Executive summary: This report examines the financial performances of DESCO on the basis of analyzing and calculating their

five major types of ratios; Liquidity Ratio, Asset Management Ratio, Debt Management Ratio, Profitability Ratio and Stock Market Ratio. The paper also includes the calculations and evaluation of Du Pont Equation. The company current ratio, quick ratio, inventory turnover ratio and total asset turnover ratio etc. appears as better than the previous years. However, the average collection period and average payment period has become unsatisfactory which may lead to financial crisis as the companys only service offering is electricity supply which is offered almost in all cases on credit. Fall in fixed asset turnover ratio signifies that the company should utilize its fixed asset more. In this paper, slight fall in ROA and ROE is observed. While the former urges more efficient utilization of assets, the latter calls for an increase in return to the shareholders. The substantial fall in EPS shows that the company is falling behind in providing return to consumers which is not a very good sign. The company should try to return more to its shareholders. In a nutshell it can be said that in the recent years the company has been somewhat efficient in utilizing, managing and maintaining resources but isnt giving back enough to the shareholders which gives out a very grave signal.

Introduction: Dhaka Electric Supply Co. Ltd. (DESCO) was created as a distribution company in November 1996 under the Companies Act 1994 as a Public Limited Company with an Authorized Capital of Tk.5.00 billion. However, the operational activities of DESCO at the field level commenced on September 24, 1998 with the taking over of the electric distribution system of Mirpur area (comprising Kallayanpur, Kafrul, Pallabi Sales & Distribution Division) from the erstwhile Dhaka Electric Supply Authority (DESA) with a consumer strength of 71,161 and a load demand of 90 MW. In the subsequent years of successful operation and performance, the operational area of DESCO was expanded through inclusion of Gulshan Circle in April, 2003 and Tongi Pourashava Area in March, 2007. Today, the total consumer strength stands at 446,129 as of 30th June, 2010 with a maximum load demand of 622 MW. The area under service of the Company is about 220 square kilometers which comprises the areas bounded by the Mirpur Road, Agargaon Road, Rokeya Sarani, Progati Sarani, New Airport Road, Mymenshing Road, Mohakhali Jheel, Rampura Jheel connected with the Balu River in the South and East and the Turag River in the West and areas under Tongi Pourashava in the North. Recently Purbachal Model Town a Rajuk project, situated on the east side of the Balu River and adjacent to Dakshinkhan area, has also been included under the operational area of DESCO. DESCO incorporated under the Companies Act 1994 with its own Memorandum and Articles of Association. The company as a whole owned by Government of Bangladesh and DESA representing government by acquiring 100% shares. DESCO managed by a part time Board of Directors appointed by its shareholders, they are responsible for policy decisions. The Board of Directors appointed Managing Director and two full time Directors and they were also members of the Board Directors after appointment. The Company is run by a management team headed by the Managing Director under the guidance of the Board of Directors with a view to run it efficiently and economically with optimum overhead cost and manpower. With the expansion of operational areas followed by increase in number of consumers and system load, DESCO reorganized its activities into 9 (nine) Sales & Distribution (S&D) Divisions.

1. Liquidity Ratio:

1) Liquidity Ratio Formula Current Ratio(time s) Quick (Current assets- 2.148449 21 2.372867 24 2.390701 09 2.257525 17 2.659837 94 Current 2006 asset/ 2.641974 61 2007 2.653953 24 2008 2.580689 46 2009 3.232091 22 2010 3.644742 46

current liabilities

ratio(times inventories)/curr ) ent liabilities

Current Ratio

Graphical representation:
4 3.5 3 2.5 2 1.5 1 0.5 0 2006 2007 2008 2009 2010

Current Ratio

CURRENT RATIO (times)

Year Interpretation: In 2010, this companys current assets were 3.6447 times higher than its current liabilities. This ratio did not fluctuate that much up to 2008. After that, it increased to a satisfactory level in 2009 following an upward trend in 2010, which is very favorable for the Company.

This ratio has increased from 3.23 times to 3.64 times in 2010 because the companys current assets increased from Tk.16,052,781,843 to Tk.17,288,454,805 and its current liabilities decreased from Tk.4,966,685,880 to Tk.4,743,395,449 in 2010. Quick Ratio

Quick ratio
3 2.5 2 1.5 1 0.5 0 2006 2007 2008 2009 2010

Quick ratio (times)

Year

Graphical representation: Interpretation: In 2010, this companys current assets excluding inventories were 2.66 times higher than their current liabilities. The Companys Quick Ratio has followed a more or less stable trend up to 2009 and then in 2010, it rose to a satisfactory level, which is very good for the Company. This ratio has increased because the companys current assets increased from Tk.16,052,781,843 to Tk.17,288,454,805, inventory decreased from Tk. 4,840,363,451 to Tk.4,671,022,906 and its current liabilities decreased from Tk.4,966,685,880 to Tk.4,743,395,449 in 2010.

2. Asset Management Ratio:

Formula Inventory Turnover Ratio(time s) Total Asset Sales/ Turnover Ratio(time s) Fixed Asstet Turnover Ratio(time s) Average Collection Period(day s on avg) Average Payment Period(day s on avg) AP/( AR/(Sales/36 5) Sales/Fixed asset Assets Sales/ Inventory

2006 1.3076865 2

2007 1.2765210 5

2008 1.3228382 1

2009 2.0245619 6

2010 2.3144768 2

Total 0.4696248 1

0.4718612 4

0.5150347 2

0.4184346

0.4143121 2

1.0513319 1

1.0563629 3

1.2560504 5

1.3302179 5

1.2277751 6

128.05882 3

92.803361 7

72.601476 7

79.336956 3

80.189468 2

109.28796

93.856344 7

80.219959 7

83.650981 6

78.651537 9

Purchase/365) 7

Inventory Turnover Ratio

Graphical representation:

Inventory Turnover Ratio

2.5 2 1.5 1 0.5 0 2006 2007 2008 2009 2010 Inventory Turnover Ratio

Inventory turnover ratio (times)

Year

Interpretation: In 2010, this company has sold out and restocked its inventory 2.3145 times. We can see that this ratio was kind of stable throughout 2006, 2007 and 2008 and then it started to follow an upward trend and continued to increase in 2010, which is really good. This ratio has increased from 2.02 times to 2.31 times in 2010 because sales have increased from Tk.9,799,615,712 to Tk.10,810,974,226 and inventory has decreased from Tk.4,840,363,451 to Tk.4,671,022,906 in 2010.

