually implies a more financially stable business. Companies
with a higher debt to equity ratio are considered riskier to creditors and investors than
companies with a lower ratio. Unlike equity financing, debt must be repaid to the lender.
Since debt financing also requires debt servicing or regular interest payments, debt can be a
far more expensive form of financing than equity financing. Companies leveraging large
amounts of debt might not be able to make the payments.

3.Interest Coverage Ratio

The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily
a company can pay interest on its outstanding debt. The interest coverage ratio may be
calculated by dividing a company's earnings before interest and taxes (EBIT) during a given
period by the company's interest payments due within the same period. The Interest coverage
ratio is also called “times interest earned.” Lenders, investors, and creditors often use this
formula to determine a company's riskiness relative to its current debt or for future
borrowing.
 18

Interest Coverage Ratio Formula =

Profitability Ratio

Profitability ratios measure the ability of a business to earn profit for its owners. While
liquidity ratios and solvency ratios explain the financial position of a business, profitability
ratios and efficiency ratios communicate the financial performance of a business

Gross Profit Margin Ratio

Gross profit margin is a profitability ratio that measures how much of every dollar of
revenues is left over after paying cost of goods sold (COGS). Gross profit margin is
calculated by subtracting cost of goods sold (COGS) from total revenue and dividing that
number by total revenue. The top number in the equation, known as gross profit or gross
margin, is the total revenue minus the direct costs of producing that good or service. Direct
costs (COGS) do not include operating expenses, interest payments and taxes, among other
things. The gross profit ratio is also known as gross profit margin and this ratio expresses the
relationship of gross profit to net sales (cash and credit) in terms of percentage. This ratio is
calculated to find the profitability of business. A high gross profit ratio is a symbol of good
management. The main objective of computing this ratio is to determine the efficiency with
which production and/or purchase operations and selling operations are carried on.

- OSR Journal of Economics and

Finance (IOSR-JEF)

Revenue − Cost of Goods Sold

Gross Margin = 
Revenue
 19

Net Profit Margin Ratio

The net profit margin is equal to how much net income or profit is generated as a percentage
of revenue. Net profit margin is the ratio of net profits to revenues for a company or business
segment. Net profit margin is typically expressed as a percentage but can also be represented
in decimal form. The net profit margin illustrates how much of each dollar in revenue
collected by a company translates into profit. Net income is also called the bottom line for a
company or the net profit. Net profit margin is also called net margin. The term net profits
are equivalent to net income on the income statement, and one can use the terms
interchangeably.

Net Profit Margin=

Operating Profit Margin Ratio:

The operating margin measures how much profit a company makes on a dollar of sales, after
paying for variable costs of production, such as wages and raw materials, but before paying
interest or tax. It is calculated by dividing a company’s operating profit by its net sales. When
calculating an operating margin, operating earnings is the same thing as EBIT, or earnings
before interest and taxes. EBIT, or operating earnings, is revenue minus cost of goods sold
and the regular selling, general, and administrative costs of running the business, excluding
interest and taxes.

Operating Income
Operating Margin = 
Revenue

Return on Equity:

Return o equity (ROE) is a measure of financial performance calculated by dividing net

income by shareholders’ equity. Because shareholders’ equity is equal to a company’s assets
 20

minus its debt, ROE could be thought of as the return on net assets. ROE is considered a
measure of how effectively management is using a company’s assets to create profits
Relatively high or low ROE ratios will vary significantly from one industry group or sector to
another. When used to evaluate one company to another similar company the comparison
will be more meaningful.
Annual Net Income
ROE = 
Average Stockholders' Equity

Higher values are generally favorable meaning that the company is efficient in generating
income on new investment. However, relying solely on ROE for investment decisions is not
safe. It can be artificially influenced by the management, for example, when debt financing is
used to reduce share capital there will be an increase in ROE even if income remains constant

Earnings Per Share (EPS)

Earnings per share (EPS) is a profitability indicator which shows dollars of net income
earned by a company in a particular period per share of its common stock (also called
ordinary shares). Earnings per share is calculated by dividing net income for a period
attributable to common stock owners by the weighted average number of common shares
outstanding during the period.

Return on Capital Employed:

Return on capital employed (ROCE) is a financial ratio that measures a company’s

profitability and the efficiency with which its capital is used. In other words, the ratio
measures how well a company is generating profits from its capital. The ROCE ratio is
considered as an important profitability ratio and is used often by investors when screening
for suitable investment candidates. ROCE is a useful metric for comparing profitability
across companies based on the amount of capital they use. There are two metrics required to
 21

calculate return on capital employed: earnings before interest and tax and capital employed.
Capital employed is the total amount of capital that a company has utilized in order to
generate profits. It is the sum of shareholders' equity and debt liabilities. It can be simplified
as total assets minus current liabilities. Instead of using capital employed at an arbitrary point
in time, analysts and investors often calculate ROCE based on the average capital employed,
which takes the average of opening and closing capital employed for the time period under
analysis. Capital employed is the sum of stockholders' equity and long-term finance.
Alternatively, capital employed can be calculated as the difference between total assets and
current liabilities.

