Financial Ratio Analysis of

Premier Cement Mills Limited

and

Meghna Cement Mills Limited

 University of Dhaka
Faculty of Business Studies
Department of International Business

Course code: IB-206

Financial Ratio Analysis of

Premier Cement Mills Limited
and
Meghna Cement Mills Limited

Submitted to:
Pallabi Biswas
Lecturer
Department of International Business
University of Dhaka

Submitted by:
Roll No. Name
BB-030-020 Md. Towhidul Islam
RH-030-022 Tanzia Sultana Munny
BB-030-24 Md. Redoy
BB-030-26 Niamul Islam Rimon

Date of Submission: 13/11/2019

Introduction

With the rising of development, cement industry plays an important role in the economy.
Development of cement industry in Bangladesh dates back to the early-fifties but its growth in
real sense started only about a decade. The country has been experiencing an upsurge in cement
consumption for the last five years. Within the span of the two to three years, industry attained
expanded capacity of the product with stable growth rate of consumption. Bangladesh cement
industry is the 40th largest market in the world. But people are afraid to invest in this sector.
One reason is that one need proper pushing factors to be attracted in this industry. So, he or she
needs evaluation. Financial ratio analysis is one tools that is used to evaluate the firm’s
performance. It takes past information to estimate future trends. One can easily predict the
future movement through ratio analysis. It gives a better understanding of firm’s position. We
have selected Premier Cement Mills Limited and Meghna Cement Mills Limited – two leading
cement firm in Bangladesh. We have analyzed their financial statement of past three years, that
is 2016, 2017, and 2018. This ratio analysis will provide the financial performance evaluation
of those two firm. This ratio helps analyst to answer question such as, Does the firm have
enough liquidity to pay the bills? and, how effectively does the firm collect cash from its
customers? Moreover, ratio analysis identifies the financial strength and weaknesses of firm
by properly establishing the relation between items of balance sheet and income statement.

Objectives

The objectives of our study are as follow:

i. Measuring the financial performance of two firm

ii. Finding out various ratios of those two firm
iii. Evaluating the results
iv. Finding out the position in their industry
v. Compare their financial performance with each other

Methodology

First thing we did – select two same category firm. Those two company is DSE enlisted. Then
we collated their annual report from their official page. We used ratio analysis method through
ms excel to figure out the financial position of two firm. Those ratio was then evaluated based
on marginal value provided from financial scholars. Ratio values were calculated separately.
Then, two company we compared with one another. We used graph, chart to better understand
the trends. The study covers a evaluation of 3 year of financial performance.

Limitations

We tried to bring the best out of our study in analyzing financial state on two cement company.
However, there exist some limitation in our approach. We evaluated the ratio with some
industrial base. But this can not properly represent the current market scenario. There can be
change because of economical factors. This wasn’t considered in our study. Their web site
wasn’t up to date. So, we might miss the recent data. Besides, we have analysed only thre years
of financial data. We could have done more. Thus this small time period doesn’t represent the
whole financial situation of those two firm. Furthermore, there can be some gap of data from
financial statement. In addition, we measured a few ratios only though there were bunch of
other ratios. Afterall, we tried our best to figure out the financial position of those two cement
company.

Theoretical Discussion

Probability Ratios

Profitability Ratios helps to evaluate the firms profit relative to a given level of sales, a certain
level of assets and the owners’ investment. It helps us understand whether the company is able
to generate enough sales relative to its expenses during a specified period. Most commonly
used by Financial Analysts, Profitability Ratio analysis measure and evaluate a
company's earning generation ability relative to its revenue and expenses during a specific time
period. Profit is essentially whatever is left from the revenue after deducting all the associated
expenses. Profitability ratios also show how well companies use their existing assets to
generate profit and value for shareholders. Higher ratio results are often more favorable, but
ratios provide much more information when compared to results from other, similar companies,
the company's own historical performance, or the industry average. Profitability ratios types
include gross profit margin, operating profit margin, net profit margin, EBITDA Margin,
Earnings per share, ROE, ROCE, ROA, Contribution margin and more.
Solvency (Debt) Ratios

The debt ratio is a financial ratio that measures the extent of a company’s leverage. The debt
ratio is defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It
can be interpreted as the proportion of a company’s assets that are financed by debt. Debt Ratio
Analysis helps the financial analyst to learn about the company's dependency on "external
finance" (debt) as compared to "internal finance" (equity). It indicates the ability of accompany
to repay principle amount of its debt, pay interest on its borrowing, and to meet its others
financial obligation. The higher the debt ratio, the more leveraged a company is, implying
greater financial risk. At the same time, leverage is an important tool that companies use to
grow, and many businesses find sustainable uses for debt. Debt Ratio is also viewed as the
long-term solvency ratio. Debt Ratios types include Debt to Equity Ratio, Debt Coverage
Ratio, Capital Gearing Ratio, Interest Coverage Ratio and more.