Total Asset Turnover Ratio

Graphical representation:
Total asset turnover ratio (times)

Total Asset Turnover Ratio

0.6 0.5 0.4 0.3 0.2 0.1 0 2006 2007 2008 2009 2010 Total Asset Turnover Ratio

Year

Interpretation: In 2010, every Tk.1.00 worth of total asset was generating Tk.0.4616 worth of sale. After following an upward trend up to 2008, this ratio fell in 2009 and in 2010 decreased very insignificantly. This ratio has slightly decreased in 2010 from that of 2009 because along with the increase of sales from Tk.9,799,615,712 in 2009 to Tk.10,810,974,226 in 2010, their total assets have also gone up in 2010.

Fixed Asset Turnover Ratio

Graphical representation:
Fixed asset turnover ratio (times)

Fixed Asset Turnover Ratio

1.4 1.2 1 0.8 0.6 0.4 0.2 0 2006 2007 2008 2009 2010

Fixed Asstet Turnover Ratio

Year

Interpretation: In 2010, every Tk.1 worth of fixed asset is generating Tk.1.2278 worth of sale. This ratio after remaining stable in 2006 and 2007, followed an upward trend up to 2009. Then in 2010, this ratio has decreased which is not good for the company, so the company should try to increase its sales using as less fixed asset as possible. This ratio has decreased from 1.33 times in 2009 to 1.23 times in 2010 because fixed assets have increased from Tk.7,366,924,871 to Tk.8,805,337,136 in 2010, though sales have also comparatively increased.

Average Collection Period Graphical representation:

Avg. collection period (days) (((((((days(days(avg.avg.)

Average Collection Period

140 120 100 80 60 40 20 0 2006 2007 2008 2009 2010

Average Collection Period

Years

Interpretation: In 2010, on an average, it took 81 days to receive the accounts receivable from the customers. This ratio has decreased greatly from 2006 to 2008 and then in 2009 and 2010 this ratio has increased, which is not good. The company should collect their dues early, so that they could easily meet their future short term obligations. This ratio has increased from 80 days in 2009 to 81 days in 2010 because the companys accounts receivable has increased from Tk.2,130,059,408 to Tk.2,375,140,475 in 2010.

Average Payment Period

Graphical representation:

Average Payment Period

120 100 80 60 40 20 0 2006 2007 2008 2009 2010 Average Payment Period

Avg. payment period (days)

Interpretation:

Year

Interpretation: On an average, it took 79 days to make the payment to the creditors in 2010. But this is less than their average collection period, which is bad for the company. So the companys credit policy should be changed.

3. Debt Management Ratio: Formula DebttoAsset Ratio (%) DebttoTotal Equity Ratio (%) Total Debt/ 75.8692012 75.778608 3 74.942784 5 68.742533 66.429349 7 (Total Debt/Total asset)* 100 2006 2007 2008 74.942784 5 2009 68.742533 2010 66.429349 7

75.8692012 75.778608 3

(Total Debt + Total Equity)*100

10

TimesInteres t

EBIT/Interes t Expense

7.38563741 4.5182413 9

6.8561212 1

9.7654735 3

6.9361669

Earned (%)

Debt-to-Asset Ratio

Graphical representation:

Debt- to- Asset Ratio

Debt-asset ratio(%) Debt-total equity ratio (%)
80 75 70 65 60 2006 2007 2008 2009 2010 Debt- to- Asset Ratio

Year

Interpretation: In 2010, 66.43% of total assets were financed by debt.

Debt-to-Equity Ratio

Graphical representation:

11

Debt- to- Total Equity Ratio

80 75 70 65 60 2006 2007 2008 2009 2010 Debt- to- Total Equity Ratio

Year

Interpretation: In 2010, the companys capital structure consisted of 66.43% loan and the remaining balance i.e. 33.57% was equity. Times Interest Earned

Graphical representation:

Times-Interest -Earned
Times-interest-earned (times)
12 10 8 6 4 2 0 2006 2007 2008 2009 2010 Times-Interest -Earned

Year

Interpretation: In 2010, the companys EBIT was 6.94 times higher than its interest expense.

12

After 2006, this ratio fell significantly in 2007 but then it started to rise up and increased gradually up to 2009 and then again in 2010, this ratio fell badly. It has decreased from 9.77 times to 6.94 times in 2010 because the EBIT has gone down from Tk.1,658,122,680 to Tk.1,534,280,431 and the Interest Expense has increased from Tk.169,794,396 to Tk.221,200,045 in 2010.

4. Profitability Ratio: In (%) Gross Profit (Gross Profit/Sales)* 2006 2007 2008 2009 2010

23.5290734 21.6620832 24.4049657 21.8890356 21.5781971

Margin 100 Net Profit (Net Profit/Sales)* 9.1495574 9.63353785 10.8911682 16.4020465 16.5455083

Margin 100 ROA (Net Income/Total Asset)*100 ROE (Net income/Total Equity)*100 17.8065351 18.7672664 22.3860858 21.9569417 20.419636 4.29685916 4.54569311 5.60932977 6.86318382 6.85500459

13

Gross Profit Margin:

Graphical representation:

Gross Profit Margin

25 24 23 22 21 20 2006 2007 2008 2009 2010 Gross Profit Margin

Gross profit margin (%)

Year

Interpretation: In 2010, for every Tk.100 sales, the gross profit of the company was Tk.21.58. This ratio seems to fluctuate a lot. At first it decreased in 2007 compared to 2006, then it increased in 2008 and then again decreased in 2009 and continued to decrease in 2010, which is bad for the Company. The ratio has decreased in 2010 compared to 2009 because the Sales of the Company have increased but the Gross Profit has not sufficiently increased to make the Gross Profit Margin higher. The sales of the company have gone up from Tk.9,799,615,712 to Tk.10,810,974,226
14

and the gross profit has also gone up from Tk.2,145,041,372 in 2009 to Tk.2,332,813,327 in 2010. But in order to improve the gross profit margin, gross profit should increase more sufficiently.

