Financial ratio analysis of padma textile mills ltd

Fin 245

Prepared by

Md. Raihan ChawdhuryId# 052200021

Group# 2

Prepared forMs. Tamanna khan

Faculty memberFaculty of business administration

Eastern universityDhaka

September 30,2007

ToMs. Tamanna KhanFaculty MemberFaculty of Business Administration,Eastern University

madam,

Here the Report you asked to do. I did the report on ratio analysis of padma textile mills ltd. I took help from the company’s annual report. I also took balance sheet, income statement, and cash flow statement from annual report of padma textile mills ltd and some other information from Internet.

Thank you for assigned me this report & I request you to accept this.

Sincerely

Md. Raihan Chawdhury

Executive summary

The primary purpose of ratios is to point out areas needing further

investigations. Ratios will not carry meaningful business reasoning if

there is no supporting quantitative and financial information.

I have collected data from the annual report of the company and

some definition from net. At first I put the data in excel sheet and

took the data to the table for each individual ratio. I make the chart

by using Ms. excel then analyze the data according to the chart then I

interpreted my decision several point of view.

Current ratio compares assets which will become liquid within

approximately twelve months with liabilities which will be due for

payment in the same period and is intended to indicate whether there

are sufficient short term assets to meet the short- term.

The acid test ratio serves as a supplement to the current ratio in

analyzing liquidity. It is provide a more penetrate. The debt to equity

ratio tell us that creditors are provide how much of financing for each

1 TK being provided by shareholders ting measure of liquidity than

does the current ratio. The long term debt to capitalization ratio tells

us the relative importance of long term debt to the capital structure

of the firm. The debt to assets ratio serves a similar purpose to the

debt to equity ratio. It highlights the relative importance of debt

financing to the firm by showing the percents of the firms assets that

is supported by debt financing. Coverage ratio is designed to relate

the financial changes of a firm to its ability to service. This ratio

serves as one measure of the firm’s ability to meet its interest

payment and thus avoid bankruptcy. Fore more information please

read the report

Table of contents

Executive summaryChapter page no Chapter 1…………………………………………………………………….1 1.1 Introduction………………………………………………………………………………1 1.1.1purpose of the report…………………………………………………………………1 1.1.2scope…………………………………………………………………………………...1 1.1.3 Limitation………………………………………………………………………………2 1.1.4 Source and methods of collecting information……………………………………..2 1.1.5 About the company…………………………………………………………………...2 Chapter 2……………………………………………………………………….3 2.1Analysis ……………………………………………………………………………………3 2.1.1common sizing…………………………………………………………………………3 2.1.2 Indexing……………………………………………………………………………….6 2.1.3 Ratio analysis…………………………………………………………………………9. 2.1.3.1 Liquidity ratio…………………………………………………………………….9 2.1.3.1.1 Current ratio………………………………………………………………..9 2.1.3.1.2 Acid test ratio……………………………………………………………..10. 2.1.3.2 Leverage ratio………………………………………………………………….10 2.1.3.2.1 Debt to equity……………………………………………………………..10 2.1.3.2.2 Debt to total asset………………………………………………………...11 2.1.3.3 Coverage ratio …………………………………………………………………12 2.1.3.3.1 Interest coverage…………………………………………………………12 2.1.3.4 Activity ratio …………………………………………………………………...12 2.1.3.4.1 Receivable turnover……………………………………………………………..............12 2.1.3.4.2 Receivable turnover in days (RTD)…………………………………………………….13 2.1.3.4.3 Inventory turnover (IT)…………………………………………………………………..14 2.1.3.4.4 Inventory turnover in days………………………………………………………………15 2.1.3.4.5 Total assets turnover (Capital)…………………………………………………………15 2.1.3.5 Profitability ratio……………………………………………………………….16 2.1.3.5.1 Net profit Margin………………………………………………………………………...16 2.1.3.5.2 Return on investment (ROI)…………………………………………………………...17 2.1.3.5.3 Return on Equity (ROE)………………………………………………………………...17

Chapter 3……………………………………………………………………18 3.1 Conclusion……………………………………………………………18 Bibliography Appendix

Chapter 1

1.1 Introduction

1 .1.1purpose of the report

There are four main purposes of preparing this report.

