Post on 10-Jun-2015
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Putting Your Eggs in the Right Basket: Analysis of Financial Statement & Earnings Quality
(Textile Industry)
Introduction
Study findings suggest that investors of any organization, tend to focus less on the notes and other interpretations of the financial statements, the point where their perceived importance and degree of thoroughness to read the reports vary.
It was observed that numbers of the statements tend to be the focal point for taking any investment decision in any particular firm. But additional information such as ratio analysis and their accurate interpretation is pivotal for decision making as such ratios inform the investors regarding the past, present and expected future financial health for the company.
Ratios: Why So Vital for Decisions
• Helps to review the performance of any organization over time.• Makes it possible to compare the performance of an organization with its competitors in the same industry.• Makes it possible to compare the performance of an organization with the industry average.• Brings out any problem within the company which can be rectified in the future period.
Ratios: Why So Vital for Decisions
• Makes the financial position of an organization comprehendible to the investors.
• Helps to judge the efficiency of any organization in terms of operations and management.
• Used to establish future trends of financial performance. Hence, ratios help to formulate the future plans for any particular organization.
• Helps to evaluate the performance of different divisions within the same company.
Taking Decisions for Investment
Parameters
Financial Statement Analysis Financial Reporting Quality
Investment Parameters
Financial Statement Analysis:1. Refers to the process of understanding the risk and
profitability of a firm through analysis of reported financial information, by using different accounting tools and techniques such as ratio analysis.
2. A process of reviewing and evaluating financial statements to gain knowledge regarding financial health and to enable more effective decision making.
Investment Parameters
Earnings Quality: Refers to the overall reasonableness of reported earnings. In
other words, it refers to the degree to which earnings reflect underlying financial condition of the company, enabling the current and potential investors to know how much the reported earnings accurately match the income for that
period.
Companies under Study
Company Name
1 Alhaj Textiles Mills Ltd.2 Altex Industries Ltd.3 Anlima Yarn Dyeing Ltd4 Apex spinning & Knitting mills5 Argon Denims Ltd6 Desh Garments Ltd.7 Envoy Textiles Ltd. 8 Family Tex Bangladesh Ltd9 Generation Next Ltd
10 H.R. textile Mills ltd11 Maksons Spinning Mills ltd
Framework of the Study: Ranking & Scoring
• Calculate the ratios1
• Rank the ratios 2
• Add up the ratios to derive the aggregate score
3
Financial Statement Analysis
1. Activity Ratios Measures how efficiently the company manages its
activities especially how well it utilizes it assets . Combines information from the income statement in the
numerator with balance sheet items in the denominator. Average balance sheet data are used for bringing
consistency
Different Activity Ratios
Activity Ratios Numerator Denominator
Inventory turnover COGS or cost of sales Average inventory
Days of inventory on hand Number of days in period Inventory turnover
Receivables turnover Revenue Average receivables
Days of sales outstanding Number of days in period Receivables turnover
Payables turnover Purchases Average trade payables
Number of days of payables
Number of days in period Payables turnover
Working capital turnover Revenue Average working capital
Fixed asset turnover Revenue Average net fixed assets
Total asset turnover Revenue Average total assets
Name of the Company Activity Ratio
Inventory Turnover (Times)
Rank
DOH (Days) Rank Receivable Turnover (Times)
Rank
Alhaj Textile Mills ltd. 1.473 10 300 10 45.497 4
Alltex Industries ltd. 3.118 5 116 5 54.186 3
Anlima Yarn Dyeing ltd. 2.503 9 147 9 3.420 7
Apex Spinning & knitting Mills ltd. 9.359 2 40 2 8.693 5
Aragon Denims ltd.
2.701 7 135 7 2.150 10
Desh Garments ltd 25.811 1 29 1 254.932 1
Envoy Textile ltd. 6.667 4 55 4 2.823 9
FamilyTex (BD) ltd. 3.110 6 117 6 4.925 6
Generation Next Fashion ltd. 2.573 8 141 8 106 2
H.R. Textile mills ltd. 7.563 3 49 3 3.206 8
Maksons Spinning Mills ltd 0.961 11 417 11 1.696 11
Name of the Company Activity Ratio
DSO (Days) RankPayables Turnover
(Times)
Rank Payable Deferral Period (Days)
Rank
Alhaj Textile Mills ltd. 43 4 10.372 8 40 8
Alltex Industries ltd. 38 3 3.596 5 118 5
Anlima Yarn Dyeing ltd. 109 7 17.504 9 31 9
Apex Spinning & knitting Mills ltd. 45 5 2.277 4 161 4
Aragon Denims ltd.
