Assignment

ACCOUNTING PRENCIPLE

Submitted To: Submitted By:

Dr. Mohammad Tareq Ibrahim Khalil
ID: 1915216660

North South Subject Code: BUS 505

University Section: 05

Submission Date: 22nd August, 2019

Table of Contents

Introduction......................................................................................................................................3
1. Report on Financial Ratios of BATBD Ltd.................................................................................4
1.1. Profitability...........................................................................................................................4
1.2 Liquidity.................................................................................................................................6
1.3 Managerial Efficiency............................................................................................................8
1.4 Solvency / Capital Structure/ Leverage / Gearing Ratio......................................................11
1.5 Market Performance.............................................................................................................13
2. Decision for giving Short Term Credit......................................................................................14
3. Decision for Buying Bonds.......................................................................................................15
4. Decision for Buying Shares.......................................................................................................17
Workings........................................................................................................................................19
 Introduction

This project is to locate the annual report for a company and become familiar with the contents
of an annual report and analysis of financial statement. I am required to obtain the 2016, 2017
and 2018 annual report of BATBD Ltd. and then answer the following questions. I am assigned
to do Ratio Analysis of BATBD Ltd. Besides, as a short term creditor I have to choose only one
company and decide why I will provide credit to BATBD Ltd. or Orion. Furthermore, I have to
choose any of the companies from which I will buy bonds and shares. This report is prepared on
the basis of annual report of BATBD Ltd. and Orion of 2016, 2017 and 2018.

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1. Report on Financial Ratios of BATBD Ltd.

1.1. Profitability

Profitability is ability of a company to use its resources to generate revenues in excess of its
expenses. Profitability is a relative figure. In order to measure BATBD Ltd.’s income for the
year 2016, 2017 and 2018; profitability ratios analysis is done. The profitability ratios of
BATBD Ltd. are as follows:

2016 2017 2018

Profitability (%) (%) (%)
Return on Equity (ROE) 45.28 37.30 38.04
[ROE=Net Profit/ Average Total Equity]
Return on Assets (ROA) 23.22 19.15 19.45
[ROA=Net Profit/ Average Total Asset]
Gross Profit Margin 45.40 47.70 50.40
[GPM=Gross Profit/Sales]
Net Profit Margin 17.33 15.06 18.32
[NPM=Net Profit/ Sales]

Return on Equity (ROE): It’s the ratio net income over average common shareholders’ equity
for the particular year. The higher the ROE the better the performance of the company. From the
table we can see that the ROE of BATBD Ltd. is 45.28% for the financial year 2016, 37.30% for
the financial year 2017 and 38.04% for the financial year 2018. So the performances of the
company is decreased in 2017 then increased in 2018.

Return on Equity (ROE)

45.28%
37.30% 38.04%

2016 2017 2018

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Return on Assets (ROA): It’s the ratio net income over average total asset for the particular
year. The higher the ROA the better the performance of the company. From the table we can see
that the ROA of BATBD Ltd. is 23.22% for the financial year 2016, 19.15% for the financial
year 2017 and 19.45% for the financial year 2018. So the performances of the company is
decreased in 2017 then increased in 2018.

Return on Assets (ROA)

23.22%
19.15% 19.45%

2016 2017 2018

Gross Profit Margin: It’s the ratio of total gross profit over net sale for the particular year. The
higher the GPM the better the performance of the company. From the table we can see that the
GPM of BATBD Ltd. is gradually increasing for the year 2016, 2017 and 2018 (45.40 %< 47.70
%< 50.40%).

Gross Profit Margin

50.40%

47.70%

45.40%

2016 2017 2018

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Net Profit Margin: It’s the ratio of total net operating profit over net sale for the particular year.
The higher the NPM the better the performance of the company. From the table we can see that
the NPM of BATBD Ltd. is 17.33% for the financial year 2016, 15.06% for the financial year
2017 and 18.32% for the financial year 2018. So the performances of the company is decreased
in 2017 then increased in 2018.

Net Profit Margin

18.32%
17.33%
15.06%

2016 2017 2018

1.2 Liquidity

Measure short-term ability of the company to pay its maturing obligations and to meet
unexpected needs for cash.

Liquidity 2016 2017 2018

Current Ratio 1.46 1.30 1.31
[CR= Current Asset/ Current Liabilities]
Acid Test Ratio/ Quick Asset Ratio 0.43 0.41 0.46
[QR/AR= (Current Asset – Inventory)/ Current Liabilities]

Current Ratio: The current ratio indicates a company's ability to pay its current liabilities from
its current assets. This ratio is one used to quickly measure the liquidity of a company. It’s the
ratio of current assets over current liabilities. The ideal ratio is 1.5 for a company. Higher than
this means more liquidity for the company but indicates unprofitable investment of current asset,
lower than this indicates liquidity problem. From the table we can see that current ratio of

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BATBD Ltd. is lower than 1.5 in the all three financial year 2016 (1.46), 2017 (1.30), 2018
(1.31). This indicates liquidity problem for the company.