ROCE=
 22

Chapter 04

Projected Financial Statement

 23

KDS Garments Ltd

Projected Statement of Profit or loss and other comprehensive income
For the year ended 30 June 2019
Projected Income statement for forecasting Actual period: Forecast
Particulars 2018/2019 2019/2020 2020/2021 2021/2022

The projected income statement for upcoming three years (2019/2020-2021/2022)

Revenue 2,070,885,808 2,372,172,031 2,717,291,374 3,112,620,972
period has been prepared based on some assumptions and using excel calculation.
Less : Cost of Goods Sold (1,693,676,814) (1,885,491,192) (2,159,804,974)(2,474,027,747.64)
(KDS Annual Report2018/19)
Gross Profit 377,208,994 486,680,839 557,486,400 638,593,225
Less : Operating Expenses (120,943,556) (144,988,508) (166,082,400) (190,245,170)
Less : Selling and distribution expenses (44,518,310) (47,818,645.51) (54,775,619.68) (62,744,740.67)
Operating Profit 211,747,128 293,873,685 336,628,381 385,603,314
Less: Finance cost (102,452,340) (123,987,407) (142,025,918) (162,688,792)
Add : Finance income 58,508,370 54,572,097 50,900,646 47,476,199
Profit before other income 167,803,158 224,458,376 245,503,108 270,390,720
Other income 1,856,963 1,891,394 1,926,462 1,962,182
Profit(Loss) from investment in associates (31,890) 520 (8) 0
Profit before income tax and distribution of WPPF 169,628,231 226,350,289 247,429,562 272,352,902
Less : Workers profit participation& dist.(WPPF) (8,481,412) (10,837,642.71) (12,414,374.96) (14,220,500.69)
Profit before income tax (EBT) 161,146,819 215,512,646 235,015,187 258,132,401
Tax Expense: -
Less: Current Tax (24,586,468)
Less: Deffered Tax (3,575,523)
Total Tax (28,161,991) (34,084,889.92) (37,169,358.41) (40,825,513.63)
Net Profit/(Loss) after Tax 132,984,828 181,427,756 197,845,829 217,306,887
Fair valuation surplus of investments -
TOTAL COMPREHENSIVE INCOME 132,984,828 181,427,756 197,845,829 217,306,887
 24

Projected Balance Sheet for forecasting periods

KDS Garments Ltd

Projected Balance Sheet
As on 30 June 2019
Actual Forecast
PARTICULARS 2018-2019 2019/2020 2020/2021 2021/2022

Assets
Non-Current Asset:
Property, Plant & Equipment(PPE) 1,371,421,690 1,533,292,873 1,714,269,981 1,916,608,118
Investment in associate 48,265,804 48,345,224 48,424,774 48,504,455
Intangible assets 1,662,505 1,377,433 1,141,242 945,552
Capital work in progress 14,529,904 4,551,317 1,425,645 446,566
Other investment 4,920,847 5,142,983 5,375,146 5,617,790
Total Non-Current Assets 1,440,800,750 1,592,709,829 1,770,636,788 1,972,122,481

Current Assets:
Inventories 667,063,710 664,591,264 761,280,416 872,036,547
Trade Receivables 1,128,378,143 1,205,597,009 1,380,995,270 1,581,911,635
Advances, Deposits & Prepayments 58,349,397 96,063,800 110,039,800 126,049,121
Other Receivables 373,446 1,848,412 2,117,331 2,425,375
Short Term investments 8,820,656 9,236,097 9,671,105 10,126,601
Cash & Cash Equivalents 6,082,955 12,004,658 13,751,176 15,751,788
Due from affiliated company 421,112,376 275,842,216 315,973,574 361,943,508
Total Current Assets 2,290,180,683 2,265,183,457 2,593,828,671 2,970,244,575

Total Assets 3,730,981,433 3,857,893,286 4,364,465,460 4,942,367,056

 25

KDS Garments Ltd

Projected Balance Sheet

As on 30 June 2019
Actual Forecast
PARTICULARS 2018-2019 2019/2020 2020/2021 2021/2022

Shareholders Equity:
Share Capital 600,600,000 645,645,000 694,068,375 746,123,503
Share Premium 120,000,000 120,000,000 120,000,000 120,000,000
Revulation Reserve 214,391,703 214,391,703 214,391,703 214,391,703
Retained earnings 559,538,849 650,876,605 751,875,684 865,072,315
Total Shareholers Equity 1,494,530,552 1,630,913,308 1,780,335,762 1,945,587,521

Non-Current Liabilities:

Long Term Loan 113,581,686 138,462,886 168,794,561 205,770,692

Defined benefit obligation-gratuity 66,478,037 77,346,392 89,991,591 104,704,128
Deferred tax liability 43,999,854 49,393,795 55,448,978 62,246,467
Total Non-Current Liabilities 224,059,577 265,203,073 314,235,131 372,721,286

Current Liabilities:
Trade and other payables 937,557,390 801,857,316 918,516,845 1,052,148,776
Current portion of long term borrowings 90,559,800 99,719,306.32 121,563,814.08 148,193,578.96
Current Tax liability 36,859,697 35,620,055 34,422,105 33,264,443
Due to affi liated company 39,918,292 109,158,689 125,039,820 143,231,444
Short term bank loan 842,600,806 788,625,896 903,360,430 1,034,787,306
Provision for WPPF and welfare fund 64,895,319 79,824,873 91,438,326 104,741,381
Total current Liabilities 2,012,391,304 1,914,806,136 2,194,341,339 2,516,366,928

Total Liabilities 2,236,450,881 2,180,009,209 2,508,576,470 2,889,088,214

Total Equity & Liabilities 3,730,981,433 3,810,922,517 4,288,912,232 4,834,675,736

 26

Assumptions And Calculations:

Assumptions:-

• The forecasting has been done hypothetically and there is no connection with the actual budget or forecast
made by KDS Accessories Ltd.

• Interest rate has been calculated based on the average of all the interest taken by the firm in each actual
period.

• Finance cost has been calculated in proportion to operating profit.

• The sales growth rate has been calculated in accordance with the formula: (sales current year - sales
previous year)/sales previous year.

• The sales of the forecasting period have been done by taking the average of the growth rate of the actual
period.

• Provision for WPPF is calculated in proportion to sales.

