AN ASSAIGNMENT ON FINANCIAL RATIO ANALYSIS OF M.I. CEMENT FACTORY LIMITED

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Financial analysis is the selection, evaluation, and interpretation of financial data, along with other pertinent information, to assist in investment and financial decision-making.
In our study we will try to measure the risk and profitability of M.I. Cement Factory Limited by the financial ratio analysis.
M.I. cement factory was introduced on 11 December, 1994 under the Companies Act 1994 as a public Limited company. The plant, equipped with world famous O’Sepa Separator, initially went into operation with the daily production capacity of 600 metric tons in the year 2000 and marketed its product with the brand name Crown cement. From the very beginning, it has maintained an uncompromising policy of producing high quality cement. As a result, it has gained huge popularity in the market. Due to increase of demand, the company has set up its second unit with the production capacity of 800 metric tons per day in 2002 and third unit with capacity of 1400 tons per day in 2007.
Gradually with the increase of demand the management undertook further expansion program for 4th unit of the plant raising the total production capacity to 5800 metric tons per day. The 4th unit expansion would be completed within 2011.
In our study we have shown the statement of financial position, statement of comprehensive income, liquidity ratio, solvency ratio, profitability ratio and their analysis.  

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AN ASSAIGNMENT ON FINANCIAL RATIO ANALYSIS OF M.I. CEMENT FACTORY LIMITED