Current Ratio
1.46

1.3 1.31

2016 2017 2018

Acid Test Ratio/ Quick Asset Ratio: The quick ratio is an indicator of a company’s short-term
liquidity, and measures a company’s ability to meet its short-term obligations with its most liquid
assets. Because we're only concerned with the most liquid assets, the ratio excludes inventories
from current assets. Quick ratio is calculated as “Quick ratio = (Current Assets-
Inventories)/Current Liabilities”. The ideal quick ratio is 0.8 for a company. Higher than this
means more liquidity for the company but indicates unprofitable investment of current asset,
lower than this indicates liquidity problem. From the table we can see that quick ratio of BATBD
Ltd. is lower than 0.8 in the all three financial year 2016 (0.43), 2017 (0.41), 2018 (0.46). This
indicates liquidity problem for the company.

Acid Test Ratio/ Quick Asset Ratio

0.46

0.43

0.41

2016 2017 2018

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1.3 Managerial Efficiency

Managerial Efficiency 2016 2017 2018

Asset Turnover Ratio 1.34 1.27 1.06
[ATR= Sales/ Average Total Assets]
Days Inventory 172.16 212.20 250
[DI = 365/ (COGS/Average Inventories)] Days Days Days
Average Collection Period 8.35 11.86 21.67
[ACP= 365/(Credit Sales/Average Accounts Receivables)] Days Days Days
Average Payment Period 100 109.28 325.90
[APP= 365/(Credit Purchase/ Average Accounts Payable)] Days Days Days
Cash Conversion Cycle
[CCC= Days Inventory + Average Collection Period- Average 280.51 333.34 597.57
Payment Period]

Asset Turnover Ratio: It measures the value of a company's sales or revenues generated relative
to the value of its assets. The Asset Turnover ratio can often be used as an indicator of the
efficiency with which a company is deploying its assets in generating revenue. ATR is the ratio
of sales over average total assets. The higher the ATR the better the performance of the
company. From the table we can see that the asset turnover ratio is gradually decreasing of
BATBD Ltd. for the financial year 2016 and 2017 and 2018 (1.34 < 1.27 < 1.06). So the
performances of BATBD Ltd. gradually decreasing in these financial years.

Asset Turnover Ratio

1.34
1.27
1.06

2016 2017 2018

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Days Inventory: It is an efficiency ratio that measures the average number of days the company
holds its inventory before selling it. The day’s inventory is a financial measure of a company's
performance that gives investors an idea of how long it takes a company to turn its inventory into
sales. To find day’s inventory we divide 365 by average inventories. Generally, a lower Days
Inventory is preferred. From the table we can see that the Days inventory is gradually decreasing
of BATBD Ltd. for the financial year 2016 and 2017 and 2018 (172.16 Days < 212.20 Days <
250 Days). So the performances of BATBD Ltd. gradually decreasing because its inventory sales
are slower than previous financial years.

Days Inventory
250
212.2
172.16

2016 2017 2018

Average Collection Period: It is

Average Collection Period
basically the daily calculation that
21.67
measures how many times a company

11.86
can turn its accounts receivable into
8.35 cash during a day. To find days’
average collection period we divide
365 by accounts receivable turnover.
2016 2017 2018 Generally, a lower average collection
period like 15 Days is preferred for an efficient manager. From the table we can see that average
collection period of BATBD Ltd. is 8.35 Days in the financial year 2016, 11.86 Days in the
financial year 2017 and 21.67 Days is high in the financial year 2018. In in the financial year of
2016 and 2017 the manager collect account receivables before 15 Days, but in the financial year
2018 it takes 21.67 Days.

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Average Payment Period: It is the daily calculation that measures how fast a company pays it’s
due to suppliers. To find days’ average payment period we divide 365 by accounts payable
turnover. From the table we can see that average payment period of BATBD Ltd. is 325.90 Days
is high in the financial year 2018, 109.28 Days in the financial year 2017 and 100 Days in the
financial year 2016.

Average Payment Period

325.9

100 109.28

2016 2017 2018

Cash Conversion Cycle: It measures how fast a company can convert cash on hand into
inventory and accounts payable, through sales and accounts receivable, and then back into cash.
The formula of finding CCC is CCC= Days Inventory + Avg. Collection Period - Avg. Payment
period. From the table we can see that the Days inventory of BATBD Ltd. is 280.51 for the
financial year 2016, 333.34 for the
Cash Conversion Cycle financial year 2017 and 597.57 for the
597.57 financial year 2018.

