grameen phone management

8/10/2019 Grameen Phone Management

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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 inNovember 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 at446,129 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


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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 ofBangladesh 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 | 2006 | 2007 | 2008 | 2009 | 2010 |

Current Ratio(times) | Current asset/ current liabilities | 2.64197461 | 2.65395324 |

2.58068946 | 3.23209122 | 3.64474246 |

Quick ratio(times) | (Current assets-inventories)/current liabilities | 2.14844921 |

2.37286724 | 2.39070109 | 2.25752517 | 2.65983794 ||

* Current Ratio

Graphical representation:

CURRENT RATIO (times)

Year

Interpretation:

In 2010, this companys current assets were 3.6447 times higher than its currentliabilities.

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


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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 (times)Year


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 | 2006 | 2007 | 2008 | 2009 | 2010 |Inventory Turnover Ratio(times) | Sales/ Inventory | 1.30768652 | 1.27652105 |

1.32283821 | 2.02456196 | 2.31447682 |

Total Asset Turnover Ratio(times) | Sales/ Total Assets | 0.46962481 | 0.47186124 |

0.51503472 | 0.4184346 | 0.41431212 |

Fixed Asstet Turnover Ratio(times) | Sales/Fixed asset | 1.05133191 | 1.05636293 |

1.25605045 | 1.33021795 | 1.22777516 |

Average Collection Period(days on avg) | AR/(Sales/365) | 128.058823 | 92.8033617

| 72.6014767 | 79.3369563 | 80.1894682 |

Average Payment Period(days on avg) | AP/( Purchase/365) | 109.287967 |93.8563447 | 80.2199597 | 83.6509816 | 78.6515379 |

* Inventory Turnover Ratio |

|


Year


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Inventory turnover ratio (times)

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 andthen 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 |

|

|


Year

Total asset turnover ratio (times)

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 |

|

Fixed asset turnover ratio (times)


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.


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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 PeriodGraphical representation: ||

Years

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

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 PeriodGraphical representation: |

Avg. payment period (days)

|

Year

Interpretation:

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 | 2006 | 2007 | 2008 | 2009 | 2010 |Debt- to- Asset Ratio (%) | (Total Debt/Total asset)* 100 | 75.8692012 | 75.7786083

| 74.9427845 | 68.742533 | 66.4293497 |

Debt- to- Total Equity Ratio (%) | Total Debt/ (Total Debt + Total Equity)*100 |

75.8692012 | 75.7786083 | 74.9427845 | 68.742533 | 66.4293497 |

Times-InterestEarned (%) | EBIT/Interest Expense | 7.38563741 | 4.51824139 |


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6.85612121 | 9.76547353 | 6.9361669 |

* Debt-to-Asset Ratio |

|


YearDebt-asset ratio(%)

Interpretation:

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

* Debt-to-Equity Ratio |

|

Debt-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)

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Year


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|

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

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 (%) | | 2006 | 2007 | 2008 | 2009 | 2010 |

Gross Profit Margin | (Gross Profit/Sales)* 100 | 23.5290734 | 21.6620832 |

24.4049657 | 21.8890356 | 21.5781971 |

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

16.4020465 | 16.5455083 |

ROA | (Net Income/Total Asset)*100 | 4.29685916 | 4.54569311 | 5.60932977 |

6.86318382 | 6.85500459 |

ROE | (Net income/Total Equity)*100 | 17.8065351 | 18.7672664 | 22.3860858 |

21.9569417 | 20.419636 |

* Gross Profit Margin:


Year

Gross profit margin (%)

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


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Tk.9,799,615,712 to Tk.10,810,974,226 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 ||


Year

Net profit margin (%)

Interpretation:

Interpretation:

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.

* ROAGraphical representation: ROA(%)|

Year

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

ratio more favorable. * ROE (%)

ROE:Graphical Representation: Year


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|

|

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 2010because 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 in 2010.

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

shareholder 5. Stock Market Ratio: | Formula | 2006 | 2007 | 2008 | 2009 | 2010

|

EPS (taka per share) | Net income/ Total no. of share outstanding | 45.5247272 |

55.9378292 | 78.7316149 | 120.422032 | 111.676701 |

DPS**(taka per share) | Total Dividend paid/ Total no. of share outstanding | 0 | 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 (taka per share)

EPSGraphical representation: 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 DPS (taka per share)

Graphical representation: |

YearInterpretation: 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


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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: Year

M/B ratio (times)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. * P/E

Ratio:Graphical

Representation: Year

P/E ratio

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 toTk.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 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-PontEquation:ROA= (Net Profit Margin)*(Total Asset Turnover Ratio) (Net income/