These are:

How to make a formal report

How to do team work

How to communicate with business people &

Also learn some of the business techniques.

Besides, I also have some other objectives such as I want to give

people some basic ideas about the financial condition of padma

textile mills ltd I also try to find out the overall condition of padma

textile mills ltd.

1.1.2 Scope

In this report I analyzed different types of ratio to

find the financial condition of padma textile mills ltd. I also try to find

out the position of padma textile mills ltd in the market

1.1.3 Limitation

I prepared this report only based on the

annual report of padma textile mills ltd. So was not possible for me to

analyze the financial data properly. That’s the reason why some

analysis can’t give the appropriate result. But I should try my best to

find out the real condition of the textile mills.

1.1.4 Source and methods of collecting information

I

prepared the report only based on secondary data. Because here we

analyze the financial data.

1.1.5 About the company

The Padma Textile Mills Ltd. (the

"Company"), a member of the BEXIMCO Group, was incorporated in

Bangladesh as a public limited company. It commenced commercial

operation in 1990 and went for public issue of shares in 1992. During

the year, the principal activities of the company were manufacturing

of yarn (cotton, polyester and polycotton) by its textile spinning mills

and sales thereof. The no. of employees at the end of 2005 is 2676.

The registered office of the Company is located at House No.17, Road

No.2, Dhanmondi Residential Area, and Dhaka. The industrial units

are located at Tatki of Narayanganj and at Beximco Industrial Park in

Sarabo of Gazipur. 

