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Introduction
Term paper
Methodology.
Sources of information
Both primary and secondary sources of data are used to complete the study. They are1) Primary Data
2) Secondary Data
Primary Data
We have collected primary information through our calculation on Microsoft excel. We have
used different types of ratio formula to calculate the ratio and to measure stock we used stock
valuation formula.
Secondary Data
We have collected Secondary information by these ways
Limitation.
We have a very little knowledge about share. We cannot collect sufficient information about ACI
Ltd. We cannot find sufficient data from the annual report. And we also have time limitation for
the term paper.
Term paper
Ratio analysis
Introduction to ratio.
Ratio analysis is used to evaluate a firms current financial position and the direction of this
position is expected to take in the future. By determining the firms financial position, investors
form opinion about future condition of the firm and the safety of their investment. Managers use
the information provided by ratio analyses to plan the actions that will correct the firms
weaknesses and take advantage of its strengths.
Purpose of ratio analysis
To evaluate the management performance in three areas
1. Profitability
2. Efficiency.
3. Risk.
Importance of financial ratio
1. Compare to the other entities
2. Examine the firms performance.
Limitation of Financial ratios
1. For the firms with different divisions, it is difficult to identify ratios.
2. Industry leaders ratio should be standard.
3. Inflation may distort the balance sheet.
4. Seasonal factor may distort the financial statement.
5. Different accounting practice may distort the financial statement.
6. It is difficult to generalize about whether a particular ratio is good or bad.
7. Results may not be consistent. Some ratios are good some are bad.
Term paper
Liquidity ratio.
Liquidity ratio is a ratio analysis that provides quick, easy to use measures to liquidity by relating
the amount of cash and other current assets to the firms current obligations. It indicates a firm
capability to repay short term debt.
Current ratio: The current ratio is a widely used measure for evaluating a companys liquidity
and short term debt paying ability. The ratio is computed by,
Current assets
Current liabilities
Year
Ratio
2002-03
2003-04
2004-05
2005-06
2006-07
1.15
1.16
1.01
1.01
1
Here we can see that current ratio is lower. The current ratio indicates that company hasnt
enough capability to measure liquidity position.
Quick
ratio:
measure of
a company's liquidity and ability to meet its obligations. Quick ratio, often referred to as acid-test
ratio, is obtained by subtracting inventories from current assets and then dividing by current
Term paper
liabilities. Quick ratio is viewed as a sign of company's financial strength or weakness (higher
number means stronger, lower number means weaker).
Current assets - Inventory
Current liabilities
Year
Ratio
2002-03
2003-04
2004-05
2005-06
2006-07
0.50
0.55
0.55
0.58
0.65
Here we can see that quick ratio is higher. So this ratio measures higher the liquidity.
Accounts receivable turnover: The number of times in each accounting period that a firm
converts credit sales into cash. A high turnover indicates effective granting of credit and
Term paper
collection from customers by the firm's management. Accounts receivable turnover is calculated
by dividing the average amount of receivables into annual credit sales.
Sales
Accounts receivable
Year
Ratio
2002-03
2003-04
2004-05
2005-06
2006-07
13.90
9.88
9.45
8.57
5.47
Here we can see that accounts receivable turnover ratio is not higher. So this ratio measures
lower the liquidity.
Receive collection period: The amount of receivables turnover (net sales divided by average
receivables) divided by the average receivables to calculate how many times during the year that
Term paper
accounts receivable turns over. Average receivables are equal to the sum of beginning receivables
and ending receivables, divided by two. The number alone doesnt provide much information. It
must be compared to average receivable collection periods for other companies in the industry,
as well as past collection periods, to find out if collection times are increasing or decreasing.
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Accounts receivable turnover
Year
Ratio
2002-03
2003-04
2004-05
2005-06
2006-07
25.9
36.42
38.1
42
65.81
Here we can see that receive collection period ratio is higher. So this ratio measures lower the
liquidity.
Inventory turnover: The ratio of a company's annual sales to its inventory; or equivalently, the
fraction of a year that an average item remains in inventory. Low turnover is a sign of
inefficiency, since inventory usually has a rate of return of zero.
Term paper
Cost of goods sold
Inventory
Year
Ratio
2.02
2002-03
2003-04
2004-05
2005-06
2006-07
2.57
3.03
3.18
2.98
Here we can see that inventory turnover ratio is lower. So this ratio measures lower the
liquidity.
