Comparative Ratio Analysis of Three Listed Companies

Of ICT Sector

August 08, 2012

TABLE OF CONTENT

Title Page No
Letter of Transmittal 3
Acknowledgement 4
Introduction and Rationale of the study 6
Objectives 6
Sources of Data 6
Methodology 7
Findings of the Ratio Analysis 8
Liquidity Ratio 8
Debt Ratio 9
Profitability/Performance 10
Activity Ratio 13
Market Performance 18
Conclusion 19
Bibliography 19

Introduction and Rationale of the study

A widely held view is that the growth of the ICT industry may provide an opportunity for

developing countries to ‘leapfrog’ into the industrialized economy. For example, low-income

economies that have a strong human capital base can take advantage of the rapid decline in the

cost of computing power and telecommunication over the last decade that has made it possible

to deliver IT service from a remote location. This has led to the emergence of

offshore/outsourcing industry, the market of which is expected to reach US$252 billion in 2010.
[ CITATION IGC12 \l 1033 ]
There is considerable potential for the development of ICT industries in Bangladesh because of

the availability of trained personnel at relatively low wage rates. The present government of

Bangladesh envisions creating a “Digital Bangladesh” by 2021, which critically depends on

proper policies as well as infrastructure development for this sector. However, in order to

capture significant gains from the growth of the ICT industry worldwide, policy makers and

firms both require a clear understanding of its dynamics. While a cheap and abundant human

capital base can explain the early stage of software industry development, improved

productivity is required to take advantage of emerging opportunities and carve out a niche in

the export of outsourced services. 

Objectives

This Study will examine the financial statement and analysis its financial prospects in terms of

liquidity, debt, company performance, efficiency and the market performance of the market.

Sources of Data

The main data source ids the published annual reports of DAFODILCOM (Daffodil Computers

Ltd.), ISNLTD (Information Services Network Ltd.), and BDCOM (BDCOM Online limited) for

the year ended 2007, 2008, 2009, 2010 and 2012.

Methodology

The Financial Ratios:

I. Liquidity Ratio

i) Current Ratio

ii) Quick Ratio

II. Debt Ratio

i) Debt-to-equity

ii) Debt-to-Total Asset

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 III. Profitability/Performance

i) Gross Profit Margin

ii) Net Profit Margin

iii) Return on Asset (ROA)

iv) Return on Equity (ROE)

IV. Activity Ratio

i) Account Receivables Turnover

ii) Average Collection Period

iii) Inventory Turnover

iv) Inventory Turnover in days

v) Payable Turnover

vi) Payable Turnover in Days

vii) Operating Cycle

viii) Cash Conversion Cycle

V. Market Performance

i) EPS

ii) Payout Ratio

iii) PE Ratio

Findings of the Ratio Analysis

Liquidity Ratio
In a nutshell, a company's liquidity is its ability to meet its near-term obligations, and it is a

major measure of financial health. Liquidity can be measured through several ratios.

I. Current ratio 
The current ratio is the most basic liquidity test. It signifies a company's ability to meet its short-

term liabilities with its short-term assets. A current ratio greater than or equal to one indicates

that current assets should be able to satisfy near-term obligations. A current ratio of less than

one may mean the firm has liquidity issues.

Current Ratio = (Current Assets) / Current Liabilities

Current ratio

Company/Years 2007 2008 2009 2010 2011 Average

DAFODILCOM 2.51 1.42 1.71 1.84 2.66 2.03

ISNLTD 3.12 4.96 6.11 2.87 2.09 3.83
BDCOM 7.18 7.01 1.62 1.56 4.65 4.40
Table 1: Current ratio

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

DAFODIL.

II. Quick Ratio

 The quick ratio is a tougher test of liquidity than the current ratio. It eliminates certain current

assets such as inventory and prepaid expenses that may be more difficult to convert to cash.

Like the current ratio, having a quick ratio above one means a company should have little

problem with liquidity. The higher the ratio, the more liquid it is, and the better able the

company will be to ride out any downturn in its business.

Quick Ratio = (Cash + Accounts Receivable + Short-Term or Marketable Securities) / (Current

Liabilities)

Acid test ratio

Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 1.97 1.37 0.81 1.22 2.20 1.51
ISNLTD 3.12 4.96 6.11 2.87 2.09 3.83
BDCOM 6.06 5.76 1.37 1.30 4.22 3.74
Table 2: Acid test ratio

The quick ratio also behalf like the current ratio. Among the three companies BDCOM online

Ltd. is more liquid then ISNLTD and then DAFODIL. One interesting observation is the Current

and Quick ratios of all selected year are same, because of null inventories in their operations.

