Assignment On Financial Statements & Analysis Of CMC Kamal Textile Mills Ltd. Date Of submission: 7th September 2011 Assignment On Financial Statements & Analysis Of CMC Kamal Textile Mills Ltd. Submitted To- Md. Amdadul Haque Submitted By- Sharmin Sultana08093101019 Samir Mohammad Renat08093101022 Urmi Adhikary08093101040 Shanchita Noor(18th Intake)08092101001 Bangladesh University of Business & Technology (BUBT) Dhaka Commerce College Road, Mirpur 2, Dhaka 1216 CHAPTER-1 INTRODUCTION 1. 1 Introduction:
As we needed to complete the course Managerial Finance, as a part of assignment, we were needed to analyse the Financial Statement of CMC Kamal Textile Mills Ltd. We collect the Annual Report of the years 2006 to year 2010 and then we analysis the financial statement of this organization. 1. 2 Background of the study: As we needed to complete an assignment on CMC Kamal Textile Mills Ltd. First we collected the annual report of CMC Kamal Textile Mills Ltd. From Motijheel in front of the Dhaka Stock exchange. Then we had begun to analyze its financial statements.
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For this work our honorable course teacher Amdaul Haque helped us a lot. He suggested us how can we make a better financial statement on CMC Kamal Textile Ltd. 1. 3 Significance of the study: The first reason of the study is to know the financial condition of this company and to observe the present situation on CMC Kamal Textile Mills Ltd. By which we learn how to analyze a company. Now we are able of to analyze any company’s financial statement by the help of their annual report. So it helps us to learn about the practical knowledge of a company and now we are able to analyze a company properly by applying these method. . 4 Scope of the study: We know that our main aim is to earn practical knowledge. By the help of this subject we have earned some practical knowledge about a company. We have know how they perform their financial activity, how the pay loan. We have also known about the different names account payable, account receivable, etc. So it is a really a great experience for us. It will help us to have practical experience about a company. 1. 5 Objectives of the Study: 1. To know about the company’s financial condition. 2. How company perform their financial activity. 3.
What was their financial condition in last five years? 4. To learn how can we analyze a company? 5. Comparing the ratio according to the last five years. 1. 6 Methodology: For preparing this assignment we make group discussion we work together we collected annual report from Motijheel and we study about the CMC Kamal Textime Mills Ltd. Financial activity. We hope this assignment is enough to know the financial condition of CMC Kamal Textime Mills Ltd. 1. 6. 2 Research Design: This report is a descriptive type of research which briefly reveals the overall activities performed by Mercantile Bank Ltd.
It has also been administered by collecting secondary data. Annual report of MBL was the major secondary data sources in this regard. Ratio analysis in the form trend analysis and comparative analysis have also been used as major tools for the financial performance evaluation. The study is performed based on the information extracted from different sources collected by using a specific methodology. This report is analytical in nature. 1. 6. 3 Sources of data: Sources of secondary data of this report are: * Annual Report of CMC Kamal Textile Ltd. 1. 6. Data Collection Procedure: Conducting this report secondary data are used. Data regarding the Performance Evaluation of CMC Kamal Textime Mills Ltd. were collected from secondary sources like: Annual Reports, journals, Brochures, Manuals and Publication of CMC Kamal Textime Mills Ltd. official website. We also collect some information by taking expert opinion from the officers and difference observation while we were analyzing the annual report. 1. 6. 5 Instruments Used for Analysis: A. Ratio analysis A. 1. Time series (Trend) analysis A. 2. Comparative analysis
A. Ratio Analysis: Financial statement provides information about a firm’s positions at a point in time as well as its operations over some past period. The quantitative (such as ration analysis) tools are used to analyze the gathered data and different types of computer software are used for reporting the gathered information from the analysis. The term ‘ratio’ refers to the numerical or quantitative relationship between two items. Ratio can be classified into four broad groups- 1. Liquidity Ratio. 2. Activity Ratio. 3. Debt Ratio 4. Profitability Ratio.
Ratio analysis is made in the form of trend analysis and comparative analysis. A1. Trend Analysis It is really important to analysis trends in ratios as well as their absolute levels. This analysis informs us whether a company’s financial condition improving or deteriorating 1. 7 Limitation of the Report: Every matter has got some limitations. So this is also not an exception. The limitations of this internship report are been sated below: * Due to time and cost restriction, the study is concentrated in selected areas. To continue study in such a vast area requires a big deal of time.
