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Capital Structure Analysis of Lafarge Surma Cement Limited
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STAMFORD UNIVERSITY BANGLADESH Assignment On: Capital Structure Analysis of Lafarge Surma Cement Limited Course Title: Finance Theory Course Code: FIN -608 Submit To Mohammad Salahuddin Chowdhury, ACA Assistant Professor, Dept. of Finance, University of Dhaka Submit By Md. Jahidul Islam; ID: MBA-05014570 Jabun Nahar; ID: MBA 05014443 Rajib Kumar Saha; ID: MBA 05014533 Date of submission 17 th April 2013
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Page 1: Capital Structure Analysis of Lafarge Surma Cement Limited

STAMFORD UNIVERSITY BANGLADESH

Assignment On: Capital Structure Analysis of Lafarge Surma

Cement Limited Course Title: Finance Theory

Course Code: FIN -608

Submit To

Mohammad Salahuddin Chowdhury, ACA

Assistant Professor, Dept. of Finance,

University of Dhaka

Submit By

Md. Jahidul Islam; ID: MBA-05014570

Jabun Nahar; ID: MBA 05014443

Rajib Kumar Saha; ID: MBA 05014533

Date of submission

17th April 2013

Page 2: Capital Structure Analysis of Lafarge Surma Cement Limited

Letter of Transmittal

April 17, 2013

Mohammad Salahuddin Chowdhury, ACA

Assistant Professor, Dept. of Finance,

University of Dhaka

Subject: Submission of Assignment titled “Capital Structure Analysis of Lafarge Surma Cement Limited”.

Dear Sir, This is informing you that I have done this assignment on “Capital Structure Analysis of

Lafarge Surma Cement Limited”. It is a great pleasure for me to present you such type of

assignment. To prepare this assignment I collect essential data. I learnt a lot of unknown

issues of direct Marketing, while preparing this assignment. This assignment was a

challenging experiences for us a theoretical as well as practical. I tried my best to make the

assignment a sound one as per your valuable counseling and proper guidance.

I express our gratitude to you for giving us the opportunity to making this assignment. I would be obliged if you kindly call me for any explanation or any query about the assignment as and when deemed necessary. Within the time limit, I have tried my best to compile the pertinent information as

comprehensively as possible and if you need any further information, I will be glad to

assist you.

Thanking you, On behalf of my group

___________________________

Md. Jahidul Islam

MBA: 05014570

Dept. of Business Administration

Stamford University Bangladesh

Page 3: Capital Structure Analysis of Lafarge Surma Cement Limited

Executive Summary

Capital structure, the mixture of a firm's debt and equity, is important because it costs

company money to borrow. Capital structure also matters because of the different tax

implications of debt vs. equity and the impact of corporate taxes on a firm's profitability.

Firms must be prudent in their borrowing activities to avoid excessive risk and the

possibility of financial distress or even bankruptcy.

A firm's debt-to-equity ratio also impacts the firm's borrowing costs and its value to

shareholders. The debt-to-equity ratio is a measure of a company's financial leverage

calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion

of equity and debt the company is using to finance its assets.

A high debt/equity ratio generally means that a company has been aggressive in financing its

growth with debt. This can result in volatile earnings as a result of the additional interest

expense.

The target (optimal) capital structure is simply defined as the mix of debt, preferred stock

and common equity that will optimize the company's stock price. As a company raises new

capital it will focus on maintaining this target (optimal) capital structure.

Page 4: Capital Structure Analysis of Lafarge Surma Cement Limited

Table of Contents

1. Introduction 1

2. Capital Structure 2

Clarifying Capital Structure-Related Terminology 2 Capital Ratios and Indicators 3

Additional Evaluative Debt-Equity Considerations 3

Factors That Influence a Company's Capital-Structure Decision 4

3. Cement Industry of Bangladesh 5

Industry Overview 6

Existing Industry Structure 6

Market for Cement Industry 6

Future Prospect 7

Market Share 7

4. Lafarge Surma Cement Limited 8

Company Overview 8

Basic Information 9

Interim Financial Performance: 2012 9

Shareholders & Investors 10

Composition of the Shareholders

5. Data Analysis 12

Findings from Annual Report Analysis 12

Comparison of Balance Sheet & Income Statement Items 12

Cross Table Analysis of Ratios 14

6. Conclusion 16

Page 5: Capital Structure Analysis of Lafarge Surma Cement Limited

Introduction

Capital structure, the mixture of a firm's debt and equity, is important because it costs

company money to borrow. Capital structure also matters because of the different tax

implications of debt vs. equity and the impact of corporate taxes on a firm's profitability.