Net Profit Margin

Graphical representation:

Net Profit Margin

Net profit margin (%)
20 15 10 5 0 2006 2007 2008 2009 2010 Net Profit Margin

Interpretation: Interpretation:

Year

In 2010, for every Tk.100 sales, the company has made a net profit of Tk.16.55. This ratio has continuously followed an upward trend from 2006 to 2009 and though insignificantly but increased in 2010, which is very good for the company. Compared to 2009, this ratio has increased slightly because, as the sales of the company increased, the net profit of the company has also sufficiently gone up to make the ratio higher. So, as the sales rose to Tk.10,810,974,226 in 2010 from Tk.9,799,615,713 in 2009, the net profit also went up to Tk.1,788,730,635 in 2010 from Tk.1,607,337,522 in 2009.
15

ROA

Graphical representation:

ROA
8

Interpretation: In 2010, every Tk.100 worth of total asset has generated Tk.6.855 worth of net income. Although compared to 2009, this ratio has very slightly decreased, it has continued an upward trend throughout 2006, 07, 08 and 09. The ratio has gone down slightly from 6.8631% to 6.8550% in 2010 because along with the increase in the companys net income from Tk.1,607,337,522 in 2009 to Tk.1,788,730,635 in 2010, their total assets increased from Tk.23,419,706,714 to Tk.26,093,791,941. This means, their assets are a bit less efficient to generate more net income. It will be better for the Company to handle its Assets at a more optimum amount.
16

ROA(%)

6 4 2 0 2006 2007 2008 2009 2010

ROA

Year

So the company might utilize its assets in a better way in order to make this ratio more favorable.

ROE:

Graphical Representation:

ROE
25 20 15 10 5 0 2006 2007 2008 2009 2010 ROE

ROE (%)

Year

Interpretation: In 2010, the companys shareholders have earned Tk.20.42 for every Tk.100 investment in the company. This ratio increased from 2006 to 2008 and then it fell slightly in 2009 and 2010. The ratio fell from 21.96% in 2009 to 20.42% in 2010 because along with the increase in net income the total equity of the company has subsequently increased from Tk.7,320,407,097 in 2009 to Tk.8,759,855,635
17

in 2010. So the company should try to improve this situation in order to attract more shareholder

5. Stock Market Ratio:

Formula EPS (taka per share) Net income/ Total no. of share outstanding 2006 2007 55.9378292 2008 78.7316149 2009 120.422032 2010 111.676701

45.5247272

DPS**(taka per share)

Total Dividend paid/ Total no. of share outstanding

20

25

23.8095238

37.5000009

M/B(times)

Market Value Per share/Book Value Per Share

1.01500792

3.20236878

4.25079536

1.46413609

2.55070144

P/E

Market Value Per share/EPS

5.70019891

17.0635867

18.9885601

6.66821502

12.4914148

(**in the year 2006, company paid no dividend, so dividend paid=0)

EPS

Graphical representation:
18 EPS (t

EPS
140 120 100 80 60 40 20 0 2006 2007 2008 2009 2010 EPS

Year

Interpretation: In 2010, the companys shareholders have earned Tk.111.68 for every share they hold. The EPS has followed a good upward trend from 2006 to 2009 and then it fell in 2010. The reason for the fall from Tk.120.42/share in 2009 to Tk.111.68/share in 2010 is that their number of common stock has increased to a great extent in 2010. So it will be better for the company if they increase their Net Income more sufficiently.

DPS

Graphical representation:

DPS**
DPS (taka per share)
40 30 20 10 0 2006 2007 2008 2009 2010 DPS**

Year 19

Interpretation: In 2010, the company has paid dividend of Tk.37.50 to the shareholders for every share they hold. The company paid both stock dividend and cash dividend. From the graph we can see that the DPS has gradually increased from 2006 to 2008. In 2009, it fell very slightly and then again in 2010, this ratio has increased sharply, which is good for the company. The ratio increased from Tk.23.81/share in 2009 to Tk.37.50/share in 2010 because besides increase in the number of shares outstanding, the total dividend paid by the company increased to a great extent from Tk.317,798,500 in 2009 to Tk.600,639,165 in 2010 M/B Ratio: Graphical Representation:

M/B
5 4 3 2 1 0 2006 2007 2008 2009 2010 M/B

M/B ratio (times)

Year

Interpretation: In 2010, the market value per share was 2.55 times higher than the book value per share which was Tk.546.908383/share. By looking at the graph we can see that this ratio rose up gradually from 2006 to 2008 and then in 2009 it fell all on a sudden and then again in 2010, the ratio went up to a great extent. This increase in the ratio from 2009 to 2010 occurred due to the heavy increase in the market price per share of the company which rose from Tk.803/share to Tk.1,395/share in 2010 and also the book value per share of the company fell slightly in 2010 compared to 2009, i.e. from Tk.548.4462862/share to Tk.546.908383/share in 2010.
20

P/E Ratio:

Graphical Representation:

P/E
20 15 10 5 0 2006 2007 2008 2009 2010 P/E

P/E ratio

Year

Interpretation: In 2010, the companys shareholders were willing to pay Tk.12.49 for every taka of reported earnings. If we look at the graph, we can see that there was a gradual increase in the P/E Ratio of the company from 2006 to 2008, then in 2009 it drastically fell to a very low level and then again in 2010 it rose up to a satisfactory level. From 2009 to 2010, the huge increase in this ratio took place mainly due to the great increase in the market price of the shares from Tk.803/share in 2009 to Tk.1,395/share in 2010, and also because of the decrease in the EPS from Tk.120.4220316/share in 2009 to Tk.111.6767011/share in 2010. As we know, very high or
21

very low Price to Earning (P/E) Ratio is never good as it is never sustainable. If the P/E ratio is too low, then shareholders will not want to invest in that company considering the companys low performance at the stock market. On the other hand, if this ratio is too high, the shareholders may want to sell this share and when there will be more supply at the market the price per share will fall. So this ratio should always remain close to the Industry Average. Here, as we do not have the industry average, we can not decisively say whether this ratio is good or bad.

