financial statement analysis- bhanero textile mills

8/11/2019 Financial Statement Analysis- Bhanero Textile Mills

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Financial Statement

AnalysisBhanero Textile Mills LimitedSubmitted By: Tabina Hassan (11U3016)

Submitted To: Miss Mehreen Furqan

Submission Date: 29 March' 14


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Executive Summary

For the purpose of my financial statement analysis project, I have chosen Bhanero Textile Mills

Limited. The purpose of performing this assignment and the whole analysis is to look at the trend

of growth of the company by assembling, comparing and assessing its past five yearsfinancial

data; including years from 2009 to 2013. After profoundly evaluating the financial statements of

the company it can be concluded that the corporation has been progressing well despite the

economic turmoil prevailing in the country for past few years. The analysis begins by

considering the basic statements of the company such as Profit and Loss Accounts, Balance

Sheets and Cash Flow Statements. These statements are then used to calculate various significant

ratios and percentages such as cash flow ratios, liquidity ratios, solvency ratios, returns on capital

ratios, profitability ratios and market measures, to obtain a more thorough understanding of the

operations of the company. In the end the report will discuss the decisions that a banker and an

investor make keeping in mind the performance of the company for the last five years. The

liquidity position and capital structure & solvency state of the company is reasonably satisfactory

and is exposed to less risk. The management of the company has been playing a remarkable role

managing its debt and equity appropriately and has also ensured full utilization of the companys

assets, to avoid inefficiency, resulting in increase in the return on assets (ROA) and return on

equity (ROE) present in the Textile sector. Over all the financial position of the company is

satisfactory.


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ContentsCC.2 Income Statements ............................................................................................................................... 4

CC.3 Balance Sheets ...................................................................................................................................... 5

CC.4 Statements of Cash Flows ..................................................................................................................... 7

CC.5 Five Year Growth Rates ......................................................................................................................... 9

CC.6 Common-Size Income Statements...................................................................................................... 10

CC.7 Common-Size Balance Sheets ............................................................................................................. 11

CC.8 Trend Index of Selected Accounts(Year 2009=100%) ......................................................................... 13

CC.9 Per Share Results ................................................................................................................................ 15

CC.11 Analysis of Cash Flow Ratios ............................................................................................................. 16

CC. 12 Short-Term Liquidity Analysis .......................................................................................................... 17

CC. 13 Common-Size Analysis of Current Assets and Current Liabilities .................................................... 18

CC. 18 Capital Structure and Solvency Ratios ............................................................................................. 19

CC. 19 Return on Invested Capital Ratios ................................................................................................... 20

CC. 20 Asset Utilization Ratios .................................................................................................................... 21

CC. 21 Analysis of Profit Margin Ratios ....................................................................................................... 22

CC. 22 Analysis of Depreciation .................................................................................................................. 23

CC.23 Analysis of Discretionary Expenditure .............................................................................................. 24

CC. 28 Market Measures ............................................................................................................................. 25

Conclusion ................................................................................................................................................... 26

As an Investor ......................................................................................................................................... 26

As a Banker.............................................................................................................................................. 26

References .................................................................................................................................................. 27

Appendix ..................................................................................................................................................... 28

Financial Statements For 2013 ...................................................................................................................

Rough Calculations .....................................................................................................................................


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CC.2 Income Statements

The Income Statement of the company also known as Statement of Profit and Loss depicts

revenues and expenses that are due to transactions incurred while conducting operations for a

given period of time. Revenues of the firm shows cash inflows and expenses shows cash

outflows. And the difference between the two represents Net income of a company. It can be

seen from the table above that the the total sales of the company have been increasing steadily

with an increase in 2011 but then again it decreased in 2012 and continued increasing. The Gross

Profit shows a similar trend. The profit before taxes fell drastically from 2011 to 2012 but then

gradually started increasing in 2012 till 2013. Likewise same trend in the net income is visible

that it fell drastically in 2012 but started to increase afterwards. The earnings per share of the

company has also shown a similar trend as NI and EBT has shown i.e. it decreased in from

287.73 in 2011 to 102.16 in 2012 and then increased to 195.67. Another important point is that

although expenses increased the management of the company was able to efficiently increase its

total income over the years.


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The Balance Sheet of a company is one of the most important financial statements which

describe where a company stands at a specific date in financial terms by listing down its total

assets, liabilities and owners equity.