Firms must be prudent in their borrowing activities to avoid excessive risk and the

possibility of financial distress or even bankruptcy.

A firm's debt-to-equity ratio also impacts the firm's borrowing costs and its value to

shareholders. The debt-to-equity ratio is a measure of a company's financial leverage

calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion

of equity and debt the company is using to finance its assets.

A high debt/equity ratio generally means that a company has been aggressive in financing its

growth with debt. This can result in volatile earnings as a result of the additional interest

expense.

If a lot of debt is used to finance increased operations (high debt to equity), the company

could potentially generate more earnings than it would have without this outside financing.

If this financing increases earnings by a greater amount than the debt cost (interest), then

the shareholders benefit as more earnings are being spread among the same amount of

shareholders. However, the cost of this debt financing may outweigh the return that the

company generates on the debt through investment and business activities and become too

much for the company to handle. Insufficient returns can lead to bankruptcy and leave

shareholders with nothing.

The debt/equity ratio also depends on the industry in which the company operates. For

example, capital-intensive industries such as auto manufacturing tend to have a debt/equity

ratio above 2, while personal computer companies tend to have a debt/equity ratio of under

0.5. (Read more in Spotting Companies In Financial Distress and Debt Ratios: Introduction.) A

company can change its capital structure by issuing debt to buy back outstanding equities or

by issuing new stock and using the proceeds to repay debt. Issuing new debt increases the

debt-to-equity ratio; issuing new equity lowers the debt-to-equity ratio.

As you will recall from Section 13 of this walkthrough, minimizing the weighted average cost

of capital (WACC) maximizes the firm's value. This means that the optimal capital structure

for a firm is the one that minimizes WACC.

Page 6: Capital Structure Analysis of Lafarge Surma Cement Limited

Capital Structure

For stock investors that favor companies with good fundamentals, a strong balance sheet is

an important consideration for investing in a company's stock. The strength of a company'

balance sheet can be evaluated by three broad categories of investment-quality

measurements: working capital adequacy, asset performance and capital structure. In this

section, we'll consider the importance of capital structure.

A company's capitalization (not to be confused with market capitalization) describes its

composition of permanent or long-term capital, which consists of a combination of debt and

equity. A company's reasonable, proportional use of debt and equity to support its assets is a

key indicator of balance sheet strength. A healthy capital structure that reflects a low level of

debt and a corresponding high level of equity is a very positive sign of financial fitness.

(Learn about market capitalization in Market Capitalization Defined).

Clarifying Capital Structure-Related Terminology

The equity part of the debt-equity relationship is the easiest to define. In a company's capital

structure, equity consists of a company's common and preferred stock plus retained

earnings, which are summed up in the shareholders' equity account on a balance sheet. This

invested capital and debt, generally of the long-term variety, comprises a company's

capitalization and acts as a permanent type of funding to support a company's growth and

related assets.

A discussion of debt is less straightforward. Investment literature often equates a company's

debt with its liabilities. Investors should understand that there is a difference between

operational and debt liabilities - it is the latter that forms the debt component of a company's

capitalization. That's not the end of the debt story, however.

Among financial analysts and investment research services, there is no universal agreement

as to what constitutes a debt liability. For many analysts, the debt component in a company's

capitalization is simply a balance sheet's long-term debt. However, this definition is too

simplistic. Investors should stick to a stricter interpretation of debt where the debt

component of a company's capitalization should consist of the following: short-term

borrowings (notes payable), the current portion of long-term debt, long-term debt, and two-

thirds (rule of thumb) of the principal amount of operating leases and redeemable preferred

stock. Using a comprehensive total debt figure is a prudent analytical tool for stock investors.