• Depreciation has been calculated in proportion to property, plant and equipment.

We have assumed the firm will provide 5% stock and 10% cash dividend for the forecasting period
 27

Calculation: This calculation is made by excel.

calculations
Actual Forecast

Particulars 2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

Sales growth -0.014807197 0.305780
Average sales growth 0.145486642 0.145486642 0.145486642 0.145486642

Cost of goods sold in proportion to sales -0.77685881-0.789802191-0.817851379

Average -0.79483746 -0.79483746 -0.79483746 -0.79483746

Operating expenses in proportion to sales -0.064916777-0.060043088-0.058401847

Average -0.061120571 -0.061120571-0.061120571 -0.061120571

Selling expenses in proportion to sales -0.018542944-0.020434333-0.021497231

Average -0.020158169 -0.020158169 -0.020158169-0.020158169

Finance cost in proportion to operating profit -0.434789722-0.347088826-0.483842879

Average -0.421907142 -0.421907142 -0.421907142-0.421907142

Finance income growth 0.0593184681.80612736

Average 0.932722914 0.9327229140.932722914 0.932722914

Other income growth -0.0478131950.084895811

Average 0.018541308 0.018541308 0.018541308 0.018541308

Profit (loss) from investment in associates growth -0.864818331

-1.167768817
Average -1.016293574 -1.016293574-1.016293574 -1.016293574

WPPF in proportion to sales -0.004658328-0.004952098

-0.004095548
Average -0.004568658 -0.004568658-0.004568658-0.004568658

Tax in proportion to EBT -0.141340734-0.158371218

-0.174759832
Average -0.158157261 -0.158157261 -0.158157261-0.158157261
 28

PPE growth 0.177432163 0.058631164

Average 0.118031663 0.118031663 0.118031663 0.118031663

Intangible assets growth 0.047408932 -0.39035208

Average -0.171471574 -0.171471574 -0.171471574 -0.171471574

Other investment growth 0.046297739 0.04398582

Average 0.04514178 0.04514178 0.04514178 0.04514178

Investment in Associates growth 0.003951204 -0.00066028

Average 0.001645462 0.001645462 0.001645462 0.001645462

Capital work in progress growth -0.53802401 -0.835500173

Average -0.686762 -0.686762 -0.686762 -0.686762

Inventory in proportion to sales 0.231431813 0.286937516 0.322115158

Average 0.280161496 0.280161496 0.280161496 0.280161496

Trade Receivable in proportion to sales 0.44637256 0.53342524 0.544877047

Average 0.508224949 0.508224949 0.508224949 0.508224949

Adv, Dep and prepaid in proportion to sales 0.041204741 0.052107608 0.028176057

Average 0.040496136 0.040496136 0.040496136 0.040496136

Other receiveables in proportion to sales 0.000816758 0.00134053 0.000180332

Average 0.000779207 0.000779207 0.000779207 0.000779207

Short term investment growth 0.049546198 0.044651133

Average 0.047098666 0.047098666 0.047098666 0.047098666

Cash and cash equivalents in proportion to sales 0.008707608 0.00353688 0.002937369

Average 0.005060619 0.005060619 0.005060619 0.005060619

Due from affiliated company in proportion to sales 0.015716408 0.129782335 0.203348912

Average 0.116282551 0.116282551 0.116282551 0.116282551

Trade and other payable in proprotion to sales 0.225540142 0.335807208 0.452732539

Average 0.33802663 0.33802663 0.33802663 0.33802663

Current portion of long term borrowings in

proportion to long term loans. 0.78531164 0.577942424 0.797309876
Average 0.72018798 0.72018798 0.72018798 0.72018798
 29

Current Tax liability growth -0.215782567 0.148519857

Average -0.033631355 -0.033631355 -0.033631355 -0.033631355

Due to affi liated company in proportion to sales 0.118773088 0 0.01927595

Average 0.046016346 0.046016346 0.046016346 0.046016346

Short term bank loan in proportion to sales 0.200831711 0.389635465 0.406879415

Average 0.332448864 0.332448864 0.332448864 0.332448864

Provision for WPPF in proportion to sales 0.030921897 0.038692741 0.031336986

Average 0.033650541 0.033650541 0.033650541 0.033650541

Long term loan growth 0.801950644 -0.363830714

Average 0.219059965 0.219059965 0.219059965 0.219059965

deferred tax liability growth 0.156730159 0.088449775

Average 0.122589967 0.122589967 0.122589967 0.122589967

Defined benefit obligation gratuity growth 0.213724232 0.113251573

Average 0.163487902 0.163487902 0.163487902 0.163487902

Depreciation in proportion to PPE 0.062885026 0.056308628 0.070171912

Average 0.063121855 0.063121855 0.063121855 0.063121855

Total Loan 401,103,430 721,123,229 933,160,606 888,345,203 1,024,924,244 1,182,980,885

Average 561,113,330 827,141,918 910,752,904 956,634,723 1,103,952,564

Interest Rate 8.50% 9.25% 10.75%

Average 9.50% 9.50% 9.50% 9.50%

Actual Forecast

Share capital
Share capital Share Capital Share capital Share Capital Share Capital
Calculation of bonus share & cash dividend 30 June 2016 30 June 2017 30 June 2018 30 June 2019 30 June 2020 30 June 2021
520,000,000 572,000,000 600,600,000 645,645,000 694,068,375 746,123,503
Growth rate (share capital) 0.10 0.05
Average (share capital) 0.08
2018-2019 2019-2020 2020-2021
Bonus share (Assumed 5% will continue as of last two years) 5% 30030000 32,282,250 34,703,418.75

Cash dividend( assumed 10% will continue as of last two years) 10% 60060000 64,564,500 69,406,837.50
 30

Chapter 05-

Ratio Analysis of KDS Garments Ltd.

