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LETTER OF TRANSMITTAL 26 July 2012 Farzana Huda Lecturer Dept. of Business Administration East West University Subject: Submission of assignment on Financial Report Analysis of H. R. Textile Mills. Madam: We would like to submit the assignment on financial report analysis of H. R. Textile Mills Ltd. It had been a great experience for us to work with such a real life issue to analyze with. We tried utmost to make & let it look like a professional one. Any shortcomings are expected to have a kind view for our encouragement. We would like to thank you for your sincere & honest try to let us make easy & get familiar with the terms & facts of this analysis to help us make the paper a successful one. Our efforts will be valued, if this report can serve for what its been meant for & our assistance will be there for any queries. Sincerely, ID: 2010-2-13-053
Ratio Analysis
1. Liquidity Ratio Liquidity ratios measure your companys ability to cover its expenses. The two most commonliquidity ratios are the current ratio and the quick ratio
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2007
0.97007008
0.75937274
2008
0.97661953
There is tk. 0.97 of current asset to pay every tk.1.0 of current liabilities.
0.74331439
2009
0.93852261
There is tk. 0.94 of current asset to pay every tk.1.0 of current liabilities.
0.75716174
2010
0.98008068
There is tk. 0.98 of current asset to pay every tk.1.0 of current liabilities.
0.80381884
2011
1.00884981
There is tk. 0.97 of current asset to pay every tk.1.0 of current liabilities.
0.89805563
Comparisons: HR textiles Mills current ratio is clearly way below compared to the industry standard.
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With a little fluctuation (less than 0.1), its current ratio is close to 1.0 where the standard is 4.1times. In 2007 and 2008, the ratio was almost same at 0.97 times and in 2009 it slightly declined to 0.94 times and again recovered in 2010 by reaching 0.98times. In 2011 its ratio reached to 1.01 which is best ratio achieved in recent five years.
This is because there is hardly any gape between the current assets and current liabilities. With the increase of current assets in each year the current liabilities also increased. So the company continuously suffered in meeting current obligation through 2007 to 2011 with its current assets.
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The quick ratio has improved slightly in 2010 and 2011 and reached to .89 which was around 0.75 in 2007 to 2009. The quick ratio improved a bit in 2010 and 2011 as the company observed the hightest current assets along with lowest stock available in that period.
HR Textiles Mills quick ratio can be improved by Increasing current assets or by decreasing current liabilities or increasing sales of inventory. 2. Asset Management Ratio Asset Management Ratio Asset management ratios measure how effectively the the firm is managing its assets. These ratios are designed to answer the following question: Does the total amount of each type of asset as reported on the balance sheet seem reasonable, too high, or too low in view of current and projected sales levels 2.1 Inventory Turnover Ratio Inventory turnover ratio calculated by dividing the cost of goods sold by the inventory. Here is the formula of inventory turnover ratio: Formula= Cost of Goods Sold/Inventories 2.2 Fixed Asset Turnover Ratio Fixed asset turnover ratio measures how effectively the firm uses its plant and equipment to help generate sales. It calculated by dividing the sales by the net fixed assets. In the following the formula of fixed asset turnover is given: Formula= Sales/Net Fixed Asset 2.3. Total Asset Turnover Total asset turnover ratio measures the turnover of all of the firms assets. It is calculated by dividing the sales by the total assets. In the following the formula of total asset turnover is given: Formula = Sales/Total Assets Year 2007 2008 2009 2010 2011 Stocks and Stores 388,713,646 470,224,622 107,762,570 110,913,971 78,500,199 Cost of Goods Sold 662,193,262 1,010,972,536 1,286,814,881 1,062,651,934 1,553,115,036 Inventory Turnover ratio 1.703550335 2.14997788 11.94120446 9.580866364 19.78485476
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2007
1.703550335
The inventory is 1.59394768 sold for 1.703 times compared to cost of goods sold The inventory is 2.501797515 sold for 2.14 times compared to cost of goods sold The inventory is 2.606207213 sold for 11.94 times compared to cost of goods sold The inventory is 2.453590686 sold for 9.58 times compared to cost of goods sold
The firm used 1.59 0.869589812 times of fixed asset to generate sales.