Activity Ratios

Activity ratios are a category of financial ratios that measure a firm's ability to convert different
accounts within its balance sheets into cash or sales. Activity ratios measure the relative
efficiency of a firm based on its use of its assets, leverage, or other similar balance sheet items
and are important in determining whether a company's management is doing a good enough
job of generating revenues and cash from its resources. Activity ratios gauge an organization's
operational efficiency and profitability. These ratios are most useful when compared to a
competitor or industry to establish whether an entity's processes are favorable or unfavorable.
Activity ratios can form a basis of comparison across multiple reporting periods to determine
changes over time. This ratio helps us understand the how effectively the firm is utilizing its
resources. This ratio effectively tracks the flow of cash from sales activity to receivables,
inventory, and payables. Turnover Ratios types include the inventory turnover, receivables
turnover and payables turnover. Also, you can calculate the cash conversion ratio using the
three types of turnover ratio formulas to find out the length of cash cycle.

Liquidity Ratios

Liquidity is the ability to convert assets into cash quickly and cheaply. Liquidity ratios are most
useful when they are used in comparative form. Liquidity ratios are an important class of
financial metrics used to determine a debtor's ability to pay off current debt obligations without
raising external capital. Liquidity ratios measure a company's ability to pay debt obligations
and its margin of safety through the calculation of metrics. Liquidity ratio analysis provides us
with an understanding that whether the company will be able to serve its short-term liabilities
(current liabilities) with the help of its short-term assets (current assets). This helps an analyst
understand whether the company has enough cash in the system to survive for at least one
operating cycle. Liquidity Ratios types include current ratios, quick ratio, cash ratio, defensive
interval ratio and working capital ratio. Liquidity ratio analysis may not be as effective when
looking across industries as various businesses require different financing structures. Liquidity
ratio analysis is less effective for comparing businesses of different sizes in different
geographical locations.

Findings and Analysis

1. Probability Ratios

Gross Profit Margin

Profitability is an important factor to consider for investors. Investors look at mainly net profit
margin along with gross margin. Gross profit margin calculator is useful to investors because
by calculating the percentage, they can easily compare it with other similar companies. Gross
profit margin is a metric used to assess a company's financial health and business model by
revealing the amount of money left over from sales after deducting the cost of goods sold. The
gross profit margin is often expressed as a percentage of sales and may be called the gross
margin ratio. Comparing the gross profit percentage of all similar companies in the same
industry provides the investors with the knowledge of whether the gross profit of the target
company is healthy or not. Higher the gross profit percentage, better the company’s overall
health and profitability.

Gross Profit Margin

2018 2017 2016
Meghna Cement 10.28% 11.00% 11.62%
Premier Cement 15.09% 16.44% 21.68%
Operating Profit Margin

The operating margin measures how much profit a company makes on a dollar of sales, after
paying for variable costs of production, such as wages and raw materials, but before paying
interest or tax. It is calculated by dividing a company’s operating profit by its net sales. There
are many firms which emphasize the net profit. The net profit is the result of the whole income and
expenses rendered by a company. But if the net profit margin is higher, it doesn’t ensure the efficiency
of a company. Rather, it may hide the actual profit generated by the operating efforts of the company.
That’s why the investors should look at operating profit. Since operating profit helps in finding
out actually how much profit the companies have made from its operations, it ensures
efficiency and profitability. And that’s the reason – it is one of the most significant profitability
ratios of all.

Operating Profit Margin

2018 2017 2016
Meghna Cement 6.35% 7.05% 7.60%
Premier Cement 9.99% 9.90% 14.66%

Net Profit Margin

The net profit margin means how much net income or profit is generated as a percentage of
revenue. Net profit margin is the ratio of net profits to revenues for a company or business
segment. By using the net margin formula, the investors are able to understand how much a
firm has been profiting from its revenue. If the proportion of net profit is less compared to the
net sales of the company, then the investors would enquire why it is so and may find other
important details about the company. Similarly, if the net margin is too much, then also the
investors need to see through other details to find out why the net margin is too good to be true.