The total assets of the company slightly decreased in 2011 from Rs. 3,794,691,686 to Rs.

3,630,854,231in 2012 and then rose to Rs. 4405622676 in 2013. On the other side of the balance

sheet i.e. the liability and owner equity side, we can see a general trend of decrease in the total

liability side. The overall decrease in total liabilities was mostly due to the decrease in the long-

term financing-secured and current portion of long term borrowings.

The Owners Equity section of the balance sheet shows a drastic increase from year 2009 to 2011i.e from Rs. 984,716,498 to Rs.2, 203,752,076. This increase is mainly attributed to the increase

in the General Reserves. Another important thing that should be noted over here is that the

company has continued to increase its reserves as well as the unappropriated profit over the

course of five years. All of this shows the company to be financially stable. But as I examined

the liability part of the statement, I noticed that the liabilities have also increased in 2013.

However, this increase in total liabilities is set off due to the increase in the companys current

assets, reserves and unappropriated profits.


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CC.4 Statements of Cash Flows


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The purpose of Statement of Cash Flows is to help understand the purposes of the companys

investment and credit decisions. It doesnt onlydepicted the way cash changes over years but it

is also significant in terms of analyzing the prospects of future cash flows.

The Cash Flow from operating activities of the company also known as Free cash flows are

showing a decrease in 2013, this low cash from operations can be attributed mainly to large cash

outflow from deposits and prepayments in the first year. This simply suggests that a large

amount of cash was drained from the changes in working capital of the company.

The Cash Flow from investing activities remained negative throughout the 5 year time. The only

thing that changed in it was that overall it became more negative but then it became less negative

in 2013. This negative value is attributed to the Purchase of property, plant and equipment. The

only positive aspect of these negative values is that this shows that the firm is growing and

because of that its assets are increasing.

Cash flows from financing activities relate to the investors and creditors. It shows the amount

invested in the company or loaned out to it from its creditors. From year 2009 to 2012 we can see

negative cash flow values meaning that it is cash out flow. This negative value is mainly due to

payment of long term financing which over the years have increased.

The value of cash and cash equivalents has shown an initial general upward trend from 2009 to

2013.


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CC.5 Five Year Growth Rates

The growth rate of sales of Bhanero Textile Mills shows that its sales have been increasing by

13.10% over the period of five years which is very good. Net Income growth rate of the

company over the 5 year period is 48.65% which is a very good growth rate showing that the

company is enjoying increasing rates of profits every year.

The dividend and Equity over a five year period shows a growth rate of 58.44% and -5.23%

respectively. This means that the firm payment of dividends in increasing every year at a good

rate which is very attractive for investors but its equity is decreasing.


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CC.6 Common-Size Income Statements

The CommonSize Income Statement shows the percentage of every component of income

statement in terms of its Net Sales. From the table above we can see that the Cost of Goods Sold

makes up the major percent of the companys total sales i.e. on an average almost 85%. This

percentage showed an decreasing trend in 2009 and 2010 but afterwards it showed a increasing

trend till 2013 with the exception of 2012.

The Gross Profit showed a constant increase from 2009 till 2011 but decreased afterwards in

2012.

Profit before taxes and profit after taxes show a similar trend which is after 2009 they increased

and then increase till 2011. But there was a decrease in both of them in 2012 but it then later

increase in 2013.


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The Common Size Balance Sheet helps analyze the composition of the components of the

balance sheet. On the Asset side of the balance sheet we can see that the current assets comprise

more than 50% of the total assets. Only in year 2009 and 2010 the non-current assets were more

than the 50% of the total assets. The composition of non-current assets have been showing a

decreasing value over the years and current assets showing an increasing value which is one of

the reason of the year 2011 value of current assets being more than the non-current assets. The

other reason of the drop in non-current assets was due to the decreasing value of Property, plant

and equipment and increasing value of current assets was due to the increasing value of Stock in

trade.

The Liabilities and Owners Equity section of the common size balance sheet show the changes

in the percentage of Liabilities and Equity in terms of its total shareholder's equity and total

liabilities. The total liability shows a decreasing trend mainly due to decrease in long term

financing secured and current portion of long term borrowings. Total equity has increased from

31.42% to 66.90% which is more than doubled. This shows that Bhanero Textile is moving more

towards internal financing rather than external financing which means that management is trying

to reduce the risk associated external financing.