As an internee I had only three month which is not enough. * As a financial organization a bank has some restrictions to serve all the real data of the bank to the general people as a result the study is mostly depending on official files and annual reports. * Available data also could not be verified. In most cases I simply did not have any option but to furnish with data without verification. * CMC Kamal Textile Mills Ltd. key personnel are very busy and they could not able to give me enough time for discussion about various topics. Sometimes such kinds of tasks were given in the Company that was no way related to my topic and we were responsible to do it which breaks my concentration in my major area of investigation. * Every organization has its own secrecy that is not revealed to others. * Lack of experience has acted as constraints in the way of meticulous exploration of the topic. CHAPTER-2 THEORITICAL BACKGROUND 3. Theoretical aspects: 3. 1 Financial performance analysis: Financial performance analysis of a company is very important to get an overall view about an organization.
It generally consists of interpretation of balance sheet and interpretation of income statement. By using these two sources one can perform the ratio analysis in the form of trend and comparative analysis which are the major tools for analyzing the financial performance of a bank. 3. 2 Balance sheet: In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year.
A balance sheet is often described as a “snapshot of a company’s financial condition”. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business’ calendar year. A standard company balance sheet has three parts: assets, liabilities and ownership equity. . 3. 3 Income statement: Income statement also referred as profit and loss statement, earnings statement, operating statement or statement of operations is a company’s financial statement that indicates how the revenue is transformed into the net income.
It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e. g. , depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. 3. 1. Ratio Analysis Ratio analysis involves methods of calculating and interpreting financial ratios to assess the bank’s performance and status. The basic inputs to ratio analysis are the bank’s income statement and balance sheet. 3. 2. Types of Ratio Comparisons
Ratio analysis is not merely the application of a formula to financial data to calculate a given ratio. More important is the interpretation of the ratio value. To answer such questions as is it too high or too low? Is it good or bad? Two types of ratio comparisons can be made: Cross-sectional & Time-series analysis. * Time-series Analysis Time-series analysis evaluates performance over time. Comparison of current to past performance, using ratios, allows the firm to determine whether it is progressing as planned. Additionally, time-series analysis is often helpful in checking the reasonableness of a firm’s projected financial statements. Cross-Sectional Analysis Cross-Sectional analysis evaluates performance of different firms` financial ratios at the same point in time. 3. 3. Cautions about Ratio Analysis Before discussing specific ratios, we should consider the following cautions: * A single ratio does not generally provide sufficient information from which to judge the overall performance of the firm. * Be sure that the dates of the financial statements being compared are the same. * It is preferable to use audited financial statements for ratio analysis. * Be certain that the data being compared have all been developed in the same way. . 4. Groups of Financial Ratios Financial ratios can be divided into four basic groups or categories: i. Liquidity ratios ii. Activity ratios iii. Debt ratios & iv. Profitability ratios Liquidity, activity, and debt ratios primarily measure risk, profitability ratios measure return. In the near term, the important categories are liquidity, activity, and profitability, because these provide the information that is critical to the short-run operation of the firm. 3. 4. 1. Analyzing Liquidity The liquidity of a business firm is measured by its ability to satisfy its short term obligations as they come due.
Liquidity refers to the solvency of the firm’s overall financial position. The three basic measures of liquidity are- 3. 4. 1. a. Net Working Capital: Net Working Capital, although not actually a ratio is a common measure of a firm’s overall liquidity. A measure of liquidity is calculated by subtracting total current liabilities from total current assets. Net Working Capital =Total Current Assets –Total Current Liabilities. 3. 4. 1. b. Current Ratio: One of the most general and frequently used of these liquidity ratios is the current ratio.
Organizations use current ratio to measure the firm’s ability to meet short-term obligations. It shows the banks ability to cover its current liabilities with its current assets. Current Ratio = Current Asset/Current Liabilities 3. 4. 1. c. Quick Ratio: The quick ratio is a much more exacting measure than current ratio. This ratio shows a firm’s ability to meet current liabilities with its most liquid assets. Quick Ratio=Cash + Government Securities + Receivable / Total Current Liabilities. 3. 4. 2. Analyzing Activity: Activity ratios measure the speed with which accounts are converted into sale or cash.
With regard to current accounts measures of liquidity are generally inadequate because differences in the composition of a firm’s current accounts can significantly affects its true liquidity. A number of ratios are available for measuring the activity of the important current accounts which includes inventory, accounts receivable, and account payable. The activity (efficiency of utilization) of total assets can also be assessed. 3. 4. 2. a. Operating Cost to Income Ratio: It measures a particular Bank’s operating efficiency by measuring the percent of the total operating income that the Bank spends to operate its daily activities.
