Corporate Finance Case Study: Square Textiles

Corporate Financial Analysis:

Square Textiles Ltd.

TERM PAPER

FIN 639

SEC: 1

Submitted By:

Ehsanul Hannan 081 124 060

Noor-A-Nazia 081 125 060

Md. Sajjad Bin M. Rahman 081 589 060

Submitted To:

Dr. Masud Rahman

Professor

MBA Program, School Of Business

April 16, 2011

April 16, 2011

Dr. Masud Rahman

Professor

MBA Program

School of Business

North South University

RE: Submission of term paper on “Corporate Financial Analysis: A Case on Square textiles

Ltd.”

Dear Sir:

We do hereby feel privileged to submit our term paper on “Corporate Financial Analysis:

Square Textiles Ltd.”, with an intention to have a better understanding of the course

“Corporate Finance”.

We greatly value the opportunity you gave us.

With Regards

Ehsanul Hannan Noor-A-Nazia Md. Sajjad Bin M. Rahman

ID: 081 124 560 ID: 081 125 060 ID: 081 589 060

i

Acknowledgement

At first, we show our gratitude to almighty ALLAH without whose grace, nothing is

possible. Our special thanks go to the honorable course instructor of the course, Dr.

Masud Rahman, who helped us in every sector to prepare this project paper with his

acquired knowledge and vast experience. We are very grateful for his guideline and

utmost patience towards us.

ii

Abstract

The objective of this case study is to find out the policy decisions made by Square

Textiles Ltd. that influenced share price movement. We were also interested to analyze

its investment decisions and the impact on share price. We also tried to forecast the

share price by identifying growth opportunity of the firm.

iii

Contents

Chapter 1 Introduction & Methodology...............................................................1

1.1 Introduction........................................................................................................1

1.1.1 Square Textiles Ltd. at a glance...................................................................1

1.2 Objective of the study........................................................................................1

1.3 Methodology......................................................................................................2

1.3.1 Financial Analysis techniques.....................................................................2

1.3.2 Statistical Techniques.................................................................................3

1.3.3 Nature and Source of Data.........................................................................3

1.3.4 Time – Period under Consideration............................................................3

1.3.5 Standard of comparison.............................................................................3

1.4 Limitations of the study......................................................................................3

Chapter 2 Analysis & Interpretation of Financial Data..........................................5

2.1 Balance Sheet Analysis.......................................................................................5

2.1.1 Sources of “Discrepancies” in the Balance Sheet........................................6

2.2 Cash Flow Analysis..............................................................................................8

2.2.1 Analysis of the Cash Flow:..........................................................................9

2.3 Ratio Analysis......................................................................................................9

2.3.1 Liquidity Ratio...........................................................................................10

2.3.2 Asset Management Ratio..........................................................................13

2.3.3 Debt Management Ratio..........................................................................17

2.3.4 Profitability Ratio......................................................................................19

2.3.5 Market Value Ratio...................................................................................22

Chapter 3 Stock Price Movement.......................................................................25

3.1 Account Closing................................................................................................25

3.2 Dividend Declaration........................................................................................25

3.3 Record Date......................................................................................................26

3.4 Annual General Meeting...................................................................................26

3.5 M&A Activities..................................................................................................26

Chapter 4 Prospective Analysis..........................................................................28

iv

4.1 Different Growth Rates.....................................................................................28

4.2 Scenario 1: Growth at Sustainable Growth Rate..............................................28

4.3 Scenario 2: Growth as per Gordon Model........................................................29

4.4 Scenario 3: Growth at GDP growth rate...........................................................29

4.5 Scenario 4: Optimistic.......................................................................................30

4.6 Scenario 5: Pessimistic......................................................................................30

4.7 Choice of Growth Rate......................................................................................31

4.8 The Plug Variable..............................................................................................31

4.9 Weighted Average Cost of Capital....................................................................31

4.10 Share Price according to Gordon Model...........................................................32

Chapter 5 Findings and Conclusions...................................................................33

5.1 Financial Performance......................................................................................33

5.2 Stock Price Movement......................................................................................33

5.3 Growth Prospect and Future Share Price.........................................................33

Appendix 34

A.1 Regression results.............................................................................................34

A.2 Weighted Average Cost of Capital....................................................................39

A.3 Financial Statements & Performance Data.......................................................40

v

Chapter 1

Introduction & Methodology

1.1 Introduction

This case study is prepared with an intention to meet partial requirement of the course

‘Corporate Finance’ and to have a better insight of the subject matter. We have chosen

Square textiles Ltd., one of the leading yarn manufacturers of the country for this purpose.

We performed an analysis of the company and tried to evaluate its justification with the

acquired knowledge from this course.

1.1.1 Square Textiles Ltd. at a glance

Square Textiles Ltd. was established as a public limited company in 1994 as a group company

in Square Group with a business line of manufacturing and marketing of yarn. The company

started its operation on 1997 and was listed at both Dhaka Stock Exchange and Chittagong

Stock Exchange in 2004. At the end of 2009 paid-up capital of the company was Tk. 705.84

million with 70,584,053 shares outstanding. The company is very profitable and doing very

good in terms of share price also. Dividend payout in both cash and bonus share form has

also been very consistent through the last few years.

Square Textiles got Oeko-Tex Standard 100 and ISO-9002 certification in 2000.

At end of 2009, the production capacity of the company stands at 11,582,899 Kg Ring Yarn

and 12,329,688 Kg of O/E yarn.

1.2 Objective of the study

The objective of this Case Study is to:

Identify policy decisions that has an impact on share price movement

Relate consequences of financial activities with the valuation of the firm

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1.3 Methodology

A number of methods and techniques which were used towards reaching a conclusion are

stated below: -

1.3.1 Financial Analysis techniques

A balance sheet analysis was performed to identify the sources of discrepancies in balance

sheet that causes book value and market value of share to be different.

A cash flow analysis was performed to study the cash dealings of the firm and to identify its

financial position.

We also performed a ratio analysis to evaluate the firm’s financial strengths or weaknesses.

The most prominent Financial Analysis techniques include the following 3 methods: -

Bench Mark Analysis

Time Series (Trend) Analysis

Cross Section Analysis

Bench mark Analysis

This method is literally unusable in Bangladesh as no industry data is widely available

regardless of any sector. This led to high dependency on the remaining two methods.

Time Series (Trend) Analysis

The time series analysis is predominantly known as “Trend Analysis”, where we try to find a

trend of a specific performance of the company. Different ratios are computed over time

and comment is made whether any increasing / decreasing trend is found.

Cross – Section Analysis

In this type of analysis, Company’s financial ratios are compared with other industry ratio

averages. This can also be performed by issuing comparison between two companies of

similar business.