 31

Ratios useful to analyze financial performance of KDS Garments Ltd.

Profitability Ratio

2016/17 2017/18 2018/19 2019/20 2020/21 2021/22

Operating 13.97% 12.97% 10.22% 12.39% 12.39% 12.39%
Profit Margin

Net Profit 7.60% 7.92% 6.42% 7.65% 7.28% 6.98%

Margin
Return on 4.79% 4.12% 3.56% 4.70% 4.53% 4.40%
Assets
Return on 9.27% 9.27% 8.90% 11.12% 11.11% 11.17%
Equity

Return on Asset

A high Return on assets is a tell-tale sign of solid financial and operational

performance because it gives a clear indication of whether the business is
continuing to earn an increasing profit on each dollar of investment. A falling ROA
is a sure sign of trouble for the growth companies like KDS garments Ltd. But it is
expected to rise in the forecasting period in the first phrase though cannot continue
in the same mode. Companies like KDS Garments requires a higher values of fixed
assets for operations as such industries are capital intensive, therefore the ROA will
be lower as their large asset base will increase the denominator of the formula.
Therefore, having lower ROA doesn’t mean that KDS cannot utilize its assets
smoothly. Moreover, as a general rule, a return on assets under 5% is considered an
asset intensive company while a return on assets above 20% is considered an asset
light company.
 32

Return on Asset
6.00%

5.00%
4.79% 4.70%
4.53% 4.40%
4.00% 4.12%
3.56%
3.00%

2.00%

1.00%

0.00%
2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2021

Return on Equity

ROE measures the profit made for each dollar from shareholder’s equity. There is a
fluctuating trend regarding ROE in which such is expected to do better than the
actual period in the forecasting period. Such a fluctuating trend may trouble a
company like KDS Garments Ltd. But it doesn’t mean that higher ROE is always
fruitful because the company having more debt will have less shareholders’ equity
resulting in a higher ROE. Moreover, one mustn’t forget that cost of debt is usually
lower than the cost of equity. Even share repurchases and write-downs can
artificially boost ROE. In KDS Garments, the ROE is expected to rise in the
forecasting period as its high debt is magnifying the ROE.
 33

Return on Equity
12.00%
11.12% 11.11% 11.17%
10.00%
9.27% 9.27%
8.90%
8.00%

6.00%

4.00%

2.00%

0.00%
2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2021

Net Profit Margin

Net profit margin is a strong indicator of firm’s overall success and is usually stated
as a percentage. KDS Garments Ltd has a higher net profit margin and is expected
to continue in the forecasting period that indicates efficiency in management,
strong pricing strategies and ability to control costs by selling goods at a price
significantly higher than its costs.
 34

Net profi t margin

7.60% 7.92% 7.65% 7.28% 6.98%

6.42%

2 0 1 6 /2 0 1 7 2 0 1 7 /2 0 1 8 2 0 1 8 /2 0 1 9 2 0 1 9 /2 0 2 0 2 0 2 0 /2 0 2 1 2 0 2 1 /2 0 2 2

Liquidity Ratio

2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

Current 1.15 1.19 1.14 1.18 1.18 1.18
Ratio
Net 157349359 257892349 277789379 350377321 399487332 453877647
working
capital
Quick 0.79 0.85 0.81 0.84 0.84 0.83
Ratio

Current ratio

A ratio measuring the ability of the firm to meet its short term obligations that are due within a
year and it can be calculated by dividing current assets by current liability.
 35

Current Ratio
1.19

1.18 1.18 1.18

1.15

1.14

2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

There is a fluctuating trend in the current ratio of KDS Garments Ltd. in this three years’
period which indicates that the business is in perplexing position to meet its short term
obligations and the firm needs to put emphasis to keep some financial resources to remain
solvent in the short term but it doesn’t mean that the company is unable to meet its short term
debts because current ratio alone cannot measure the true liquidity form of the firm. Again too
better current ratio indicates the firm is not efficiently managing the assets.

Cash Ratio

A ratio estimating the share of current liabilities of the firm that can be paid off immediately
with highly liquid assets and it can have calculated dividing the firm’s most liquid assets by
its current liabilities.
 36

Cash Ratio
0.85
0.84 0.84
0.83

0.81

0.79

2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

In KDS Garments Ltd. there is a decreasing trend in cash ratio but still the firm is maintaining
preferable ratio of 1%. The ratio provides the most conservative measure of the liquidity position
of the firm and it is unrealistic for a firm to hold large amount of cash. On that perspective KDS
Garments Ltd is holding enough cash and cash equivalents to meet its current liabilities.

Quick Ratio

A ratio measuring the ability of a business to pay its short term liabilities by having assets that
are readily convertible into cash. The assets are known as quick assets since they can be
quickly converted into cash. Usually the ratio can be calculated as same as current ratio except
the amount of current assets short of prepaid expenses & inventory as this two cannot be
converted into cash quickly.
 37

Quick Ratio
0.85
0.84 0.84
0.83

0.81

0.79

2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

There is a fluctuating trend in the quick ratio of KDS Garments Ltd. in this three years’ period
with the ratio of less than one (1) which indicates the firm is in challenging position to pay
expenses or loans and sustain its operations.