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CC.8 Trend Index of Selected Accounts(Year 2009=100%)

For the purpose of observing the trend of the few selected accounts from Balance Sheet and

Income Statement we have considered the values of Year 2009 as base year values. Starting with

cash and cash equivalents we can see that over the years it is growing i.e. from 159.76% to

234.64%. This growth shows that the company will have more liquid asset in hand which can be

used in case of unforeseen circumstances. Accounts receivables show a normal growth pattern.

Inventories have had a overall growing trend. Total current assets have been growing on average

and total current liabilities of the company have been showing a decreasing trend which is good

for the company with the exception of 2013. Working capital showed an increasing trend which

showed that the firm have now more assets to deal with its current liabilities compared to

preceding years.

Plant asset show a decreasing trend. The long term debt and total liabilities have shown a

decreasing trend over the years. Shareowners equity has shown an increasing trend over the past


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5 years. The net sales also show a general upward trend. Cost of goods sold, administrative

expenses and marketing and all have a fluctuating trend as values are only positive for all these

accounts in 2010 and 2012. Interest expense showed a downward trend. Earnings before taxes

and Net income have been showing a general upward trend.

Overall, all of the components have increased in the last five years which shows that over this

time period the company has expanded capital and sales.


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CC.11 Analysis of Cash Flow Ratios

The cash flow adequacy ratio provides insight into whether a company generates sufficient cash

from operations to cover capital expenditures, investments in inventories, and cash dividends.

This ratio for Bhanero Textiles is 1.17, which indicates that funds generated from operations are

sufficient to cover capital expenditures, investments in inventories and cash dividends. Also this

is the combined average for the five years and the case might be different if we look at these

ratios in each separate year. The cash reinvestment ratio provides insight into the amount of cash

retained and reinvested into the company for both asset replacement and growth. This ratio is

negative for the company in 2013 which is because of the negative cash provided by the

operations in that year. Secondly, this ratio was highest in 2010 mainly due to a high cash from

the operations of the company. Coming to the industrial average in this table, we can see that the

adequacy ratio as well as the cash reinvestment ratio has remained above that of the average of

the company for almost all years. This indicates that the company has performed better than

most of the companies in the same industry.


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CC. 12 Short-Term Liquidity Analysis

The current ratio tells how much current assets are there to cover for the current liabilities. The

ratio is above 1 showing that there were no liquidity problems for the company. A/R turnover

has remained below the average value for the 5 years which shows that company is not as good

as other firm in converting its receivables into sales as other firms. Days sales in receivables

have been below the average value which is not a good for the firm. Days sales in inventory

shows that it went below average below the average in 2011 which was a good sign as it meant

that in comparison to other firm Bhanero Textiles converted its inventories to sales a bit quicker

than the other firms.

The approximate conversion period of the firm has been constantly below average. The cash to

CA ratio shows a general upward trend and has been above the average value of the industry.

The cash to CL ratio shows how much cash a company has in order to support its liabilities and

the higher the ratio the better and in this case the ratio has been well above the industrial average

value.

Working capital of the company has been above the industrial average value and positive

showing that now the company have the necessary funds to grow. Days purchases in A/P has

remained well below the average value showing that compared to others Bhanero pays for it

purchases quite early which is a good thing for its suppliers. The cash provided by operations to

current liabilities shows how much cash a company has in order to support its liabilities and it

has remained above the industrial average value.


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CC. 13 Common-Size Analysis of Current Assets and Current Liabilities

From the table, we can see that stock in trade and trade debts make up most of the component of

the current assets whereas other receivables contributes the least to the current assets side. As for

the current liabilities portion short-term borrowing-secured is the largest part of the current

liabilities side and the smallest contribution to current liabilities is mark-up accrued on loans and

other payables.


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CC. 19 Return on Invested Capital Ratios

RNOA shows how muchthe amount generated is because of the utilization of the assets of the

company. The RNOA value in our case has been above the industrial average value of 49.9%,

showing that our firm uses more assets to generate its returns compared to the other firms in the

industry. The ROCE was above the industrial average value. Due to the increasing value of

ROCE creditors and equity financers are quite encouraged. A further analysis in the

disaggregation of return on common equity shows that the main reason for the increase in thereturn is the increase in total asset turn over which means that the company is not only increasing

sales but is efficiently using its assets for this purpose and the increase in the equity multiplier.