Page 7: Capital Structure Analysis of Lafarge Surma Cement Limited

Capital Ratios and Indicators

In general, analysts use three different ratios to assess the financial strength of a company's

capitalization structure. The first two, the debt and debt/equity ratios, are popular

measurements; however, it's the capitalization ratio that delivers the key insights to

evaluating a company's capital position.

The debt ratio compares total liabilities to total assets. Obviously, more of the former means

less equity and, therefore, indicates a more leveraged position. The problem with this

measurement is that it is too broad in scope, which, as a consequence, gives equal weight to

operational and debt liabilities. The same criticism can be applied to the debt/equity ratio,

which compares total liabilities to total shareholders' equity. Current and non-current

operational liabilities, particularly the latter, represent obligations that will be with the

company forever. Also, unlike debt, there are no fixed payments of principal or interest

attached to operational liabilities.

The capitalization ratio (total debt/total capitalization) compares the debt component of a

company's capital structure (the sum of obligations categorized as debt plus the total

shareholders' equity) to the equity component. Expressed as a percentage, a low number is

indicative of a healthy equity cushion, which is always more desirable than a high percentage

of debt. (To continue reading about ratios, see Debt Reckoning).

Additional Evaluative Debt-Equity Considerations

Funded debt is the technical term applied to the portion of a company's long-term debt that

is made up of bonds and other similar long-term, fixed-maturity types of borrowings. No

matter how problematic a company's financial condition may be, the holders of these

obligations cannot demand immediate and full repayment as long the company pays the

interest on its funded debt. In contrast, bank debt is usually subject to acceleration clauses

and/or covenants that allow the lender to call its loan. From the investor's perspective, the

greater the percentage of funded debt to total debt, the better. Funded debt gives a company

more wiggle room.

Page 8: Capital Structure Analysis of Lafarge Surma Cement Limited

Factors That Influence a Company's Capital-Structure Decision

The primary factors that influence a company's capital-structure decision are as follows:

1. Business Risk

Excluding debt, business risk is the basic risk of the company's operations. The greater the

business risk, the lower the optimal debt ratio.

As an example, let's compare a utility company with a retail apparel company. A utility

company generally has more stability in earnings. The company has less risk in its business

given its stable revenue stream. However, a retail apparel company has the potential for a bit

more variability in its earnings. Since the sales of a retail apparel company are driven

primarily by trends in the fashion industry, the business risk of a retail apparel company is

much higher. Thus, a retail apparel company would have a lower optimal debt ratio so that

investors feel comfortable with the company's ability to meet its responsibilities with the

capital structure in both good times and bad.

2. Company's Tax Exposure

Debt payments are tax deductible. As such, if a company's tax rate is high, using debt as a

means of financing a project is attractive because the tax deductibility of the debt payments

protects some income from taxes.

3. Financial Flexibility

Financial flexibility is essentially the firm's ability to raise capital in bad times. It should come

as no surprise that companies typically have no problem raising capital when sales are

growing and earnings are strong. However, given a company's strong cash flow in the good

times, raising capital is not as hard. Companies should make an effort to be prudent when

raising capital in the good times and avoid stretching their capabilities too far. The lower a

company's debt level, the more financial flexibility a company has.

Let's take the airline industry as an example. In good times, the industry generates significant

amounts of sales and thus cash flow. However, in bad times, that situation is reversed and the

industry is in a position where it needs to borrow funds. If an airline becomes too debt

ridden, it may have a decreased ability to raise debt capital during these bad times because

investors may doubt the airline's ability to service its existing debt when it has new debt

loaded on top. (Learn more about this industry in Dead Airlines And What Killed Them and 4

Reasons Why Airlines Are Always Struggling).

Page 9: Capital Structure Analysis of Lafarge Surma Cement Limited

4. Management Style

Management styles range from aggressive to conservative. The more conservative a

management's approach is, the less inclined it is to use debt to increase profits. An aggressive

management may try to grow the firm quickly, using significant amounts of debt to ramp up

the growth of the company's earnings per share (EPS).

