FIN 340 REPORT

ON

WORKING CAPITAL MANAGEMENT

SUBMITTED TO:
MD. ANWAR KHAN FIN-329, SECTION 02

SUBMITTED BY:
Jahir Ali Abbas Uddin 0910172030 0910533030

TABLE OF CONTENT

Introduction Ratio Analysis. Management of Receivables

03 04 08

Management of Inventory. 09 Management of payables 10 Problems & Recommendations... 10 Conclusion . Appendix.... 11 12

Introduction

HeidelbergCement Bangladesh Ltd. is one of the largest producers of quality cement in Bangladesh. HeidelbergCement Bangladesh Ltd. is a member of HeidelbergCement group, Germany. The group has 136 years of experience in producing cement and is operating in more than 50 countries. It has around 53000 employees and an annual turnover of Euro 11.1 billion. In Bangladesh it represents two reputed brands Ruby Cement and Scan Cement. In 1998, HeidelbergCement Group established its presence in Bangladesh by setting up a floating terminal with onboard packing facilities in the port of Chittagong and by distributing the cement to the key markets of Dhaka and Chittagong. In Bangladesh, Heidelberg group is one of the largest foreign investors having an investment of 100 million US$ with more than 260 employees working round the clock to materialize the mission of this great global company. By satisfying the needs and aspirations of its customers, employees, shareholders and the wider community, the company is able to maintain its position of strength as a sustainable cement provider without compromising commitment to long term stability and environmental responsibility.

Products & Innovation

Portland Composite Cement (PCC) As part of its relentless pursuit for innovation and constant drive to improve quality, HeidelbergCement has introduced Portland Composite Cement (PCC) during 2003. Absorbing European Norms in cement producing made HeidelbergCement Bangladesh Ltd. the pioneer in this sector.

Cement produced according to the BDS EN ScanCement and RubyCement are designed to achieve the best characteristics for its customers; this result is achieved by design using clinker and high quality other constituents. PCC has the optimum of: Durability, Long-term strength and workability. ScanCement and RubyCement are produced according to the European norms BDS EN 197-1:2003.

Ratio Analysis
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1. Solvency Measures:

A firm is considered solvent when its assets exceed its liabilities. Solvency demonstrates the degree to which current liabilities are covered in the event of liquidation. We are going to use some solvency ratios to find out the solvency of Heidelberg Cement Bangladesh Ltd.

Solvency Ratio current ratio quick ratio

2007 1.03 0.71

2008 1.27 0.66

2009 2.03 1.52

From the time period of 2007 to 2009 the companys current ratio has improved over the period and the companys quick ratio also improved from 2007 to 2009. These ratios indicate that short term creditors of Heidelberg Cement have a very good coverage if current assets are to be liquidated to pay of current liabilities.

Solvency Measures 2007 NWC 64703000

2008 638679000

2009 1719100000

From the above table we observe that the company has a positive and a high amount of net working capital. This means some of Companys Current assets were financed by the long term sources of fund. Here the company has not that much long term loan in 2006-2007 period compared to its short term loan and there were no long term loan in 2008, they paid off all of their long term loans in 2008. The Excess liquidity of the company was financing their day to day business.

Solvency Measures 2007

2008

2009

NLB

800973000

7684530000 1819400000

Net liquid balance is used to cover the working capital requirements. As past years shows that the companys NLB is growing, so it is a good sign for the company to run its day to day business. For many years they were not facing any kind of liquidity problem.

2. Liquidity Measures:

I. Cash Flow from operation:

2007 CF from Operation 1127700000

2008 32700000

2009 2088800000

The above figures show that Heidelberg Cement has been generating a strong cash flow from operation except in 2008.

II. Cash Conversion efficiency

2007 Cash Conversion Efficiency 20.06%

2008 0.51%

2009 28.98%

In 2008 their cash conversion efficiency was very poor. This is due to the fact that in 2008 they have spent a lot of cash to buy and stock inventory. Otherwise, we can say that they have good cash conversion efficiency which means they are very efficient in managing their receivable, payable and inventory.

III. Cash conversion Period

Cash Conversion Period 2007 Days Inventory held DSO Operating Cycle DPO CCC 56.03 37.56 93.59 111.57 -17.99

2008 103.14 35.02 138.16 101.63 36.53

2009 58.05 30.65 88.70 89.90 -1.2

Heidelberg Cement has large DPO. But it does not create any problem in the relationship with the suppliers. The suppliers of HBCL are mainly the subsidiaries of the Heidelberg group. So they have a good advantage in this area. And that is why the companys CCC was negative in 2007. Negative CCC means the company doesnt need any external financing. They were very efficient in managing the cash. Without investing in Inventories and A/R they were efficiently running the operation. Although they had sufficient cash in their hand, from2007 to 2008 the companys Operating cycle increased significantly and DPO decreased slightly. As a result in 2008 the companys CCC was 36.53 days. This increase was a result of a high Days inventory Held (103.14 days).

In 2008 they brought a very high amount of inventory from their sister concern company from Indonesia named Indocement. So the company needed financing from somewhere. They have sufficient amount of cash and from that liquid cash the company was financing their operation. They dont need any external financing for that time lag. They mostly depend on internal financing. As they are subsidiary of Heidelberg group they get lots of facilities in many areas. This is their competitive advantage.

In 2009, the situation became normal again and their cash conversion period became negative once again

IV. Current Liquidity Index:

2007 CLI 27.56

2008 39.40

2009 25.78

In 2007-2008 the CLI was increasing. And it is positive number. CLI represents the Cash against to cover its the current liabilities. The CLI for past years show that the company has high CLI. This means the company has ample cash to cover its current debts.