170 10 1.081 1 338 1
Desh Garments ltd 2 1 4.015 6 94 6
Envoy Textile ltd. 320 9 1.884 3 194 3
FamilyTex (BD) ltd. 73 6 8.141 7 44 7
Generation Next Fashion ltd. 3 2 77.133 10 5 10
H.R. Textile mills ltd. 124 8 1.863 2 195 2
Maksons Spinning Mills ltd 213 11 17.451 11 21 11
Name of the Company Activity Ratio
Working Capital Turnover (Times)
Rank Fixed Asset Turnover (Times)
Rank Total Asset Turnover (Times)
Rank
Alhaj Textile Mills ltd. 3.2925 61.689 4 1.102 4
Alltex Industries ltd. -8.922 91.681 5 0.911 6
Anlima Yarn Dyeing ltd. -19.666 11 0.586 11 0.442 10
Apex Spinning & knitting Mills ltd. 28.270 2 6.189 1 2.863 1
Aragon Denims ltd.
6.620 4 1.221 7 0.460 8
Desh Garments ltd
-4.436 7
2.095 3 1.568 2
Envoy Textile ltd. -13.290 10 0.937 10 0.500 7
FamilyTex (BD) ltd. 3.303 5 1.575 6 1.008 5
Generation Next Fashion ltd. 21.136 3 1.061 8 0.443 9
H.R. Textile mills ltd. 34.389 1 2.919 2 1.184 3
Maksons Spinning Mills ltd-7.124 8
1.027 9 0.381 11
Name of the Company
Activity Ratio
Rank (Inventory Turnover )
Rank (Receivable Turnover )
Rank(Payables Turnover )
Rank (Working Capital
Turnover)
Rank (Total Asset Turnover)
Score Rank of Score
Alhaj Textile Mills ltd.
10 4 8 64
32 6
Alltex Industries ltd.
5 3 5 96
28 3
Anlima Yarn Dyeing ltd. 9 7 9 11 10 46 8
Apex Spinning & knitting Mills ltd. 2 5 4 2 1 14 1
Aragon Denims ltd. 7 10 1 4 8 30 5
Desh Garments ltd 1 1 6 7 2 17 2
Envoy Textile ltd. 4 9 3 10 7 33 7
FamilyTex (BD) ltd. 6 6 7 5 5 29 4
Generation Next Fashion ltd. 8 2 10 3 9 32 6
H.R. Textile mills ltd. 3 8 2 1 3 17 2
Maksons Spinning Mills ltd 11 11 11
811 52 9
2. Liquidity Ratios
Measures a company’s ability to meet its short term obligations.
Liquidity measures how quickly assets are converted into cash and ability to pay off short-term obligations.
Typically achieved through efficient use of assets and managing the structure of liabilities.
Different types of Liquidity Ratios
Liquidity Ratios Numerator Denominator
Current ratio Current assets Current liabilities
Quick ratio Cash+ short term marketable investments+ receivables
Current liabilities
Cash ratio Cash+ short term marketable investments
Current liabilities
Defensive interval ratio Cash+ short term marketable investments+ receivables
Daily cash expenditures
Cash conversion cycle DOH + DSO – number of days of payables
Analysis of LiquidityCompanies Current Ratio Cash Conversion
Cycle (Days)Quick Ratio
Alhaj Textiles Ltd. 2.06 264 0.81
Altex Industries Ltd. 0.77 -11 0.28
Anlima yarn Dyeing 0.66 224 0.32
Apex spinning & dyeing mills
1.13 -78 0.65
Argon Denims Ltd. 1.078 -33 0.90
Desh Garments Ltd. 0.47 -60 0.20
Envoy Textiles Ltd. 1.21 130 0.80
Family Tex Bangladesh Ltd 2.67
145 1.26
Generation Next Ltd 1.08143
0.60
H.R. textile mills ltd 0.97 357 0.67
Maksons Spinning mills ltd
1.90 610 0.91
Ranking and ScoreCompanies Current
RatioCCC Quick Ratio Score Rank of
ScoreAlhaj Textiles Ltd. 2 9 4 15 4Altex Industries Ltd. 9 4 10 23 8
Anlima yarn Dyeing 10 8 9 27 11Apex spinning & dyeing mills
5 1 7 13 3
Argon Denims Ltd. 11 3 11 25 10
Desh Garments Ltd. 4 2 5 11 2
Envoy Textiles Ltd. 1 5 1 7 1
Family Tex Bangladesh Ltd
6 7 8 21 7
Generation Next Ltd 7 6 3 16 5H.R. textile mills ltd 8 10 6 24 9Maksons Spinning mills ltd
3 11 2 16 5
3. Solvency Ratios
Company’s ability to fulfill its long term obligations and includes in-depth analysis of the components of financial structure.