Net Profit Margin

2018 2017 2016
Meghna Cement 1.47% 1.31% 1.30%
Premier Cement 4.40% 5.44% 9.92%
Earnings Per Share

Earning per share is measure of how much a shareholder is earning on each share he or she
holds. It is most commonly used corporate profitability measure for publicly traded firms.
Earnings per share (EPS) tells common shareholders how much of the available income is
associated with the shares they own. Earnings per share (EPS) is calculated as a company's
profit divided by the outstanding shares of its common stock. The resulting number serves as
an indicator of a company's profitability. The higher a company's EPS, the more profitable it is
considered.

Earning Per Share (EPS)

2018 2017 2016
Meghna Cement 3.62 2.91 3.42
Premier Cement 4.18 5.17 5.99

Return On Assets (ROA)

Return on assets is a measure to gauge how much profit is generated by the business with the
number of total assets invested in the business. This ratio is measured with net income and total
assets. Return on assets (ROA) is an indicator of how profitable a company is relative to its
total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's
management is at using its assets to generate earnings. As the funds required for the total assets
is provided by all these set of investors. Total asset is funded by both equity and debt holders.
It is required to add back interest expenses in the net income which seats in the numerator of
the ratio. Return on assets is displayed as a percentage.

Return on Assets
2018 2017 2016
Meghna Cement 1.41% 1.42% 1.83%
Premier Cement 3.40% 5.26% 9.68%

Return On Equity (ROE)

The Return on Equity (ROE) ratio is a profitability ratio used for measuring the return that an
organization earns on Shareholders’ Equity. It measures how effectively management is using
a company’s assets to create profits. A good or bad ROE will depend on what’s normal for the
industry or company peers. The ROE ratio is very helpful for the shareholders for measuring
the efficiency of the managers. A higher ratio indicates that the managers of the company are
efficiently utilizing the shareholders’ money and it gives them a basis to decide to stay invested
in the company or leave the company. It is a mixed ratio, which means it uses one element from
the Income Statement and the other from the Balance Sheet.

Return on Equity
2018 2017 2016
Meghna Cement 36.20% 29.08% 34.23%
Premier Cement 41.93% 53.30% 79.11%

2. Solvency (Debt) Ratios

Debt to Total Assets Ratio

Debt to asset ratio is the ratio of the total debt of a company to the total assets of the company.
This ratio represents the ability of a company to have the debt and also raise additional debt if
necessary, for the operations of the company. It is an indicator of a company's financial
leverage. It tells you the percentage of a company's total assets that were financed by creditors.
The higher the ratio, the higher the degree of leverage (DoL) and, consequently, financial risk.
The total debt to total assets is a broad ratio that analyzes a company's balance sheet by
including long-term and short-term debt (borrowings maturing within one year), as well as all
assets—both tangible and intangible, such as goodwill.

Debt to Total Assets Ratio

2018 2017 2016
Meghna Cement 87.47% 82.35% 82.58%
Premier Cement 66.38% 63.13% 56.94%

Times Interest Earned Ratio

Times Interest Earned Ratio is also known as interest coverage ratio. It find out the ability to
pay the interest to the creditor. It is the ratio between earnings before interest and taxes and the
interest expenses of the company over that specific period. It helps in determining the liquidity
position of the company by determining whether they are in a comfortable position to pay
interest on its outstanding debt. The result is a number that shows how many times a company
could cover its interest charges with its pretax earnings. A better TIE number means a company
has enough cash after paying its debts to continue to invest in the business.

Times Interest Earned Ratio

2018 2017 2016
Meghna Cement 1.32 1.33 1.29
Premier Cement 2.52 3.10 3.39

3. Activity Ratios

Inventory Turnover Ratio

Inventory turnover is a ratio showing how many times a company has sold and replaced
inventory during a given period. Inventory Turnover Ratio helps in measuring the efficiency
of the company with respect to managing its inventory stock to generate sales. A company can
then divide the days in the period by the inventory turnover formula to calculate the days it
takes to sell the inventory on hand. Calculating inventory turnover can help businesses make
better decisions on pricing, manufacturing, marketing and purchasing new inventory. It dictates
how fast a company replaces a current batch of inventories and transforms the inventories into
sales. A low turnover implies weak sales and possibly excess inventory, while a high ratio
implies either strong sales or insufficient inventory.