Net working Capital

The net
Net Working Capital working
capital
453877647
position
350377321 350377321 indicates a
277789379 good sign in
257892349
the actual
157349359 period which
is expected to
2016/2017 2017/2018 2017/2018 2019/2020 2020/2021 2021/2022 endure in the
forecasting
period as
such is in increasing trend i.e. current assets are growing at a higher rate than current liabilities.
 38

Efficiency Ratio

Efficiency 2018-2019 2017-2018 2016-2017

Ratio
1) Working capital 7.45 6.15 10.23
Turnover (Times)
2) Current Asset 0.90 0.99 1.33
Turnover (Times)
3) Inventory 3.02 3.03 3.36
Turnover (Times)

Working Capital turnover

A ratio measuring how efficiently a business uses its working capital to produce sales and it
can be calculated through dividing Working
net sales by net working capital.
Capital Turnover

10.23

7.45
6.15

2016/17 2017/18 2018/19

There is a fluctuating trend in the working capital turnover of KDS Garments Ltd. in this three
years’ period which indicates the firm needs to put much emphasis regarding the sale of
inventory and collecting the payment from customers hastily to run the company’s operation
more smoothly which in turn leads to limiting the need for additional financing.
 39

Current Asset Turnover

A ratio measuring the ability of the firm to generate sales through its current assets and it can
Current
be calculated through dividing net sales by currentAsset
assets. Turnover

4.5

1.33
0.9 0.99

2016/17 2017/18 2018/19

There is a diminishing trend in the Current asset turnover of KDS Garments Ltd. in this three
years period which indicates the firm has a high needs of the external finance. One of the causes
that influenced this situation is the growth of accounts receivable. The firm needs to keep the
inventory stock to the minimum level which will allow the continuous operation process and
efficiency should be accelerated regarding the accounts receivable collection process. Besides,
the firm needs to put much emphasis on the sales promotion and marketing research.

Inventory Turnover ratio:

A ratio measuring the number of times a business sells and replaces its stock during a
given period and it can be calculated dividing cost of sales by average inventory.
 40

Inventory Turnover Ratio

3.36

3.02 3.03

2016/17 2017/18 2018/19

There is also a diminishing trend in the inventory turnover ratio of KDS Garments Ltd. in this
three years’ period which indicates most of the inventory are being tied up in the capital which
may be challenging for business. So the firm needs to sells its good fasters to clear up the
inventory level and the firm must put emphasis in sales promotion.

Debt Management Ratio

2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

Debt to
equity 0.94 1.15 1.50 1.34 1.41 1.48
ratio
TIE ratio 1.82 2.95 3.67 3.10 2.58 2.24
 41

Debt to Equity Ratio

The debt to equity ratio is a leverage ratio that highlights the capital structure of a company
whether its capital structure tilted either towards debt or equity financing. For instance, in
2016/17 the debt to equity ratio is 0.94 which means for every dollar in equity KDS Garments
Ltd has 94 cents in leverage. A higher debt equity ratio designates KDS Garments Ltd a levered
firm which is not preferable as the firm is stable with significant cash flow generation. Therefore,
KDS Garments Ltd can magnify the return on equity by using more equity. As the cost of equity
is lower than the cost of debt, KDS Garments Ltd can lower the WACC increasing D/E up to a
certain point. But KDS Garments management need to be careful for not raising the debt too
high because the cost of borrowings will skyrocket, as will the cost of equity and the company’s
WACC will get extremely high, driving down its share price.

Debt To Equity Ratio

1.6

1.4

1.2

0.8

0.6

0.4

0.2

0
2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

Time Interest Ratio

TIE indicates how many times a company can cover its interest charges on a pretax earnings
basis. It is also known as interest coverage ratio. A higher time interest earned ratio of KDS
Garments Ltd is favorable because it means the company presents less of a risk to investors and
 42

creditors in terms of solvency. But such is expected to decrease in the forecasting period that will
be troublesome for KDS Garments Ltd. However, a high TIE ratio doesn’t necessarily mean that
a company is managing its debt repayment in the most efficient way. This means business may
not utilize excess income for reinvestment through expansion but paying down debt obligations
quickly. A company with high TIE ratio may lose favor with long term investors. But each and
every company should keep a decent T/E ratio and need to reduce debt obligations to some
extent for eradicating future uncertain occurrence. There KDS Garments need to take some steps
to reduce some debt though their debt enables them to magnify the good returns

Time interest Ratio

4

3.5

2.5

1.5

0.5

0
2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

Market Efficiency Ratio

2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

EPS(Taka) 2.14 2.20 2.21 2.81 2.85 2.91

P/E ratio 26.46 34.66 28.05 22.06 21.75 21.30

 43

Earnings Per Share

EPS indicates how much money a company makes for each share of its stock. There is an
increasing trend in ROE of KDS Garments Ltd and such indicates investors will pay more for the
firm with higher profit. It is not wise to judge a performance of the company with EPS alone as it
can be distorted if a company conducts a share buy-back. Moreover, EPS doesn’t take account of
a company’s debt position and financial leverage also. It will be better if it can be judged with
P/E ratio that indicates the value of share per dollar earned. KDS Garments Ltd have a
fluctuating trend in P/E ratio. Too high P/E ratio indicates a positive future performance and
investors have higher expectation for future earnings growth but such growth stocks are volatile
as they are considered overvalued. From that perspective, KDS Garments Ltd have a moderate
P/E ratio which is less volatile and investors faces less risk to invest in the stock. And if the stock
price rises higher, the investors make a good profit. To be noted, KDS Garments had high P/E
ratio in 2016/2017 that indicates investors considered its stock as overpriced stock and risky
investments for investors that time.