5. Growth Rate

Firms that are in the growth stage of their cycle typically finance that growth through debt by

borrowing money to grow faster. The conflict that arises with this method is that the

revenues of growth firms are typically unstable and unproven. As such, a high debt load is

usually not appropriate.

More stable and mature firms typically need less debt to finance growth as their revenues

are stable and proven. These firms also generate cash flow, which can be used to finance

projects when they arise.

6. Market Conditions

Market conditions can have a significant impact on a company's capital-structure condition.

Suppose a firm needs to borrow funds for a new plant. If the market is struggling, meaning

that investors are limiting companies' access to capital because of market concerns, the

interest rate to borrow may be higher than a company would want to pay. In that situation, it

may be prudent for a company to wait until market conditions return to a more normal state

before the company tries to access funds for the plant. (Read more about market conditions

in The Cost Of Unemployment To The Economy and Betting On The Economy: What Are The

Odds?)

Page 10: Capital Structure Analysis of Lafarge Surma Cement Limited

Cement Industry of Bangladesh

Industry Overview

The development of cement industry in Bangladesh dates back to the early-fifties but its

growth in real sense started only about decade or so. Bangladesh has been experiencing an

upsurge in the use of cement in recent years. Increase in demand for cement has soared

mainly due to the property sector boom and infrastructure development concentrated in the

Dhaka Metropolitan area and other major urban areas of the country. The infrastructural

development at grass root level has led to an increased demand for cement at an average rate

of 8% per annum during the past decade.

Existing Industry Structure

In terms of cement production, Bangladesh ranks about 40th in the world. Cement

manufacturing is a highly fragmented business in Bangladesh. During the 1990s, many small

cement companies entered the market as soon as the government started encouraging local

production with favorable tariff differential. Currently 123 companies are listed as cement

manufacturers in the country. Of them 63 have actual production capacity while about 30 do

not have any production at all. The current installed capacity is 22.0 MMT. However, because

of supply constraints for power and clinkers, the actual capacity is about 17.0 MMT.

Bangladesh is one of the few sizable producers of cement that does not have its own supply

of limestone and cannot produce clinkers domestically. There is a strong tax-support for

local cement manufacturers in Bangladesh. They receive a significant import tax advantage

over finished cement (about 15% for raw-materials versus 100% for finished cement). This

tariff differential helps most to operate profitably. A change in the tariff structure is not

anticipated in the near future.

Market for Cement Industry

Construction takes up an important role in the economy (about 10% of the GDP). Annual

demand for cement in the country is about 10.0 MMT. Understandably the market has a

capacity overhang. There is a small market for export of cement, mainly to the small

northeastern states of India. However, the size of the export is quite small (about 200 KMT a

year). There are four categories of cement consumers in the country. The largest with about

60% of the consumption are the individual homebuilders. This is also the most price

sensitive segment. Real estate developers, especially in the country’s urban area constitute

about 8% of the market. Construction contractors constitute another 3% of the market.

Lastly, various government projects take up about 30% of the total cement construction.

Page 11: Capital Structure Analysis of Lafarge Surma Cement Limited

Future Prospect

The industry realized about 20% sales growth in 2009, mostly because of the latent demand

from last years. On a secular basis, ongoing demand growth is expected to be about 8%, the

outlook for the cement industry seems positive for a number of reasons.

First, the government seems to be on a war footing to increase both the amount and the

efficiency of spending in social and physical infrastructure under the Annual Development

Programs (ADP). Second, the private sector is also energized because of certain tax

advantages for undeclared funds if they are invested in real estate.

Third, a number of large infrastructure construction projects (such as the Padma Bridge) are

on the horizon. Both the government and the private sector are soliciting funds for such

projects. If implemented, these projects would significantly improve demand for

construction materials.

Market Share

The largest 10 cement manufacturers hold about 70% of the market share. While Heidelberg,

Holcim and Lafarge are the leaders among multinational cement manufacturers; Shah, Akij

and MI are the leading domestic manufacturers. Shah cement is the market leader with close

to 12% of the market share, closely followed by Heidelberg with about 10% of the market

share.