For the sake of the case study, we will perform Time Series analysis on the seven year data

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that we have and a Cross Section analysis between our company of interest Square Textiles

Ltd. and Apex Spinning & Knitting Mills Ltd (ASKML).

1.3.2 Statistical Techniques

To relate share price movement with different events or policy decisions e.g. account

closing, record date, dividend declaration, AGM etc. we relied on simple regression by

populating dummy variable against the event.

1.3.3 Nature and Source of Data

The data used in this study is secondary data collected from annual reports and Dhaka Stock

Exchange web site and data archive

1.3.4 Time – Period under Consideration

We collected seven (08) years of data of Square Textiles Ltd., and considered data from 2003

to 2010. For enquiry into share price movement we’ve used only the data from 2008 – 2010

since news about different events were only available for this period. For trend analysis, we

used data of 2003 – 2009 since annual report of 2010 is yet to be published. We accept that

only seven year data is not good enough to comment on the financial performance of the

company, but it can at least give us a glimpse of the recent trend that the company is going

through.

1.3.5 Standard of comparison

As the industry benchmark was not available to us, we decided to compare the ratios of our

company with that of another one. We chose Apex Spinning & Knitting Mills Ltd. for the

comparison as this company’s performance was the best among the companies whose data

were available.

1.4 Limitations of the study

Like all other case studies, this too has got its limitations. Following are the areas where we

had our limitations

Unable to conduct direct interview with Square Textiles employees to get a better

insight of our findings.

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Unavailability of information in a “Soft Copy” which consumed lot of time.

No information was available on the overall market share in the yarn industry in

Bangladesh. Moreover, the industry averages were not also available which would

have been a better option to compare with.

Financial year of Square Textiles and ASKML ends in different months which can

create inaccuracies in cross-section analysis

Due to time constraint, cross section analysis was done only for last year. It would be

better if it was compared for last 7 years.

Due to unavailability of project data, we could not perform an analysis of investment

decisions made by Square Textiles

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Chapter 2

Analysis & Interpretation of Financial Data

2.1 Balance Sheet Analysis

The Balance Sheet shows the financial position of a firm at a specific point in time. The

financial statement indicates the investments made by the firm in the form of assets and the

means by which the assets were financed – that is, whether the funds were raised by

borrowing (which is actually the Liabilities part of a Balance Sheet) or by selling ownership

shares or common shares or common stocks (which is basically the Equity part of a Balance

Sheet). Amounts shown on a balance sheet are generally the historic cost of items and not

their current values. Balance sheet can be defined as: Assets = Liabilities + Equity. The assets

side of the balance sheet is always equal to the total liabilities and equities.

Table 1: Balance sheet of Square Textiles Ltd. based on book value of share

Figures in Taka

Balance SheetAssets Liabilities and EquitiesCurrent Assets Current LiabilitiesStocks 942,568,134 Short Term Bank Loan 573,802,358Trade Debtors 1,683,329,048 Short Term Loan 552,993,073Short Term Loan 431,848,649 Sundry Creditors 870,756,515Advance, Deposits and Prepayments 120,651,506 Other Current Liabilities 170,321,074

Cash & Bank Balances 46,332,373 Provision for income tax 108,728,783Total Current Assets 3,224,729,710 Total Current Liabilities 2,276,601,803

Fixed Assets Non-current LiabilitiesAssets at Cost Less Depreciation

1,378,552,606 Deferred Tax Liability 112,276,486

Investment-Long Term (At Cost)

105,000,000 Total Liabilities 2,388,878,289

Share Money Deposit 800,000,000 EquitiesTotal Fixed Assets 2,283,552,606 Share capital 705,804,530

General Reserve and Surplus 2,413,563,497

Tax Holiday -Total Equities 3,119,404,027

Total Assets 5,508,282,316 Total Liabilities & Equities 5,508,282,316

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The above table shows the Balance Sheet of Square Textiles Ltd. as presented in their annual

report. According to this balance sheet the book value of Square Textiles shares for the day

December 31, 2009 should be 44.19 Taka. But in reality we can see that the actual market

price on that day was much higher than that, 111.54 Taka.

2009 2008 2007 2006 2005 2004 20030

20406080

100120140160180

111.

54

117.

3

127.

4

75.6 81

.7

138.

3

43.1

44.1

9

50.0

4

51.2

3

51.6

5

49.6

6

48.7

44.5

3

Market Value Vs Book Value

market price book value

Year

Valu

e (in

Tak

a)

Figure 1: Comparison between Market Value & Book Value of Square Textiles Shares

Having a look at the trend analysis of the market value and book value of Square Textiles

Ltd., it was found that the Market value has been much higher than the book value by a

huge margin. These values indicate that there exists some sort of discrepancy between these

two types of values. Our intention is to identify these discrepancies and thus propose a

Balance Sheet based on the Market Value.

2.1.1 Sources of “Discrepancies” in the Balance Sheet

In order to identify the sources of discrepancies we now concentrate on the Balance Sheet

for the year 2009, of Square Textiles Ltd. After a thorough analysis of balance sheet items,

the following items were identified as factors contributing towards raising discrepancies

between the book value and market value: -

Fixed Assets are “Undermined”: The financial statements have been prepared under the

historical cost convention and fixed assets are stated at cost less accumulated depreciation.

But, as suggested by the Time Value of Money concept, price changes as time passes.

Moreover, the depreciation was charged using the Straight – Line method. From this analysis

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above we reach to a conclusion that the values of fixed assets are undermined. The asset

composition shows that a significant 30% of fixed assets are land and building which have

been recorded at historical cost. But over the years these assets’ market price has

significantly increased which has not been reflected in the balance sheet.

No Intangible Assets section: It was found that the company did not incorporate any

Intangible assets in the balance sheet. One of the most important intangible assets is

“Trademark” which was not considered in preparing the balance sheet. Square Textiles Ltd.

is in operation in Bangladesh for the last 11 years, since 1997, and has been holding a

healthy position for last several years. They have been profitable with a fair performance in

share market also. So, this is certainly an evidence of their goodwill which should be valued.

The firm recently acquired Mithapur Textiles and also merged with Square Spinning Ltd.

These M&A activities have been recorded as cost/share price. But the brand value acquired

from these activities has not been recorded.

Equity “Understated”: As we can find from the balance sheet here that equity of Square

Textiles Ltd. has been severely understated. The company calculates its equity from the

period of 2004 when it was first listed with Dhaka Stock Exchange, but with reference to the

Time Value of Money concept the equity has increased a lot over this period of time. Gain

from price increase in land and building has not been recognized.

Upon identifying the above mentioned discrepancies, we adjusted the balance sheet in

terms of the market value of stocks. In order to standardized in terms of market value the

following three values were changed in the original balance sheet.