3. Efficiency Measures

Efficiency Ratio NWC turnover Inventory turnover Days sales in inventory AVG collection period

2007 86.88 6.51

2008 9.97 3.54

2009 4.20 6.1

56.03

103.14

58.05

37.8

37.56

29.01

NWC turnover and inventory turnover is on average much better and Days sales in inventory is acceptable. Average collection period is lower which is good for the company. Therefore, the efficiency level of the company is really good.

4. Profitability Measures

Profitability Ratio net profit margin ROA ROE

2007 11.06% 12.04% 12.06%

2008 9.30% 10.09% 21.76%

2009 11.81% 14.11% 21.42%

Profit margin, ROA and ROE tells that this is a dream company at cement sector. All these three ratios are high over the period.

5. Market Value Ratio

Market Value Ratio price earning ratio Earning per share

2007 10.95 110

2008 11.47 105

2009 14.19 151

For this company, P/E ratio is very much high in comparison with industry P/E ratio. It has also a high EPS. Overall, the company has a good market book ratios and it indicates that investors are very much interested to invest in this firm. It has the highest valued share than any other company in the cement industry.

Management of Receivables
The company is very efficient in managing their receivables. They have conservative collection procedure. They maintain maximum modern policy of collecting cash. Because of their efficiency in collecting receivables they have a huge amount of cash balance. The following analysis will show how much cash they have per share. 2007 Net cash (decrease) / increase during th eyear Opening Balance Closing Balance Number of shares EPS TOTAL CASH AVAILABLE PER SHARE 150.65 Cash Dividend per share 25 136.00 33 322.03 53 759,976,000 (82,749,000) 1051100000 91,227,000 851,203,000 768500000 2008 2009 Average

851,203,000 768,454,000 1819600000 5,650,360 110 5,650,360 105 5,650,360 151

Average Net Cash Remain After Dividend per share

Cash Remain After Dividend

125.65
709944000

103.00
581992120

269.03
1520116351

165.90
9373508237

This analysis clearly shows that this company retained on an average 165 taka per share these 3 years. On an average they have sufficient cash of 432354132 Taka per year. HeidelbergCements credit policy is not very flexible. They dont encourage credit sales to increase their sales. They dont want to increase the risk of credit. As they are MNC, they face legal bindings in collecting if customers dont pay. They have huge idle fund to finance their A/R but they are not taking the option.

Management of Inventory
The suppliers of raw material of Heidelberg Cement Bangladesh are mainly the subsidiaries of the Heidelberg group. Because of this advantage they dont need to invest a significant amount of cash in inventory.

2007 Inventory (MM BDT) 677.0

2008 1454.9

2009 861.1

From the above table we can see that in 2008 Heidelberg Cement have invested a significant amount of cash in inventory. Cement industry was in recession in 2008. Heidelberg Group also faced recession in 2008. But HCBL did not face any recession in 2008. Other firms in cement showed a huge decrease in EPS. But they maintained EPS of 105, which is extraordinary. They import Raw Materials from their sister concern at a cheap rate. Thats why they maintained a high EPS. The HCBL at 2008 perfectly anticipated that the price of raw materials will go up in 2009. Thats why HCBL stocked inventory in 2008.

Management of Payables
The creditors of HCBL are mainly the subsidiaries of the Heidelberg group. As a result they can delay the payment of their payable without harming the relationship with their creditors. They dont need to finance their payable externally. The cash generated from receivable are enough to pay any short term credit. As HCBL is the subsidiary of Heidelberg group they get lots of facilities in many areas. This is their competitive advantage.

Problems and Recommendation:

This problems and recommendations are based on the statements of year ended 2007, 2008 and 2009.

1. Huge Amount of Idle Cash

HCBL have too much idle cash because of their efficiency in working capital management and conservative collection procedure. They were keeping lots of retained earnings in Bangladesh and not investing in new project.

They should invest this huge idle fund in any value added project or if there is no any scope they can remit this money by giving more cash dividends. By giving cash dividend more they can add more value to their parent company. In 2010 they have declared that they are using their own fund of Tk. 1260 million to expand their production by double in Chittagong factory.

2. Conservative Credit Policy

HCBLs credit policy is not very flexible. They have huge idle fund to finance their A/R but they are not doing this. In this saturated market they have the scope to increase sales but they are not attempting for it. They are not willing to take risk. But in business one has to take risk and high risk means high chance of return. They should make more flexible credit policy to increase their sales and to gain more market share.

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Conclusion
HCBL is doing well in working capital management but they have huge idle money thats why they are not giving that much of emphasis in managing their capital more efficiently. As they are the subsidiary of Heidelberg group they maintain maximum modern policy of collecting and disbursing cash. They get many competitive advantages as Heidelberg group helps them a lot with technology. They mainly trade with their sister concerns. HCBL is the leading company in the cement industry. But they have to think about managing the idle money to add value to HCBL.

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Appendix
Liquidity Ratio:
Formula Current Ratio (times) Quick Ratio (times) 2007 2008 2009

Quick Ratio:
Formula Inventory Turnover (times) Total Asset Turnover (times) Fixed Asset Turnover (times) Average Collection Period (days) Average Payment Period (days) 2007 2008 2009

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Debt. Management Ratio:

Formula Debt. To Asset Ratio Times Interest Earned (times) 2007 2008 2009

Profitability Ratio:
Formula Gross Profit Margin Net Profit Margin Return on Asset (ROA) Return on Equity (ROE) 2007 2008 2009

Stock market Ratio:

Formula Earnings Per Share (EPS) market Value to Book Value (M/B) Price to Earning (P/E) 007 2008 2009

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