Du-Pont Equation:

ROA= (Net Profit Margin)*(Total Asset Turnover Ratio) (Net income/ Total Assets)= (Net Income /Sales)*(Sales / Total Assets)

Year ROA (%)

2006 4.29685916

2007 4.54569311

2008 5.60932977

2009 6.86318382

2010 6.85500459

Interpretation: The ROA has continued an upward trend throughout 2006, 07, 08 and 09. In 2009 and 2010, the ROA of the company was almost same. In 2010, this ratio fell slightly by 0.01%. At present, the ROA of the Company seems to be at a stable condition. The very slight fall in 2010 occurred due to the slight fall in the Total Asset Turnover Ratio from 0.418434604 times in 2009 to 0.414312119 times in 2010. This small decrease in the Total Asset Turnover Ratio occurred due to the increase in Total Assets from Tk.23,419,706,714 in 2009 to Tk.26,093,791,941 in 2010. Extended/ Modified Du-Pont Equation:

Return on equity (ROE) = Net profit margin*total asset turnover*equity multiplier (EM)
22

(Net profit/total equity) = (net profit/sales) *(sales/total asset) * (total asset/total Stockholders

equity)

Year ROE (%)

2006 17.8065351

2007 18.7672664

2008 22.3860858

2009 21.9569417

2010 20.419636

Interpretation: This ratio increased from 2006 to 2008 and fell slightly in 2009 and then again fell by a small percentage in 2010. The ROE of the Company though fell by a small percentage in 2010, does not seem to fluctuate much. The fall in 2010 occurred due to the slight fall in the Total Asset Turnover Ratio, which in turn was a result of an increase in the amount of Total Assets in 2010 compared to that of 2009. Moreover, the Equity Multiplier, which is the ratio of Total asset to Total Equity, had decreased by a significant level in 2010 resulting in the subsequent decrease in the ROE of 2010. The Equity Multiplier had decreased because of the increase in the Total Equity from Tk.7,320,407,097 in 2009 to Tk.8,759,855,635 in 2010. The ROE of the Company though fell by a small percentage in 2010, does not seem to fluctuate much.

Findings: After completing the five major types of ratio analysis for DESCO in the year 2010, we can now evaluate the companys financial performances in terms of its strengths and weaknesses. We found out that the Companys Profitability Ratio was in a moderate condition i.e. neither very good nor very bad. The Sales, Net Profit went up in 2010, although the Gross Profit went down. The Net Profit margin was good; compared to the previous years, the ROA has followed an increasing trend up to 2009 and remained almost unchanged in 2010; the ROE increased in 2008 and fell vey slightly in 2009 and 2010. So the Company is in a moderate situation in profitability. By loooking at the Asset Mangement Ratio we can say that the Company is utilizing its Inventory very well and its Total Asset is also utilized well though it will be better if the Company increases its Sales using
23

lesser Fixed Assets. In addition, the Company should also try to collect its Receivables a bit faster, since its Average Payment Period is 2 days less than its Average Collection Period. But it is good that the Companys Average Payment Period in 2010 has decreased in comparison to the previous years. We can see that the Companys Liquidity Ratio is following an upward trend. The Debt Mangement mostly depends on the decision of the Managerial Body of the Company, but the Times Interest Earned has followed an upward trend upto 2009 and fell in 2010. When we look at the Stock Market Ratios, we can see that the Companys DPS, M/B and P/E Ratio after decreasing in 2009, all went up to significant level in 2010. Though the EPS went down in 2010, it had been following an upward trend.

Recommendations: Finally we can recommend the company to handle their Fixed Assets efficiently and also to update or use more modern and productive Assets. Moreover they should reduce their Average Collection Period. For this they can provide some discounts, which may help to quicken the collection of receivables and lessen the chance for any bad debt. To increase their Operating Income, they can try to reduce their Operating & Financial Expenses. But also, we cannot deny the fact that as net income has improved so shareholders will be happy, their earnings will increase, and this will positively reflect the stock market.

Conclusion: Analyzing the overall situation, financial performance in 2010 was good enough. Comparing with the past record it is seen that in 2010 the performance has improved Based on these assumptions, DESCO seems like a more or less stable company maintaining somewhat satisfactory growth in sales revenue thus maintaining predictable growth in their net income. Our recommendation is that shareholders may invest in the company, but they should not expect a very high level of return as risk is predictable and low.

24

APPENDIX: 1) Liquid ity Ratio Formula Curre nt Ratio( times) Quick ratio(t imes) Current asset/ current liabilities (Current assetsinventorie s)/current liabilities 2006 (74519 95528/ 282061 5872) (74519 95528(8655455937 -916718318)/ (1052616966 5774928506)/ 4078820730 (1605278184 34840363451)/ 4966685880 (1728845480 54671022906)/ 4743395449 2007 8655455937/ 3261344547 2008 2009 2010

10526169665/ 16052781843/ 17288454805/ 4078820730 4966685880 4743395449

139204 3261344547 5595)/ 282061 5872

25

2) Asse t mana geme nt ratio: Formu 2006 la Inve ntory Turn over Ratio (time s) Total Asse t Turn over Ratio
26

2007

2008

2009

2010

Sales/ Invent ory

6324979173/4 836770179

7381279238/ 5782340389

9189386688/ 6946720020

9799615712/ 4840363451

10810974226 /4671022906

Sales/ Total Assets

6324979173/1 3468153796

7381279238/

9189386688/

9799615712/

10810974226

15642902244 17842266477 23419706714 /2341970671 4

(time s)

Fixe d Asst et Turn over Ratio (time s) Aver age

Sales/ Fixed asset

6324979173/6 016158268

7381279238/ 6987446307

9189386688/ 7316096812

9799615712/ 7366924871

10810974226 /8805337136

AR/(S ales/3

2219094213/(6 1876732950/ 324979173/36 5) (7381279238 /365)