Lastly, the growth rate of equity shows a general upward trend. This indicates that the company

will continue its growth in sales and earnings.


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CC. 21 Analysis of Profit Margin Ratios

Gross Profit Margin has remained above the industrial average indicating that the company has

adequate resources to pay for the additional expenses compared to the other companies in the

industry. Operating margin profit shows the effectiveness of a company in controlling its costs. It

has remained well above the average showing that the company improved its cost management

compared to other companies in the industry. Net profit margin shows the amount of total

revenue converted into profits and in this case above the industrial average.


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CC. 22 Analysis of Depreciation

The annual depreciation has been decreased from 10.26% in 2009 to 1.03% in 2013. Annual

Depreciation expense as a percent of sales has also shown a decreasing trend over the years

dropping from.


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CC.23 Analysis of Discretionary Expenditure

Maintenance and repair have continued to increase over the years for the company, which points

to the fact that the company is growing and employing more assets. The expense for maintenance

and repairs as a percentage of total sales have been showing a general downward trend. The

expense for maintenance and repairs as a percentage of plant assets has shown the same trend as

the expense for maintenance and repairs as a percentage of total sales.


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CC. 28 Market Measures

The P/E ratio has remained well above the industrial average value of indicating that the future

growth prospects of the firm are increasing. The P/B ratio is well below the average value of the

industry showing that the stock is undervalued compared to other firms. The earning yield of the

company has remained above the average value. The dividend payout ratio of the company has

also remained below the industrial average value of 0.41.


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Conclusion

As an Investor

After the analysis of all the ratios calculated, considering it from the perspective of an investor, I

conclude that investing in the company is not a good option. Compared to other firms in the

industries it has managed its assets very. The general upward trend of ROCE and return on long

term debt and equity has shown a growth and is also above the industrial average which makes it

a superior choice for investing.

The ratios indicate that proper cost management is being done and assets are optimally utilized.

But the company's P/B ratio is below industrial average indicating stocks to be undervalued and

even though the company is getting profits, its profit ratios are below industrial average. Also the

dividend payout ratio is decreasing over the years and is below industrial average which shows

that the company is paying less dividends and is retaining the profits to reinvest in company. So I

will not invest in Bhanero Textiles.

As a Banker

Considering it from the perspective of an banker, I will provide Bhanero Textiles loan because

their current ratios are above average showing that enough current assets are available to pay

current liabilities. Also the company is not facing any serious liquidity problem. The Accounts

Receivables turnover for the company have remained above the average value which shows

company can easily convert it receivables into sales as compared to other companies. The

approximate conversion period however is below the average which is a good thing as it shows

company is better than other companies in industry. The cash to current liabilities of Bhanero

Textiles is higher than average which shows that the company compared to other firms has more

cash to support its liabilities.

Lastly, the cash flow from operation to current liabilities shows how much cash a company has

in order to support its liabilities but for Bhanero Textiles, this value has remained above the

industry average for the last 3 years of analysis showing that it is increasing its cash to provide

for its liabilities. Considering the liquidity, solvency and capital structure of the company I will

give a loan to this company.


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References

http://www.kse.com.pk/

http://www.umergroup.com/bhanero-financial-reports.html#/financial_reports/1

http://www.umergroup.com/bhanero-financial-reports.html

http://www.scstrade.com/StockScreening/SS_CompanySnapShotHP.aspx?symbol=BHAT
http://www.kse.com.pk/http://www.kse.com.pk/http://www.umergroup.com/bhanero-financial-reports.html#/financial_reports/1http://www.umergroup.com/bhanero-financial-reports.html#/financial_reports/1http://www.umergroup.com/bhanero-financial-reports.htmlhttp://www.umergroup.com/bhanero-financial-reports.htmlhttp://www.scstrade.com/StockScreening/SS_CompanySnapShotHP.aspx?symbol=BHAThttp://www.scstrade.com/StockScreening/SS_CompanySnapShotHP.aspx?symbol=BHAThttp://www.scstrade.com/StockScreening/SS_CompanySnapShotHP.aspx?symbol=BHAThttp://www.umergroup.com/bhanero-financial-reports.htmlhttp://www.umergroup.com/bhanero-financial-reports.html#/financial_reports/1http://www.kse.com.pk/


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Appendix(Financial Statements of 2012 and Rough Work)

financial statement analysis- bhanero textile mills

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