The Value of Assets Less Depreciation was changed from taka 1,378,552,606 to Taka

4,132,057,851

Goodwill was added valued as taka 2,000,000,000.

General Reserve and Surplus has been changed from 2,413,563,497 taka to 7,167,104,742

taka.

As a result the Total Assets and Total Liabilities & Equities sides balanced at taka

10,261,787,561.

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Table 2: Balance sheet of Square Textiles Ltd. based on Market value of share

Balance SheetAssets Liabilities and EquitiesCurrent Assets Current LiabilitiesStocks 942,568,134 Short Term Bank Loan 573,802,358Trade Debtors 1,683,329,048 Short Term Loan 552,993,073Short Term Loan 431,848,649 Sundry Creditors 870,756,515Advance, Deposits and Prepayments

120,651,506 Other Current Liabilities 170,321,074

Cash & Bank Balances 46,332,373 Provision for income tax 108,728,783Total Current Assets 3,224,729,710 Total Current Liabilities 2,276,601,803

Fixed Assets Non-current LiabilitiesAssets Less Depreciation 4,132,057,851 Deferred Tax Liability 112,276,486Investment-Long Term (At Cost) 105,000,000 Total Liabilities 2,388,878,289Share Money Deposit 800,000,000Intangible Assets 2,000,000,000 EquitiesTotal Fixed Assets 7,037,057,851 Share capital 705,804,530

General Reserve and Surplus 7,167,104,742

Tax Holiday -Total Equities 7,872,909,272

Total Assets 10,261,787,561 Total Liabilities & Equities 10,261,787,561

2.2 Cash Flow Analysis

The statement of cash flows is designed to show how the firm’s operations have affected its

cash position by examining the investment and financing decisions of the firm. Often time,

the information contained in the statement of cash flows answer questions like: Is the firm

generative the cash needed to purchase additional fixed assets for growth? Does it have

excess cash flows that can be used to repay debt or to invest in new products? Information

contained in the Cash Flow Statement is useful both for financial managers and investors.

Following is the cash flow analysis of Square Textiles Ltd.:-

Table 3: Cash Flow Statement for Square Textiles Ltd. for the year 2009

2009 2008Cash flow from operating activitiesReceipts:Cash from sales revenue 3,888,585,244 2,763,272,886Cash from other income 259,007 23,676

Total cash receipts 3,888,844,251 2,763,296,562

Payments:Purchase for raw & packing materials (2,840,712,628) (1,951,063,214)

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Manufacturing & operating expense (517,209,344) (482,296,269)Finance Cost (112,410,317) (114,091,254)Income tax (41,934,432) (77,675,961)Workers profit participation fund (16,355,199) (13,369,264)

Total payment (3,528,621,920) (2,638,495,962)

Net Cash Flow From Operating Activities 360,222,331 124,800,600

Cash flow from investing activitiesCash flow from investing activitiesPurchase of fixed assets (97,332,491) (130,606,406)Profit from disposal of Fixed Assets 295,000 1,047,111Cash Receiver from Merger of SSL (10,000,000) 13,198,790Net Cash Flow From Investing Activities (107,037,491) (116,360,505)

Cash flow from financing activitiesShort term Bank loan (203,726,227) (27,451,291)Short term loan from/(to) sister Concern 58,058,364 129,959,939Payment of Dividend (105,876,079) (98,583,425)Net Cash Flow From Financing Activities (251,543,942) 3,925,223

Net cash position 1,640,898 12,365,318Opening cash & cash equivalents 44,691,475 32,326,157

Closing Cash & Cash Equivalent 46,332,373 44,691,475

2.2.1 Analysis of the Cash Flow:

Net Cash Flow from Operating Activities: The net cash flow from operating activities was

much higher than previous year mainly due to increase in sales which shows a good sign for

the company.

Net Cash Flow from Investment Activities: There is no significant change in net cash flow

from investment activities compared to the previous year.

Net Cash Flow from Financing Activities: The company has paid off a large amount of short

term loan which caused a large amount of cash outflow..

Net cash after 2009 position is weaker than 2008 even after a significant rise in sales. This

happened mainly due to paying off a large amount of short term loan.

2.3 Ratio Analysis

The real value of financially statements lies in the fact that they can be used to help predict a

firm’s financial position in the future and to determine expected earnings and dividends. An

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analysis of the firm’s ratios generally is the first step in a financial analysis. The ratios are

designed to show relationships between financial statement accounts within firms and

between firms.

Sources for these ratios are the company Financial Statements within the industry that

contains figures on assets, liabilities, profits, and losses. Industry ratios are only meaningful

when compared with other information. Since individual companies are most often

compared with industry data, ratios help an individual understand a company's performance

relative to that of competitors and are often used to trace performance over time.

There are 5 major categories when ratio analysis is considered. These categories are:

Liquidity Ratio which gives a picture of a company’s short term financial situation or

solvency.

Asset Management Ratio uses turnover measures to show how efficient a company is in its

operations and use of assets.

Debt Management Ratio shows the extent that debt is used in a company's capital

structure.

Profitability Ratio uses margin analysis and show return on sales and capital employed.

Market Value Ratio shows company’s standing in the capital market.

2.3.1 Liquidity Ratio

Liquid asset is an asset that can be converted to cash without significant loss of its original

value. This basically indicates the strength of a company in terms of meeting the current

obligations or liabilities, e.g. employee salary. Sometimes low liquidity even leads to

bankruptcy. Two commonly used Liquidity Ratios are (1) Current Ratio and (2) Acid Test

Ratio.

Current Ratio

Current Ratio is the ratio of current assets to current liabilities, which refers to the short

term solvency of the company and calculated as: -

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Table 1: Current Ratio for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Current Ratio 1.35 1.21 1.38 1.12 1.41 1.14 1.01 1.10

We can see from the above data that the current ratio for Square Textiles is 1.35, which is

below the benchmark standard for any company. But comparing with Apex Spinning &

Knitting Mills Ltd., it is higher as Apex Spinning & Knitting Mills Ltd. has a Current Ratio of

0.89.

2009 2008 2007 2006 2005 2004 20030.000.200.400.600.801.001.201.401.60

Current Ratio

Year

Ratio

Figure 2: Current Ratio Trend

The trend line of current ratio for Square textiles shows that the company has maintained a

somewhat steady current ratio for the last 7 years and also there has been improvement in

current ratio from last year.

