Running head: FINANCIAL RATIO ANALYSIS 1

Financial Ratio Analysis: Which company’s financial situation is better between DESCO and

DPDC?

Prepared By:

Md. Rahikul Islam Chy.

Md. Amdadul Haque

Md. Mizanur Rahman

Md. Minhaj Uddin

Army Institute of Business Administration

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FINANCIAL RATIO ANALYSIS

Abstract

This paper is regarding comparative analysis of financial performance using ratio analysis

between Dhaka Electric Supply Company Limited and Power Grid Company of Bangladesh

Limited. Financial Ratios supportive to analyze financial locus of both company. Financial

analysis helps to evaluate the financial health of a firm. Ratios are intended for a number of years

which demonstrates the change and describe the current situations of the company. Ratios are

useful tool for various stakeholders like management, financiers, shareholders and creditors etc.

In order to analyze the financial performance of both companies, ratios are used. Secondary data

is used from published annual reports of both companies for time period 2018-2020. The final

result of the paper in accordance to the financial performance, DESCO Company is quite good

though they could not reach standard position of any ratio. While the financial performance of

DPDC is poor after 2013-2014 and directors should pay more attention to revive the company.

Keywords- Ratios, Annual Reports, DESCO, DPDC, Financial performance.

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FINANCIAL RATIO ANALYSIS

Liquidity Ratio

It indicates whether a company’s current assets will be enough to meet the company’s
obligations when they become in debt.

Current Ratio

It illustrates a company’s ability to remain solvent. Basically, it interprets for per unit short-term
liability, how much short-term asset does the company owns.

Company 2018 2019 2020

DESCO 2.10405443 1.91314001 1.65477362

DPDC 1.98610591 1.86559819 2.44355925

Current Ratio
3

2.5

1.5

0.5

0
2018 2019 2020

DESCO DPDC

Interpretation

The chart shows the current ratio of two companies. In 2018, the current ratio of DESCO was
2.1040 which indicate the company has current assets 2.1040 times larger than current liabilities.
It is considered favorable sign for the company. But Next year (2019 and 2020), it decreased
constantly to 1.91314 & 1.65477362, it suggests that company current liabilities is increasing
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FINANCIAL RATIO ANALYSIS
compare to pay their assets, which is also not a good sign for the company. In 2020, their ratio
was 2.1040. After analyzing their three years ratio, we found out that it was quite
complementary. On the other hand, DPDC’s current ratio of 2019 was 1.86559819 that means
this year their current liabilities exceed current assets. The company took too much loan this year
or else they invested too much for which asset decreased. In 2020, it goes up 2.44355925 which
indicate this year they cleared their loans and invest less to increase current asset. Though it was
comfortable to meet its current liabilities but the current asset of the company was more which
means current asset was not utilizing properly as funds were either idle or looking for investors.

Recommendation

To avoid fluctuation, companies need to keep the ability to pay their current liabilities and they
should invest if the current asset is too high.

Quick Ratio

It provides a better measure of overall liquidity only when a firm’s inventory which cannot easily
be converted into cash. It illustrates for per unit liabilities, how much liquid assets does the
company owns. Liquid assets are current assets that can be converted to cash in the short-term.
Inventory does not include in liquid assets.

Company 2018

DESCO 1.67064738 1.65839887

DPDC 1.83683386 1.72619606

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FINANCIAL RATIO ANALYSIS

Quick Ratio
2.5

1.5

0.5

0
2018 2019 2020

DESCO DPDC

Interpretation

In this graph, the quick ratios of DESCO company's three years were 1.67064738, 1.65839887,
and 1.26534851 which indicates that against per unit liability, the company had these much
available quick funds on hand. The company’s quick ratio in three years was quite good because
they had enough quick ratios to pay the debts. On the other hand, DPDC, company's three years
were 1.83683386, 1.72619606, 2.27937571. Quick ratio of 2019 was lower which indicates
company relies too much on inventory or other assets to pay its current debts. In 2020, it
increased to 2.27937571 means Company had too much cash on hand.