Ranking in terms of Liquidity

Rank Current ratio Acid test ratio
1 BDCOM ISNLTD

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 2 ISNLTD BDCOM
3 DAFODILCOM DAFODILCOM
Table 3: Ranking in terms of Liquidity

Debt Ratio
The debt ratio compares a company's total debt to its total assets, which is used to gain a

general idea as to the amount of leverage being used by a company. A low percentage means

that the company is less dependent on leverage, i.e., money borrowed from and/or owed to

others. The lower the percentage, the less leverage a company is using and the stronger its

equity position. In general, the higher the ratio, the more risk that company is considered to

have taken on.

Total debt to equity ratio

Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 39.00% 39.00% 23.00% 22.00% 24.00% 29.00%
ISNLTD 24.00% 14.00% 7.00% 20.00% 31.00% 19.00%
BDCOM 7.00% 8.00% 33.00% 33.00% 11.00% 18.00%
Table 4: Total debt to equity ratio

DAFODILCOM have comparatively higher debt portion relative to the equity than other two

companies. It might not be normal compared to the industry and which might put the firm

under risk but indicate high leverage.

Debt-to-Total Asset

Company/Years 2007 2008 2009 2010 2011 Average

DAFODILCOM 39.91% 70.47% 58.42% 54.42% 37.59% 52.16%

ISNLTD 32.10% 20.17% 16.38% 34.84% 47.94% 30.29%

BDCOM 13.94% 14.26% 61.86% 64.15% 21.49% 35.14%

Table 5: Debt-to-Total Asset

DAFODILCOM also have comparatively higher debt portion relative to the Assets than other

two companies. It seems using more debt compared to the industry and which might put the

firm under risk pressure but indicate high leverage.

Ranking in terms of high leverage

Rank Total debt to Debt-to-Total Asset
 equity ratio
1 DAFODILCOM DAFODILCOM
2 ISNLTD BDCOM
3 BDCOM ISNLTD
Table 6: Ranking in terms of high leverage

Profitability/Performance
Every firm is most concerned with its profitability. One of the most frequently used tools of

financial ratio analysis is profitability ratios which are used to determine the company's bottom

line. Profitability measures are important to company managers and owners alike. If a small

business has outside investors who have put their own money into the company, the primary

owner certainly has to show profitability to those equity investors.[ CITATION Ber04 \l 1033 ]

I. Gross Profit Margin

The gross profit margin looks at cost of goods sold as a percentage of sales. This ratio looks at

how well a company controls the cost of its inventory and the manufacturing of its products

and subsequently passes on the costs to its customers. The larger the gross profit margin, the

better for the company. The calculation is: Gross Profit/Net Sales = ____%. Both terms of the

equation come from the company's income statement.[ CITATION FIN12 \l 1033 ]

Gross Profit Margin

Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 19.16% 19.16% 19.93% 18.71% 21.72% 19.74%
ISNLTD 45.93% 51.38% 44.47% 49.62% 47.85% 47.85%
BDCOM 65.35% 67.03% 73.94% 68.38% 63.16% 67.57%
Table 7: Gross Profit Margin

Higher GPM indicates higher profitability of the firm.

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 II. Net Profit Margin

When doing a simple profitability ratio analysis, net profit margin is the most often margin

ratio used. The net profit margin shows how much of each sales dollar shows up as net

income after all expenses are paid. For example, if the net profit margin is 5% that means

that 5 cents of every dollar is profit. The net profit margin measures profitability after

consideration of all expenses including taxes, interest, and depreciation. The calculation

is: Net Income/Net Sales = _____%. Both terms of the equation come from the income

statement.[ CITATION FIN12 \l 1033 ]

Net Profit Margin

Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 4.72% 4.04% 6.05% 6.29% 12.39% 6.70%
ISNLTD 22.56% 24.35% 20.56% 19.43% 10.53% 19.49%
BDCOM 6.87% 7.84% 7.76% 9.46% 16.29% 9.65%
Table 8: Net Profit Margin

Here also higher NPM indicates higher profitability of the firm.

III. Return on Asset (ROA)

The Return on Assets ratio is an important profitability ratio because it measures the efficiency

with which the company is managing its investment in assets and using them to generate profit.

It measures the amount of profit earned relative to the firm's level of investment in total assets.

The return on assets ratio is related to the asset management category of financial ratios. The

calculation for the return on assets ratio is: Net Income/Total Assets = _____%. Net Income is

taken from the income statement and total assets are taken from the balance sheet. [ CITATION
FIN12 \l 1033 ]
Return on Asset
Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 3.67% 3.06% 5.32% 4.45% 5.21% 4.34%
ISNLTD 9.33% 9.50% 5.81% 4.97% 2.62% 6.45%
BDCOM 2.96% 3.42% 2.81% 5.04% 6.02% 4.05%
Table 9: Return on Asset
The higher the percentage, the better the firm’s asset utilization to earn, because that means the

company is doing a good job using its assets to generate sales.

