FIN635 Summer'12

ASSIGNMENTFinancial Analysis of Apollo Ispat, GPH Ispat & BSRM SteelBUS 503: FINANCIAL MANAGMENTSection: ASubmitted to:

Md. Sharif Hossain (Ph. D)Course Instructor BANGLADESH UNIVERSITY OF PROFESSIONALSubmitted by:

Md. Mostafizur Rahman

ID: 1406005 Md. Ahaduzzaman

ID: 1406031Hiran Barua Avi

ID: 1406047Md. Shahadat Hossain

ID: 1406067

Md. Mamun Ali Biswas

ID: 1406095

Master of Business Administration

Bangladesh University of Professional, DhakaTable of ContentPage Number

Ratio Analysis

1.1Liquidity ratio19

1.1.1Current ratio19

4.1.2Quick ratio21

1.2Asset management ratio22

1.2.1Inventory turover ratio22

1.2.2DSO23

1.2.3Fixed asster turnover ratio24

1.2.4Total asset turnover ratio25

1.3Debt management ratio25

1.3.1Debt ratio25

1.3.2TIE ratio26

1.4Profitability ratio27

1.4.1Profit margin on sales27

1.4.2ROA28

1.4.3ROE29

1.5Market value ratio30

1.5.1EPS30

1.5.2P/E ratio31

1.5.3M/B ratio32

1.6Overall comment on HCBL33

Findings and conclusion39

Reference40

Ratio Analysis1.1 Introduction

Ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. The level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment. To evaluate a firms financial condition and performance, the financial analyst usually performs analysis on various aspects to find out the financial health of the firm; among which ratio analysis is one of the most important and commonly used methods. In this study various ratio analyses will be done to understand the financial condition of the company and to compare this condition with its rival firm to get a clear picture. The financial ratios can be analyzed based on three criteria: Benchmark Analysis: A benchmark is a point of reference with which the financial ratios of the specific company can be compared. For example, the current ratio of 2:1 is considered to be ideal for a company and it is assumed to be the benchmark.

Time Series Analysis: It involves comparing a present ratio with past and expected future ratios for the company. For instance, the current ratio (the ratio of current assets to current liabilities) for the present year could be compared with the current ratio for the previous years. When financial ratios are arranged over a period of years, the analyst can study the composition of change and determine whether there has been an improvement or deterioration in the firms financial condition and performance over time.

Cross Section Analysis: The third method of comparison involves comparing the ratios of one with those of similar firms or with industry averages at the same point in time. Such a comparison gives insight into the relative financial condition and performance of the firm. It also helps us to identify any significant deviation from any applicable industry average. In this paper, ratios of Apollo Ispat Complex Limited, GPH Ispat Limited and BSRM Steels Limited are calculated and analyzed based on bench mark, time series and cross sectional analysis.

1.2 Liquidity RatioA liquid asset is one that can be easily converted to cash without significant loss of its original value. Liquidity or Short Term Solvency ratios are used to determine a company's ability to pay off its short-terms debts obligations. The higher the value of the ratios, the larger will be the margin of safety that the company possesses to cover short-term debts. It shows the relationship of a firms cash and other current assets to its current liabilities. Different types of liquidity ratios are discussed below.1.2.1 Current RatioCurrent Ratio is the ratio of current assets to current liabilities. The current ratio indicates the ability of a company to pay its current liabilities from current assets that shows the strength of the companys working capital position. Current ratio of 2:1 is considered to be a healthy condition for most business organization.Current Ratio = Current Assets / Current Liabilities

Fig 1.2.1: Current Ratios of Apollo Ispat, GPH Ispat & BSRM Current Ratio is a measurement of short term liquidity. The result shows how much current asset the organization is holding for every taka in current liabilities. According to Benchmark analysis the current ratio of 2:1 is considered to be ideal for a company. Considering three company, the current ratio of Apollo Ispat has above 2. This is good news, that they have huge liquidity to be engaged in any big project as per any uncertain demand. Moreover, Apollo Ispat is in good position compared to its rival company GPH Ispat and BSRM Steel.1.1.2 Quick RatioThe Quick ratio or acid-test measures a company's ability to meet its short-term obligations with its most liquid assets. Inventories typically are the least liquid of a firms current assets they are the assets on which require more time to be sold and losses are most likely to occur in the event of liquidation. Therefore, it is important to measure the firms ability to pay off short term obligations without having to rely on the sale of inventories. Quick ratio of 1:1 is considered to be a healthy condition for most businesses. It is calculated as follows.Quick Ratio= (Current Assets- Inventories)/ Current Liabilities