Acid Test Ratio (Quick) Ratio

Acid Test Ratio is a better measure than Current Ratio as it deducts inventories from Current

assets and thus provides a better idea about the liquidity of the firm. It is calculated as

follows:

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Acid Test Ratio=Current Assets−InventoriesCurrent Liabilities

Table: Acid Test (Quick) Ratio for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Acid Test Ratio 0.96 0.76 0.96 0.73 0.91 0.80 0.75 0.76

Currently Square Textiles is maintaining a quick ratio of 0.96, which is lower than the

Benchmark ratio of 1. But comparing with Apex Spinning & Knitting Mills Ltd., it is much

higher as Apex Spinning & Knitting Mills Ltd. has a Quick Ratio of 0.075.

2009 2008 2007 2006 2005 2004 20030.00

0.20

0.40

0.60

0.80

1.00

1.20

Acid Test Ratio

Year

Ratio

Figure 3: Acid Test Ratio Trend

As we can see from the graph above, the quick ratio trend is not steady. It may indicate that

the company has gone for multiple projects/investments in last few years. The company’s

quick ratio is pretty much close to the benchmark of 1.

Overall Comment on Liquidity

The overall liquidity position of the company is not very good but it is getting better. Both

the ratios have increased in 2009. Considering the length of operation of Square Textiles the

performance is quite good especially in terms of quick ratio as it is pretty close to

benchmark. The kind of ups and downs found in the trend analysis is mainly due to the fact

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that the company has gone for multiple projects/investments in last few years. This

eventually is good news for a firm like Square Textiles who has very strong financial support

from the group. Also the company’s position is much better compared to Apex Spinning &

Knitting Mills.

2.3.2 Asset Management Ratio

Whether the assets of the company are being used effectively or in other words is able to

generate sales, is suggested by the asset management ratio.

Inventory Turnover

It shows that how many times the inventory of a firm is sold and replaced in a specific

period.

Inventory Turnover=Cost of Goods SoldInventories

Table: Inventory Turnover for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Inventory Turnover 3.55 2.04 3.39 4.18 3.79 5.14 5.28 9.56

The inventory turnover for Square Textiles is 3.55 whereas, Apex Spinning & Knitting Mills

Ltd. has inventory turnover of 9.56. So, in this regard, Square Textiles is in a much worse

position.

2009 2008 2007 2006 2005 2004 20030.00

1.00

2.00

3.00

4.00

5.00

6.00

Inventory Turnover

Year

Tim

es

Figure 4: Inventory Turnover Trend

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The trend line does not look very impressive. Inventory turnover is getting lower. This might

be due to increasing price of raw materials and also due to price reduction to cope up with

the competitive market. However, there is a very sharp rise from 2008 to 2009. This can

primarily be attributed to the handsome increase in export sales.

Days Sales Outstanding

Days Sales Outstanding refers to the average time a company takes to turn the receivables

into cash.

Table: Days Sales Outstanding for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009DSO 158.26 202.06 117.67 114.36 115.52 123.93 145.83 54.16

During the last year Square Textiles had a DSO of 158.26 days whereas, Apex Spinning &

Knitting Mills Ltd. has DSO of 54.16 days. So, in this regard, Square Textiles is in a much

worse position.

2009 2008 2007 2006 2005 2004 20030.00

50.00

100.00

150.00

200.00

250.00

DSO

Year

Days

Figure 5: Days Sales Outstanding Trend

The trend analysis shows that during the period 2008 Square Textiles had the worst DSO of

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202.06. in 2009, it improved a bit. But DSO is still too high. This may be due to the fact that

most of Square Textiles’ dales are export sales which naturally take longer to be collected.

Fixed Asset Turnover

This ratio refers to how much sales or revenue is generated by employing the fixed assets of

the company.

Fixed Assets Turnover= SalesNet Fixed Assets

Table: Fixed Asset Turnover of Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009

Fixed Asset Turnover 1.70 1.29 1.62 1.54 2.00 2.08 1.73 4.63

Square Textiles had Fixed Asset Turnover Ratio of 1. 70, which means their Taka 1 of fixed

asset can generate taka 1.70 of sales whereas, Apex Spinning & Knitting Mills Ltd. has Fixed

Asset turnover of 4.63. So, in this regard, Square Textiles is in a much worse position. But a

further inquiry shows that ASKML is very low on fixed assets, which is an indication of off-

balance sheet financing. On the other hand, Square Textiles did not go for leasing option.

2009 2008 2007 2006 2005 2004 20030.00

0.50

1.00

1.50

2.00

2.50

Fixed Asset Turnover

Year

Ratio

Figure 6: Fixed Asset Turnover Trend

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The trend analysis shows that Square Textiles’ Fixed Asset Turnover deteriorated for during

2007 and 2008. But in 2009 it got a little better.

Total Asset Turnover

Like the fixed asset, this ratio refers to how much sales or revenue is generated by

employing the fixed assets of the company.

Total Assets Turnover= SalesTotal Assets

Table: Total Asset Turnover of Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Total Asset Turnover 0.70 0.53 0.73 0.84 0.92 0.97 0.84 1.93

Square Textiles had Total Asset Turnover Ratio of 0.70, which means their Taka 1 of total

asset can generate taka 0.70 of sales whereas, Apex Spinning & Knitting Mills Ltd. has Total

Asset turnover of 1.93. This is once again due to the fact that ASKML has opted for off-

balance sheet financing

2009 2008 2007 2006 2005 2004 20030.00

0.20

0.40

0.60

0.80

1.00

1.20

Total Asset Turnover

Year

Ratio

Figure 7: Total Asset Turnover Trend

The total asset turnover of Square Textiles was increasing during the period 2003-2004 but

then it started to drop and reached a lowest in 2008. It stands at 0.70 in 2009, which shows

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a turning point in turnover trend.

Overall Comment on Asset Management

Square Textiles is in a worse position than Apex Spinning & Knitting Mills Ltd. in all the Asset

Management Ratio, except for DSO. Though high DSO is explainable, but the other ratios are

not impressive at all.

It seems that the company is not managing its assets very well though there is an indication

that the company is getting better in asset management.

2.3.3 Debt Management Ratio

Debt Management Ratios judge the debt management performance of a company. If a

company goes for too much debt for financing its operations, it might end up in a very hard

financial situation.

Debt Ratio

The Debt Ratio measures the percent of total funds provided by creditors. Debt includes

both current liabilities and long-term debt.

Debt Ratio= Total DebtTotal Assets

Table: Debt Ratio for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Debt Ratio 43.37% 48.95% 39.70% 40.69% 38.26% 46.82% 50.67% 53.07%

Square Textiles Ltd. has a much lower debt ratio than Apex Spinning & Knitting Mills Ltd. Last

year the debt ratio of Square Textiles Ltd. was 43.37% which is lower than the industry

recommended average of 50%. It looks like the company prefers capital financing to debt

financing.