It is calculated as follows: Cost Income Ratio = Total Operating Expenses / Total Operating Income 3. 4. 2. a. Total Asset Turnover: The total asset turnover indicates the efficiency with which the firm is able to use all its assets to generate sales. Total Asset Turnover = Sales/ Total Asset 3. 4. 2. b. Investment to Deposit Ratio: Investment to Deposit Ratio shows the operating efficiency of a particular Bank in promoting its investment product by measuring the percentage of the total deposit disbursed by the Bank as loan and advance or as investment. The ratio is calculated as follows:
Investment to Deposit Ratio = Total Investments / Total Deposits 3. 4. 2. c. Inventory turnover: A ratio showing how many times a company’s inventory is sold and replaced over a period. Inventory Turnover= Cost of good sold/ Average Inventory The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or “inventory turnover days”. This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.
High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall. 3. 4. 2. d. Average Collection Period: Average collection period is useful in evaluating credit and collection policies. This ratio also measures the quality of debtors. It is arrived at by divided the average daily sales into the accounts receivable balance: Average Collection Period=Accounts receivable/ (Credit sales/365) A short collection period implies prompt payment by debtors.
It reduces the chances of bad debts. Similarly, a longer collection period implies too liberal and inefficient credit collection performance. It is difficult to provide a standard collection period of debtors. 3. 4. 2. e. Average Payment Period: Average payment period ratio gives the average credit period enjoyed from the creditors that means it represents the number of days by the firm to pay its creditors. A high creditor’s turnover ratio or a lower credit period ratio signifies that the creditors are being paid promptly.
This situation enhances the credit worthiness of the company. However a very favorable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors. It can be calculated using the following formula: Average Payment Period=Accounts payable/ Average purchase per day 3. 4. 3. Analyzing Debt The debt position indicates the amount of other people’s money being used in attempting to generate profits.
In general, the more debt a firm uses in relation to its total assets, the greater its financial leverage, a term use to describe the magnification of risk and return introduced through the use of fixed-cost financing such as debt and preferred stock. 3. 4. 3. a. Debt Ratio: The debt ratio measures the proportion of total assets provided by the firm’s creditors. Debt Ratio = Total Liabilities / Total Assets 3. 4. 3. c. Time Interest Earned Ratio: This ratio measures the ability to meet contractual interest payment that means how much the company able to pay interest from their income.
Time Interest Earned Ratio=EBIT/ Interest 3. 4. 4. Analyzing Profitability These measures evaluate the bank’s earnings with respect to a given level of sales, a certain level of assets, the owner’s investment, or share value. Without profits, a firm could not attract outside capital. Moreover, present owners and creditors would become concerned about the company’s future and attempt to recover their funds. Owners, creditors, and management pay close attention to boosting profits due to the great importance placed on earnings in the marketplace. 3. 4. 4. a. Operating Profit Margin:
The Operating Profit Margin represents what are often called the pure profits earned on each sales dollar. A high operating profit margin is preferred. The operating profit margin is calculated as follows: Operating Profit Margin = Operating Profit / Sales 3. 4. 4. b. Net profit Margin: The net profit margin measures the percentage of each sales dollar remaining after all expenses, including taxes, have deducted. The higher the net profit margin is better. The net profit margin is calculated as follows: Net profit Margin = Net profit after Taxes / Sales 3. 4. 4. c.
Return on Asset (ROA): Return on asset (ROA), which is often called the firms return on total assets, measures the overall effectiveness of management in generating profits with its available assets. The higher ratio is better. Return on Asset (ROA) = Net profit after Taxes / Total Assets 3. 4. 4. d. Return on Equity (ROE): The Return on Equity (ROE) measures the return earned on the owner’s investment. Generally, the higher this return, the better off the owners. Return on Equity (ROE) = Net profit after Taxes / Stockholders Equity 3. 4. 4. e. Price/ Earnings ratio (PE ratio):
The Price/ Earnings ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share relative to the income or profit earned by the firm per share. P/E ratio – Price per share / earnings per share 3. 4. 4. f. Earnings per share (EPS): EPS represents the dollar amount earned behalf of each outstanding share of common stock. EPS= Net income/no. of common share outstanding CHAPTER-3 FINANCIAL ANALYSIS * Liquidity Ratio: A class of financial metrics that is used to determine a company’s ability to pay off its short-terms debts obligations.
Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio. Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will calculate only the sum of cash and equivalents divided by current liabilities because they feel that they are the most liquid assets, and would be the most likely to be used to cover short-term debts in an emergency.