Total Assets)= (Net Income /Sales)*(Sales / Total Assets) Year | 2006 | 2007 | 2008 |

2009 | 2010 |

ROA (%) | 4.29685916 | 4.54569311 | 5.60932977 | 6.86318382 | 6.85500459 |

Interpretation: The ROA has continued an upward trend throughout 2006, 07, 08 and


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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 inTotal 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)(Net profit/total equity) = (net

profit/sales) *(sales/total asset) * (total asset/total Stockholders equity)

Year | 2006 | 2007 | 2008 | 2009 | 2010 |

ROE (%) | 17.8065351 | 18.7672664 | 22.3860858 | 21.9569417 | 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 inthe 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 wellthough it will be better if the Company increases its Sales using lesser Fixed Assets. In

addition, the Company should also try to collect its Receivables a bit faster, since

itsAverage 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


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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 beenfollowing 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 improvedBased 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.APPENDIX: |

1) Liquidity Ratio | | | | | | |

| Formula | 2006 | 2007 | 2008 | 2009 | 2010 |Current Ratio(times) | Current asset/ current liabilities | (7451995528/ 2820615872)

| 8655455937/3261344547 | 10526169665/4078820730 |

16052781843/4966685880 | 17288454805/4743395449 |

Quick ratio(times) | (Current assets-inventories)/current liabilities | (7451995528-

1392045595)/ 2820615872 | (8655455937-916718318)/ 3261344547 |

(10526169665-774928506)/ 4078820730 | (16052781843-4840363451)/

4966685880 | (17288454805-4671022906)/ 4743395449 |

2) Asset management ratio: | | | | | | || | | | | | |

| Formula | 2006 | 2007 | 2008 | 2009 | 2010 |

Inventory Turnover Ratio(times) | Sales/ Inventory | 6324979173/4836770179 |

7381279238/5782340389 | 9189386688/6946720020 | 9799615712/4840363451 |

10810974226/4671022906 |


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Total Asset Turnover Ratio(times) | Sales/ Total Assets | 6324979173/13468153796

| 7381279238/15642902244 | 9189386688/17842266477 |

9799615712/23419706714 | 10810974226/23419706714 |

Fixed Asstet Turnover Ratio(times) | Sales/Fixed asset | 6324979173/6016158268 |

7381279238/6987446307 | 9189386688/7316096812 | 9799615712/7366924871 |10810974226/8805337136 |

Average Collection Period(days on avg) | AR/(Sales/365) |

2219094213/(6324979173/365) | 1876732950/(7381279238/365) |

1827843956/(9189386688/365) | 2130059408/(9799615712/365) |

2375140475/(10810974226/365) |

Average Payment Period(days on avg) | AP/( Purchase/365) |

1,314,567,514/(4,390,393,141/365) | 1271910501/(4946360677/365) |

1351935827/(6151294250/365) | 1631201300/(7117531238/365) |

1865308079/(8656378087/365) |

3) Debt management ratio: | | | | |

| | | | | | |

| | | | | | |

| Formula | 2006 | 2007 | 2008 | 2009 | 2010 |

Debt- to- Asset Ratio(%) | (Total Debt/Total asset)* 100 |

(10218180703/13468153796)*100 | (11853973618/15642902244)* 100 |

(13371491316/17842266477)* 100 | (16099299618/23419706714)*100 | (17333936306/26093791941)* 100 |

Debt- to- Total Equity Ratio(%) | Total Debt/ (Total Debt + Total Equity)*100 |

(10218180703/ (10218180703+3249973094))*100 | (11853973618/

(11853973618+3788928627))* 100 | (13371491316/

(13371491316+4470775160))*100 | (16099299618/

(16099299618+7320407097)*100 | (17333936306/

(17333936306+8759855635))*100 |

Times-Interest -Earned(times) | EBIT/Interest Expense | 1247283558/168879609 |

1282202314/283783491 | 1752184549/255564990 | 1658122680/169794396 |1534280431/221200045 |

4) Profitability ratios: | | | | |

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| | 2006 | 2007 | 2008 | 2009 | 2010 |

Gross Profit Margin(%) | (Gross Profit/Sales)* 100 | (1488208994/6324979173)*100

| (1598938849/7381279238)*100 | (2242666668/9189386688)*100 |

(2145041372/9799615712)*100 | (2332813327/10810974226)*100 |

Net Profit Margin | (Net Profit/Sales)* 100 | (578707600/6324979173)*100 |(711078329/7381279238)*100 | (1000831565/9189386688)*100 |