1827843956/ (9189386688 /365)

2130059408/ (9799615712 /365)

2375140475/( 10810974226 /365)

Colle 65) ction Perio d(da ys on avg) Aver age Pay ment Perio d(da ys on avg) AP/( Purch ase/36 5)

1,314,567,514/ (4,390,393,141 /365)

1271910501/ (4946360677 /365)

1351935827/ (6151294250 /365)

1631201300/ (7117531238 /365)

1865308079/( 8656378087/ 365)

27

3) Debt management ratio:

Form ula Debt- (Tota toAsset Ratio (%) l

2006

2007

2008

2009

2010

(10218180703 (118539736 /13468153796 18/1564290 2244)* 100

(13371491316 (1609929961 /17842266477 )* 100 8/234197067 14)* 100

(17333936306 /26093791941 )* 100

Debt/ )*100 Total asset) * 100

Debt- Total toTotal Equit y Ratio (%)

(10218180703 (118539736 18/

(13371491316 (1609929961 / 8/

(17333936306 / (17333936306 +8759855635) )*100

Debt/ / (Tota l Debt + Total Equit y)*1 00

(10218180703 (118539736 +3249973094) 18+3788928 )*100 627))* 100

(13371491316 (1609929961 +4470775160) 8+732040709 )*100 7)*100

Time s-

EBIT 1247283558/1 /Inter 68879609

1282202314 /283783491

1752184549/2 55564990

1658122680/ 169794396

1534280431/2 21200045

Intere est st - Expe

Earne nse d(tim es)

4) Profitability ratios:

2006

2007

2008

2009

2010

28

Gros (Gros s Prof it Mar gin( %) Net Prof it Mar gin RO (Net Profit s Profit /Sales )* 100

(1488208994/ (1598938849/ (2242666668/ 6324979173) *100 7381279238) *100

(2145041372/

(2332813327/

9189386688)* 9799615712)* 10810974226) 100 100 *100

(578707600/6 (711078329/7 (1000831565/ 324979173)* 381279238)* 100

(1607337522/

(1788730635/

9189386688)* 9799615712)* 10810974226) 100 100 *100

/Sales 100 )* 100 (Net

(578707600/1 (711078329/1 (1000831565/ 3468153796) *100 5642902244) *100

(1607337522/

(1788730635/

A(% Inco ) me/T otal Asset )*100 RO E(% ) (Net inco me/T otal Equit y)*10 0

17842266477) 23419706714) 23419706714) *100 *100 *100

(578707600/3 (711078329/3 (1000831565/ 249973094)* 100 788928627)* 100

(1607337522/

(1788730635/

4470775160)* 7320407097)* 8759855635)* 100 100 100

5) stock market ratios: Form ula EPS(t aka per Net inco me/ 578707600/127 711078329/127 1000831565/1 11940 11940 2711940 120.42 178873063 5/1601704 4
29

2006

2007

2008

2009

2010

share) Total no. of share outst andin g DPS* *(tak Total Divid 0 254238800/127 317798500/12 11940 711940 317798500/ 133475370 0 600639165 /16017044

a per end share) paid/ Total no. of share outst andin g M/B(t Mark imes) et Valu e Per share /Boo k Valu e Per Share P/E(ti mes) Mark et Valu e Per share /EPS 259.5/45.52472 954.5/55.93782 1495/78.73161 715 924 492 259.5/(324997 954.5/(378892 1495/(4470775

803/457.03 85832

1395/546.9 08383

3094/12711940 8627/12711940 160/12711940) ) )

804/120.42

1395/111.6 767011

30

Reference: 1. Newspaper Archive of NSU Library 2. Books: Managerial Finance, Twelfth Edition by Lawrence J. Gitman Fundamentals of Financial Management, Tenth Edition by Eugene F. Brigham and Joel F. Houston. 3. Internet Links: Corporate website of DESCO- https://www.desco.org.bd/ DSE Website (http://www.dsebd.org/) and other websites likehttp://www.bdstockprice.com/dailytrades/desco/

Case Study
Ques. (a): Why are ratios useful? What are the five major categories of ratios? Ans. (a): Ratios are useful because it helps to judge or evaluate a particular companys financial performances. By calculating and analyzing these ratios the progress of a company can be tracked over time and also compare its strength relative to other firms with whom they are competing. These financial ratios are designed to help one evaluate a financial statement. For example a companys perspective and present shareholders would want to judge profitability ratios and stock market ratio to ensure the level of risk and return with their share purchase.

Five major categories of ratios are:

1) Liquidity Ratio - it measures a firms capability to meet its short term obligations. 2) Asset Management Ratio it measures a companys assets sales generating power as well the speed at which different accounts are converted to sales.

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3) Debt Management Ratio this ratio measures how much of the companys total assets were financed by debt. 4) Profitability Ratio it measures how much of the companys income are generated from sales, assets and equity. 5) Stock Market Ratio this ratio shows how good or bad the company is performing in the stock market. This ratio is especially useful for the shareholders of the company.

Ques. (b): Calculate DLeons 2003 current ratio and quick ratio based on the projected balance sheet and income statement data. What can you say about the companys liquidity position in 2001, 2002, and as projected for 2003? We often think ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?

Ans. (b): Current Ratio (2003) = (Current Assets) (Current Liabilities) = $2,680,112 $1,144,800 = 2.34 times Quick Ratio (2003) = (Current Assets Inventory) (Current Liabilities) = $(2,680,112 1,716,480) ($1,144,800) = 0.84times Ratio 2003E 2002 2001 2.3 times IA 2.7 times

Current Ratio 2.34 times 1.2 times

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Quick Ratio

0.84 times 0.4 times

0.85 times --

In the year 2003E, the company is expected to have a better liquidity condition as both its Current Ratio and Quick Ratio have increased almost twice from the past year 2002. But it cannot be considered satisfactory because the ratios are still below the Industry Average. It is important to notice that Quick ratio shows, Current Assets excluding inventories are 0.84 times below Current liabilities, whereas Current Ratio shows, Current Assets to be 2.34 times higher than Current liabilities. This difference could be that the company is holding higher levels of inventories, which is not good, because that add more costs. Or probably their demands for foods have fall down which lead to less sell and more inventory.