The benchmark as we know for this ratio is 1, the trend of quick ratio of Apollo Ispat shows that the ratio had been increasing. So we can conclude here that the position of Apollo Ispat is pretty good in terms of this quick ratio. On the other hand, the position of the comparing firm has not been that stable compared to the standard and also compared to that of Apollo Ispat.

Fig 1.2: Quick Ratios of Apollo Ispat, GPH Ispat & BSRM Steel

1.3 Asset Management Ratio

A set of ratios that measure how effectively a firm manages its assets compared to its sales. These ratios are designed to find out whether the total amount of each type of asset as reported on the balance sheet appear reasonable, too high, or too low considering current and projected sales levels. Asset Management Ratio is done based on inventory turnover ratio, days sales outstanding and fixed asset and total asset turnover ratio. 1.3.1 Inventory Turnover RatioInventory Turnover Ratio tells how often a business's inventory turns over during the course of the year. Inventories are the least liquid form of asset and a high inventory turnover ratio is generally positive. On the other hand, an unusually high ratio compared to the average for the industry could mean that the business is losing sales because of inadequate stock on hand. The ratio is calculated as follows:Inventory turnover ratio= Cost of goods sold /Inventories

Fig 1.3.1: Inventory turnover ratio of Ispat, GPH Ispat & BSRM Steel The trend line of inventory ratio shows that BSRM Steel is far ahead than others which makes the position stable for BSRM Steel.1.3.2 Days Sales OutstandingDSO is called the average collection period, is used to evaluate the firms ability to collect its credit sales in a timely manner. It is calculated by dividing accounts receivable by average sales per day which indicates the average length of time it takes the firm to collect its credit sales. DSO is calculated as follows:Daily Sales Outstanding (DSO)=Receivables/Average sales per day

=Receivables/ [Annual sales/360]

Fig 1.3.2: DSO ratio of Apollo Ispat, GPH Ispat & BSRM Steel It shows that in case of BSRM Steel Credit sales is very low compared to others.1.3.3 Fixed Asset Turnover RatioFixed assets turnover ratio measures how effectively the firm uses its plant and equipment to help generate sales. So, fixed Asset Turnover ratio measures the amount of sales generated for every dollar's worth of fixed assets. The fixed asset turnover ratio is calculated by dividing sale by total fixed assets. It is calculated as follows:Fixed Assets Turnover Ratio = Sales/ Net Fixed Assets

Fixed asset turnover ratio for Apollo Ispat in FY 2013 is 1.66 which is greater than the ratio of previous years. Apollo Ispat was successful in utilizing its revenue generating assets. But the existing fixed assets were successful in generating increased sales. On the other hand BSRM Steel has higher fixed than Apollo Ispat over the period but the sales is same. Apollo Ispat is in redundant fixed asset. In that sense Apollo Ispat is in quite stable position.

Fig 1.3.3: Fixed Assets Turnover Ratio of Apollo Ispat, GPH Ispat & BSRM Steel 1.3.4 Total Asset Turnover RatioTotal Asset Turnover ratio measures the amount of sales generated for every dollar's worth of total assets. The total asset turnover ratio is calculated by dividing sale by total assets. It is calculated as follows:Total Assets Turnover Ratio = Sales/ Total Assets