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2009 2008 2007 2006 2005 2004 20030.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Debt Ratio

Year

%

Figure 8: Debt Ratio trend

The trend analysis shows that Square Textiles Bangladesh had a high debt ratio at the end of

the year 2003. But after that the debt ratio has started to go down dramatically. This is

actually a very good sign for the company. The company is managing debt in very efficient

way.

Times Interest Earned

Table: Times Interest Earned for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009TIE 3.56 3.53 4.88 6.22 6.85 4.26 2.46 2.06

Last year Square Textiles Ltd. had Times Interest Earning of 3.56. It means that Square

Textiles Ltd. has got Taka 3.56 to pay interest of Taka 1 whereas Apex Spinning & Knitting

Mills Ltd. had TIE of 2.06. In this respect Square Textiles Ltd. was in a better position.

18 | P a g e

2009 2008 2007 2006 2005 2004 20030.001.002.003.004.005.006.007.008.00

TIE

Year

Tim

es

Figure 9: Times Interest Earned Trend

Square Textiles have maintained a pretty good TIE for the last 7 years. From the trend, it is

seen that TIE declined between 2005 and 2008. But last year it improved a bit.

Overall comment on Debt Management

Debt Ratio of Square Textiles Ltd. is much lower than Apex Spinning & Knitting Mills Ltd. It is

less than the benchmark of 50%. This indicates that Square Textiles Ltd. is not a highly

levered firm.

Square Textiles Ltd. had much lower debt ratio last year. Higher profitability might be the

reason for what Square Textiles Ltd. did not take more loans.

Last year Square Textiles Ltd. had much high TIE, which can also be justified by high profit of

the last year.

Square Textiles’ overall debt management performance is very impressive which is very

good news for the company.

2.3.4 Profitability Ratio

Profitability is the company's ability to generate revenues in excess of the costs incurred in

producing those revenues. Profitability Ration is the measure of performance showing how

much the firm is earning compared to its sales, assets or equity.

19 | P a g e

Profit Margin on Sales

Table: Profit Margin on Sales for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009Profit Margin 6.71% 7.75%

13.87% 13.31% 10.69% 8.08% 7.98% 0.87%

Last year, Square Textiles had profit margin of 6.71%. It means by utilizing Taka 100 of sales,

it can have net income of Taka 6.71. The profit margin of Square Textiles is much better

compared to Apex Spinning & Knitting Mills.

2009 2008 2007 2006 2005 2004 20030.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%16.00%

Profit Margin

Year

%

Figure 10: Profit Margin on Sales Trend

The trend analysis shows that Square Textiles profit margin had been increasing till 2007. But

for the last 2 years, we see a declining trend. Though sales has increased in last few years,

the profit margin has gone down due to decline in price of finished goods and also due to

increase in raw material price

Return on Asset

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Table: Return on Assets for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009ROA 4.73% 4.07% 10.12% 11.18% 9.88% 7.83% 6.71% 1.68%

Last year, it had Return on Asset of 4.73%. It means by utilizing Taka 100 of asset, it can have

net income of Taka 4.73. ROA of Square Textiles also was much better than Apex Spinning &

Knitting Mills.

2009 2008 2007 2006 2005 2004 20030.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

ROA

Year

%

Figure 11: Return on Assets Trend

ROA dropped drastically during 2008. In 2009, it regained a little. This is also due to

decreased profitability caused by price increase of raw materials and price cut for finished

goods

Return on Equity

Table: Return on Equity for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009ROE 8.36% 7.98% 17.44% 19.70% 16.88% 14.72% 13.61% 3.49%

21 | P a g e

Last year, it had Return on Equity of 8.36%. It means by utilizing Taka 100 of total equity

available to common shareholders, it can have net income of Taka 8.36. ROE of Square

Textiles was better than Apex Spinning & Knitting Mills’ ROE of 3.49%.

2009 2008 2007 2006 2005 2004 20030.00%

5.00%

10.00%

15.00%

20.00%

25.00%

ROE

Year

%

Figure 12: Return on Equity trend

The ROE trend is quite similar to ROA.

Overall comment on profitability

Square Textiles has been a profitable company almost since its establishment and during the

past few years the Profit Margin ratio has improved a lot. But in last couple of years,

profitability has gone down to changing economy. But still the firm has considerable offset

compared to its competitor.

2.3.5 Market Value Ratio

Market value is the most critical ratio while making any kind of investment decision about

the company.

Price / Earning Ratio

Table: Return on Equity for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009P/E Ratio 30.23 24.90 14.25 8.54 12.61 27.44 10.12 48.02

22 | P a g e

P/E Ratio of Square Textiles Ltd. in the last year was higher than that of Apex Spinning &

Knitting Mills Ltd.

2009 2008 2007 2006 2005 2004 20030.005.00

10.0015.0020.0025.0030.0035.00

P/E

Year

Ratio

Figure 13: Price / Earning Ratio Trend

P/E Ratio of Square Textiles Ltd. climbed up in the last year from 2008. The company has

maintained a healthy P/E ratio for the last 7 years.

Market Value / Book Value Ratio

Table: Market / Book Value for Square Textiles Ltd. & Apex Spinning & Knitting Mills Ltd.

Company Square Textiles Ltd. ASKMLYear 2009 2008 2007 2006 2005 2004 2003 2009M/B Ratio 2.52 2.34 2.49 1.46 1.65 2.84 0.97 1.67

M/B Ratio of Square Textiles Ltd. is higher than that of Apex Spinning & Knitting Mills Ltd.

23 | P a g e

2009 2008 2007 2006 2005 2004 20030.00

0.50

1.00

1.50

2.00

2.50

3.00

M/B

Year

Ratio

Figure 14: Market Value Book Value Trend

M/B trend shows that for Square Textiles Ltd. it was steady for last 3 years after some ups

and downs in the earlier years.

Overall comment on Market Value

Square Textiles’ P/E ratio of last 7 years suggest that shareholders are willing to spend a

much higher price for the company’s shares compared to the earnings. This indicates trust

on the company. All the previous ratios also suggest that the company is doing quite well for

last several years. The company’s performance has gained trust among the share market

investors and as a result the share price is quite high compared to book value which is also

reflected in M/B ratio.

24 | P a g e

Chapter 3

Stock Price Movement

In this section of the report, we try to relate stock price movement with different

events/corporate decisions like AGM, account closing, dividend declaration, M&A etc. by

doing a simple regression of share price against a dummy variable populated indicating the

event. The value of the dummy variable is taken as 0 for all dates before the event and 1 for

all dates after the event. Regression was done with a 95% confidence interval.