We know, Liquidity Ratio measures the firms ability to pay the short-term obligations as they come due. 1) To managers this ratio is very important because the manger needs to know how much asset the company has in comparison to its current liabilities. The liquidity ratio shows the manager whether they have a strong or weak liquidity position to pay off their debts. 2) To bankers this ratio is important for credit analysis because the bank needs to judge the companys liquidity position to see whether the company has the capability of paying the interest and their loan amount on time. 3) Stockholders must be aware of liquidity ratios for this shows the firms ability to pay their returns, and the level of risk that is associated if the firm goes bankrupt, then they have to bear the loss. However not all these three groups will have an equal interest on the Liquidity Ratio. For a manager all the five major ratios are important to evaluate the companys financial performance. Stockholders will also pay attention on their Profitability Ratio. Bankers will look at their other accounts payable to measure the depth of their debt.

Ques. (c): Calculate the 2003 inventory turnover, day sales outstanding (DSO), fixed asset turnover, and total assets turnover. How does Deleons utilization of assets stack up against other firms in its industry?

Ans. (c): Inventory Turnover Ratio = (Sales) (Inventory)

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= ($7,035,600) ($1,716,480) = 4.10times Day Sales Outstanding (DSO) = (Accounts Receivable) (Sales365) = ($878,000) ($7,035,600/365) = 45 days. Fixed Asset Turnover Ratio = (Sales) (Fixed Asset) = ($7,035,600) ($817,040) = 8.61times Total Asset Turnover Ratio = (Sales) (Total Asset) = ($7,035,600) ($3,497,152) = 2.01times

Overall, if we look at all these Asset-Management Ratios we can quite easily conclude that its utilization of assets has been quite ineffective in comparison to other firms in the industry. Inventory turnover of 4.10 is low compared to the industry average of 6.1, DSO is 45 days compared to Industry average (IA) of 32days, which is a bad sign as it is above the IA and the reason behind it is the Accounts Receivable is increasing more than the sales, and Fixed Asset Turnover Ratio 8.61 has shown some improvement as it is higher than the IA 7. Last but not the least; total asset turnover ratio 2.01 is also lower than the IA 2.6. It has only managed to utilize its fixed assets better than the other companies in the industry on an average Hence, we can say that D Leons assets efficiency needs to be made effective in order to better the asset management position compared to the other firms in the industry. Probably the assets that D Leon is using are of inefficient; they are also not handling the assets effectively. That is why the assets are giving poor performances and failed to generate more sales compared to their competitors. They should never have too much assets rather try to have an optimum level of assets.

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Ques. (d): Calculate the 2003 debt, times-interest earned, and EBITDA coverage ratios. How does D Leon compare with the industry with respect to financial leverage? What can you conclude from these ratios?

Ans. (d): Debt Ratio = (Total debt) (Total Assets) = (Current liabilities + Long-term liabilities) (Total Assets) = ($1,144,800 + $400,000) ($3,497,152) = 44.17%

Times-Interest Earned = (Earnings before interest and tax) (Interest expense) = ($492,648) ($70,008) = 7.04times

EBITDA Coverage Ratio = (EBITDA + Lease Payments) (Interest + Principal Payments + Lease Payments) = ($609,608 + $40,000) ($70,008 + $0 + $40,000) = 5.91times

Financial Leverage = [Total Debt / (Total Debt + Total Equity)] 100 = [$1,544,800/ ($1,544,800+$1,952,352)] 100 = 44.17% With respect to financial leverage, D Leons financial condition after calculating these ratios were found to be weak when compared to the industry average.

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The firms Debt ratio is expected to improve by falling in the year 2003 from 82.8% to 44.17%, which means they are financing less of their assets with other peoples money now. It is a good sign, 44.17% of total assets are financed by debt and the rest by owners equity. TIE has improved a lot than that of their past records and it is above the Industry Average. It was (-1) times in 2002 whereas it is now 7.04times in 2003. This means that the firm can now finance their interest expenses more easily from their operating profits. EBITDA coverage ratio is also expected to improve from 0.1times in 2002 to 5.91times in 2003. It has improved extensively as TIE Ratio. However, the EBITDA is still below the IA, again not a good sign for the company. Their competitors are performing better than them.

Ques. (e): Calculate the 2003 profit margin, basic earning power (BEP), return on assets (ROA), and return on Equity. What can you say about these ratios?

Ans. (e):

Profit Margin = (Net income) (Sales) = ($253,584) ($7,035,600) = 3.604% Basic Earning Power (BEP) = (EBIT) (Total Assets) = ($492,648) ($3,497,152) = 14.09%

Return on Assets (ROA) = (Net Income) (Total Assets) = ($253,584) ($3,497,152) = 7.25%

Return on Equity (ROE) = (Net income) (Total Common Equity)

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= ($253,584) ($1,952,352) = 13%

The companys Profit Margin is expected to improve in 2003 than that of 2002, which is a good sign. Moreover it is also above the Industry Average. Their Net Income is expected to increase highly which caused the ratio to improve, and the relative increase in net profit is higher than increase in sales which caused the ratio to rise. BEP is expected to rise from -4.6% of 2002 to 14.09% in 2003, which is a good as this would be a large increase but as it is still 5.01% below the industry average it cannot be comment as satisfactory, they have to improve further. Because of its relative increase in EBIT more than total assets increase the ratio improved. ROA is also expected to improve in 2003 than that of 2002, i.e. total assets are efficiently generating more net income. But this particular ratio is a little below the Industry Average which leaves them with the scope to improve further, they should have optimum amount of assets. ROE has also improved from their past years. This is a good sign for the shareholders, they are happy with the companys performance, which again help to grow their confidence over the company. However this ratio is below the Industry Average, which should be their area of concern to improve more.