Recommendation

Companies need to pay off current liabilities and at the same time increases sales so that the cash
on hand increases.

Financial Leverage Ratio

It measures how much of the company assets belong to the shareholders rather than creditors.

Debt-to-Equity

It indicates the percentage of funds provided by creditors in response of per unit equity.

Company 2018 2019 2020

DESCO 2.44975117 2.55905673 2.80343388
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FINANCIAL RATIO ANALYSIS
DPDC 4.54497325 1.08857486 0.9287551

Debt-to-Equity
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2018 2019 2020

DESCO DPDC

Interpretation

The debt to equity ratio of DESCO in three years were 2.44975117, 2.55905673, 2.80343388

that shows the financing which comes from creditors and investors. This ratio indicates company

used more bank loans than investor financing. DESCO’s debt to equity ratio is gradually shows

that they were able to lower their debt in response of equity. That indicate that they are in a good

position whereas DPDC’s debt to equity ratio in 2018 was higher. That means their debt was

way too much in terms of shareholder’s equity. But they were able to decrease their debt in 2019

& 2020 shows they started using shareholder’s equity and avoided taking loan. Comparing both

company, I would say DESCO is in better position as they are fluctuating less and able to

manage their debt in these three years.

Recommendation

Companies need to avoid taking bank loan and use shareholders equity.

Debt to Total Assets

It shows what percentage of assets is funded by borrowing compared with the percentage of
resources that are funded by the investors.
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FINANCIAL RATIO ANALYSIS

2018 2019 2020

DESCO 0.71012402 0.71902668 0.73707969
DPDC 0.81965648 0.52120462 0.48153086

Debt-to-Total Assets
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2018 2019 2020

DESCO DPDC

Interpretation

This graph shows the debt to total assets ratio of two companies. The debt to total assets ratio of

DESCO was 0.71012402, 0.71902668, 0.73707969 in three yeas that shows their debt was fine

against the asset they had and they were fluctuating less where DPDC’s ratio was 0.81965648,

0.52120462, 0.48153086 in three that indicates they were lowering their debt and utilizing assets

more. Between both companies, I would say DPDC is in better position as they were utilizing

their assets more.

Recommendation

Companies should reduce the debt proportion to lower the ratio. Companies can issue new or
additional shares to increase the cash flow which will increase total assets.
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FINANCIAL RATIO ANALYSIS

Activity Ratio

It measures how effectively the firm is using its assets.

Inventory Turnover

It helps to determine how effectively the firm is its inventory into sales.

2018 2019 2020

DESCO 6.0597611 10.0352307 5.15650174
DPDC 21.049005 22.9057075 24.3478219

Inventory Turnover
30
25
20
15
10
5
0
2018 2019 2020

DESCO DPDC

Interpretation

DESCO Company’s inventory turnover ratio in three years was 6.0597611, 10.0352307, and
5.15650174. These measure company’s efficiency in turning its inventory into sales. In 2018, it
was good as company sold its inventory 6 times over. Next year, it declined to 10 times and after
that it improved to 5 times. It shows that company’s inventory turnover ratio was balanced as
company was able in managing its inventory efficiently. Comes to DPDC, they took 21, 22 and
24 times to turn the inventories into sales. This shows company did not overspend by buying too
much inventory and wasted resources by storing non-salable inventory.

Recommendation
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FINANCIAL RATIO ANALYSIS
Companies need to convert their inventories into cash by selling their finished goods within short
period of time...

Inventory Turnover in Days

It indicates how many days the firm averagely needs to turn its inventory into sales.