Page 12: Capital Structure Analysis of Lafarge Surma Cement Limited

Lafarge Surma Cement Limited

Company Overview

Lafarge Surma Cement Ltd. (LSC) was incorporated on 11 November 1997 as a private

limited company in Bangladesh under the Companies Act 1994 having its registered office in

Dhaka. On 20 January 2003 Lafarge Surma Cement Ltd. was made into a public limited

company. The Company is listed in Dhaka and Chittagong Stock Exchange. Today, Lafarge

Surma Cement Ltd. has more than 20,000 shareholders.

In November 2000, the two Governments of India and Bangladesh signed a historic

agreement through exchange of letters in order to support this unique cross border

commercial venture and till date it is the only cross border industrial venture between the

two countries. Since Bangladesh does not have any commercial deposit of limestone, the

agreement provides for uninterrupted supply of limestone to the cement plant at Chhatak in

Bangladesh by a 17 km long belt conveyor from the quarry located in the state of Meghalaya.

The company in Bangladesh, Lafarge Surma Cement Ltd. wholly owns a subsidiary company

Lafarge Umiam Mining Private Ltd. (LUMPL) being registered in India, which operates its

quarry at Nongtrai in Meghalaya.

This commercial venture with an investment of USD 280 million, which is one of the largest

foreign investments in Bangladesh, has been financed by Lafarge of France, world leader in

building materials, Cementos Molins of Spain, leading Bangladeshi business houses together

with International Finance Corporation (IFC – The World Bank Group), the Asian

Development Bank (ADB), German Development Bank (DEG), European Investment Bank

(EIB), and the Netherlands Development Finance Company (FMO).

Lafarge Group, with 176 years of experience, holds world’s top-ranking position in Cement,

Aggregates, Concrete and Gypsum. It operates in 64 countries with around 68,000

employees. Lafarge is named as one of the 100 Most Sustainable Companies in the World.

Cementos Molins of Spain, with 75 years of experience, also operates in Mexico, Argentina,

Uruguay, and Tunisia.

Now, after three years of production operations, we are producing world class clinker and

cement which is a demonstration of the sophisticated and state-of-the-art machineries and

processes of our plant at Chhatak. The Company is already meeting about 8% of the total

market need for cement and 10% of total clinker requirements of Bangladesh market

whereas we continue to enjoy strong growth rates. By supplying clinker to other cement

producers in the market, we contribute some USD 50~60 million per annum worth of foreign

currency savings for the country. We contribute around BDT 1 (one) billion per annum as

Page 13: Capital Structure Analysis of Lafarge Surma Cement Limited

government revenue to the national exchequer of Bangladesh. About 5,000 people depend on

our business directly or indirectly for their livelihood.

We believe that cement is an essential material that addresses vital needs of the construction

sector. We are optimistic to meet the growing needs for housing and infrastructure in the

construction sector of Bangladesh.

Basic Information

Authorized Capital in BDT*

(mn)

14000.0

Paid-up Capital in BDT*

(mn)

11614.0 52 Week's Range 28.4 - 45

Face Value 10.0 Market Lot 500

Total no. of Securities 1161373500 Business Segment Cement

Interim Financial Performance: 2012

Particulars

Unaudited / Audited

Q1(3 Months) Q2(6 Months) Q3(9 Months) Q4 (12 Months)

201203 201206 201209 201212

Turn Over in BDT* (mn) 2797.71 5539.84 7823.46 0

Net Profit After Tax in BDT *(mn) (Continuing Operations)

464.58 619.5 1236.33 1853.43

Net Profit After Tax in BDT *(mn) (Including Extra-ordinary Income)

0 0 0 0

Basic EPS in BDT* (Based on continuing operations)

0.400 0.530 1.060 1.600

Diluted EPS in BDT* (Based on continuing operations)

0.000 0.000 0.000 0.000

Basic EPS in BDT* (Including Extra-ordinary Income)

0.000 0.000 0.000 0.000

Diluted EPS in BDT* (Including Extra-ordinary Income)

0.000 0.000 0.000 0.000

Page 14: Capital Structure Analysis of Lafarge Surma Cement Limited

Shareholders & Investors

The Company is fortunate to have a blend of both international and local shareholders. The

international shareholders of Lafarge Surma Cement Ltd. bring in technological and

management expertise while the local partners provide deep insights of the economy of

Bangladesh. The shareholders believe that growth and innovation must add value, not only

for the Company, but also for customers, whom the Company serves through modern and

well-located production facilities as well as innovative and reliable products.