Ques. (f): Calculate the 2003 Price\Earnings Ratio, Price\Cash Flow Ratio and Market\Book Ratio. Do the ratios indicate that investors are expected to have high or low opinion of the company?

Ans. (f): Price to Earnings Ratio = (Price per Share) (Earnings per Share) = ($12.17) ($1.014) = 12.0019

Price/Cash flow = (Price per share) (Cash Flow per Share) Cash Flow Ratio = (Net income + Depreciation) (Shares Outstanding)
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= ($253,584 + $116,960) (250,000) = $1.48/share Therefore, Price/Cash flow = ($12.17) ($1.48) = 8.2times

Market / Book Ratio = (Market Price per Share) (Book Value per Share) =$12.17/$7.809 =1.558 times In the year 2003 it is expected that Price Earnings Ratio, Price/Cash Flow and Market to Book Value Ratio has improved from 2002 and 2001, which is a good sign. But all the ratios are still below the Industry Average, which is not at all satisfactory.

We should remember that too high or too low Price Earnings Ratio is never good since it is never sustainable, and thus shareholders may lose confidence. It is recommended that the ratio should be near IA, and for us it is below that which is a bad sign. Thus we can comment that even though the company improved from their past years still it is performing less than their competitors in the market, which means their financial performance in the stock market still, have to be improved, and thus investors will not have a high opinion about the company. However investors should appreciate their potential improvement in the year 2003.

Ques. (g): Use the extended DU PONT equation to provide a summary and overview of DLeons financial condition as projected for 2003. What are the firms major strengths and weaknesses?

Ans. (g): Extended Du- Pont Equation: ROE = Net Profit Margin Total Assets Turnover Equity Multiplier

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 (Net Income Total Equity) = (Net Profit Sales) (Sales Total Assets) (Total Assets Total Equity) ($253,584 $1,952,352) = ($253,584 $7,035,600) ($7,035,600 $3,497,152) ($3,497,152 $1,952,352) 13% = 3.604%2.01times 1.79 0.13 = 0.036 2.01 1.79

Previously we saw that their ROE has improved from the past years in 2003, but is below the industry average. And we also know that, the Extended DU-Pont Equation helps us to pin point their weakness and strengths. To start with the analysis, we can tell that the company has its strength improved in their net profit margin which was negative in 2002 and they performed so well in improving the net profit margin that it is above the Industry Average which is a very good sign for the company. Their total asset turnover ratio is almost same as 2002 but both their total asset and sales have increased. However their sales relative increase is less than their asset increase. And their equity has increased. Overall due to these improvements their ROE increased from 2002 to 2003. To talk about their weakness, it is that the companys ROE is still way below the industry average (IA), which is not at all good. Since their total asset turnover ratio did not improve and still below the industry average, it caused the Roe to be less than IA. However even though their net profit margin is slightly greater than industry average, this could not affect the Du-Pont equation much. Again their inventory turnover ratio has gone up from 2002 and is also below IA. Even though their Cost of Goods Sold (COGS) in the year 2002 and 2003 varied less, since they are maintaining high inventories, their ratio fall. This is bad, maintaining high inventories are associated with high cost, which again can reduce net income and thus hamper profitability ratio. So it is recommended to decrease some of their assets especially inventories to perform better in the future.

Ques. (h): Use the following simplified 2003 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price. For example, if the company could improve its collection procedures and thereby lower its DSO from 45.6
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days to the 32-day industry average without affecting sales, how would that change ripple through the financial statements (shown in thousands below) and influence the stock price? Accounts receivable Other current assets Net fixed assets Total assets $ 878 1,802 817 $3,497 Debt Equity Liabilities+ equity $3,497 $1,545 1,952

Ans. (h): If the DSO has to improve (decrease the average number of days to collect account receivables from customers) without changing the sales that means the Numerator of the DSO formula, i.e. Accounts receivables has to decrease. Account receivables decrease again means that the customers have paid their due and this brings the same amount of cash (current asset) into the company. Therefore ultimately there will be no change into the Balance Sheet of the company, i.e. same amount of number is being reduced and increased within the Current Asset Section, which thus leaves it unchanged ultimately. For this change in DSO, there will be No Effect in the stock price. Calculation shown: We know, DSO= Account Receivable (Sales360) Now, new DSO is 32days and keeping sales constant, we get, New Account Receivables = $625.33(in thousands) So the A/R will decrease from $878 to $625.33 by (878-625.33) = $252.77(in thousands) and hence the current asset apart from A/R will increase by $252.67 (in thousands) and the new total other current asset apart from A/R will be $2054.67 (in thousands).

Putting these values into the Balance Sheet, we get,

Accounts receivable $625.33

Debt

$1,545.00
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Other current asset Net fixed asset Total Asset

2054.67 817.00 $3497.00 Equity Total Debt + Equity 1,952.00 $3497.00

Ques. (i): Does it appear that inventories could be adjusted, and, if so, how should that adjustment affect D Leons profitability and stock price?

Ans. (i): Previously we saw that the inventory turnover ratio was low from their past ratios and also below the Industry Average. This means that the company is maintaining more inventories than required. From the income statement we found out the company sales have increased, which means they are keeping more inventories than required. Keeping too much inventories in hand are associated with their high maintenances cost, warehouse costs, utility cost can go up. This would increase their expense and lowers net income after tax which again lowers their Profitability Ratio. However this will have No Impact on the stock price.