Provides information regarding the relative amount of debt in the company’s capital structure and the adequacy of earnings and cash flow to cover interest expenses and other fixed charges as they come due.
Different Types of Solvency Ratios
Solvency Ratios Numerator Denominator
Debt to asset ratio Total debt Total assets
Debt to capital ratio Total debt Total debt + total SE
Debt to equity ratio Total debt Total SE
Financial leverage ratio
Average total assets Average total equity
Interest Coverage EBIT Interest payments
Fixed charge coverage EBIT+ lease payments Interest payments+ lease payments
Analysis of Solvency RatioCompanies Debt to asset Debt to
capitalDebt to equity
Leverage Int. coveragre
ratioAlhaj Textiles Ltd. 0.404 1.507 0.650 2.381 0.131
Altex Industries Ltd. 0.224 1.177 1.11 5.777 1.705
Anlima yarn Dyeing 0.118 0.217 0.288 2.404 0.774
Apex spinning & dyeing mills
0.029 0.032 0.035 1.916 2.405
Argon Denims Ltd. 0.347 0.497 0.988 1.987 2.747
Desh Garments Ltd. 0.121 0.280 0.417 3.696 0.446
Envoy Textiles Ltd. 0.129 0.174 0.213 1.547 0.126
Family Tex Bangladesh Ltd 0.016 0.020 0.021 1.362 7.953
Generation Next Ltd 0.125 0.197 0.537 1.367 1.856
H.R. textile mills ltd 0.123 0.316 0.502 3.860 15.673
Maksons Spinning mills ltd 0.088 0.154 0.198 2.222 0.667
Ranking and Score
Companies Debt to
asset
Debt to
capital
Debt to equity
Leverage
Interest coverage
ratio
Score Rank of Score
Alhaj Textiles Ltd. 11 10 9 4 10 44 11Altex Industries Ltd. 9 11 11 1 6 38 8
Anlima yarn Dyeing 8 4 4 11 11 38 8Apex spinning & dyeing mills
10 9 10 7 3 39 10
Argon Denims Ltd. 7 5 8 9 5 34 7
Desh Garments Ltd. 6 8 7 2 1 24 4
Envoy Textiles Ltd. 3 3 3 5 8 22 3
Family Tex Bangladesh Ltd 4 6 5 6 7 28 5
Generation Next Ltd 2 2 2 8 4 18 2H.R. textile mills ltd 1 1 1 10 2 15 1Maksons Spinning mills ltd
5 7 6 3 9 30 6
4. Profitability Ratios Reflects a company’s competitive position in the market and the quality of its
management. The Income Statement reveals the sources of earnings and the components of
revenues and expenses. Earnings can be distributed to shareholders or reinvested in the company. Reinvestment provides increased solvency and a cushion against short-term
problems.