Fig 1.3.4: Total Assets Turnover Ratio of Apollo Ispat, GPH Ispat & BSRM Total Asset turnover of Ispat, & BSRM Steel remains stable during the period 2013-2014, but the trend of BSRM Steel goes down during the period. This is a good sign that BSRM Steel utilization of asset in generating sales increased. Moreover the decrease of the ratio is very marginal that indicates the company is maintaining their asset properly.1.4 Debt Management RatioDebt Management ratios help to evaluate a company's long-term solvency measuring the extent to which the company is using long-term debt. This ratio reflects how effectively a firm is managing its debts. 1.4.1 Debt RatioThe debt ratio indicates how much of a company's assets are provided through debt or the percentage of the firms assets financed by creditors. Total debt includes both current liabilities and long term liabilities. Creditors prefer low debt ratios, because the lower the ratio, the greater the cushion against creditors losses in the event of liquidation. The owners on the other hand can benefit from leverage because it magnifies earnings, and thus the return to stockholder. But, too much debt often leads to financial difficulty, which eventually might cause bankruptcy. It is calculated as follows:

Debt Ratio= Total Debt/ Total Assets

Fig 1.4.1: Debt Ratio of Apollo Ispat, GPH Ispat & BSRM Regarding the period 2013-2014 Debt ratio is remaining same for BSRM Steel. Declining debt ratio is good news for company because lower the debt ratio, the greater the cushion against creditors losses in the event of liquidation.

1.4.2 Times Interest Earned (TIE) Ratio

The TIE ratio measures the extent to which earnings before interest and taxes (EBIT), also called operating income, can decline before the firm is unable to meet its annual interest cost. Failure to meet this obligation can bring legal action by the firms creditor, possibly resulting in bankruptcy. The TIE ratio is computed by dividing earnings before interest and taxes (EBIT) by interest charges. It measures the ability of the firm to meet its annual interest payments. The TIE ratio is calculated as follows:Time interest earned ratio = EBIT/ Interest charges

Here the TIE ratio of BSRM Steel is higher as they are withdrawing all long term debt and paying less interest on debt which is a good strategy for the company.

Fig 1.4.2: TIE Ratio of Apollo Ispat, GPH Ispat & BSRM 1.5 Profitability Ratio

A group of ratios that show the combined effect of liquidity, asset management, and debt management on operating results .It is the net result of a number of policies and decisions. 1.5.1 Profit Margin on Sales:

Profit Margin is the ratio measures net income per dollar of sales and is calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales. It is calculated as follows:Profit margin on sales = Net Income/ SalesProfit margin on sales is more or stable over the time period of 2013 to 2014 for Apollo Ispat. Thats good news for Apollo Ispat indeed. On the other hand, the profit of others is fluctuating over the period.

Fig 1.5.1: Gross Profit margin on sales of Apollo Ispat, GPH Ispat & BSRM1.5.2 Return on Asset (ROA):

Return on Asset (ROA) is an indicator of a company which deals with profit relative to its total assets. It gives an idea as to how efficient management is at using its assets to generate earnings. It is 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". The ROA after interest and taxes are computed as follows:Return on Asset (ROA) = Net Income / Total Assets

ROA of Apollo Ispat is decreasing from 2013 to 2014. Due to the high investment in fixed asset, this ratio declined at that period which is not a bad news for the company.

Fig 1.5.2: Return on Asset of Apollo Ispat, GPH Ispat & BSRM1.5.3 Return on Equity (ROE):

Return on Equity (ROE) measures the rate of return on common stockholders equity. It measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested. The return on equity (ROE) is measured as follows:

Return on Equity (ROE) = Net income / Total Shareholders Equity

Fig 1.5.3: Return on Equity of Apollo Ispat, GPH Ispat & BSRMThe ROE of Apollo Ispat, & BSRM Steel is decreasing from the year 2013 to 2014. The decreasing trend of of Apollo Ispat, & BSRM Steel is responsible for the increase of equity. It indicates that the rate of return on the common stockholders investment is rising over the year which is a good indicator for the company in future.

1.6 Market Value RatiosMarket value ratio is a set of ratio that relates the firms stock price to its earnings and book value per share. These ratios give management an indication of what investors think of the companys past performance and future prospect. If the firms liquidity, asset management, debt management, and profitability ratios are all good then market value ratios will be high which will lead to an increase in the stock price of the company.1.6.1 Earnings per Share:

Earnings per Share (EPS) are the portion of a company's profit allocated to each outstanding share of common stock. It serves as an indicator of a company's profitability. It is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. It is calculated as follows:

EPS = Net Income/ Number of Shares OutstandingEPS of Apollo Ispat has been increasing at slightly rate over the years. This is not bad news because this will help to attract the investors and thus the company can collect more money from stock market.