IV. Return on Equity (ROE)

The Return on Equity ratio is perhaps the most important of all the financial ratios to investors

in the company. It measures the return on the money the investors have put into the company.

This is the ratio potential investors look at when deciding whether or not to invest in the

company. The calculation is: Net Income/Stockholder's Equity = _____%. Net income comes

from the income statement and stockholder's equity comes from the balance sheet. [ CITATION
FIN12 \l 1033 ]

Return on Equity
Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 5.11% 3.70% 5.65% 5.44% 6.45% 5.27%
ISNLTD 11.56% 10.84% 6.23% 5.96% 3.42% 7.60%
BDCOM 3.17% 3.71% 3.74% 6.69% 6.68% 4.80%
Table 10: Return on Equity

In general, the higher the percentage, the better earning capability against its equity, with some

exceptions, as it shows that the company is doing a good job using the investors' money.

Ranking in terms of Profitability & Performance

Gross Profit
Rank Net Profit Margin Return on Asset Return on Equity
Margin
1 BDCOM ISNLTD ISNLTD ISNLTD
2 ISNLTD DAFODILCOM BDCOM BDCOM
3 DAFODILCOM BDCOM DAFODILCOM DAFODILCOM
Table 11: Ranking in terms of Profitability & Performance

Activity Ratio
Activity ratios measure company sales per another asset account—the most common asset

accounts used are accounts receivable, inventory, and total assets. Activity ratios measure the

efficiency of the company in using its resources. Since most companies invest heavily in

accounts receivable or inventory, these accounts are used in the denominator of the most

popular activity ratios.[ CITATION Edi12 \l 1033 ]

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 I. Account Receivables Turnover

Accounts receivable is the total amount of money due to a company for products or services

sold on an open credit account. The accounts receivable turnover shows how quickly a

company collects what is owed to it.[ CITATION FIN12 \l 1033 ]

Total Credit Sales

Accounts Receivable Turnover =
Accounts Receivable

Receivable Turnover
Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 5.32 3.84 5.82 22.66 11.26 9.78
ISNLTD 1.00 0.90 0.92 0.73 0.63 0.84
BDCOM 2.11 2.18 2.40 3.33 3.21 2.65
Table 12: Receivable Turnover

The higher the receivable turnover indicates quicker chance of receivable collection.

II. Average Collection Period

This indicates the collection period in days of the receivables of credit sales.

Average Collection Period

Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 67.69 93.67 61.81 15.89 31.98 54.21
ISNLTD 358.39 398.53 389.84 492.87 569.13 441.75
BDCOM 170.42 165.31 149.81 108.10 112.18 141.16
Table 13: Average Collection Period

The lower the collection period indicates quicker receivable collection.

III. Inventory Turnover

For a company to be profitable, it must be able to manage its inventory, because it is money

invested that does not earn a return. The best measure of inventory utilization is

the inventory turnover ratio (aka inventory utilization ratio), which is the total annual sales

or the cost of goods sold divided by the cost of inventory.[ CITATION Ber04 \l 1033 ]
 Total Annual Sales or Cost of Goods Sold
Inventory Turnover =
Inventory Cost

Using the cost of goods sold in the numerator is a more accurate indicator of inventory

turnover, and allows a more direct comparison with other companies, since different

companies would have different markups to the sale price, which would overstate the actual

inventory turnover.[ CITATION IGC12 \l 1033 ]

Inventory Turnover
Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 5.14 44.62 4.49 6.28 4.74 13.06
ISNLTD - - - - - -
BDCOM 5.91 4.51 5.90 8.39 8.73 6.69
Table 14: Inventory Turnover

The higher turnover indicates the maximum utilization of inventory efficiently.

(ISNLTD do not have any inventory for operation)

IV. Inventory Turnover in days

The lower turnover in days indicates the maximum utilization of inventory efficiently.

Inventory Turnover (Days)

Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 70.08 8.07 80.17 57.28 75.95 58.31
ISNLTD - - - - - -
BDCOM 60.87 79.87 61.01 42.88 41.23 57.17
Table 15: Inventory Turnover (Days)

(ISNLTD do not have any inventory for operation)

V. Payable Turnover
A short-term liquidity measure used to quantify the rate at which a company pays off its

suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made

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from suppliers and dividing it by the average accounts payable amount during the same period.

[ CITATION FIN12 \l 1033 ]

Payable Turnover
Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 36.95 32.62 41.98 27.69 33.40 34.53
ISNLTD - - - - - -
BDCOM 8.27 6.14 1.54 4.01 4.76 4.94
Table 16: Payable Turnover

The lower payable turnover allows the firm to get the maximum advantage of credit purchase.