333.34
280.51

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2016 2017 2018

1.4 Solvency / Capital Structure/ Leverage / Gearing Ratio

Gearing ratio is any one of several financial measurements that look at how much capital comes
in the form of debt, or assesses the ability of a company to meet its financial obligations.
Solvency / Capital Structure/ 2016 2017 2018
Leverage / Gearing Ratio (%) (%) (%)
Debt to Equity 87.20 100 91.48
[Total Debt/ Equity]
Equity Ratio 187.20 200.82 191.48
[ER=Total Asset/Equity]
Interest Coverage Ratio 275.80 92.80 42.86
[ICR=EBIT/ Interest] Times Times Times

Debt to Equity: The debt to equity ratio is a financial, liquidity ratio that compares a company’s
total debt to total equity. The debt to equity ratio shows the percentage of company financing
that comes from creditors and investors. The benchmark of company’s debt to equity is 100%.
Higher than this benchmark indicates higher dependence of debt and too much high may indicate
financial risk. From the table we can see that debt to equity ratio of BATBD Ltd. is 87.20% for
the financial year 2016, 100% for the financial year 2017 and 91.48% for the financial year
2018. So, from this values we can easily say that the company has less dependency of debt which
clears them from financial risk.

Debt to Equity

100%

91.48%

87.20%

2016 2017 2018 Equity Ratio: The equity ratio is

an investment leverage or

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solvency ratio that measures the amount of assets that are financed by owners’ investments by
comparing the total equity in the company to the total assets. It’s the ratio of total shareholders’
equity over total asset. The benchmark of company’s equity ratio is 50%; less than this
benchmark figure indicates indicate higher dependence of debt and too low may indicates high
financial risk. From the table we can see that equity ratio of BATBD Ltd. is 187.20% for the
financial year 2016, 200.82% for the financial year 2017 and 191.48% for the financial year
2018

Equity Ratio
200.82%

191.48%
187.20%

2016 2017 2018

Interest Coverage Ratio: The interest coverage ratio is used to determine how easily a company can pay
their interest expenses on outstanding debt. The ratio is calculated by dividing a company's earnings
before interest and taxes (EBIT) by the company's interest expenses for the same period. The interest
coverage ratio; the higher the better. From the table we can see that interest coverage ratio of BATBD
Ltd. is 275.80 for the financial year 2016, 92.80 for the financial year 2017 and 42.86 for the
financial year 2018.

Interest Coverage Ratio

275.8

92.8

42.86

2016 2017 2018

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1.5 Market Performance

Market Performance 2016 2017 2018

126.37 130.50 166.87
Earnings Per Share
Taka Taka Taka
Dividend Payout Ratio 0.43 0.46 0.36
[DPR= Dividend Paid Per Share/ Earning Per Share]
Price Earnings Ratio
[PER = Price Per Share/ Earning Per Share]
Net Asset Value 314.70 385.20 492.14
[NAV= Net Asset/Number of Outstanding Share]
Taka Taka Taka

Dividend Payout Ratio: The dividend payout ratio is the ratio of the total amount of dividends
paid out to shareholders relative to the net income of the company. It is the percentage of
earnings paid to shareholders in dividends. The higher DPR, the better for the investors of the
company. From we can see that Dividend Payout Ratio of BATBD Ltd. is increasing for the
financial year 2016 and 2017, (0.43<0.46) and decreases in 2018(0.36).

Price Earnings Ratio: The price-earnings ratio (PER) is the ratio for valuing a company that
measures its current share price relative to its per-share earnings. High PER indicates high
expectation of the investors about the future of the company.

Net Asset Value: Net asset value is a market performance indicator shows that the company’s
fair value. It was 314.70 Taka per share in 2016. It was higher in 2017 (385.20 Taka) as well as
in 2018 (492.14 Taka). The net asset value has increased from the previous two years which is a
good sign for BATBD Ltd.

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2. Decision for giving Short Term Credit

A short-term creditor, such as a bank, is primarily interested in liquidity-the ability of the

borrower to pay obligations when they come due. Liquidity measures short-term ability of the
company to pay its maturing obligations and to meet unexpected needs for cash. Before giving
any short term credit to BATBD Ltd. or ORION, I have to analyze their current ratio for the
latest financial year 2018. Among them, who has higher current ratio have more liquid asset; by
which, they are able to pay any short term debt quickly than others.