Company 2018 2019 2020

DESCO 60.2333976 36.3718592 70.7844229
DPDC 17.3404871 15.9348931 14.991074

Inventory Turnover in Days

80
70
60
50
40
30
20
10
0
2018 2019 2020

DESCO DPDC

Interpretation
The graph shows the ratio of inventory turnover in days of two companies. DESCO Company
took 60 days, 36 days and 70 days in three years to turn the inventories into sales where DPDC
Company took 17 days, 15 days, 14 days to turn the inventories into sales. DESCO Company’s
period was quite long where DPDC took very less days. Perhaps DESCO Company’s inventory
was extraordinarily high at the end of the year. In this position, DPDC is in satisfactory position
as they were taking less times to turn inventories into sales.

Recommendation
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FINANCIAL RATIO ANALYSIS
To avoid delays, companies need to focus on increasing inventory turnover ratio.

Profitability Ratio
It shows how well a company utilizes its assets to produce profit and value to shareholders.

Gross Profit Margin

It measures how efficiently a company uses its materials and labor to produce and sell products
profitably.

Company 2018 2019 2020

DESCO 8.81% 09.17% 8.90%
DPDC 13.23% 14.57% 14.15%

Gross Profit Margin

0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
2018 2019 2020

DESCO DPDC

Interpretation
In this chart, we can see the gross profit margin ratio of two companies. DESCO company, for
per unit generated in sales, they had ratios in three years were 8.81%, 9.17%, 8.90% left over to
cover basic operating costs and profit. It clearly shows that in 2018, company’s financial
situation was quite okay as they could make some profit on sales. But in 2017, it has increased 1
percent which was quite pleasant because their sales decreased as well as gross profit increased.
Next year 2017, they decreased 1 percent ratio which was not satisfactory. DPDC company, their
ratios in three years were 13.23%, 14.57%, 14.15%. In 2018, they had lower ratio 1.34% which
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FINANCIAL RATIO ANALYSIS
could earn hardly profit means decrease in sales volumn due to increased price. But next year,
they increased their sales volum to 14.57% and after that it reached to 14.15%. I would say both
companies is in same position but DPDC is much better as their gross profit was high compared
to DESCO.

Recommendation
Companies should be continuously monitoring their gross profit margin ratio to be certain it is
sufficient to cover its selling, general and administrative expenses, interest expense and to earn a
profit. Company should stay safe by decreasing their sales and increasing gross profit.

Operating Profit Margin

It demonstrates how much revenues are left over after all the variable or operating cost has been
paid.

Company 2018 2019 2020

DESCO 2.76% 3.48% 2.45%
DPDC 2.39% 4.20% 2.89%

Operating Profit Margin

4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2018 2019 2020

DESCO DPDC

Interpretation
In this chart, we can see the Operating profit margin ratio of two companies. DESCO had 2.76%,
3.48%, 2.45% in three years.In 2018, they had 2.76% which converts its revenue to operating
income can be questionable to investors and creditors..But in 2019, operating expenses decreased
more for which operating profit increased that caused to operating profit. The ratio increased to
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FINANCIAL RATIO ANALYSIS
0.72% and next year it decreased its operating profit in some amount and move from negative to
positive one. DPDC had 2.39%, 4.20%, 2.89% in three years that shows they were increasing
each year which was good for the company except 2020 but obviously as the ratios were very
low, they did not turn out very well for them. For that, I think DESCO is in better position.
Recommendation
Companies need make enough money from their ongoing operations to pay for their variable
costs as well as fixed costs thus operating profit will increase and sales level will decrease.

Net Profit Margin

It measures the amount of profit that a firm can extract from its total sales.

Company 2018 2019 2020

DESCO 1.39% 2.77% 1.16%
DPDC 1.15% 2.94% 1.73%

Net Profit Margin

3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2018 2019 2020

DESCO DPDC

Interpretation
In this chart, DESCO company’s net profit margin ratios in three years were 1.39%, 2.77%,
1.16%. From 2018 to 2019, their ratios had increased and in 2020 it got decreased. The reason
can be that their total assets were very high because they did not invest much or the company
took long term loan to increase production capacity. DPDC Company’s net profit margin was
1,15%, 2.94%, 1.73% which shows the same scenario as DESCO. I would say both companies is
in same position but as DPDC fluctuated less shows they will try hard to increase their net profit
against total assets.
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FINANCIAL RATIO ANALYSIS

Recommendation
Companies need to increase net profit by clearing all expenses and they should lower total assets
by investing more and more and using their assets.