The firm is earning 0.869 times from investment on total assets. The firm is earning 1.23 times from investment on total assets. The firm is earning 1.21 times from investment on total assets. The firm is earning 1.08 times from investment on total assets.
2008
2.14997788
The firm used 2.50 1.231374305 times of fixed asset to generate sales
2009
11.94120446
The firm used 2.61 1.208296614 times of fixed asset to generate sales
2010
9.580866364
The firm used 2.45 1.081341676 times of fixed asset to generate sales
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Comparison: HR textiles Mills inventory turnover ratio is clearly way below compared to the industry standard.
i a R u T y r o t e v n I
Y ear The average inventory turnover ratio of hr textile is high within the year of 2002 to 2011 of the company standard is 7.4 times. So, overall performance is good for the company.
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RATIO ANALYSIS OF HR TEXTILES MILLS LTD. Com parisonof S tocks-S toresandCOGSin 200 7-201 1
1.6E+ 09 1.4E+ 09 1.2E+ 09 1E+ 09 80000000 60000000 40000000 20000000 0
Cost of Goo
G O C / e r d n a s k c o t S
2007
2008
2009
2010
2011
Y ear The condition of the cost of goods sold is higher than the stocks &stores of HR Textile in which the revenue is increasing day by day.
Industry St
) m ( v o n r u T t s A d e x i F
1 0.5 0 2006.5 2007 2007.5 2008 2008.5 2009 Yea r 2009.5 2010 2010.5 2011 2011.5
The fixed asset turnover ratio of HR Textile is not suitable between the year of 2007 to 2010 of HR Textile with the company standard. But in 2011 the fixed asset turnover ratio is increased with the company standard.
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) s e m i t
Y ear
The total asset turnover ratio of HR Textile ltd is good with the company averages. But in one year among 2007 to 2011 is low from the company standard. Recommendation: The overall inventory turnover ratio of HR Textile is not so good. The fixed asset turnover ratio is also not suitable for HR Textile ltd. But the total asset turnover ratio is standard for the HR Textile ltd. The HR textile has arises some problem in the overall asset management ratio. They should recover the problem for the betterment of the organization. If we are comparing an old firm that acquired many of its fixed asset years ago at low prices with a new company that acquired its fixed asset only, we probably would find that old firm has a higher fixed asset turnover ratio
i ( v n r u e s A l t a o T
Interpretation:
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2008
73.10748%
2009
75.7899682%
2010
75.4772988%
2011
71.7388066%
Comparisons: HR textiles Mills Debt-Asset ratio is clearly way above compared to the industry standard, which is not very good for the company.
80.00 % 70.00 % 60.00 % 50.00 % 40.00 % 30.00 % 20.00 % 10.00 % 0.00% 200 200 200 200 201 201 201 6 7 8 9 0 1 2 D ebt-Asse R tio in % t a IndustryA era e v g
Recommendation: The company needs to use Is assets more and pay off their debts to bring this debt ratio in a good situation for the company
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It is clearly visible that time interest earned ratio of HR textiles ltd is clearly well under the Industry standard. From 2007 to 2010 it almost stabilized to 1.65 times but in 2011 it reached to 2.1 but still falls way short of the standard.
Recommendation: The company should try to increase the sales to ultimately increase the EBIT to be able to cover the interest on the debt it has financed.
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total sales. Formula for evaluating this ratio= Net Profit/Sales Year 2007 2008 2009 2010 2011 Net Profit or Income 4,464,273 5,135,005 5,208,570 6,300,056 63,789,810 Sales 743,815,304 1,140,247,661 1,256,238,796 1,192,399,829 1787093874 Net Profit margin on Sells 0.006001857 0.004503412 0.004146162 0.00528351 0.035694717
Interpretation :
Interpretation
For each $1 of sales the 0.6001857% company earns $0.006001857 For each $1 of sales the 0.4503412% company earns $0.004503412 For each $1 of sales the 0.4146162% company earns $0.004146162 For each $1 of sales the 0.528351% company earns $0.00528351 For each $1 of sales the 3.5694717% company earns $0.035694717
Comparison:
HR textiles Mills Net Profit margin is clearly way below compared to the industry standard, which is an indication of upcoming alarming situation.