3.1 Account Closing

Year R2 F Significance F Co-efficient P-Value of Co-efficient

2008 0.78464 134.805 6.73182E-14 13.3031746 6.73182E-14

2009 0.207308 10.46094 0.002447 -4.07143 0.002447

2010 0.006267 0.239632 0.627286 0.3 0.627286

There is significant statistical evidence that the share price was positively correlated with

account closing in 2008. And we also see a significant negative correlation in 2009. But there

is no statistical evidence that the share price was correlated to account closing in 2010.

3.2 Dividend Declaration

Year Dividend Paid R2 F Significance F Co-efficient P-Value of

Co-efficient

2008 25% Cash20% Bonus

0.1537 5.993255 0.019845 4.672222 0.019845


0.300204 17.58851 0.000143 -3.59545 0.000143


0.565958 53.46095 6E-09 -10.7548 6E-09

We see significant positive correlation between dividend declaration and share price in

2008. In later years the correlation is more significant and there is an increase in R 2 which

indicates the correlation becoming higher. If we observe the dividend payout for these

years, we find that the company has declared lesser and lesser dividends in the later years

and the relation is significantly negative. This suggests that the stockholders definitely did

25 | P a g e

not like the decrease in dividend payout.

3.3 Record Date


2008 0.298928 16.62913 0.000217 -8.16857 0.000217

2009 0.965318 1196.835 5.04E-33 -15.7315 5.04E-33

2010 0.886335 304.1134 5.17E-20 -13.826 5.17E-20

The regression results indicate significant negative relation between record date and share

price. Decrease in share price after record date is mainly due to that fact that shareholders

who likes to get dividends holds the share until record date and sells them afterwards.

3.4 Annual General Meeting


2008 0.158764 7.549105 0.00896 -5.84909 0.00896

2009 0.131547 6.36187 0.015537 -3.83354 0.015537

2010 0.581957 55.68386 4.3E-09 9.795 4.3E-09

The regression results indicate significant relation between AGM and share price. However

the relation was negative in 2008 and 2009 while we find a significant positive correlation in

year 2010. The change in sign of correlation cannot be explained with available data.

3.5 M&A Activities

Apart from the regular annual events, we were interested to observe the effect on share

price caused by 2 very big decisions made by Square Textiles in recent years: merger with

Square Spinning Ltd. and acquisition of Mithapur Textiles Ltd.

Decision R2 F Significance F Co-efficient P-Value of Co-efficient

Merger with Square Spinning Ltd.

0.392191 23.22916 2.6E-05 -3.91818 2.6E-05

Acquisition of Mithapur Textiles Ltd.

0.000123 0.004814 0.945042 -0.0599 0.945042

The Regression analysis shows that the stockholders did not like the merger between Square

Textiles and Square Spinning Ltd. On the other hand, they were indifferent about the

26 | P a g e

takeover of Mithapur Textiles.

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Chapter 4

Prospective Analysis

4.1 Different Growth Rates

It is important to identify a practicable growth rate of a firm to be able to forecast its share

price in future. Different growth scenarios create different effect on share price. In this study

we first consider the following growth scenarios to observe the effect:

Scenario 1: Growth at Sustainable Growth Rate

Scenario 2: Growth as per Gordon Model

Scenario 3: Growth at GDP Growth Rate

Scenario 4: Optimistic Growth Rate

Scenario 5: Pessimistic Growth Rate

4.2 Scenario 1: Growth at Sustainable Growth Rate

Sustainable Growth Rate, gs = p× (1−d )×(1+D

E)

T−p× (1−d )×(1+DE

)

Where,

p = Profit Margin on Salesd = Dividend Payout RatioD/E = Debt Equity RatioT =Ratio of total assets to sales

In our case, gs = 1.36%

Table: 3 yrs Forecast at g = gs 2009 2010 2011 2012Sales 3,882,244,010 3,935,002,593 3,988,478,150 4,042,680,424Net Income 260,634,002 264,175,943 267,766,019 271,404,882Dividend 218,810,564 221,784,137 224,798,120 227,853,062Addition to Retained Earnings 41,823,438 42,391,806 42,967,899 43,551,820Total Assets 5,508,282,316 5,583,138,293 5,659,011,542 5,735,915,886Total Debt 2,388,878,289 2,421,342,460 2,454,247,810 2,487,600,334Common Stock 705,840,530 705,840,530 705,840,530 705,840,530

28 | P a g e

Retained Earnings 2,413,563,497 2,455,955,303 2,498,923,202 2,542,475,022Total Financing 5,508,282,316 5,583,138,293 5,659,011,542 5,735,915,886External Funds Needed 0 0 0 0Debt: Equity Ratio 0.77 0.77 0.77 0.77Sustainable Growth Rate 1.36% 1.36% 1.36% 1.36%EPS 3.69 3.74 3.79 3.85Price (P/E = 30.227) 111.61 113.13 114.67 116.23

4.3 Scenario 2: Growth as per Gordon Model

According to Gordon Model, g=Retention Rate × ROEIn our case, Retention Rate = 16%

ROE = 8.36%

So, Growth Rate, g = 1.34%

Table: 3 yrs Forecast at g = 1.34%

2009 2010 2011 2012Sales 3,882,244,010 3,934,149,612 3,986,749,193 4,040,052,029Net Income 260,634,002 264,118,679 267,649,945 271,228,425Dividend 218,810,564 221,736,062 224,700,673 227,704,921Addition to Retained Earnings 41,823,438 42,382,617 42,949,273 43,523,504Total Assets 5,508,282,316 5,581,928,051 5,656,558,429 5,732,186,615Total Debt 2,388,878,289 2,420,817,592 2,453,183,923 2,485,982,992Common Stock 705,840,530 705,840,530 705,840,530 705,840,530Retained Earnings 2,413,563,497 2,455,946,114 2,498,895,387 2,542,418,891Total Financing 5,508,282,316 5,582,604,236 5,657,919,840 5,734,242,413External Funds Needed 0 -583,858 -1,175,539 -1,775,149Debt: Equity Ratio 0.77 0.77 0.77 0.76Sustainable Growth Rate 1.36% 1.36% 1.36% 1.36%EPS 3.69 3.74 3.79 3.84Price (P/E = 30.227) 111.61 113.11 114.63 116.16

4.4 Scenario 3: Growth at GDP growth rate

GDP growth rate = 5.8%

Table: 3 yrs Forecast at g = 5.8%

2009 2010 2011 2012Sales 3,882,244,010 4,107,414,163 4,345,644,184 4,597,691,547Net Income 260,634,002 275,750,774 291,744,319 308,665,490Dividend 218,810,564 231,501,577 244,928,668 259,134,531Addition to Retained Earnings 41,823,438 44,249,197 46,815,651 49,530,958Total Assets 5,508,282,316 5,827,762,690 6,165,772,926 6,523,387,756Total Debt 2,388,878,289 2,527,433,230 2,674,024,357 2,829,117,770