Earnings Per Share

2.85 2.91
2.81

2.14 2.2 2.21

2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

 44

Price Earnings Ratio

The P/E ratio for 2016/2017 to 2018/2019 are trailing P/E ratio whereas the P/E ratio for
2019/2020 to 2021/2022 are forwarding P/E ratio. If the forward P/E ratio is lower than the
current P/E ratio it means analysts are expecting earnings to increase. If the forward P/E ratio is
higher than the current P/E ratio analysts expects a decrease in earnings. It is to be noted that
forward P/E is smaller than the trailing P/E since the forward P/E accounts for future earnings
growth relative to today’s share price. However, trailing P/E has shortcomings as the company’s
past performance doesn’t signal future behavior. Investors will commit money based on future
earnings power, not the past. In KDS Garments Ltd, forward P/E ratio is smaller than current
trailing P/E that indicates positive future.

Price Earning Ratio

34.66

26.46 28.05 28.05

21.75 21.3

2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

Overall the financial performance of KDS Garments Ltd is quite satisfactory and it is expected to
remain constant or much better in the forthcoming period. Despite of severe unfavorable
economic condition for readymade garments sector of last few years, KDS Garments achieved
worthy performance in all core areas of its operations.
45
 46

Calculation of financial ratios for both actual & forecasting period:

• Activity/Efficiency Ratio
• Debt Ratio
• Profitability Ratio
• Liquidity Ratio

Activity/ Efficiency Ratio:

The three basic measures of activity are:

 Asset Turnover ratio = Sales/Average assets

 Average assets = (Beginning Assets + Ending
Assets)/2
 Inventory days= Ending Inventory/Cost of sales x 365
 Receivable days= Receivables/Credit sales x 365
 Payable days= Payable/credit purchase (cost of sales) x 365

2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

Asset 0.63 0.57 0.61 0.63 0.66 0.67
Turnover
Inventory days 109 days 133 days 144 days 129 days 129 days 128 days
Receivable 163 days 195 days 199 days 186 days 186 days 186 days
days
Payable days 106 days 155 days 202 days 155 days 155 days 155 days

Debt Ratio:

The two basic measures to assess financial solvency are:

➢ Debt - Equity Ratio (times) = Total liabilities/Total equity
➢ Times Interest Earned Ratio= Operating profit / Finance cost

2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

Debt to equity 0.94 1.15 1.50 1.34 1.41 1.48
ratio
TIE ratio 1.82 2.95 3.67 3.10 2.58 2.24
 47

Profitability Ratio:

The basic measures to evaluate earnings are:

 Operating Profit Margin= Operating Profit/Revenue

 Net Profit Margin=Net Profit After Tax/Revenue
 Return on Assets=Net Profit After Tax/ Total Assets
 Return on Equity= Net Profit After Tax/Stockholders Equity
 Earnings Per Share=Net Profit after tax/number of shares outstanding
 Price to Earnings ratio= Market price per share/Earning per share

2015/2016 2016/2017 2017/2018 2018/2019 2019/2020 2020/2021

Operating 13.97% 12.97% 10.22% 12.39% 12.39% 12.39%
Profit Margin
Net Profit 7.60% 7.92% 6.42% 7.65% 7.28% 6.98%
Margin
Return on 4.79% 4.12% 3.56% 4.70% 4.53% 4.40%
Assets
Return on 9.27% 8.85% 8.90% 11.12% 11.11% 11.17%
Equity
EPS(Taka) 2.14 2.20 2.21 2.81 2.85 2.91
P/E ratio 26.46 34.66 28.05 22.06 21.75 21.30

**** The P/E ratio for 2018/2019 to 2020/2021 known as forward P/E has been
calculated by the following manner:

Forward P/E = current price per share / expected EPS of the forecast.

Liquidity Ratio:

The three basic measures of Liquidity are:

➢ Current Ratio = Current Assets/Current Liabilities
➢ Net Working Capital= Current Assets-Current Liabilities
➢ Quick Ratio= (Current Assets-Inventories)/Current Liabilities

2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022

Current 1.15 1.19 1.14 1.18 1.18 1.18
Ratio
Net 157349359 257892349 277789379 350377321 399487332 453877647
working
capital
Quick 0.79 0.85 0.81 0.84 0.84 0.83
Ratio
 48

Chapter 06

Findings and Analysis

Findings and Analysis

 49

Financial ratio analysis also referred to as “Quantitative Analysis” is considered to be the most
important steps while analyzing a company from an investment perspective. It is a study of ratios
between various items in financial statements. Ratios are classified as profitability ratio, liquidity
ratio, asset utilization ratios and leverage ratios based on the indication they provide.

Every study belongs some specific findings, my report is not an exception to this. The major
findings of the report are as follows:

 The higher the current ratio, the more liquid the firm is considered to be. Current ratio of
KDS Garments is in fluctuating trend in its actual period but it is expected to boost in the
forecasting period adjacent to 1.18 taka against 1tk current liabilities which is a good
sign.

 The net working capital position indicates a good sign in the actual period which is
expected to endure in the forecasting period as such is in increasing trend i.e. current
assets are growing at a higher rate than current liabilities.

 The quick ratio is less than 1 indicating the current assets are highly dependent on
inventory. The quick ratio is in fluctuating trend in the current period but it is expected to
rise gradually in the forecasting period. To enhance the ratio, KDS Garments Ltd has to
accelerate cash, short term investments & reduce the current liability.

 The greater the asset turnover ratio the more the company is efficient in utilizing the
assets. The asset turnover ratio is in fluctuating trend in the actual as it decreases at a
greater margin in 2017/2018 due to lower sales but such is expected to grow at an
increasing trend in the forecasting period.

 The situation of inventory days was not satisfactory in actual period as there was an
increasing trend but such is expected to decrease in the forecasting period. KDS
 50

Garments need to improve its sales or advertising technique to sell its inventory quickly
so the capital doesn’t get tied in the inventory.

 KDS Garments LTD needs to focus on collection ability or credit control department
needs to play a vital role to reduce the receivable days without losing customers. KDS
Garments Ltd has a downward trend in receivable days which indicates they have started
performing well to collect cash from their customers over the time period. This needs to
be reduced more so that they have enough cash to meet the expenses of other operations.