Composition of the Shareholders

Surma Holdings B.V.

Surma holding B.V. was incorporated in the Netherlands, which owns 58.87% of Lafarge

Surma Cement Ltd. Lafarge Group of France and Cementos Molins of Spain each owns 50%

share of Surma Holding B.V.

Lafarge Group

One of the major sponsors, Lafarge Group holds world’s top-ranking position in Building

Materials, with about 68,000 employees in 64 countries. Lafarge was founded in France in

1833. Through the years since its inception, it has been growing steadily to take lead in the

production of different kinds of construction materials and has established itself as the

world leader in construction material business. In 2010, for the sixth consecutive year,

Lafarge has been listed as one of the 100 most sustainable companies in the world.

Page 15: Capital Structure Analysis of Lafarge Surma Cement Limited

Cementos Molins

Another major sponsor, Cementos Molins, based in Barcelona, Spain, is a renowned cement

company founded in 1928. With over 75 years of experience in manufacturing cement,

Cementos Molins has industrial operations also in Mexico, Argentina, Uruguay and Tunisia.

Lafarge and Cementos Molins as major sponsors, the equity partners are Asian Development

Bank (ADB), International Finance Corporation (IFC) and Islam Group and Sinha Group from

Bangladesh. The financiers to the project include Asian Development Bank (ADB),

International Finance Corporation (IFC), German Development Bank (DEG), European

Investment Bank (EIB), the Netherlands Development Finance Company (FMO) and local

Standard Chartered Bank and AB Bank Limited. In addition to that Citibank N.A., HSBC,

Commercial Bank of Ceylon PLC, Uttara Bank Limited, The Trust Bank Limited, Eastern Bank

Limited have participated in working capital management of the Company.

Share Holding Patterns

Years Director (%) Govt. (%) Institutions (%) Foreign (%) Public (%)

Lafarge Surma 59.06 0 9.06 1.94 29.94

Director59%

Govt.0%

Institutions 9%Foreign

2%

Public 30%

Share Holding Patterns

Page 16: Capital Structure Analysis of Lafarge Surma Cement Limited

Data Analysis

Findings from Annual Report Analysis

Findings from the Financial Statement analysis of the above mentioned five Cement

Companies.

Lafarge Surma Cement Limited

(Tk. In million)

Year Total

Assets Debt Equity

Debt

Ratio

D/E

Ratio EBIT

Interest

Exp

Interest

Coverage

Ratio

2010 16,558 10,393 2,768 62.77% 375.47% 660 1087 0.61

2009 17,291 8,222 4,430 47.55% 185.60% 2,332 870 2.68

2008 17,829 9,504 3,427 53.31% 277.33% 1,707 1224 1.39

2007 17,729 10,995 3,253 62.02% 338.00% (239) 1138 -0.21

2006 17,116 11,121 4,808 64.97% 231.30% (521) 163 -3.20

Laferge surma has the highest assets base Debt ratio and D/E ratio is decreasing steadily,

which shows that it is increased depending on equity rather than debt.

Comparison of Balance Sheet & Income Statement Items

Sales

(Tk. In million)

Years 2010 2009 2008 2007 2006

Lafarge Surma 5,655 7,543 6,211 2,399 153

0

2000

4000

6000

8000

2006 2007 2008 2009 2010

Sales

Sales

Page 17: Capital Structure Analysis of Lafarge Surma Cement Limited

Total Assets

(Tk. In million)

Years 2010 2009 2008 2007 2006

Lafarge Surma 16,558 17,291 17,829 17,729 17,116

Equity

(Tk. In million)

Years 2010 2009 2008 2007 2006

Lafarge Surma 4,229 4,430 3,427 3,253 4,808

Net Profit After Tax

(Tk. In million)

Years 2010 2009 2008 2007 2006

Lafarge Surma (505) 582 635 (855) (513)