Fig 1.6.1: Earnings per Share of of Apollo Ispat, GPH Ispat & BSRM Steel1.6.2 Price/Earning (P/E) Ratio

This is the ratio of the price per share to earnings per share. It shows how much investors are willing to pay per dollar of reported profit. It is calculated as follows:

P/E Ratio = Market Price per Share/ Earnings per Share

Considering the year 2014 the P/E ratio of Apollo Ispat is comparatively low with respect to other rival firm. This indicates the demand and trust for this share is increasing respect to the investors. The investors have paid 16.73 taka for earning 1 taka profit from the company.

Fig 1.6.2: Earnings per Share of Apollo Ispat, GPH Ispat & BSRM Steel 1.6.3 Market/Book (M/B) Ratio:

The ratio of a stocks market price to its book value gives another suggestion of how investors regard the company. Companies with relatively high rates of return on equity generally sell at higher multiples of book value than those with low returns. The formula for Market/Book Value is given below:Market /Book Ratio = Market Price per Share / Book Value per Share

The cross section analysis indicates that the market/book ratio of Apollo Ispat is lower with respect to other rival forms. Due to these, investors are not willing to pay more for the book value of Apollo Ispat which implies that trust of investors is not.

Fig 1.6.3: Market/Book ratio of Apollo Ispat, GPH Ispat & BSRM Steel4.7 Overall Comment on Ratio analysis From the liquidity analysis, Apollo Ispat, GPH Ispat & BSRM Steel are doing well. Apollo Ispat has a better liquidity according to the current ratio and quick ratio compared to other rival firm. Good quick ratio indicates the ability to meet its short-term obligations with its most liquid assets.

From the asset management ratio analysis, it is seen that BSRM Steel has huge inventories in its stock. From DSO, trend shows that over the years BSRM Steel is more conservative in credit sell than that of other firm. Both total asset turnover ratio and fixed asset turnover ratio is higher for BSRM Steel compared to other firm over the entire period due to effective and efficient asset management policy. From the debt ratio analysis, we found that Apollo Ispat has a lower debt ratio compared to other firm which is a good sign. Apollo Ispat has a higher TIE ratio compared to other. Since Apollo Ispat has incurred interest charges only for lease financing and bank overdraft, so its interest obligations are quite lower than its operating income which is a good news.

Profitability analysis shows that Apollo Ispat has an increasing profit margin on sales over the years. On the other hand, BSRM Steel & GPH Ispat shows a decreasing trend in profit margin on sales. Similarly, Apollo Ispat has a decreasing ROA & decreasing ROE over the years which might be controversial.

P/E ratio is volatile for both of the companies. But comparing to its rival firm, P/E ratio has improved for Apollo Ispat. The moderate P/E ratio of Apollo Ispat indicates that demand for this share as well as trust of the investors has increased for the company. The M/B ratio is also higher for booth BSRM Steel & GPH Ispat comparing Apollo Ispat All these performance analyses justify why the market price is higher than the book value of the company.4.8 Findings and Conclusion

After analyzing the financial data regarding the ratio analysis, strategy analysis, accounting analysis and prospective analysis we have some key findings and those are given below:

The company has the motivation to pay out the long term loan for which they will able to maintain better debt ratio and TIE ratio. To make the share holders happy the company also paid regular dividends. Again, the company has a tendency of increasing non-interest bearing short term liabilities every year to keep the cost of net working capital is low. From time series study of ratio analysis, we see that the company is showing improvement in every ratio. It was capable to improve its DSO ratio, inventory turnover ratio, asset turnover ratio, debt ratio, profit margin, TIE ratio, ROA, ROE etc. Also on those ratios position of Apollo Ispat is much better than the competitors.

In terms of market value ratios the company also showing improvement that indicates that the investors have trust on the company management. The investors are keeping trust on the company because they believe that it has a great potentiality of future growth because company utilizing its cash for further investment. References

1. Annual Report of Apollo ISPAT of 2013-20142. Annual Reports of GPH ISPA of 2013-20143. Annual Report of BSRM Steel of 2013-2014

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