Inventory Turnover Ratio

2018 2017 2016
Meghna Cement 6.7 8.4 7.4
Premier Cement 17.23 8.67 7.97

Accounts Receivable Turnover Ratio

The accounts receivable turnover ratio is an accounting measure used to quantify a company's
effectiveness in collecting its receivables or money owed by clients. It is also known as debtors
turnover. It calculates that how many times business collects the average accounts receivable
per year and it is used for the purpose of evaluation of the efficiency of the company to provide
a credit facility of its customer and its timely collection. A high receivables turnover ratio can
indicate that a company’s collection of accounts receivable is efficient and that the company
has a high proportion of quality customers that pay their debts quickly. A low receivables
turnover ratio might be due to a company having a poor collection process, bad credit policies,
or customers that are not financially viable or creditworthy.

Accounts Receivable Turnover

2018 2017 2016
Meghna Cement 90.9 97.3 53.8
Premier Cement 87.3 84.7 72.1

Accounts Payable Turnover Ratio

Accounts payable is the amount owed by the company to its customer for purchasing goods or
services. The accounts payable turnover ratio is a short-term liquidity measure used to quantify
the rate at which a company pays off its suppliers. Accounts payable turnover shows how many
times a company pays off its accounts payable during a period. The accounts payable turnover
ratio shows how efficient a company is at paying its suppliers and short-term debts. This ratio
helps creditors analyze the liquidity of a company by gauging how easily a company can pay
off its current suppliers and vendors. Companies that can pay off supplies frequently
throughout the year indicate to creditor that they will be able to make regular interest and
principle payments as well.

Accounts Payable Turnover

2018 2017 2016
Meghna Cement 61.7 39.0 16.1
Premier Cement 37.15 22.18 28.05

Total Assets Turnover Ratio

The asset turnover ratio is an efficiency ratio that measures a company’s ability to generate
sales from its assets. It measures the value of a company's sales or revenues relative to the value
of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a
company is using its assets to generate revenue. It is the ratio between the net sales of a
company and total average assets a company holds over a period of time. The higher the asset
turnover ratio, the more efficient a company. Conversely, if a company has a low asset turnover
ratio, it indicates it is not efficiently using its assets to generate sales.

Total Assets Turnover

2018 2017 2016
Meghna Cement 0.80 1.06 1.30
Premier Cement 0.74 0.83 0.94

4. Liquidity Ratios

Current Ratio

The current ratio is a liquidity ratio that measures a company's ability to pay short-term
obligations or those due within one year. It tells investors and analysts how a company can
maximize the current assets on its balance sheet to satisfy its current debt and other payables.
The current ratio compares all of a company’s current assets to its current liabilities. These are
usually defined as assets that are cash or will be turned into cash in a year or less, and liabilities
that will be paid in a year or less. The current ratio is sometimes referred to as the “working
capital” ratio and helps investors understand more about a company’s ability to cover its short-
term debt with its current assets. Weaknesses of the current ratio include the difficulty of
comparing the measure across industry groups, overgeneralization of the specific asset and
liability balances, and the lack of trending information.

Current Ratio
2018 2017 2016
Meghna Cement 1.13 1.05 1.07
Premier Cement 0.80 0.88 1.05

Quick Ratio
Quick ratio is a liquidity ratio which is used as a measure of the ability of the company to meet
its current obligation. It is utilized to assess whether a business has sufficient assets that can be
translated into cash to pay its bills. It indicate company’s short-term liquidity position. It is also
called the acid test ratio. It measures a company’s ability to meet its short-term obligations with
its most liquid assets. The higher the ratio result, the better a company's liquidity and financial
health; the lower the ratio, the more likely the company will struggle with paying debts.

Quick Ratio
2018 2017 2016
Meghna Cement 0.97 0.90 0.85
Premier Cement 0.74 0.72 0.83

Cash Ratio

It is a ratio of company’s cash and cash equivalent assets to its liabilities. The cash ratio is used
to measure the liquidity of the firm and gives us a quantitative relationship between cash &
cash equivalent with the current liabilities of the company. The metric calculates a company's
ability to repay its short-term debt with cash or near-cash resources, such as easily marketable
securities. This information is useful to creditors when they decide how much money, if any,
they would be willing to loan a company. The cash ratio is derived by adding a company's total
reserves of cash and near-cash securities and dividing that sum by its total current liabilities. If
Cash & Cash Equivalent = Current Liabilities; that means the firm has enough cash to pay off
the current liabilities. If Cash & Cash Equivalent < Current Liabilities; then this is the right
situation to be in, in terms of the firm’s perspective. Because this means the firm has utilized
its assets well to earn profits.

Cash Ratio
2018 2017 2016
Meghna Cement 0.19 0.06 0.07
Premier Cement 0.01 0.02 0.05