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An Assaignment On Financial Ratio Analysis of M.I. Cement Factory Limited
An Assaignment On Financial Ratio Analysis of M.I. Cement Factory Limited
Jahangirnagar University,
Savar,Dhaka.
Here is the assignment that you asked ask us to conduct on March 31, 2012 on a
Financial Ratio Analysis of M.I. Cement Factory Limited.
In this assignment we have included all the required data you have asked us to
represent. Finally, we have attached the financial statements in the appendix.
We will be pleased if you have any further query for this you can call us at your
convenient time and place.
Sincerely yours,
Group DOEL
Acknowledgement
From the core of our heart we would like to convey our earnest admiration, loyalty
and reverence to the almighty Allah, the most merciful, for keeping everything in
order and enabling us to complete this assignment successfully.
First let us express our thanks to our research supervisor, Professor Dr. Laek
Sazzad Andallah. He gives us our first introduction to the world of Financial
Ratio analysis. It would be impossible for us to finish this research without his
direction and encouragement. It has been a pleasure to have worked with him. His
support, supervision and assistance will always be greatly appreciated.
We also express our profound gratitude to all other teachers for their kind help and
valuable suggestion. We also thank Jahangirnagar University and genially thank
the office staff for their collaboration. We also wish to thank our friends,
classmates and especially to Abul Monsur Shipu, student of Mathematics, J.U. and
Khairun Naysa Ponny, student of MBBS, Gono University for their help and
encouragement.
Finally, we stretch out our heartiest love to our beloved mother, father, sister and
brother during the progress of the assignment for their direct and indirect co-
operation without which this study would not be possible.
Sincerely yours
Group DOEL
Executive summary
Financial analysis is the selection, evaluation, and interpretation of financial data,
along with other pertinent information, to assist in investment and financial
decision-making.
In our study we will try to measure the risk and profitability of M.I. Cement
Factory Limited by the financial ratio analysis.
M.I. cement factory was introduced on 11 December, 1994 under the Companies
Act 1994 as a public Limited company. The plant, equipped with world famous
O’Sepa Separator, initially went into operation with the daily production capacity
of 600 metric tons in the year 2000 and marketed its product with the brand name
Crown cement. From the very beginning, it has maintained an uncompromising
policy of producing high quality cement. As a result, it has gained huge popularity
in the market. Due to increase of demand, the company has set up its second unit
with the production capacity of 800 metric tons per day in 2002 and third unit with
capacity of 1400 tons per day in 2007.
Introduction
Financial Ratio Classification
Problem Statement
Statement of Financial Position of
M.I. Cement Factory Limited
Statement of Comprehensive Income of
M.I. Cement Factory Limited
Ratios & Analysis
Liquidity
Profitability
Solvency
Conclusion
Appendix
Introduction
Financial statement analysis (or financial analysis) the process of understanding the risk and
profitability of a firm (business, sub-business or project) through analysis of reported financial
information, particularly annual and quarterly reports.
Financial statement analysis consists of 1) reformulating reported financial statements, 2) analysis and
adjustments of measurement errors, and 3) financial ratio analysis on the basis of reformulated and
adjusted financial statements. The two first steps are often dropped in practice, meaning that financial
ratios are just calculated on the basis of the reported numbers, perhaps with some adjustments. Financial
statement analysis is the foundation for evaluating and pricing credit risk and for doing fundamental
company valuation.
Financial ratio analysis should be based on regrouped and adjusted financial statements. Two types of
ratio analysis are performed: 1) Analysis of risk and 2) Analysis of profitability
Analysis of risk typically aims at detecting the underlying credit risk of the firm. Risk analysis consists
of liquidity and solvency analysis. Liquidity analysis aims at analyzing whether the firm has enough
liquidity to meet its obligations when they should be paid. A usual technique to analyze illiquidity risk is
to focus on ratios such as the current ratio and interest coverage. Cash flow analysis is also useful.
Solvency analysis aims at analyzing whether the firm is financed so that it is able to recover from a losses
or a period of losses. A usual technique to analyze insolvency risk is to focus on ratios such as the equity
in percentage of total capital and other ratios of capital structure. Based on the risk analysis the analyzed
firm could be rated, i.e. given a grade on the riskiness, a process called synthetic rating.
Ratios of risk such as the current ratio, the interest coverage and the equity percentage have no theoretical
benchmarks. It is therefore common to compare them with the industry average over time. If a firm has a
higher equity ratio than the industry, this is considered less risky than if it is above the average. Similarly,
if the equity ratio increases over time, it is a good sign in relation to insolvency risk.
Analysis of profitability refers to the analysis of return on capital, for example return on equity, ROE,
defined as earnings divided by average equity. Return on equity, ROE, could be decomposed: ROE =
RNOA + (RNOA - NFIR) * NFD/E, where RNOA is return on net operating assets, NFIR is the net
financial interest rate, NFD is net financial debt and E is equity. In this way, the sources of ROE could be
clarified.