Current Ratio Analysis for BATBD Ltd. and ORION:

Current Ratio (CR) Analysis
Year BATBD Ltd. ORION
2018 1.31 1.81

Acid Test Ratio/Quick Asset Ratio Analysis for BATBD Ltd. and ORION:
Acid Test Ratio/Quick Asset Ratio Analysis
Year BATBD Ltd. ORION
2018 0.46 1.63

Acid
Current
Test Ratio
Ratio/Quick
(CR) Analysis
Asset Ratio
Analysis

From above, we see that ORION has higher current

ratio and Quick Asset Ratio. So, it has more liquid
asset than BATBD Ltd. As a short term creditor, I
consider ORION to give them short term credit.
BATBD Ltd. ORION
BATBD Ltd. ORION 3. Decision for Buying Bonds
A bond is a fixed income investment in which an
investor loans money to an entity which borrows the funds for a defined period of time at a
variable or fixed interest rate. So, when I will buy bond of a company, I have to consider
Profitability Ratio: ROE, ROA, Gross Profit Margin, and Net Profit Margin. Also I have to
consider Solvency Ratio: Debt to Equity, Equity Ratio and Interest Coverage Ratio.

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Profitability Ratio:

Year
2016 2017 2018
Profitability Ratio (%) (%) (%)
BATBD ORION BATBD ORION BATBD ORION
Ltd. Ltd. Ltd.
Return on Equity 45.28 9.20 37.30 5.28 38.04 5.07
(ROE)
Return on Assets 23.22 5.85 19.15 3.33 19.45 3.07
(ROA)
Gross Profit Margin 45.40 26.09 47.70 25.37 50.40 22.80

Net Profit Margin 17.33 10.48 15.06 9.64 18.32 8.67

Solvency Ratio:

Year
2016 2017 2018
Solvency Ratio (%) (%) (%)
BATBD ORION BATBD ORION BATBD ORION
Ltd. Ltd. Ltd.
Debt to Equity 87.20 56.20 100 60.33 91.48 69.51

Equity Ratio 187.20 156.20 200.82 160.33 191.48 169.51

Interest Coverage 275.80 22.43 92.80 15.28 42.86 22.44

Ratio Times Times Times Times Times Times

BATBD Ltd. has higher profitability than ORION in almost all of three years, regardless of
Gross or Net Profit Margin. So, BATBD Ltd. passed profitability test. Again, in solvency ratios
of both the companies, the debt to equity ratio of BATBD Ltd. and ORION are in a better
position because the ratios are within the benchmark. Above 100% indicates that a company is
highly dependents on debts and also has a chance of financial risk. But the debt to equity ratio of
ORION is gradually increasing and the company have to depend on debt. The equity ratio of
both the companies is higher than the benchmark of 50%, which is a good sign. It implies that

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the company have much lower dependency on debt. The equity ratio of BATBD Ltd. is higher
than ORION in three financial years. From the table we can see both the company’s profitability
and solvency ratio. Overall, BATBD Ltd. has better ability of survival than ORION. Since,
bond is a long-term loan I would buy bonds of BATBD Ltd.

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4. Decision for Buying Shares
Stockholders look at the profitability and solvency of the company. So, when I will buy bond of
a company, I have to consider Profitability Ratio: ROE, ROA, Gross Profit Margin, and Net
Profit Margin. Also I have to consider Solvency Ratio: Debt to Equity, Equity Ratio and Interest
Coverage Ratio.

Profitability Ratio:

Year
2016 2017 2018
Profitability Ratio (%) (%) (%)
BATBD ORION BATBD ORION BATBD ORION
Ltd. Ltd. Ltd.
Return on Equity 45.28 9.20 37.30 5.28 38.04 5.07
(ROE)
Return on Assets 23.22 5.85 19.15 3.33 19.45 3.07
(ROA)
Gross Profit Margin 45.40 26.09 47.70 25.37 50.40 22.80

Net Profit Margin 17.33 10.48 15.06 9.64 18.32 8.67

Solvency Ratio:

Year
2016 2017 2018
Solvency Ratio (%) (%) (%)
BATBD ORION BATBD ORION BATBD ORION
Ltd. Ltd. Ltd.
Debt to Equity 87.20 56.20 100 60.33 91.48 69.51

Equity Ratio 187.20 156.20 200.82 160.33 191.48 169.51

Interest Coverage 275.80 22.43 92.80 15.28 42.86 22.44

Ratio Times Times Times Times Times Times
BATBD Ltd. has higher profitability than ORION in almost all of three years, regardless of
Gross or Net Profit Margin. So, BATBD Ltd. passed profitability test. Again, in solvency ratios

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of both the companies, the debt to equity ratio of BATBD Ltd. and ORION are in a better
position because the ratios are within the benchmark. Above 100% indicates that a company is
highly dependents on debts and also has a chance of financial risk. But the debt to equity ratio of
ORION is gradually increasing and the company have to depend on debt. The equity ratio of
both the companies is higher than the benchmark of 50%, which is a good sign. It implies that
the company have much lower dependency on debt. The equity ratio of BATBD Ltd. is higher
than ORION in three financial years. From the table we can see both the company’s profitability
and solvency ratio. Overall, BATBD Ltd. has better ability of survival than ORION. I would
buy Shares of BATBD Ltd.be

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Workings

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