Return on equity
It measures the return earned on the common stockholders’ investment in the firm.

2018 2019 2020

DESCO 3.16% 5.99% 2.45%

DPDC 4.01% 2.63% 1.21%

Return on Equity
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2018 2019 2020

DESCO DPDC

Interpretation
The ROE ratio of DESCO company in three years are 3.16%, 5.99%, 2.45% that means company
had these percentage net income for per unit that has been invested by shareholder. From 2018 to
2019, the ratio increased means company was increasing its ability to generate profit without
needing much capital. Next year it goes down to 2.45% means company’s management was not
deploying shareholders capital properly. On the other hand, DPDC company’s ROE ratios are
4.01%, 2.63% and 1.21%. It clearly shows company’s return from shareholders investment was
very comfortable as they were able to utilize shareholder’s equity. Next year it goes down to
2.63% which was quite depressing that they were not able to properly utilize shareholders
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FINANCIAL RATIO ANALYSIS
investment or company might be borrowing more debt or generating inconsistent profits. After
that it declines to 1.21% which means they were not able to improve their situation.

Recommendation
Companies need to utilize shareholders investment and clear debt to generate profit. They can
improve asset turnover, distribute idle cash and lower tax to improve their current position
.
Coverage Ratio
It measures the firm’s ability to service its debt and meet its financial obligations.
Interest Coverage Ratio
It is used to determine how easily a company can pay interest on its outstanding debt.

Company 2018 2019 2020

DESCO 1.72254399 1.8240028 0.98327091
DPDC 1.79046864 2.15308048 1.70382502

Interest Coverage
2.5
2
1.5
1
0.5
0
2018 2019 2020

DESCO DPDC

Interpretation
The chart shows the interest coverage ratio of two companies. Where in 2018, the interest
coverage ratio of DESCO was 1.72254399, which illustrates the solvency level of the company
was good in the year means the company earns way more than what its interest costs are. But in
2020, the ratio declined to 0.98327091 which indicates the company is burdened by debt
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FINANCIAL RATIO ANALYSIS
expenses and has strong possibility of bankruptcy. On the other hand, the interest coverage ratio
of DPDC was shown increasing in 2018 & 2019. Like in 2020, their ratio was 1.70382502 which
was quite disappointed to pay interest expense without difficulties. It is assumed that in future
they will create a situation that the company will be more capable to meeting its interest
obligations from operating earnings without any difficulties.

Recommendation
DESCO Company needs to pay their loans to avoid bankruptcy and DPDC Company needs to
increase interest coverage ratio in determining company’s solvency to pay interests without
difficulties.
Conclusion
In conclusion, after analyzing the ratios and all the annual report of DESCO Company and
DPDC Company, we can say that the comparative financial situation of DESCO Company is
better than DPDC Company. Because only DESCO company could meet the standard level of
most of the ratios. If we talk about liquidity ratio, DESCO company’s current ratio and quick
ratio was complementary where DPDC Company’s fluctuation rate was too much. In financial
leverage ratio, DESCO and DPDC company’s ratios were quite close but DESCO was in better
position. In activity ratio, DESCO Company took less time to convert inventories into cash than
DPDC Company. DPDC Company was in good position than DESCO Company in profitability
ratio.Lastly coverage ratio and DPDC company was solvent enough to pay interest because
DESCO company’s fluctuation rate was high which shows that in that coverage ratio DESCO
company is more riskier. Comparing two companies all the ratio of 2015-2017, I find DESCO
Company was in better position.
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FINANCIAL RATIO ANALYSIS