Ratio analysis expresses the relationship among selected items of financial statement data. A ratio
expresses the mathematical relationship between one quantity and another. A single ratio by itself is not
very meaningful, in the upcoming illustrations we will use:
Intracompany
Industry average
Intercompany
Financial Ratio Classifications
Problem Statement:
Here the statement of financial position and the statement of comprehensive income of
M.I. Cement Factory Limited are given below. Now we have to find the financial ratios
and analyze the ratios. In our study we try to answer two flowing questions.
AS AT 30 JUNE 2011
Evaluations:
Liquidity:
Ratio Formula 2011 2010 2009
Current ratio CA/CL 3.38 1.07 0.91
Acid test or quick ratio (CA-inventory)/CL 2.96 0.67 0.63
Receivable turnover Sales/Average receivable 12.11 10.87 7.86
Inventory turnover COGS/AVG Inventory 6.92 8.99 9.88
Analysis: The current ratio of M.I. cement factory Limited has shown steady
growth over the three-year period, from 0.91 (in 2009) to 3.38 (in 2011). This
indicates that M.I. cement factory Limited now has more current assets to cover its
current liabilities. It can also be inferred that working capital of M.I. cement
factory Limited finally became positive in 2010, possibly allowing the company to
use the amount in various long-term asset financing schemes. Again we see that
the quick ratio of M.I. cement factory Limited has also shown steady growth over
the three-year period, from 0.63 (in 2009) to 2.96 (in 2011). This indicates that
now the company’s immediate short-term liquidity is at good position.
M.I. cement factory Limited has a receivables turnover of 10.28 over the 2009 –
2011 periods, with 2011 being the highest. This means the company is able, on
average, to quickly and efficiently collect its outstanding receivables 10.28 times a
year, which shows good liquidity position.
The inventory turnover of M.I. cement factory Limited is gradually increased 6.92
to 9.88 which show that the liquidity of the company’s inventory is at good
position.
Liquidity and activity wise, M.I. cement factory Limited is currently in a stable.
Profitability:
Ratio Formula 2011 2010 2009
Profit margin Income/sales 0.11 0.11 0.08
Asset turnover Sales/AVG Asset 0.87 1.64 1.46
Return on asset Income/AVG Asset 0.09 0.17 0.12
Return on Common (Income-Dividend)/AVG Common 0.14 0.32 0.29
Stockholders’ equity stockholders’ equity
EPS Net Income/Number 5.36 4.99 3.00
of share
Analysis: Like previous economic indicators, profit margin of M.I. cement factory
Limited has shown steady growth over the years, peaking at 0.11 in 2011 and
2010. Profit margin was slightly lower in 2009 at 0.08. This indicates that the net
income by each taka of sales is at better position.
Asset turnover has steadily increased from 1.46 in 2009 to 1.64 in 2010. However
in 2011 it has shown slightly lower figure that is 0.87, but it not bad. Thus, M.I.
cement factory Limited is now more efficiently using its assets to generate sales,
breaking even in 2010 and maintaining the one–to–one sales/asset activity rate.
The company’s return on equity shows a similar trend, with ROE being highest
from 2009 to 2011 at average of 25%. It should be noted that historically, the rate
of return on total assets has been significantly lower than M.I. cement factory’s
rate of return on common share holders’ equity. When return on asset exceeds
return on equity, a company is said to be trading in the equity. Trading on the
equity refers to the practice of borrowing funds at fixed interest rates or issuing
preferred stock with constant dividend rates; preferably rates that are lower than
the rate of return obtained on assets. If this can be done, the money obtained from
bond holders (or preferred share holders) earns enough to pay the interest (or
preferred dividends) and to leave some margin for the common share holders,
earning them extra revenue. Since M.I. cement factory’s ROE has always been
higher than its ROA, it is unable to take advantage of trading in the equity. This
also explains why M.I. cement factory has not issued preferred shares, as it would
prove unprofitable.
Earnings per share has also increased over 2009-2011.An earnings was highest in
2011 at 5.36.
Overall, M.I. cement factory’s profitability position has strengthened over time.
All indicators show positive growth, indicating that the company is pursuing the
right strategy in term so fusing its assets to create revenue.
Solvency:
Ratio Formula 2011 2010 2009
Debt to total assets ratio Total debt/Total asset 0.28 0.41 0.51
Analysis: From 2009 to 2011, M.I. cement factory has gotten better at financing its
total asset needs with fewer liabilities, as debt to asset ratio has slowly dropped
over the 3 year period.
Overall, except the cash debt coverage M.I. cement factory seems to be doing a
good job of covering its financial obligations with its assets and revenue sources.
Appendix:
financial_state2011
Statement_of_Financial_Position_as_at_30_June_2010
Update company information