29 | P a g e

Common Stock 705,840,530 705,840,530 705,840,530 705,840,530Retained Earnings 2,413,563,497 2,457,812,694 2,504,628,345 2,554,159,303Total Financing 5,508,282,316 5,691,086,454 5,884,493,232 6,089,117,603External Funds Needed 0 136,676,236 281,279,695 434,270,153Debt: Equity Ratio 0.77 0.84 0.92 1.00Sustainable Growth Rate 1.36% 1.42% 1.48% 1.54%EPS 3.69 3.91 4.13 4.37Price (P/E = 30.227) 111.61 118.09 124.94 132.18

4.5 Scenario 4: Optimistic

We assume an optimistic growth rate of 20%

Table: 3 yrs Forecast at g = 20%

2009 2010 2011 2012Sales 3,882,244,010 4,658,692,812 5,590,431,374 6,708,517,649Net Income 260,634,002 312,760,802 375,312,963 450,375,555Dividend 218,810,564 262,572,677 315,087,213 378,104,655Addition to Retained Earnings 41,823,438 50,188,125 60,225,750 72,270,900Total Assets 5,508,282,316 6,609,938,779 7,931,926,535 9,518,311,842Total Debt 2,388,878,289 2,866,653,947 3,439,984,736 4,127,981,683Common Stock 705,840,530 705,840,530 705,840,530 705,840,530Retained Earnings 2,413,563,497 2,463,751,622 2,523,977,373 2,596,248,273Total Financing 5,508,282,316 6,036,246,099 6,669,802,639 7,430,070,486External Funds Needed 0 573,692,680 1,262,123,896 2,088,241,356Debt: Equity Ratio 0.77 1.09 1.46 1.88Sustainable Growth Rate 1.36% 1.61% 1.89% 2.23%EPS 3.69 4.43 5.32 6.38Price (P/E = 30.227) 111.61 133.94 160.72 192.87

4.6 Scenario 5: Pessimistic

We assume a pessimistic growth rate of -10%

Table: 3 yrs Forecast at g = -10%

2009 2010 2011 2012Sales 3,882,244,010 3,494,019,609 3,144,617,648 2,830,155,883Net Income 260,634,002 234,570,602 211,113,542 190,002,187Dividend 218,810,564 196,929,508 177,236,557 159,512,901Addition to Retained Earnings 41,823,438 37,641,094 33,876,985 30,489,286Total Assets 5,508,282,316 4,957,454,084 4,461,708,676 4,015,537,808Total Debt 2,388,878,289 2,149,990,460 1,934,991,414 1,741,492,273Common Stock 705,840,530 705,840,530 705,840,530 705,840,530Retained Earnings 2,413,563,497 2,451,204,591 2,485,081,575 2,515,570,862Total Financing 5,508,282,316 5,307,035,581 5,125,913,520 4,962,903,664External Funds Needed 0 -349,581,497 -664,204,844 -947,365,856Debt: Equity Ratio 0.77 0.57 0.40 0.25Sustainable Growth Rate 1.36% 1.21% 1.07% 0.96%EPS 3.69 3.32 2.99 2.69

30 | P a g e

Price (P/E = 30.227) 111.61 100.45 90.41 81.37

4.7 Choice of Growth Rate

In the earlier scenarios, we see that high growth rate is not sustainable and it requires a very

high D/E ratio which is not desired. In the trend analysis section, we found that the firm

maintains a Debt Ratio below 50%. Considering this capital structure policy, it is very less

likely that the company will go for debt financing to achieve high growth rates.

We also found out that the sustainable growth rate is also quite similar to the growth rate

found from Gordon Model. So, it seems that the firm is actually looking to grow at

sustainable growth rate. So, we take the sustainable growth rate to predict future stock

price of the company.

4.8 The Plug Variable

As the company policy is to keep the debt ratio below a certain level, the company has been

changing the dividend payout ratio every year. So, dividend payout is the plug variable here.

4.9 Weighted Average Cost of Capital

From the financial reports, we find that the cost of debt is 15.8%

To find out the cost of equity, we take help of CAPM which says that

Cost of equity, Rj = Rf + (Rβ m – Rf)

Where,

Rf = Risk free return

=β company risk

Rm = Average market return

We consider risk free rate as 8% which is the average rate of return of bonds.

To calculate Rm and β, we took monthly closing DSE index and share price of Square Textiles.

From regression, β = 0.76

31 | P a g e

Rm = 50.43%

From these values, cost of equity Rj = 40.25%

The firm has a debt ratio = 43.37%

Weighted Average Cost of Capital = 29.65%

4.10 Share Price according to Gordon Model

According to Gordon Model, share price

P = D1/(k-g) = D0(1+g)/(k-g)

D0 = 3.1 k = 29.65% g = 1.36%

So, P = 12.42

We see that the stock of Square Textiles is highly overpriced. So, it is highly likely that the

share price will go down in future.

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Chapter 5

Findings and Conclusions

Square Textiles share price at the end of 2009 BDT 111.54 while its net asset value per share

is only BDT 44.19. So, we were interested to find out the reasons behind this difference and

also to predict future price movement. Following are the key findings in the study:

5.1.1 Financial Performance

Square Textiles is a profitable company

It is not utilizing its assets efficiently. ROA is very low.

The company is not highly levered

The company may have some hidden profit in terms of market value of their fixed

assets especially land and buildings

5.1.2 Stock Price Movement

Stock price of the company is highly affected by dividend declaration, record date, AGM

The stockholders did not like the decrease in dividend in recent years

There was a merger with Square Spinning which also did not please the shareholders

which resulted in a negative correlation with share price

5.1.3 Growth Prospect and Future Share Price

The company seems to maintain a debt equity ratio of below 1

If the firm continues with this policy, it has a very low growth opportunity

With current growth opportunity, the shares of this company is highly overpriced and

expected to fall in future

With the above observations, we come to a conclusion that the prevailing share price of the

firm is expected to be decreasing in future. However, we still need to explain why the share

price is so high with a high M/B ratio. This can be attributed to the brand value of ‘Square’

which has created a lot of trust among the investors. As a result, investors are ready to

invest in the share even with a low return and growth opportunity.