Different Profitability Ratios
Profitability Ratios Numerator Denominator
Gross profit margin Gross profit Revenue
Operating profit margin Operating income Revenue
Pretax margin EBT Revenue
Net profit margin Net income Revenue
Operating ROA Operating income Average total assets
ROA Net income Average total assets
Return on total capital EBIT Short & long term debt and equity
ROE Net income Average total equity
Return on common equity
Net income-preferred dividend
Average common equity
Analysis of Profitability
Company GP margin
(%)
Ope profit (%)
Pretax margin
(%)
Net profit margin
(%)
Operating . ROA (%)
ROA (%) Return on TC (%)
ROE (%)
Alhaj 22.3 21.7 -82.32 -104.244 0.2 0.1 13.4 11.8
Altex 14.3 5.2 -1.3 -1.7 4.6 -1.0 -1.1 -1.2
Anlima 19.9 7.5 4.0 5.0 3.3 2.2 2.3 6.1
Apex 8.9 7.4 1.7 1.2 21.6 4.1 97 6.0
Argon 20.4 11.6 10.2 8.5 5.3 3.9 8.3 11.4
Desh 9.2 0.4 0.5 0.5 0.6 0.8 71.8 3.00
Envoy 20.6 17.5 15.7 11.4 9.8 5.6 29 9.8
Familytex 29.5 28.2 25 25 28.4 25.2 10.3 34.4
Generation 25.3 18.6 14.9 12.3 7.7 5.3 20.07 9.6
H.R text 17.9 4.1 4.1 3.1 4.5 3.5 81.4 13.4
Maksons 27.2 16.3 10.8 7.1 7.3 3.0 0.5 7.5
Ranking & ScoringCompany GP
marginOperating
profitPre-tax margin
Net profit
margin
Operating ROA
ROA Return on TC
ROE Score Rank of Score
Alhaj 4 2 11 11 10 10 5 3 56 8
Altex 9 9 10 10 11 11 11 11 82 11
Anlima 7 7 7 6 8 8 9 8 60 9
Apex 11 8 8 8 2 3 1 9 50 6
Argon 5 6 5 4 5 5 8 4 42 4
Desh 10 11 9 9 9 9 3 10 70 10
Envoy 6 5 2 3 3 2 7 5 33 3
Familytex 1 1 1 1 1 1 6 1 13 1
Generation 3 3 3 2 6 4 4 6 31 2
H.R text 8 10 6 7 7 6 2 2 52 7
Maksons 2 4 4 5 4 7 10 7 43 5
5. Valuation Ratios
Mostly been used for investment decision making. Involves evaluating a company’s performance and valuing its
equity in order to assess its relative attractiveness as an investment.
Different Valuation RatiosValuation Ratios Numerator DenominatorP/E Price per share Earnings per shareP/CF Price per share Cash flow per shareP/S Price per share Sales per shareP/BV Price per share Book value per shareBasic EPS Net income-preferred
dividendsWA num of ordinary shares outstanding
Cash flow per share Cash flow from operations WA num of ordinary shares outstanding
EBITDA per share EBITDA WA num of ordinary shares outstanding
Dividends per share Common dividends declared
WA num of ordinary shares outstanding
Dividend payout ratio Common share dividends Net income attributable to common shareholders
Retention rate(b) 1 – dividend payout ratioSustainable growth rate b*ROE
Valuation Ratio
Name of the Company Price earnings ratio
Rank EPS Rank Price to cash flow ratio
Rank Price to book value
ratio
Alhaj Textile Mills ltd. 24.410 5 0.456 10 4.060 8 1
Alltex Industries ltd. 43.800 4 -0.576 11 5.562 7 1
Anlima Yarn Dyeing ltd. 462.708 1 2.342 711.771 2 1
Apex Spinning & knitting Mills ltd. 4.916 8 18.261 1
80.260 1 1
Aragon Denims ltd.2.096 11 4.77 2 3.344 11 1
Desh Garments ltd. 98.742 2 1.366 8 10.400 61
Envoy Textile ltd. 2.636 9 3.863 4 3.429 10 1
FamilyTex (BD) ltd. 2.487 10 4.02 3
3.500 9 1
Generation Next Fashion ltd.6.412 7
2.426 11.003 3 1
H.R. Textile Mills ltd. 96.462 3 2.455 5
10.543 4 1
Maksons Spinning Mills ltd. 13.888 6 0.720 9 10.402 5
1
Valuation Ratio
Name of the Company Dividend payout ratio
Rank Retention ratio Rank Sustainable growth rate
Rank
Alhaj Textile Mills ltd. 1.239 3 -0.239 10 -0.028 11
Alltex Industries ltd. 1.210 1 -0.210 9 -0.012 10
Anlima Yarn Dyeing ltd.0.943 4 0.057 8 0.004 9
Apex Spinning & knitting Mills ltd.