A company’s ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern. 1. Current Ratio: Current Ratio=Current Asset/Current Liabilities Year| 2006| 2007| 2008| 2009| 2010| Current Ratio| 1. 07| 0. 88| 0. 53| 0. 04| 0. 61| 2. Quick Ratio: Quick Ratio=Current Asset –Inventory/Current Liabilities Year| 2006| 2007| 2008| 2009| 2010| Quick Ratio| 0. 54| 0. 37| 0. 06| 0. 08| 0. 0| * Activity Ratio: Accounting ratios that measure a firm’s ability to convert different accounts within their balance sheets into cash or sales. Companies will typically try to turn their production into cash or sales as fast as possible because this will generally lead to higher revenues. Such ratios are frequently used when performing fundamental analysis on different companies. The asset turnover ratio and inventory turnover ratio are good examples of activity ratios. 1. Inventory Turnover Ratio: Inventory Turnover Ratio=Cost of Goods sold/Inventory Year| 2006| 2007| 2008| 2009| 2010|
Inventory Turnover Ratio| 6. 45| 4. 74| 2. 32| 2. 19| 3. 84| 2. Average Collection Period: Average Collection Period=Account Receivable/Average Sells Per Day Year| 2006| 2007| 2008| 2009| 2010| Average Collection Period| 39. 57| 34. 54| 10. 16| 17. 91| 22. 04| 3. Average Payment Period: Average Payment Period=Account Payable/Average Purchase per Day Year| 2006| 2007| 2008| 2009| 2010| Average Payment Period| 14. 25| 21. 65| 45. 80| 23. 02| 9. 95| 4. Total Asset Turnover: Total Asset Turnover=Sales/Total Asset Year| 2006| 2007| 2008| 2009| 2010| Total Asset Turnover| 0. 697| 0. 5387| 0. 3719| 0. 4407| 2. 1682| * Debt Ratio: A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. A debt ratio of greater than 1 indicates that a company has more debt than assets; meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company’s level of risk. . Debt Ratio: Debt Ratio=Total Liabilities/Total Asset Year| 2006| 2007| 2008| 2009| 2010| Debt Ratio| 0. 51| 0. 54| 0. 70| 0. 74| 0. 67| 2. Times Interest Earned Ratio: Times Interest Earned Ratio=Earning Before Interest & Tax/Interest Obligation Year| 2006| 2007| 2008| 2009| 2010| Times interest earned ratio| -6. 835| -66. 267| -52. 578| 165. 249| 9. 670| * Profitability Ratio: A class of financial metrics that are used to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.
For most of these ratios, having a higher value relative to a competitor’s ratio or the same ratio from a previous period is indicative that the company is doing well. Some examples of profitability ratios are profit margin, return on assets and return on equity. It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios. For instances, some industries experience seasonality in their operations. The retail industry, for example, typically experiences higher revenues and earnings for the Christmas season.
Therefore, it would not be too useful to compare a retailer’s fourth-quarter profit margin with its first-quarter profit margin. On the other hand, comparing a retailer’s fourth-quarter profit margin with the profit margin from the same period a year before would be far more informative. 1. Gross Profit Margin: Gross Profit Margin=Gross Profit/Sales Year| 2006| 2007| 2008| 2009| 2010| Gross Profit Margin| 13. 84%| 10. 53%| 10. 53%| 14. 24%| 15. 69%| 2. Operating Profit Margin: Operating Profit Margin=Operating Profit/Sales Year| 2006| 2007| 2008| 2009| 2010| Operating Profit Margin| -2. 7%| -5. 25%| -8. 71%| 9. 25%| 8. 94%| 3. Net profit Margin: Net profit Margin=EACS/Sales Year| 2006| 2007| 2008| 2009| 2010| Net profit Margin| -2. 27%| -5. 33%| -20. 30%| 8. 34%| 8. 39%| 4. Earnings per Share=EACS/No. of Share: Earnings per Share=EACS/No. of Share Year| 2006| 2007| 2008| 2009| 2010| EPS| -3. 45| -6. 69| 19. 24| 10. 06| 19. 25| 5. Return On Asset (ROA): Return on Asset (ROA) =EACS/Total Assets Year| 2006| 2007| 2008| 2009| 2010| ROA| -1. 22%| -2. 55%| -7. 55%| 3. 67%| 18. 19%| 6. Return On Equity (ROE): Return on Equity=EACS/Common Stock Equity
Year| 2006| 2007| 2008| 2009| 2010| ROE| -34. 5%| -6. 96%| -19. 24%| 10. 05%| 19. 25%| * Market Ratio: Market ratios measure investor response to owning a company’s stock and also the cost of issuing stock. These are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company’s shares. 1. Price/Earnings (P/E) Ratio: Price/Earnings (P/E) Ratio=Market Price per Share of Common Stockholders/EPS Year| 2006| 2007| 2008| 2009| 2010| P/E Ratio| -28. 99| -14. 95| -5. 20| 9. 94| 5. 19|