Inventory processing period: Inventory processing period is the average length of time require
to convert materials into finished goods and then to sell the goods. It is the amount of time the
product remains in inventory in various stage of completion. The inventory processing period,
this is the average age of the firms inventory.
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Term paper
365
Inventory turnover
Year
Ratio
181.14
2002-03
2003-04
2004-05
2005-06
2006-07
141.77
120.48
114.91
122.55
Here we can see that inventory processing period ratio is higher. So this ratio measures lower the
liquidity.
Payable turnover: A short-term liquidity measure used to quantify the rate at which a
company pays off its suppliers. Accounts payable turnover ratio is calculated by taking the total
purchases made from suppliers and dividing it by the average accounts payable amount during
the same period.
Term paper
Cost of goods sold
Accounts payable
Year
Ratio
75.48
2002-03
2003-04
2004-05
2005-06
2006-07
37.31
28.03
29.39
24.57
Here we can see that payable turnover ratio is lower. So this ratio measures higher the liquidity.
Payable payment period: The ratio can be compared to previous years. A long period shows
that it represents a source of free finance, or indicts the company is unable to pay quickly
because of liquidity problems. If the accounts payable payment period is too long, you should
note the company maybe loses out on worthwhile cash discounts, and the existing suppliers
won't continue supply. As known, when you're operating a company, that pay more quickly or
pay more slowly is a double-edged sword. You must control it cautiously.
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Term paper
365
Payable
turnover
Year
Ratio
4.84
2002-03
2003-04
2004-05
2005-06
2006-07
9.78
13.02
12.42
14.85
Here we can see that payable payment period ratio is higher. So this ratio measures higher the
liquidity.
Gross profit margin: What remains from sales after a company pays out the cost of goods sold.
To obtain gross profit margin, divide gross profit by sales. Gross profit margin is expressed as a
percentage.
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Term paper
Gross profit
sales
Year
Ratio
0.29
2002-03
2003-04
2004-05
2005-06
2006-07
0.29
0.31
0.33
0.34
Here we can see that gross profit margin ratio is higher. So this ratio measures better the profit
ability.
Operating profit margin: Operating profit for a certain period divided by revenues for that
period. Operating profit margin indicates how effective a company is at controlling the costs and
expenses associated with their normal business operations.
Operating profit
sales
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Term paper
Year
Ratio
0.07
2002-03
2003-04
2004-05
2005-06
2006-07
0.09
0.08
0
0.12
Here we can see that operating profit margin ratio is higher. So this ratio measures better the
profit ability.
Net profit margin: Net profit divided by net revenues, often expressed as a percentage. This
number is an indication of how effective a company is at cost control. The higher the net profit
margin is, the more effective the company is at converting revenue into actual profit. The net
profit margin is a good way of comparing companies in the same industry, since such companies
are generally subject to similar business conditions. However, the net profit margins are also a
good way to compare companies in different industries in order to gauge which industries are
relatively more profitable. Also called net margin.
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Term paper
Net profit
Sales
Year
Ratio
0.04
2002-03
2003-04
2004-05
2005-06
2006-07
0.03
0.04
-0.05
0.06
Here we can see that net profit margin ratio is higher. So this ratio measures better the profit
ability.
Return on assets (ROA): An indicator of how profitable a company is relative to its total
assets. ROA gives an idea as to how efficient management is at using its assets to generate
earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is
displayed as a percentage. Sometimes this is referred to as "return on investment".
Net income
Total assets
Year
Ratio
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Term paper
0.04
2002-03
2003-04
2004-05
2005-06
2006-07
0.04
0.04
-0.06
0.07
Here we can see that ROA ratio is higher. So this ratio measures better the profit ability.
Return on equity: A measure of how well a company used reinvested earnings to generate
additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but
before common stock dividends) divided by book value, expressed as a percentage. It is used as a
general indication of the company's efficiency; in other words, how much profit it is able to
generate given the resources provided by its stockholders. Investors usually look for companies
with returns on equity that are high and growing.
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Term paper
Net income
Total equity
Year
Ratio
0.14
2002-03
2003-04
2004-05
2005-06
2006-07
0.1
0.13
-0.18
0.25
Here we can see that ROE ratio is higher. So this ratio measures better the profit ability.