0.761 6 0.239 6 0.015 7
Aragon Denims ltd.0.0007 10 0.999 2 0.114 4
Desh Garments ltd. 0.810 5 0.189 7 0.008 8
Envoy Textile ltd.1.250 2 -0.250 11
0.098 5
FamilyTex (BD) ltd. Nil 11 1.000 1 0.344 2
Generation Next Fashion ltd.0.285 7 0.715 5
3.066 1
H.R. Textile Mills ltd. 0.021
8 0.979 4 0.034 6
Maksons Spinning Mills ltd. 0.005
9 0.995 3 0.117 3
Valuation Ratio
Name of the Company Rank (Price earnings ratio)
Rank (Price to cash flow ratio)
Rank (Sustainable growth rate)
Score Rank of Score
Alhaj Textile Mills ltd. 5 8 11 24 7
Alltex Industries ltd. 47
10 21 6
Anlima Yarn Dyeing ltd. 1 29 12 2
Apex Spinning & knitting Mills ltd. 8 1
7 16 5
Aragon Denims ltd.11 11 4 26 8
Desh Garments ltd. 2 6 8 16 5
Envoy Textile ltd. 9 10 5 24 7
FamilyTex (BD) ltd. 10 9 2 21 6
Generation Next Fashion ltd.7 3 1 11 1
H.R. Textile Mills ltd. 3 46 13 3
Maksons Spinning Mills ltd. 6 5
3 14 4
Financial Reporting Quality(FRQ)
• It relates to the accuracy with which a company’s financial statements reflects its operating performance and to their usefulness for forecasting future cash flows.
• Focal point of FRQ is on the income statements and the discretions in recording various revenues and expenses.
• Evaluating reporting quality is important to know the concept of accrual based accounting and cash based accounting.
Financial Reporting Quality
Companies Accrual Ratio (B/S) Rank
Alhaj Textiles Ltd. -0. 1002 1Altex Industries Ltd. -0.025 6
Anlima yarn Dyeing -0.00248 7
Apex spinning & dyeing mills -0.809 2
Argon Denims Ltd. -0.0456 4
Desh Garments Ltd. -0.04 5
Envoy Textiles Ltd. -0.0655 3
Family Tex Bangladesh Ltd 0.24 11
Generation Next Ltd 0.1660 10H.R. textile mills ltd
0.03066 9Maksons Spinning mills ltd
0.00205 8
Altman’s Z-Score
Here, X1 = Working Capital to Total Asset
X2 = Retained Earnings to Total Assets
X3 = EBIT to Total Assets
X4 = Market Value of Stock to Book Value of Liabilities
X5 = Sales to Total Assets
Z= 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 +1.0 X5
Z-Score
Score Interpretation
> 2.99 Probably in safe financial Condition
2.70- 2.99 Gray Area, difficult condition may arise
1.80- 2.69 Will go bankrupted within 2 years
< 1.80 High risk of going bankrupted
Z-Score
Companies Z-Score Rank
Alhaj Textiles Ltd. 1.393329 9
Altex Industries Ltd. 1.267881 10
Anlima yarn Dyeing0.328247348 11
Apex spinning & dyeing mills2.512770392 4
Argon Denims Ltd. 2.1497 5
Desh Garments Ltd. 1.64 6
Envoy Textiles Ltd. 1.446 7
Family Tex Bangladesh Ltd 3.62 2
Generation Next Ltd 9.7522 1H.R. textile mills ltd
3.20912821 3Maksons Spinning mills ltd
1.40021828 8
Z-Score
Companies Z-Score Rank
Generation Next Ltd 9.7522 1
Family Tex Bangladesh Ltd 3.62 2H.R. textile mills ltd
3.20912821 3Apex spinning & dyeing mills
2.512770392 4
Argon Denims Ltd. 2.1497 5
Desh Garments Ltd. 1.64 6
Envoy Textiles Ltd. 1.446 7Maksons Spinning mills ltd
1.40021828 8
Alhaj Textiles Ltd. 1.393329 9Altex Industries Ltd. 1.267881 10
Anlima yarn Dyeing 0.328247348 11
Combined Score-Rank Table
Activity Liquidity Solvency Profitability Valuation FRQ Z-score
Score Rank
Alhaj Textiles Ltd. 6 4 11 8 7 1 9 46 9
Altex Industries 3 8 8 11 6 6 10 52 10
Anlima Yarn Dyeing 8
11 8 9 2 7 11 56 11
Apex spinning 1
3 10 6 5 2 4 31 3
Argon Denims Ltd. 5
10 7 48
4 5 43 7
Desh Garments 2
2 4 105
5 6 34 4
Envoy Textiles Ltd. 7
1 3 37
3 7 30 2
Family Tex 4
7 5 16
11 2 36 6
Generation Next 6
5 2 21
10 1 27 1
H.R. textile mills 2
9 1 7 3 9 3 34 4
Maksons Spinning 9
5 6 5 4 8 8 45 8
Epilogue
Ranking and scoring method cannot help with ultimate investment decision making. As different investors have different choices , so is their investment decisions. So the ranking method cannot reflect all the investors’ preferences.