33 | P a g e

Appendix

A.1 Regression results

A.1.1 Account closing

Year 2008

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.885798821R Square 0.784639552Adjusted R Square 0.778818999Standard Error 3.567105062Observations 39

ANOVAdf SS MS F Significance F

Regression 1 1715.290867 1715.290867 134.8049916 6.73182E-14Residual 37 470.7968254 12.72423852Total 38 2186.087692

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 123.452381 0.778406141 158.5963605 5.06152E-54 121.8751803 125.0295816 121.8751803 125.0295816X Variable 1 13.3031746 1.145782816 11.61055518 6.73182E-14 10.98159812 15.62475109 10.98159812 15.62475109

Year 2009

SUMMARY OUTPUT



Regression 1 174.0535714 174.0535714 10.4609381 0.002447242Residual 40 665.5371429 16.63842857Total 41 839.5907143

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 115.8571429 0.890115792 130.1596309 3.47014E-54 114.0581518 117.656134 114.0581518 117.656134X Variable 1 -4.071428571 1.258813825 -3.234337352 0.002447242 -6.615586187 -1.527270955 -6.615586187 -1.527270955

34 | P a g e

Year 2010

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.079161735R Square 0.00626658Adjusted R Square -0.019884299Standard Error 1.937979143Observations 40



Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 119.195 0.43334531 275.0577823 2.64807E-64 118.3177383 120.0722617 118.3177383 120.0722617X Variable 1 0.3 0.612842815 0.489521934 0.627286287 -0.940635407 1.540635407 -0.940635407 1.540635407

A.1.2 Dividend Declaration

Year 2008

SUMMARY OUTPUT




Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 130.2277778 1.330094622 97.90865678 2.97752E-42 127.5216799 132.9338756 127.5216799 132.9338756X Variable 1 4.672222222 1.908499712 2.448112616 0.019845461 0.789350382 8.555094062 0.789350382 8.555094062

Year 2009

SUMMARY OUTPUT





35 | P a g e

Year 2010

SUMMARY OUTPUT




Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 119.55 1.027916609 116.3032088 2.75037E-53 117.4740803 121.6259197 117.4740803 121.6259197X Variable 1 -10.7547619 1.470897682 -7.311699539 6.0043E-09 -13.7253 -7.784223805 -13.7253 -7.784223805

A.1.3 Record Date

Year 2008

SUMMARY OUTPUT





Year 2009

SUMMARY OUTPUT





36 | P a g e

Year 2010

SUMMARY OUTPUT





A.1.4 AGM

Year 2008

SUMMARY OUTPUT





Year 2009

SUMMARY OUTPUT





37 | P a g e

Year 2010

SUMMARY OUTPUT




Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 102 0.905795419 112.6082092 1.12173E-51 100.1693192 103.8306808 100.1693192 103.8306808X Variable 1 9.795 1.312622267 7.462161999 4.29564E-09 7.142091466 12.44790853 7.142091466 12.44790853

A.1.5 M&A Activities

Merger with Square Spinning

SUMMARY OUTPUT





Acquisition of Mithapur Textiles

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.011108975R Square 0.000123409Adjusted R Square -0.025514452Standard Error 2.743636038Observations 41



Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 108.8043478 0.572087661 190.1882443 1.70733E-59 107.6471913 109.9615043 107.6471913 109.9615043X Variable 1 -0.059903382 0.86341235 -0.069379806 0.945041827 -1.806319687 1.686512923 -1.806319687 1.686512923

38 | P a g e

A.2 Weighted Average Cost of Capital

A.2.1 β Calculation

SUMMARY OUTPUT




Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.00112883 0.005051618 -0.223459041 0.823625186 -0.01114869 0.008891031 -0.01114869 0.008891031Rm-Rf 0.75919073 0.112550898 6.745310255 9.40568E-10 0.535946562 0.982434897 0.535946562 0.982434897

A.2.2 Average Market Return

Average weekly return = 0.97%

So, average annual return = 0.97*52 = 50.43%

A.2.2 Cost of Equity

Ri = .08 + 0.76 (.5043 - .08) = 40.25%

A.2.2 WACC

Cost of Debt = 15.8%

Debt Ratio = 43.37%

WACC = 0.4337 X 15.8 + (1-0.4337) X 40.25 = 29.65%

39 | P a g e

A.3 Financial Statements & Performance Data

Square Textiles Ltd.ASKML

2009 2008 2007 2006 2005 2004 2003Current Assets 3,224,729,710 3,437,049,714 1,909,672,000 1,417,780,000 1,391,410,000 1,357,092,000 1,284,065,000 481,192,792Current Liabilities 2,388,878,289 2,843,250,860 1,382,789,000 1,269,821,000 989,212,000 1,187,839,000 1,267,503,000 436,833,644Inventory 942,568,134 1,267,785,890 577,163,363 487,871,798 487,753,824 405,449,809 329,015,503 150,077,244COGS 3,348,870,289 2,589,019,736 1,958,696,404 2,041,065,393 1,847,818,461 2,083,702,523 1,737,055,759 1,434,176,589Accounts Receivable

1,683,329,048 1,689,670,282 819,360,445 821,199,524 756,736,173 834,989,837 840,066,283 235,362,912

Sales 3,882,244,010 3,052,235,640 2,541,543,000 2,620,966,000 2,390,979,000 2,459,201,000 2,102,670,000 1,586,094,474Fixed Assets 2,283,552,606 2,370,847,250 1,573,559,000 1,702,906,000 1,193,767,000 1,180,203,000 1,217,332,000 342,491,610Total Assets 5,508,282,316 5,807,896,964 3,483,231,000 3,120,686,000 2,585,177,000 2,537,295,000 2,501,397,000 823,684,402Total Debt 2,388,878,289 2,843,250,860 1,382,789,000 1,269,821,000 989,212,000 1,187,839,000 1,267,503,000 437,134,519EBIT 433,507,033 387,282,778 517,149,366 481,315,121 465,778,608 300,290,342 305,414,202 35,344,028Interest Expenses 121,730,159 109,701,045 106,026,180 77,350,086 67,966,406 70,530,935 124,160,747 17,176,247Net Income 260,634,002 236,529,908 352,447,136 348,833,453 255,494,330 198,689,678 167,893,727 13,814,819Common Equity 3,119,404,027 2,964,646,104 2,020,482,000 1,770,905,000 1,513,511,000 1,349,457,000 1,233,894,000 396,170,995Market Price 111.54 117.3 127.4 75.6 81.7 138.3 43.1 790EPS 3.69 4.71 8.94 8.85 6.48 5.04 4.26 16Book Value 44.19 50.04 51.23 51.65 49.66 48.7 44.53 472No. of shares 70,584,053 58,820,044 39,433,370 34,289,887 30,479,900 27,709,000 25,190,000 840,000Dividend payout 218,810,564 223,516,167 177,450,165 154,304,492 129,539,575 110,836,000 100,760,000Dividend per share 3.10 3.80 4.50 4.50 4.25 4.00 4.00

Source: Annual Reports

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Corporate Finance Case Study: Square Textiles

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