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5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2006 2007 2008 2009 2010 2011 2012 Net Profit margin on Sells Industry Average
So, the profitability ratio is too much below the expected return, only in 2011 it has been able to do a bit good Recommendation: The company needs to minimize its costs and get control over the things, so that the ration goes up. A. Return on Asset: This ratio indicates how well the company is using its assets and how much is getting return from its assets. Formula to get this ratio= Net Income/Total Asset Year 2007 2008 2009 2010 2011 Net Profit or Income 4,464,273 5,135,005 5,208,570 6,300,056 63,789,810 Total Assets 855,363,407 925,995,984 1,039,677,494 1,102,704,035 1,154,709,196 Return on Asset 0.005219154 0.005545386 0.005009794 0.005713279 0.055243182
Interpretation :
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2007
2008
2009
2010
2011
Comparison: HR textiles Mills Return on asset ratio is clearly way below compared to the industry standard, which is an indication of upcoming alarming situation.
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So, the return on asset ratio is too much below the average return. Recommendation: The company seems to be holding too much stock in hand, instead f that they need to increase their sales so the profit goes up.
4.2 Return on Equity: This ratio shows how return we are getting using the owners equity we
have. The formula to calculate this ratio= Net Income/Equity Year 2007 2008 2009 2010 2011 Net Profit or Income 4,464,273 5,135,005 5,208,570 6,300,056 63,789,810 Equity 200,000,000 200,000,000 200,000,000 200,000,000 220,000,000 Return on Equity 0.022321365 0.025675025 0.02604285 0.03150028 0.289953682
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2007
For $1 of owners equity the company generates 2.2321365% $0.022321365 of revenue For $1 of owners equity the company generates 2.5675025% $0.025675025 of revenue For $1 of owners equity the company generates 2.604285% $0.02604285 of revenue For $1 of owners equity the company generates 3.150028% $0.03150028 of revenue For $1 of owners equity the company generates 28.9953682% $0.289953682 of revenue
2008
2009
2010
2011
Comparison HR textiles Mills Return on equity ratio is clearly way below compared to the industry standard except from 2011, which is an indication of upcoming alarming situation.
35.00% 30.00% 25.00% 20.00% Return on Equity 15.00% 10.00% 5.00% 0.00% 2006 2007 2008 2009 2010 2011 2012 Indusrry Average
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share. Formula for computing this ratio= Net Profit (Earning available to Common Stock Holders)/Number of Common Stocks
Interpretation
10.73 Against 1 Common Stock, the company earns $10.73 13.57 Against 1 Common Stock, the company earns $13.57 12.54 Against 1 Common Stock, the company earns $12.54 15.55 Against 1 Common Stock, the company earns $12.55 26.13 Against 1 Common Stock, the company earns $26.13
Price Earnings Ratio: This ratio will show us how much we are earning against $1 of market price per share. The formula to get that ratio= Market Price of Share/ Earnings per Share
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2007
Against $1 of market price of share, company is 10.73% earning $0.1073 Against $1 of market price of share, company is 13.57% earning $0.1357 Against $1 of market price of share, company is 12.54% earning $0.1254 Against $1 of market price of share, company is 15.55% earning $0.1555 Against $1 of market price of share, company is 26.13% earning $0.2613
2008
2009
2010
2011
Recommendation:
Net Income to be increased so that it ensures generation of profits internally in the
business. HR should keep in mind whether share fluctuate in size. Companies may bring additional shares to the market or actually buy them back depending on their cash needs and expectations for the future.