(ISNLTD do not have any credit purchase/ payables)

VI. Payable Turnover in Days

Payable Turnover (Days)
Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 9.74 11.03 8.57 13.00 10.78 10.63
ISNLTD - - - - - -
BDCOM 43.55 58.67 233.25 89.70 75.65 100.16
Table 17: Payable Turnover (Days)

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

purchase.

VII. Operating Cycle

The time between the purchases of an asset and its sale, or the sale of a product made from the

asset. Most companies desire short operating cycles because it creates cash flow to cover the

company's liabilities.

Operating Cycle
Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 138.75 101.85 143.10 73.97 108.98 113.33
ISNLTD - - - - - -
BDCOM 232.13 246.28 211.66 151.58 153.98 199.13
Table 18: Operating Cycle
A long operating cycle often necessitates borrowing and thereby reduces profitability.

VIII. Cash Conversion Cycle

A metric that expresses the length of time, in days, that it takes for a company to

convert resource inputs into cash flows. The cash conversion cycle attempts to measure the

amount of time each net input dollar is tied up in the production and sales process before it is

converted into cash through sales to customers. This metric looks at the amount of time needed

to sell inventory, the amount of time needed to collect receivables and the length of time the

company is afforded to pay its bills without incurring penalties, also known as "cash

cycle."[ CITATION Ber04 \l 1033 ]

Calculated as:

Where:

DIO represents days inventory outstanding

DSO represents day’s sales outstanding

DPO represents day’s payable outstanding

Cash Conversion Cycle

Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 127.22 85.52 153.38 72.98 118.15 111.45
ISNLTD 358.39 398.53 389.84 492.87 569.13 441.75
BDCOM 261.60 260.15 -644.94 -34.32 36.86 -24.13
Table 19: Cash Conversion Cycle

The lower the cash conversion cycles the more the firm efficient in liquating its asset.

Ranking in terms of activity ratios

Inventory
Account Payable Cash
Average Inventory Turnover in Payable Operating
Receivables Turnover in Conversion
Ran Collection Turnover Turnover Cycle
days
Turnover Days Cycle
k Period

13
 DAFODILCO DAFODILCO
1 DAFODILCOM DAFODILCOM
M
BDCOM BDCOM BDCOM
M
BDCOM

DAFODILCO DAFODILCO DAFODILCO DAFODILCO

2 BDCOM BDCOM BDCOM
M M M
BDCOM
M

3 ISNLTD ISNLTD - - - - - ISNLTD

Table 20: Ranking in terms of activity ratios

Market Performance

I. EPS

The portion of a company's profit allocated to each outstanding share of common

stock. Earnings per share serve as an indicator of a company's profitability.
Calculated as:

EPS
Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 0.69 0.47 0.70 0.63 0.94 0.69
ISNLTD 1.08 1.22 1.18 1.05 0.55 1.02
BDCOM 0.67 0.92 0.86 0.61 0.51 0.71
Table 21: EPS

II. Payout Ratio

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

Calculated as:

Payout Ratio
Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 1.84 0.03 0.53 0.01 0.00 0.48
ISNLTD 0.90 0.32 0.42 0.00 0.00 0.33
BDCOM 0.00 0.00 0.00 0.00 0.53 0.11
Table 22: Payout Ratio

Mostly depend in the company policy

 III. PE Ratio
The P/E looks at the relationship between the stock price and the company’s earnings. The P/E

is the most popular metric of stock analysis, although it is far from the only one you should

consider. P/E = Stock Price / EPS

PE Ratio
Company/Years 2007 2008 2009 2010 2011 Average
DAFODILCOM 26.13 25.50 18.65 22.22 14.89 21.48
ISNLTD 15.28 14.75 20.34 20.95 49.09 24.08
BDCOM 32.84 20.65 20.93 28.69 34.80 27.58
Table 23: PE Ratio

Ranking in terms of Market performance

Rank EPS Payout P/E

1 ISNLTD BDCOM BDCOM
2 BDCOM ISNLTD ISNLTD
3 DAFODILCOM DAFODILCOM DAFODILCOM
Table 24: Ranking in terms of Market performance

Conclusion

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

Bibliography
Bernstein, J. A., & Wild, J. J. (2004). Analysis of Financial Statements (5th ed.). New Delhi: Tata McGraw-
Hill.

Ed., F. (2012). Financial Ratios. Retrieved 8 2012, 01, from about.com:

http://stocks.about.com/od/evaluatingstocks/a/pe.htm

Editor. (2012). Free Dictionary. Retrieved 8 2012, 01, from The Free Dictionary: http://financial-
dictionary.thefreedictionary.com/

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IGC. (2012). The ICT Sector in Bangladesh. Retrieved 08 2012, 01, from International Growth Center:
http://www.theigc.org/article/ict-sector-bangladesh-analysis-firm-capabilities