 KDS Garments Ltd faced exertion in 2018/2019 while disbursing payments to its
suppliers though it paid smartly the previous two years. So KDS Garments Ltd need to
improve its collection arrangements so it could pay all its suppliers quickly. Again too
much payment to the payables doesn’t indicate the good sign as it will run out of cash.
Therefore, the company need to make tradeoff among this operating cycle. It is expected
KDS Garments Ltd will be able to pay out the suppliers without any trouble in the
forthcoming period. Overall the company needs to focus on sales or advertising technique
to expand sales and needs to improve its collection ability which, in turn lead to have a
positive impact on payable days.

 A high Return on assets is a tell-tale sign of solid financial and operational performance
because it gives a clear indication of whether the business is continuing to earn an
increasing profit on each dollar of investment. A falling ROA is a sure sign of trouble for
the growth companies like KDS garments Ltd. But it is expected to rise in the forecasting
period in the first phrase though cannot continue in the same mode. Companies like KDS
Garments requires a higher values of fixed assets for operations as such industries are
capital intensive, therefore the ROA will be lower as their large asset base will increase
the denominator of the formula. Therefore, having lower ROA doesn’t mean that KDS
cannot utilize its assets smoothly. Moreover, as a general rule, a return on assets under
5% is considered an asset intensive company while a return on assets above 20% is
considered an asset light company.
 51

 ROE measures the profit made for each dollar from shareholder’s equity. There is a
fluctuating trend regarding ROE in which such is expected to do better than the actual
period in the forecasting period. Such a fluctuating trend may trouble a company like
KDS Garments Ltd. But it doesn’t mean that higher ROE is always fruitful because the
company having more debt will have less shareholders’ equity resulting in a higher ROE.
Moreover, one mustn’t forget that cost of debt is usually lower than the cost of equity.
Even share repurchases and write-downs can artificially boost ROE. In KDS Garments,
the ROE is expected to rise in the forecasting period as its high debt is magnifying the
ROE.

 EPS indicates how much money a company makes for each share of its stock. There is an
increasing trend in ROE of KDS Garments Ltd and such indicates investors will pay
more for the firm with higher profit. It is not wise to judge a performance of the company
with EPS alone as it can be distorted if a company conducts a share buy-back. Moreover,
EPS doesn’t take account of a company’s debt position and financial leverage also. It will
be better if it can be judged with P/E ratio that indicates the value of share per dollar
earned. KDS Garments Ltd have a fluctuating trend in P/E ratio. Too high P/E ratio
indicates a positive future performance and investors have higher expectation for future
earnings growth but such growth stocks are volatile as they are considered overvalued.
From that perspective, KDS Garments Ltd have a moderate P/E ratio which is less
volatile and investors faces less risk to invest in the stock. And if the stock price rises
higher, the investors make a good profit. To be noted, KDS Garments had high P/E ratio
in 2016/2017 that indicates investors considered its stock as overpriced stock and risky
investments for investors that time.

 The P/E ratio for 2016/2017 to 2018/2019 are trailing P/E ratio whereas the P/E ratio for
2019/2020 to 2021/2022 are forwarding P/E ratio. If the forward P/E ratio is lower than
the current P/E ratio it means analysts are expecting earnings to increase. If the forward
P/E ratio is higher than the current P/E ratio analysts expects a decrease in earnings. It is
 52

to be noted that forward P/E is smaller than the trailing P/E since the forward P/E
accounts for future earnings growth relative to today’s share price. However, trailing P/E
has shortcomings as the company’s past performance doesn’t signal future behavior.
Investors will commit money based on future earnings power, not the past. In KDS
Garments Ltd, forward P/E ratio is smaller than current trailing P/E that indicates positive
future.

 Net profit margin is a strong indicator of firm’s overall success and is usually stated as a
percentage. KDS Garments Ltd has a higher net profit margin and is expected to continue
in the forecasting period that indicates efficiency in management, strong pricing
strategies and ability to control costs by selling goods at a price significantly higher than
its costs.

 The debt to equity ratio is a leverage ratio that highlights the capital structure of a
company whether its capital structure tilted either towards debt or equity financing. For
instance, in 2016/17 the debt to equity ratio is 0.94 which means for every dollar in
equity KDS Garments Ltd has 94 cents in leverage. A higher debt equity ratio designates
KDS Garments Ltd a levered firm which is not preferable as the firm is stable with
significant cash flow generation. Therefore, KDS Garments Ltd can magnify the return
on equity by using more equity. As the cost of equity is lower than the cost of debt, KDS
Garments Ltd can lower the WACC increasing D/E up to a certain point. But KDS
Garments management need to be careful for not raising the debt too high because the
cost of borrowings will skyrocket, as will the cost of equity and the company’s WACC
will get extremely high, driving down its share price.

 TIE indicates how many times a company can cover its interest charges on a pretax
earnings basis. It is also known as interest coverage ratio. A higher time interest earned
ratio of KDS Garments Ltd is favorable because it means the company presents less of a
 53

risk to investors and creditors in terms of solvency. But such is expected to decrease in
the forecasting period that will be troublesome for KDS Garments Ltd. However, a high
TIE ratio doesn’t necessarily mean that a company is managing its debt repayment in the
most efficient way. This means business may not utilize excess income for reinvestment
through expansion but paying down debt obligations quickly. A company with high TIE
ratio may lose favor with long term investors. But each and every company should keep a
decent T/E ratio and need to reduce debt obligations to some extent for eradicating future
uncertain occurrence. There KDS Garments need to take some steps to reduce some debt
though their debt enables them to magnify the good returns.