Ques. (j): In 2002, the company paid its suppliers much later than the due dates, and it was not maintaining financial ratios at levels called for in its bank loan agreements. Therefore, suppliers could cut the company off, and its bank could refuse to renew the loan when it comes due in 90 days. On the basis of data provided, would you, as a credit manager, continue to sell to D Leons on credit? (you could demand cash on delivery, that is, sell on terms of COD, but that might cause D Leons to stop buying from your
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company.) Similarly, if you were the bank loan officer, would you recommend renewing the loan or demand its repayment. Would your actions be influenced if, in early 2003, D Leons showed you its 2003 projections plus proof that it was going to raise over $1.2 million of new equity capital? Ans. (j): Although, D Leons financial ratios seem to be improving compared to previous years, the firms current ratio is still poor when compared with the industry average. As a credit manager, I would not like to involve into risk if continue to extend credit to the firm considering its current poor liquidity position compared to other firms in the industry. I should make a strict analysis on the amount of their Accounts Payable before giving any credit. It is highly possible that under its existing current ratio structure the company will not be able to make the payments on time for the credit sales. The terms of Cash on Delivery can be a good call. As a Bank Loan Officer, before renewing their loan, I should look over their Profitability Ratio, Debt Management Ratio, Times Interest Earned, to ensure their capability to repay the loan when date finishes. If they are financing more of their assets from Owners Equity or their Net Income has increased then those will be good sign. But for now, considering their current ratio situation the bank manager should not renew the loan. The projected data for the financial ratios for 2003 has shown improvements than from the year 2002 and the proof of 1.2 million new equity capital would definitely create a positive influence on any creditors actions.

Ques. (k): In hindsight, what should D Leons have done back in 2001? Ans. (k): There were many important financial ratios that turned negative and hence worse in 2002 which were better in 2001. Like their Profit Margin, TIE, BEP, ROA, ROE, Price Earnings Ratio turned negative. Altogether in the year 2002 they experienced a downfall in their Liquidity Ratio, Profitability Ratio, Stock Market Ratio, Debt Management Ratio and Asset Management Ratio. However not all ratios under these headings were found to be bad. Before the company took any of its new plans in 2001 it should have calculated their expected ratio outcomes of 2002. They should have contacted all their department managers, like the
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marketing department for sales, purchasing department for asset purchase, and finance department for deciding where to invest and how to finance their assets. They should not have financed most of their assets by debt, which increased their interest expense in the year 2002 and also caused their net profit to fall. They should have collected their account receivables before so that they could easily finance their future obligations. Altogether a proper planning and management system, analyzing the five major ratios and proper coordination in team, back in the year 2001 could have saved them from facing downfall in 2002. \

Ques. (l): What are some potential problems and limitations of financial ratio analysis? Ans. (l): Some potential problems of ratio analysis are: 1) Ratios that reveal deviations from the norm merely indicate symptoms of a problem. Additional analysis is typically needed to isolate the causes of the problem. 2) A single ratio does not generally provide sufficient information from which to judge the overall performance. 3) The ratio being compared should be calculated using financial statements dated at the same point in time during the year. If they are not, the effects of seasonality may produce erroneous conclusions and decisions. 4) Using audited financial statements is preferred for ratio analysis. If they are not audited, the data in them may not reflect the firms true financial condition. 5) Results can be distorted by inflation, which can cause the book values of inventory and depreciable assets to differ greatly from their replacement values.

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Ques. (m): What are some qualitative factors analysts should consider when evaluating a companys likely future financial performance?

Ans. (m): The qualitative factors are: I. Is the companys revenue generated through sales to one key customer? If this is the case then the companys performance might be at risk if the customer stops buying from that company. This will cause overall sales and hence profit to witness dramatic fall. II. Is the companys revenue generated through sales of one product? If this is the scenario then this might hurt the financial performance of the business if the sales or demand of this product falls. This can be avoided through diversification of products. III. Is the company relying on a single supplier for its supply? Depending on a single supplier may not be wise and may lead to unanticipated shortages in supply which are important matters to be taken into account by a company. IV. The degree of competition: The presence of intense competition in an industry reduces process and profits for companies as well. Hence, a company should consider the nature of competition it will face in order to judge its likely future financial performance. V. Future Prospects: The financial performance of a company also depends upon its future prospects. The financial performance will depend upon the innovation of products. For example, in a technology based industry, firms will have to bring technological changes in its products to outwit rival firms. VI. Regulatory environment: The regulatory environment under which the company operates is a crucial determinant of financial performance. If too many regulations such as carbon emission reduction, stringent labor laws are imposed on companies then this will hurt companys profitability and hence financial performance.

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APPENDIX: Answer B Ratio Current Ratio Formula Current assets/Current liabilities 2003E $2,680,112/$1,144,800

Quick Ratio

(Current assets Inventory)/ Current liabilities

(2,680,112-1,716,480)/ 1,144,800

Answer- C Ratio Days sales outstanding Fixed ratio Total ratio Inventory Turnover Sales/Inventories 7,035,600/1,716,480
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Formula A/R/(sales/360)

2003E 878,000/(7,035,600/360) 7,035,600/817,040

asset

Turnover Sales/Fixed asset

asset

turn-over Sales/Total asset

7,035,600/3,497,152

ratio

Answer- D Ratio Debt Ratio Formula (Total Assets) 100 TIE Ratio (EBIT/Interest Expense) + $492,648/$70,008 Year 2003E Debt/Total (1,544,800/3,497,152)100

EBITDA Coverage (EBITDA Ratio

Lease ($609,608 + $40,000) ($70,008 + + $0 + $40,000) +

Payments)/(Interest Principal Payments

Lease Payments) Financial Leverage [Total Debt / (Total Debt [$1,544,800/ + Total Equity)] 100 ($1,544,800+$1,952,352)] 100

Answer- E

Ratio

Formula

Year 2003E

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Net Profit Margin

(Net

Profit

after

Tax ($253,584) ($7,035,600)

/Sales) 100 Basic (BEP) Return on Assets (ROA) (Net Income after Tax ($253,584) ($3,497,152) /Total Assets) 100 Return on Equity (ROE) (Net Income after Tax ($253,584) ($1,952,352) /Total Equity) 100 Earning Power (EBIT/Total Assets) 100 ($492,648) ($3,497,152)

Answer-F Ratio P/E Ratio Formula Market price per share/ Earnings per share Price per share/cash flow ($12.17) ($1.48) per share Calculation ($12.17) ($1.014)

Price /cash flow

Cash

(Net Income +Depreciation ($253,584 + $116,960 + $0) Amortization)/(Total (250,000) Share Out

flow per + share

Common Standing)

Market/ Book ratio

Market price per share/Book $12.17/$7.809 value per share

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48