Effective ratio.
Total asset turnover: Net sales divided by average total net assets. The resulting number shows
how often assets turnover, which can indicate how effectively a company is managing all of its
assets. The number by itself isnt informative; it must be compared to other companies in the
industry, as well as to the companys historical data. If the asset turnover is high relative to other
companies in the industry, it may indicate that too few assets for potential sales are being used or
suggest that the company is using too many old and fully depreciated assets. A low asset turnover
can indicate that capital is tied up in too many assets relative to what is needed.
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Term paper
Sales
Total asset
Year
Ratio
1.11
2002-03
2003-04
2004-05
2005-06
2006-07
1.08
1.15
1.21
1.04
Here we can see that total asset turnover ratio is lower. So this ratio measures lower the
efficiency.
Fixed asset turnover: Measure of the productivity of a firm, it indicates the amount of sales
generated by each dollar spent on fixed assets, and the amount of fixed assets required to
generate a specific level of revenue. Changes in the ratio over time reflect whether or not the
firm is becoming more efficient in the use of its fixed assets.
Sales
Fixed asset
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Term paper
Year
Ratio
3.66
2002-03
2003-04
2004-05
2005-06
2006-07
2.47
2.72
3.03
3.05
Here we can see that fixed asset turnover ratio is higher. So this ratio measures higher the
efficiency.
Risk ratio.
Debt equity ratio: A measure of a company's financial leverage. Debt/equity ratio is equal to
long-term debt divided by common shareholders' equity. Typically the data from the prior fiscal
year is used in the calculation. Investing in a company with a higher debt/equity ratio may be
riskier, especially in times of rising interest rates, due to the additional interest that has to be paid
out for the debt.
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Term paper
Long term debt
Total equity
Year
Ratio
0.28
2002-03
2003-04
2004-05
2005-06
2006-07
0.41
0.29
0.21
0.26
Here we can see that debt equity ratio is higher. So this ratio measures higher the risk of the
firm.
Debt ratio: Debt capital divided by total assets. This will tell you how much the company relies
on debt to finance assets. When calculating this ratio, it is conventional to consider both current
and non-current debt and assets. In general, the lower the company's reliance on debt for asset
formation, the less risky the company is since excessive debt can lead to a very heavy interest
and principal repayment burden. However, when a company chooses to forgo debt and rely
largely on equity, they are also giving up the tax reduction effect of interest payments. Thus, a
company will have to consider both risk and tax issues when deciding on an optimal debt ratio.
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Term paper
Total debt
Total asset
Year
Ratio
0.69
2002-03
2003-04
2004-05
2005-06
2006-07
0.64
0.66
0.67
0.73
Here we can see that debt ratio is higher. So this ratio measures higher the risk of the firm.
Interest coverage ratio: A calculation of a company's ability to meet its interest payments on
outstanding debt. Interest coverage ratio is equal to earnings before interest and taxes for a time
period, often one year, divided by interest expenses for the same time period. The lower the
interest coverage ratio, the larger the debt burden is on the company. Also called interest
coverage.
Operating profit
Interest expenses
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Term paper
Year
Ratio
2.45
2002-03
2003-04
2004-05
2005-06
2006-07
2.6
3.13
0
4.82
Here we can see that interest coverage ratio is higher. So this ratio measures lower the risk of
the firm.
Net income
Sales
Total asset
Sales
Total asset
Equity
Year
Ratio
0.14
2002-03
2003-04
2004-05
2005-06
0.1
0.13
-0.18
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Term paper
2006-07
0.25
Growth Ratio
Growth ratio: This is the rate at which a company, economy, earnings, etc. is currently growing
at or expected to grow at.
Relation rate Return on equity
Year
Ratio
0.09
2002-03
2003-04
2004-05
2005-06
0.16
0.23
-0.4
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Term paper
2006-07
0.44
Here we can see that growth ratio is higher. So this ratio measures higher the performance of
the company.
Cost of money.
Concept of cost of money:
Factors that affect the cost of money: four fundamental factors affect the cost of money.
(1) Production opportunity: the returns available within an economy from investment
in productive (cast generating) assets.
(2) Time preferences for consumption: The preferences of consumers for current
consumption as opposed to saving for future consumption.
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Term paper
(3) Risk: In a financial market context, the chance that a financial asset will not earn the
return promised. The higher the perceived risk, the higher the required rate of return.