 Overall the financial performance of KDS Garments Ltd is quite satisfactory and it is
expected to remain constant or much better in the forthcoming period. Despite of severe
unfavorable economic condition for readymade garments sector of last few years, KDS
Garments achieved worthy performance in all core areas of its operations.
 54

Chapter 07

Conclusions & Recommendation

KDS Garments

Conclusion
 55

Garments sector is the highest single contributor of Bangladesh economy. About 22 million people are
directly or indirectly involved in this sector. And about 78% of the employees are women who are playing a
pivotal role in decision making, poverty alleviation in their family. The garments sector is dependent on the
garments accessories business. The earning of garments sector like KDS Garments Ltd is likely to increase
up to US$12.5 billion by the end of 2019 and to US$18 billion by the end of the year 2025 as suggested by
estimation. Companies like KDS Accessories Ltd. are providing accessories to the garments sector and with
those the garments sector are making finished products meeting both domestic and overseas demand. As a
major player in readymade garments market, KDS Garments Ltd has wonderful chance to perform much
better than present. But the management body should consider some other issues like bank loan, operating
expenses, project finance, investments and so on. So the company should have deep concern on the above
issue and take essential steps to build sustainable competitive advantages.

Ratio analysis is the basic tool of financial analysis and financial analysis is an important part of any
business planning process as SWOT and no SWOT analysis would be complete without an analysis of
company’s financial position. Usually the financial statement analysis contains the past performance, so I
made the forecasted income statement and forecasted balance sheet for upcoming three years’ period and
conduct the ratio analysis to get an idea of how KDS Garments Ltd will be able to perform better in the
upcoming period.

From the study it is determined that company financial performance was seeing to be sound because the
company tries to increase its production and also net profit. The company need to utilize its funds more
efficiently to justify its growth in all aspects.

The report helps to explore my knowledge in this financial area that will help me to understand more about
how I can know the performance of the industry as a student of Accounting. This report is also helping me
to understand the financial condition and as well as how they will do in future. From this report an investor
can see the general picture of KDS Garments and he can take decision based on this report.

The one-month internship program helped me to enhance my knowledge beyond the text books. I have
gained practical knowledge regarding the corporate environment which I hope would support me in
future.
 56

Recommendations

The overall performance of KDS Garments Ltd shows a satisfactory position in the given period. It is not
easy to recommend some suggestion to boost the performance level of the organization much better than
the existing point.

I have observed some shortcomings regarding operational and other aspects. On the basis of my observation
I would like to present the following recommendations.

 KDS Garments should increase their equity capital in their capital structure because debt capital is
already higher.

 They should utilize their assets properly by investing them in more profitable projects as they have
to be dependent on external loan to meet liquidity needs.

 KDS Garments should invest the retained cash in government securities such as Treasury bill and
Treasury bond. They can also invest in short term marketable securities which generates more
revenues for the firm.

 They need to put emphasis on minimizing the average collection period by having a separate credit
control department or by ameliorating the collection efficiency.

 They should increase dividend per share that will serve as a promotional tool.

 Contribution analysis for each of the product lines to optimize profit in light of demand factors.

 Coordination among the employees of finance and accounts departments must be stronger to bring
maximum output. They can organize workshops, seminars, and provide more training to develop
their work ability and motivate them towards work by setting goals.
 57

 They need to reduce the debt to equity ratio to some extent though it helps them to magnify the
return to equity. Because, banking industry is not in decent shape

 Uncertain occurrences in banking industry may lead KDS Garments to catastrophe in financial
performance in future.

 They should minimize their financing expenses to make higher net profit.

 Standard set-up for staff and officers to lessen administrative overhead.

 They should concentrate on the quick ratio since it is below the ideal ratio 1:1. For this they have to
make tradeoff between producing more and less inventories.

 They should introduce a research and development department to get innovative ideas to capture the
competitive market to gain sustainable competitive advantages.

 The company should do research to minimize the cost by keeping the same quality. They can
introduce backward integration for producing raw materials to take cost advantage.

 They should keep liquid assets or safety cash balance for unanticipated cash crisis.

 There must be clear allocation of responsibilities, authorities and accountabilities.

 KDS Garments Ltd should try to minimize the operating expenses which enables the company to
save, in order to increase the profit which helps for its future expansions.
 58

 Company should continue paying taxes in the future so that it will not burden the particular period
in which it has paid the balance amount of tax.

In the face of today’s global competition with open market operation, KDS Garments Ltd must develop
and retain the high achievers and motivated workforce and equip them with latest skills and technologies.
 59

Bibliography

Sawir, Agnes Financial Performance Analysis and Corporate Financial Planning (PT Gramedia
Pustaka Utama-Jakarta, (5) 2014).

KDS Garments Limited. (2018- 19). Annual Report 2018- 19. Chattogram: KDS Garments Limited.

KDS Group Website: http://www.bd-directory.com/KDS_Group_Bangladesh.html

Course Hero (KDS Garments Website): https://www.coursehero.com/file/p6h1bor/7-P-a-g-e-Chapter- 2-

Company-Overview-21-Overview-of-KDS-Garments-Industries-Ltd/

Financial Performance Analysis-A Case Study 1Amalendu Bhunia, 2Sri Somnath Mukhuti and 2Sri Gautam
Roy/272page.

By Will Kenton –Investopedia : https://www.investopedia.com/terms/e/efficiencyratio.asp

My Accounting course:https://www.myaccountingcourse.com/financial-ratios/liquidity-ratios

OSR Journal of Economics and Finance (IOSR-JEF): e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 3, Issue
2. Ver. I (Mar. -Apr. 2014), PP 19-22www.iosrjournals.org