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Price/Earnings Ratio: it shows the willingness of the investors for investing in the company shares on the basis of profit earned by the firm per dollar. It takes into account market price per share comparing to the Earnings made by the company per share. The formula for computing the above ratios are:
5.1 Earnings per share: Net Income available to common stockholders/No of common shares
outstanding 5.2 Price/Earnings Ratio: Market Price per share/Earnings per share Interpretation: Year 2007 2008 2009 2010 2011 Net Profit or Income 4,464,273 5,135,005 5,208,570 6,300,056 63,789,810 Equity 200,000,000 200,000,000 200,000,000 200,000,000 220,000,000 Return on Equity 0.022321365 0.025675025 0.02604285 0.03150028 0.289953682 Earnings per Share 10.73 13.57 12.54 15.55 26.13 Market Price of Shares 100 100 100 100 100 Price Earnings Ratio 0.1073 0.1357 0.1254 0.1555 0.2613
Year
Analysis for every share the shareholders would receive $10.73 as dividend
2007
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2009
12.54
0.1254
2010
15.55
0.1555
2011
26.13
0.2613
We can observe the net profit or income of the company has been rising from 2007 to 2012. This leaves a hope for the shareholders to receive higher return on their stock. But if carefully analyzed the positive changes have been brought about a little. Most shareholders are interested in net profit after tax and interest, because this is the sum of money available for distribution.
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The market price per share has been remaining constant throughout the years from 2007 to 2011. This indicates there have not been any major changes in the market or share price fluctuations and the prices remained similar every year. As a result the Price/Earnings Ratio seems to maintain a constant structure through 2007 to 2011. Now if we look into Price/Earnings ratio we see that the standard is 13.0 times. From the data we can see that not much were the price/earnings ratio of these years even closer to the industry standard. There is a huge gap between the standard and actual ratios. In 2007, it was the lowest of 0.1073 times. In 2008 it increased less proportionately and again fell in 2009. Moreover, there has been a slight rise from 2009 to 2011. But this rise is far below the standard. This is not a good sign for the company. This situation is considered as risk for the firm. The investors would be unlikely to invest in this firm. HR would not be able to hold its position in the market and become risky firm. It declines the possibilities of future expected profitability. In addition to that fluctuations in market price of shares are a big concern. In spite
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return for the shareholders from high net income of the company. But the company also has to keep in mind that all the profit cannot be distributed to shareholders but save it for future. It is termed as Retained Profits. The net income after tax and interest should be reserved for future benefits.
Price/Earnings ratio holds a huge gap compared to its standard. This indicates high
risk for the firm. The increase in the ratio was lower and maintains a fixed structure. HR also should focus on the market price. Till 2011 the market price of share was constant but this would not last. Also the company is not meeting its standard ratio which may also prove risky for any further future growth prospects. This would fail to attract investors and HR should follow certain strategies to reach its standard ratio. The firm should be enough successful so that there is higher growth possibilities. Therisk-averse investors would be unlikely to invest in these shares. Conclusion HR Textiles Mills Company is one of the leading textiles companies in Bangladesh. Its financial position in the market has been very strong throughout the years but from 2007-2011 the detail survey of their financial ratios have sort out many confusions. Many things emerged and a lot of problems were recognized. The performance of the company was more clearly identified. From the five major ratios Profitability, Liquidity, Asset management, Debt and Market Value ratios, more detailed analysis has helped in understanding their weaknesses, strengths, opportunities that they may enjoy and the threats they are likely to face. To begin with Profitability Ratios, they show how profitable a firm is, they are the measure of the overall performance. It also measures how well the firm is operating or how well the current performance is compared to past performance records. The Net Profit Margin on Sales improved in 2010 and 2011 as it was far above the company standard of 4.7%. Another ratio Return on Asset was not favorable enough and was far below the standard. Moreover, Return on Equity also was not in a good condition as it has a huge gap from the standards and the actual incurred from 2007 to 2011. Overall the profitability situation of the company is not so good. It needs a lot of recovery. It needs to develop its strategies and focus more on improving net profits, high sales and ensure high return on asset and equity. Secondly Liquidity ratio measures whether a company has sufficient current assets to meet its current liabilities. It evaluates a companys ability to pay its creditors within due time. The company has enough cash to meet the debts. There are two ratios. Firstly, current ratio that measures current assets to meet current liabilities has a standard of 4.1 times. During the financial
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