Chapter 2

2.1Analysis

2.1.1common sizing

Balan

ce

Sheet common Size

2001 2002 2003

200

4

200

5

Asset

Current asset

Cash & Cash equivalance 0% 0% 0% 0% 0%

Trade debtors 30% 36% 39% 46%

50

%

Inventories 20% 17% 18% 18%

18

%

Advance,Deposits,Prepay

ments 6% 5% 4% 5% 5%

TOTALCurrent asset 55% 58% 62% 69%

73

%

Fixed asset 0% 0% 0% 0% 0%

Property,Plant &

Euipment 44% 42% 38% 31%

269

%

Cost 75% 76% 76% 67%

67

%

Accumulate Depriciation 31% 34% 37% 36%

40

%

Long term security

deposits 0% 0% 0% 0% 0%

Total non current asset 45% 42% 38% 31%

27

%

Total Asset

100

% 100% 100%

100

%

100

%

Liabilities 0% 0% 0% 0% 0%

Current Liabilities 0% 0% 0% 0% 0%

Short term loans from

bank (Secure) 30% 29% 29% 21%

22

%

Long term loans- current

Maturity(Secured) 6% 6% 5% 2% 3%

Accured expense 2% 2% 2% 2% 2%

Other creditors 2% 2% 2% 1% 1%

Total Current Liabilities 39% 40% 39% 26%

28

%

Non-current liabilites 0% 0% 0% 0% 0%

Long term loans-Net of

current Maturity 24% 23% 24% 41%

38

%

Securities Deposists

from distributors 0% 0% 0% 0% 0%

Total Non-current

liabilites 24% 23% 25% 41%

39

%

TOTAL LIABILITIES 62% 63% 64% 67%

66

%

SHAREHOLDERS EQUITY 0% 0% 0% 0% 0%

Issued share capital 1% 9% 9% 8%

10

%

Share premium 5% 5% 5% 4% 4%

Tax holiday resurve 10% 10% 10% 8% 8%

Retained Earnings 22% 14% 13% 12%

12

%

Accumulated profit-As

per the statement of

changes in equity 13% 14% 13% 0% 0%

TOTALShareholder Equity 38% 37% 36% 33% 34

%

TOTAL SHAREHOLDERS

EQUITY&LIABILITIES

100

% 100% 100%

100

%

100

%

Income statement

common sizing

200

1

200

2

200

3

200

4

200

5

Revenue

100

%

100

%

100

%

100

%

100

%

Cost of revenue

80

%

81

%

82

%

82

% 81%

Gross profit

20

%

19

%

18

%

18

% 19%

operating expence 2% 2% 2% 1% 2%

Administrative

expence 2% 2% 2% 1% 2%

Distribution

(selling)cost 0% 0% 0% 0% 0%

Profit from

operation

18

%

17

%

16

%

16

% 18%

Contribution to

workers

participation/welfar

e funds 1% 0% 0% 0% 0%

Finance cost

11

%

11

%

10

% 9% 11%

Net profit before

tax 7% 6% 5% 6% 6%

Income tax expence 2% 1% 1% 1% 1%

Net profit(after

tax)for the year

transferred to

statement of

changes in equity 5% 5% 4% 5% 5%

Earning per share

(per value tk. 10/)

(adjusting EPS of

2001,2002.2003,20

04,2005) 0% 0% 0% 0% 0%

Number shere used

to computes EPS 1% 2% 2% 2% 2%

2.1.2 Indexing

Balance sheet

indexing

200

1 2002

200

3

200

4

200

5

Asset

Current asset

Cash & Cash equivalence

100

% 45%

255

%

167

%

239

%

Trade debtors 100 129 114 139 110

% % % % %

Inventories

100

% 92%

111

%

117

%

100

%

Advance,Deposits,Prepay

ments

100

% 86%

100

%

133

%

105

%

TOTALCurrent asset

100

%

111

%

112

%

132

%

107

%

Fixed asset

Property,Plant &

Euipment

100

%

101

% 96% 96%

883

%

Cost

100

%

108

%

105

%

105

%

101

%

Accumulate Depriciation

100

%

118

%

116

%

114

%

112

%

Long term security

deposits

100

%

101

%

108

%

100

%

100

%

Total non current asset

100

%

101

% 96% 96% 88%

Total Asset

100

%

107

%

105

%

118

%

101

%

Liabilities

Current Liabilities

Short term loans from

bank (Secure)

100

%

105

%

106

% 86%

103

%

Long term loans- current

Maturity(Secured)