(1607337522/9799615712)*100 | (1788730635/10810974226)*100 |

ROA(%) | (Net Income/Total Asset)*100 | (578707600/13468153796)*100 |

(711078329/15642902244)*100 | (1000831565/17842266477)*100 |

(1607337522/23419706714)*100 | (1788730635/23419706714)*100 |

ROE(%) | (Net income/Total Equity)*100 | (578707600/3249973094)*100 |

(711078329/3788928627)*100 | (1000831565/4470775160)*100 |

(1607337522/7320407097)*100 | (1788730635/8759855635)*100 |

5) stock market ratios: | | | | |

| | | | | | |

| Formula | 2006 | 2007 | 2008 | 2009 | 2010 |

EPS(taka per share) | Net income/ Total no. of share outstanding |

578707600/12711940 | 711078329/12711940 | 1000831565/12711940 | 120.42 |

1788730635/16017044 |

DPS**(taka per share) | Total Dividend paid/ Total no. of share outstanding | 0 |

254238800/12711940 | 317798500/12711940 | 317798500/1334753700 |600639165/16017044 |

M/B(times) | Market Value Per share/Book Value Per Share |

259.5/(3249973094/12711940) | 954.5/(3788928627/12711940) |

1495/(4470775160/12711940) | 803/457.0385832 | 1395/546.908383 |

P/E(times) | Market Value Per share/EPS | 259.5/45.52472715 | 954.5/55.93782924

| 1495/78.73161492 | 804/120.42 | 1395/111.6767011 |

Reference:

1. Newspaper Archive of NSU Library2. 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:


15/26

* Corporate website of DESCO- https://www.desco.org.bd/

* DSE Website (http://www.dsebd.org/) and other websites like-

http://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 Ratioit measures a companys assets sales generating

power as well the speed at which different accounts are converted to sales.

3) Debt Management Ratiothis ratio measures how much of the companys total

assets were financed by debt.

4) Profitability Ratioit measures how much of the companys income are

generated from sales, assets and equity.5) Stock Market Ratiothis 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 liquidityposition 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 differenttypes 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


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Quick Ratio (2003) = (Current AssetsInventory) (Current Liabilities)

= $(2,680,1121,716,480) ($1,144,800)

= 0.84times

Ratio | 2003E | 2002 | 2001 | IA |

Current Ratio | 2.34 times | 1.2 times | 2.3 times | 2.7 times |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 importantfor 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 eva luate 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 theirdebt.

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?


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

= ($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; totalasset 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.

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)


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= (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.

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)


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= 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)

= ($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 theIndustry 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 PriceEarnings Ratio, PriceCash Flow Ratio and

MarketBook Ratio. Do the ratios indicate that investors are expected to have high orlow opinion of the company?

Ans. (f): Price to Earnings Ratio = (Price per Share) (Earnings per Share)

= ($12.17) ($1.014)

= 12.0019


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Price/Cash flow = (Price per share) (Cash Flow per Share)

Cash Flow Ratio = (Net income + Depreciation) (Shares Outstanding)

= ($253,584 + $116,960) (250,000)

= $1.48/shareTherefore,

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 meanstheir 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

* (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)


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* 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 Equationhelps 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 hamperprofitability 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 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 $ 878 Debt $1,545

Other current assets 1,802 Equity 1,952

Net fixed assets 817 Liabilities+

Total assets $3,497 equity $3,497


22/26

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. Thereforeultimately 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

Other current asset 2054.67Net fixed asset 817.00 Equity 1,952.00

Total Asset $3497.00 Total Debt + Equity $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 foundout 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.


23/26

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 couldrefuse 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 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


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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 departmentmanagers, like the 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.

Ques. (m): What are some qualitative factors analysts should consider when

evaluating a companys likely future financial performance?

Ans. (m): The qualitative factors are:


25/26

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 thescenario 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.

APPENDIX:

AnswerB

Ratio | Formula | 2003E |

Current Ratio | Current assets/Current liabilities | $2,680,112/$1,144,800 |

Quick Ratio | (Current assetsInventory)/Current liabilities | (2,680,112-

1,716,480)/1,144,800 |

Answer- CRatio | Formula | 2003E |

Days sales outstanding | A/R/(sales/360) | 878,000/(7,035,600/360) |

Fixed asset Turnover ratio | Sales/Fixed asset | 7,035,600/817,040 |

Total asset turn-over ratio | Sales/Total asset | 7,035,600/3,497,152 |

Inventory Turnover ratio | Sales/Inventories | 7,035,600/1,716,480 |

grameen phone management

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