(4) Inflation: The tendency of prices to increase over time. The higher the expected rate
of inflation, the greater the required return.
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Term paper
II.
Liquidity risk premium: Liquidity risk is the risk that a security cannot be sold
at a predictable price with low transaction cost on short notice. The liquidity
risk premium charged for liquidity risk or premium added to the rate on a
security if the security cannot be converted to cash on short notice and at close
to the original cost. The more easily an asset can be converted to cash at a price
that recovers the initial amount invested, the more liquid it is considered.
Financial assets generally are more liquid than real assets, and short term
financial assets generally are more liquid than long term financial assets.
III.
Maturity risk premium: A premium that reflects interest rate risk, bonds with
longer maturities have greater interest rate risk. Everything else being equal,
maturity risk premium raise interest rates on long term bonds relative to those
on short term bonds.
Stock Valuation
In this section, we try to show the way of stock valuation and try to find out the intrinsic value of
stock. For this reason, we need to consider some factors which are given below. Here we can
show the calculation of the stock valuation from 2003 to 2007
Dividend: Cash distribution made to stockholders from the firms earnings, whether the earnings
were generated in the current period or previous period.
Year 2003
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Term paper
Proposed dividend: 64680000
Issued shear: 16170000
Dividend=
Proposed Dividene
Issued shear
64680000
16170000
= 4.00
Year 2004
Proposed dividend: 68722500
Issued shear: 16170000
Dividend=
Proposed Dividene
Issued shear
68722500
16170000
= 4.25
Year 2005
Proposed dividend: 72765000
Issued shear: 16170000
Dividend=
Proposed Dividene
Issued shear
72765000
16170000
= 4.50
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Term paper
Year 2006
Proposed dividend: 97020000
Issued shear: 16170000
Proposed Dividene
Issued shear
Dividend=
97020000
16170000
=
= 6.00
Year 2007
Proposed dividend: 137445000
Issued shear: 16170000
Dividend=
=
Proposed Dividene
Issued shear
137445000
16170000
= 8.5
Here we can see that dividends per share Increased year after year because of number of the
share outstanding is same compare to the amount of providing dividends. In 2003, dividends per
share was 40.00, whereas in 2004 was 42.5, in 2005 it was increased to 4.50 After that time
period, dividends per share was increased gradually and it came to 60.00 and 85.0 in year 2006
and 2007 respectively.
Growth rate:
Current Year sells - Previous year sells
Previous year sells
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Term paper
Year 2003
0.00%
Year 2004
14.21%
Year 2005
20.76%
Year 2006
13.83%
Year 2007
39.86%
Average
g
g=
Growth rate
5
0.00 14.21 20.76 13.83 39.86
5
g = 17.732%
After calculating growth rate (g) of the stock we need to determine required rate of return(r) to
find out the intrinsic value of stock.
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Term paper
=13.85% (assumption)
We found Treasury bill rate and inflation rate from the Bangladesh Bank websites. Default risk
premium is determined 1.5% because there is a possibility that the company will not capable to
pay dividend periodically .we also consider 1% as the liquidity risk premium which indicate that
there is a possibility that the investment on stock can not converted into cash without lose at very
short notice. The maturity premium is considered as 2% which arises when the investment is
made for a longer time period
vb=
=
8.5(1 .17732)
0.1385 - 0.17732
=257.786
Here, we find the intrinsic value of the stock 257.786 which indicates the actual market price of
the stock today. We find that intrinsic value based on estimation of stock expected dividends
stream and the risky ness of the stream.
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Term paper
From the ratio analysis we find that the liquidity position in terms of current ratio was not good
because there is a large amount of inventory in current asset. We also know that more inventories
at hand are not good. To measure the liquidity position quick ratio is more important then current
ratio. In case of asset management ratio, the firm financial position is good in terms of inventory
turnover ratio, average collection period, fixed asset turnover ratio. We also see that the firms
financial position has less riskier because the firm debt ratio is very insignificant as well as long
term debt portion is decreasing every year and it come to insignificant amount. The firms
profitability position is satisfying in terms of gross profit margin, operating profit margin, net
profit margin, return on total assets because all of these ratio is increasing, but in case of return
on equity the firms profitability position is good because it is increasing every year, although
earning per share is increasing from this period of time.
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