100

%

110

%

101

% 45%

147

%

Accured expense

100

%

137

%

103

% 93%

104

%

Other creditors

100

%

149

% 84% 78% 85%

Total Current Liabilities

100

%

109

%

104

% 80%

106

%

Non-current liabilites

Long term loans-Net of

current Maturity

100

%

104

%

112

%

198

% 96%

Securities Deposists

from distributors

100

%

1000

%

100

%

100

%

100

%

Total Non-current

liabilites

100

%

105

%

112

%

197

% 96%

TOTAL LIABILITIES

100

%

108

%

107

%

126

%

100

%

SHAREHOLDERS EQUITY

Issued share capital

100

%

1000

%

110

%

105

%

125

%

Share premium

100

%

100

%

100

%

100

%

100

%

Tax holiday resurve

100

%

107

%

100

%

100

%

100

%

Retained Earnings

100

% 67%

102

%

112

% 97%

Accumulated profit-As

per the statement of

changes in equity

100

%

111

%

102

% 0%

TOTALShareholder Equity

100

%

105

%

103

%

106

%

105

%

TOTAL SHAREHOLDERS 100 107 105 118 101

EQUITY&LIABILITIES % % % % %

Income statement

indexing

200

1

200

2

200

3

200

4

200

5

Revenue

100

%

101

%

103

%

101

%

87

%

Cost of revenue

100

%

103

%

105

%

100

%

85

%

Gross profit

100

%

96

%

93

%

101

%

96

%

operating expense

100

%

99

%

101

%

72

%

124

%

Administrative

expense

100

%

103

%

103

%

75

%

129

%

Distribution

(selling)cost

100

%

86

%

92

%

57

%

93

%

Profit from

operation

100

%

95

%

92

%

105

%

94

%

Contribution to

workers

participation/welfar

e funds

100

%

33

%

69

%

183

%

83

%

Finance cost

100

%

100

%

100

%

92

%

102

%

Net profit before

tax

100

%

95

%

81

%

127

%

83

%

Income tax expense

100

%

64

%

87

%

137

%

96

%

Net profit(after

tax)for the year

transferred to

statement of

changes in equity

100

%

105

%

80

%

125

%

80

%

Earning per share

(per value tk. 10/)

(adjusting EPS of

2001,2002.2003,20

04,2005)

100

%

61

%

64

%

151

%

80

%

Number share used

to computes EPS

100

%

110

%

100

%

131

%

100

%

2.1.3 Ratio analysis

2.1.3.1 Liquidity ratio

2.1.3.1.1 Current ratio;

The current ratio of padma textile

Mills has increased here. In 2001 it

Was 1.44 but in 2005 it increased

To 2.64.the average current ratio

Of the industry is 1.94. It shows

The healthy improvement of the

Padma textile ltd. The liquidity of

Padma textile mills increased. From the chart we can see that, In

2001, 02, &03 it was increased slightly but in 2004 it increased

dramatically. It may be happened because current asset or liabilities.

From indexing we can see that in current asset Cash & Cash

equivalence, advanced, deposit, prepayment increased but creditors’

expense in current liabilities decreased. That why the liquidity

condition of padma textile mills ltd has increased.

2.1.3.1.2 Acid test ratio

This ratio serves as a supple

ment to the current ratio in

analyzing liquidity. From the

ratio analysis we can see that

the acid test ratio of padma

textile mills has increased from 2001 to 2005. In 2001 it was .92 but

in 2005 it was2.00. The average acid test ratio is 1.4. That means the

condition of 2005 ratio is better than the average. From the graph we

can see that the liquid current asset position of padma textile mills is

in improved position. Because of good current ratio it may be

happened.

2.1.3.2 Leverage ratio;

2.1.3.2.1 Debt to equity;

Here we can see that the debt to

Equity ratio was increased to

1.64 to 2.07 in between 2001 to

2004. It was little bit decreased in 2005. That means in 2005 1.97 of

financing for each 1tk being provided by the shareholders. Creditors

would generally like this Ratio to be low, because the lower the ratio,

the higher the firms financing, that is being provided by shareholders.

The average debt to equity ratio was 1.82.but in 2005 it was 1.97,

which is more than the average. That means padma textile may

experienced difficulty with creditors, because of high debt ratio.

2.1.3.2.2 Debt to total asset;

In 2001 62% of the firm’s asset

Were financed with debt and

The remaining 38% of the

Financing comes from share

holders equity. But in 2005 66% of the firm’s assets were financed

with debt and the remaining 34%of the financing comes from

shareholders equity. This debt ratio desire that if padma textile mills

were liquidated than assets could be sold to 62% in 2001 and 66% in

2005 on dollar before creditors would face a loss.. so I think the

percentage of finance provided by shareholders equity is lower and

the financial risk is high. So people can’t want to invest in padma

because of high financial risk, which is not acceptable for the investor.

2.1.3.3 Coverage ratio

2.1.3.3.1 Interest coverage

From the graph we can

See that interest coverage

Of padma decreased

From 4.43 to 3.22 in

between 2001 to2003.

It was increased in 2004, which was 5.45 but in 2005 it decreased

to3.5.The average interest coverage was 4.14, which is greater than

2005.this situation happened, because EBIT of padma textile mills

was decreased from 2001 to 2003. In 2004 it was increased to 5.45

but because of some extra expense the EBIT has gone down to3.5.