15000

16000

17000

18000

2006 2007 2008 2009 2010

Total Assets

Total Assets

0

2000

4000

6000

2006 2007 2008 2009 2010

Equity

Equity

-1000

-500

0

500

1000

2006 2007 2008 2009 2010

Net Profit After Tax

Net Profit After Tax

Page 18: Capital Structure Analysis of Lafarge Surma Cement Limited

Cross Table Analysis of Ratios

Return on Equity (ROE) = Net Income/Common Equity

Lafarge Surma 2010 2009 2008 2007 2006

ROE 23.85% 22.46% 5.14% -33.69% -16.81%

Current Ratio= Current Assets/Current Liabilities

Lafarge Surma 2010 2009 2008 2007 2006

Current Ratio 0.25 1.93 0.32 0.26 0.53

Debt-Equity Ratio = Total Debt/Total Assets

Lafarge Surma 2010 2009 2008 2007 2006

Debt Ratio 62.77% 47.55% 53.31% 62.02% 64.97%

-40.00%

-20.00%

0.00%

20.00%

40.00%

2006 2007 2008 2009

Return on Equity (ROE)

Return on Equity (ROE)

0

1

2

2006 2007 2008 2009 2010

Current Ratio

Current Ratio

0.00%

50.00%

100.00%

2006 2007 2008 2009 2010

Debt-Equity Ratio

Debt-Equity Ratio

Page 19: Capital Structure Analysis of Lafarge Surma Cement Limited

Debt-Equity Ratio = Total Debt/Total Equity

Lafarge Surma 2010 2009 2008 2007 2006

D/E Ratio 375.47% 185.60% 277.33% 338.00% 231.30%

Interest Coverage Ratio = EBIT/Interest Expense

Lafarge Surma 2010 2009 2008 2007 2006

Interest Coverage Ratio 0.61 2.68 1.39 (0.21) (3.20)

Net Profit Margin = Net Profit After Tax/Sales

Lafarge Surma 2010 2009 2008 2007 2006

Net Profit Margin 17.40% 13.19% 2.83% -45.69% -528.10%

0.00%

100.00%

200.00%

300.00%

400.00%

2006 2007 2008 2009 2010

Debt-Equity Ratio

Debt-Equity Ratio

-4

-2

0

2

4

2006 2007 2008 2009 2010

Interest Coverage Ratio

Interest Coverage Ratio

-600.00%

-400.00%

-200.00%

0.00%

200.00%

2006 2007 2008 2009 2010

Net Profit Margin

Net Profit Margin

Page 20: Capital Structure Analysis of Lafarge Surma Cement Limited

Conclusion

Even in the worst case that the Court puts a permanent ban on mining, LSCL is not without

options. How-ever, under any of these scenarios, the profitability of the company would

suffer.

There are other quarries in the region whose product are traded in the open market.

Transport of lime-stone by boat and trucks is already an established practice for Chattak

Cement Factory, a government owned manufacturer in the same area. Although it would

need substantial capacity building, LSCL can meet part of its limestone requirement from

importing locally traded limestone.

Import of clinkers like other cement manufacturers is also an option, although very costly for

LSCL. In such a case, the company would have to import cement via Chittagong, transport it

to current plants in Sunamganj for grinding, and then send it back to Dhaka and other

distribution centers. This may involve relocation of its grinding plant.

Acquiring other grinders may also be an option for LSCL, although that would require

additional capital outlay. As the cement sector consolidates, the larger companies such as

LSCL gains market shares at the cost of smaller manufacturers. It is expected that in the end

only the ten or so manufacturers, who cur-rently hold about 70% of the market share would

survive. In such a case, Lafarge can shift its manufac-turing from Sunamganj to Dhaka by

acquiring the facilities of the marginal producers.

Page 21: Capital Structure Analysis of Lafarge Surma Cement Limited

References

http://www.lafarge-bd.com

http://www.dsebd.org/

http://www.google.com.bd/

http://www.stockbangladesh.com/

http://en.wikipedia.org/wiki/

Annual_Report_Of_ Lafarge_ Surma _ Cement_Year_2010

Annual_Report_Of_ Lafarge_ Surma _ Cement_Year_2009

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