2.1.3.4 Activity ratio

2.1.3.4.1 Receivable turnover:

The five years receivables turnover of padma textile mills is 2.06,

1.61, 1.45, 1.05 and .83. The average receivables turnover is 1.4.

Here we can see that the (RT) has decreased in every year and in

2005 it was .83. That means it take a long time between the typical

sales and cash collection.

2.1.3.4.2 Receivable turnover in days (RTD)

The receivables turnover has

decreased every year, so longer time was required to collect the cash.

In the graph we can see that the RTD was increased day by day. In

2001 it was 147.76 but in 2005 it increased to438.68.in 2005 the

receivable turnover of padma was low, which was .83. May be that’s

why it need long time. I think it is not good for the company. If

receivable turnover need a long time to come, then the debt and

financial risk of the company will increase and it affect the investor. It

may happen because the product of padma textile may not so quality

product, or the consumer or buyer may face some problem in this

product, and that’s why buyers took more time for payments.

2.1.3.4.3 Inventory turnover (IT)

From the ratio analysis

we can see that the inventory of padma has gone between ups and

down. In 2001 it was 2.47 but in 2005 it decreased to 1.91. It means

that in 2001 2.47 times inventory is turned over into receivables but

in 2005 only 1.91 times inventory is turnover into receivables through

cash. That means the inventory turnover management of padma

textiles is less efficient. It also may happen because of lower

management system of padma. The employees may not careful to

their work. They may not force their buyers to make inventory into

cash. That’s may be the reason why this condition occurs.

2.1.3.4.4 Inventory turnover in days

The inventory

turnover tells us how many days on average before inventory is

turned into account receivables through sales. In 2001 padma need

131.24 days which means that padma has slower turning its

inventory. It also shows us that the clients of padma are not so good.

It also indicates that there may be some lackings on the management

of the industry. That why the time of turnover increased every year,

and it reached to191.24 in 2005.from the graph we can see that from

2001 to 2005 it fluctuates little and last it rose to 197.25.

2.1.3.4.5 Total assets turnover (Capital)

From the graph we

analyze that the capital of padma has decreased from .62 to .42 in

between 2001 to2005. The average total asset turnover is .53. It tells

us that the padma textile generates less sales revenue per dollar of

asset investment than does on average. Padma is less efficient in

total asset turnover. From our previous analysis of receivables and

inventory activity, we suspect that excessive investment in

receivables and inventories may be responsible for this problem. If

padma could generates the same sales revenue with fewer dollar

invest in receivables and inventories than the total asset turnover

would improved.

2.1.3.5 Profitability ratio

2.1.3.5.1 Net profit Margin

In 2001 to 2005 the

net profit of padma textile is 5% and the average net profit is 4.8%.

For padma’s roughly 5% out of every sales dollar constitute after tax

profit. Padma’s net profit margin is above the average which indicates

that it has a higher sales profitability.

2.1.3.5.2 Return on investment (ROI)

Here the return of investment or

earning power is decreased in 2001 it was 3% and in 2005 it is 2%. It

may happen because of low total asset turnover.

2.1.3.5.3 Return on Equity (ROE)

Here the return on equity

is lower in 2002 it was 9% but in 2005 it becomes 6% that means

investment opportunity of padma textile is not so strong and the

expenses arrangement is not so effective. The average ROE is 7.8%

which was greater than 2005.The average ROE takes us that it was

padmas condition was better in average.

Chapter 3

3.1 Conclusion

The overall condition of the padma textile mills was

not so good. Though the current and quick ratio of the company is

improved condition but the debt ratio is high, that means the financial

risk of the company is high. If the company want develops the

condition then they must improve their management system, look

carefully to their receivables, and total asset. Otherwise the company

will face a great problem

Bibliography

Van Horne,James C. ,Fundamental of financial management, New

delhi-100 00, Prentice-hall of India private limited, 2006