  1. 1. AN ASSAIGNMENT ON FINANCIAL RATIOANALYSIS OF M.I. CEMENT FACTORY LIMITED Prepared for Prepared by Group DOEL Khairuzzaman Mamun ID No :20113137 Contact no : 01761808592 Email : kpmmamun@gmail.com Md. Yeadul Islam Shaikh ID No :20113118Mohammed Sawkat Hossain. Contact no : 01727980638Lecturer, Faculty of Business Email : yeadul_ju@yahoo.com Studies, Shameema yesmin sume Jahangirnagar University, ID No :20113117 Savar,Dhaka. Contact no : 01918615964 Email : sumiju34@gmail.com Md.Razaul islam ID No :20113220 Contact no : 01670683420 Email : engr.minar@yahoo.com Submission Date: December 09,2011 Faculty of Business Studies, J.U.
  2. 2. December 09, 2011Mohammed Sawkat Hossain.Lecturer, Faculty of Business Studies,Jahangirnagar University,Savar,Dhaka.Subject: Submission of the assignment of the course Financial Accounting.Dear Md. SawkatHere is the assignment that you asked ask us to conduct on March 31, 2012 on aFinancial Ratio Analysis of M.I. Cement Factory Limited.In this assignment we have included all the required data you have asked us torepresent. Finally, we have attached the financial statements in the appendix.We will be pleased if you have any further query for this you can call us at yourconvenient time and place.Sincerely yours,Group DOEL
  3. 3. AcknowledgementFrom the core of our heart we would like to convey our earnest admiration, loyaltyand reverence to the almighty Allah, the most merciful, for keeping everything inorder and enabling us to complete this assignment successfully.First let us express our thanks to our research supervisor, Professor Dr. LaekSazzad Andallah. He gives us our first introduction to the world of FinancialRatio analysis. It would be impossible for us to finish this research without hisdirection and encouragement. It has been a pleasure to have worked with him. Hissupport, supervision and assistance will always be greatly appreciated.We also express our profound gratitude to all other teachers for their kind help andvaluable suggestion. We also thank Jahangirnagar University and genially thankthe office staff for their collaboration. We also wish to thank our friends,classmates and especially to Abul Monsur Shipu, student of Mathematics, J.U. andKhairun Naysa Ponny, student of MBBS, Gono University for their help andencouragement.We are greatful to the Faculty of Business Studies, Jahangirnagar University, forallowing us to work on Financial Ratio analysis of M.I. Cement FactoryLimited.Finally, we stretch out our heartiest love to our beloved mother, father, sister andbrother during the progress of the assignment for their direct and indirect co-operation without which this study would not be possible.Sincerely yoursGroup DOEL
  4. 4. Executive summaryFinancial analysis is the selection, evaluation, and interpretation of financial data,along with other pertinent information, to assist in investment and financialdecision-making.In our study we will try to measure the risk and profitability of M.I. CementFactory Limited by the financial ratio analysis.M.I. cement factory was introduced on 11 December, 1994 under the CompaniesAct 1994 as a public Limited company. The plant, equipped with world famousO’Sepa Separator, initially went into operation with the daily production capacityof 600 metric tons in the year 2000 and marketed its product with the brand nameCrown cement. From the very beginning, it has maintained an uncompromisingpolicy of producing high quality cement. As a result, it has gained huge popularityin the market. Due to increase of demand, the company has set up its second unitwith the production capacity of 800 metric tons per day in 2002 and third unit withcapacity of 1400 tons per day in 2007.Gradually with the increase of demand the management undertook furtherexpansion program for 4th unit of the plant raising the total production capacity to5800 metric tons per day. The 4th unit expansion would be completed within 2011.In our study we have shown the statement of financial position, statement ofcomprehensive income, liquidity ratio, solvency ratio, profitability ratio and theiranalysis.
  5. 5. Sequence of Contents FINANCIAL RATIO ANALYSISIntroductionFinancial Ratio ClassificationProblem StatementStatement of Financial Position ofM.I. Cement Factory LimitedStatement of Comprehensive Income ofM.I. Cement Factory LimitedRatios & AnalysisLiquidityProfitabilitySolvencyConclusionAppendix
  6. 6. IntroductionFinancial statement analysis (or financial analysis) the process of understanding the risk andprofitability of a firm (business, sub-business or project) through analysis of reported financialinformation, particularly annual and quarterly reports.Financial statement analysis consists of 1) reformulating reported financial statements, 2) analysis andadjustments of measurement errors, and 3) financial ratio analysis on the basis of reformulated andadjusted financial statements. The two first steps are often dropped in practice, meaning that financialratios are just calculated on the basis of the reported numbers, perhaps with some adjustments. Financialstatement analysis is the foundation for evaluating and pricing credit risk and for doing fundamentalcompany valuation.Financial ratio analysis should be based on regrouped and adjusted financial statements. Two types ofratio analysis are performed: 1) Analysis of risk and 2) Analysis of profitabilityAnalysis of risk typically aims at detecting the underlying credit risk of the firm. Risk analysis consistsof liquidity and solvency analysis. Liquidity analysis aims at analyzing whether the firm has enoughliquidity to meet its obligations when they should be paid. A usual technique to analyze illiquidity risk isto focus on ratios such as the current ratio and interest coverage. Cash flow analysis is also useful.Solvency analysis aims at analyzing whether the firm is financed so that it is able to recover from a lossesor a period of losses. A usual technique to analyze insolvency risk is to focus on ratios such as the equityin percentage of total capital and other ratios of capital structure. Based on the risk analysis the analyzedfirm could be rated, i.e. given a grade on the riskiness, a process called synthetic rating.Ratios of risk such as the current ratio, the interest coverage and the equity percentage have no theoreticalbenchmarks. It is therefore common to compare them with the industry average over time. If a firm has ahigher equity ratio than the industry, this is considered less risky than if it is above the average. Similarly,if the equity ratio increases over time, it is a good sign in relation to insolvency risk.Analysis of profitability refers to the analysis of return on capital, for example return on equity, ROE,defined as earnings divided by average equity. Return on equity, ROE, could be decomposed: ROE =RNOA + (RNOA - NFIR) * NFD/E, where RNOA is return on net operating assets, NFIR is the netfinancial interest rate, NFD is net financial debt and E is equity. In this way, the sources of ROE could beclarified.Ratio analysis expresses the relationship among selected items of financial statement data. A ratioexpresses the mathematical relationship between one quantity and another. A single ratio by itself is notvery meaningful, in the upcoming illustrations we will use: Intracompany Industry average Intercompany
  7. 7. Financial Ratio Classifications Liquidity Solvency Profitability Ratio Ratio Ratio Problem Statement: Here the statement of financial position and the statement of comprehensive income of M.I. Cement Factory Limited are given below. Now we have to find the financial ratios and analyze the ratios. In our study we try to answer two flowing questions. How much M.I. Cement Factory Limited is in worst conditions? How much M.I. Cement Factory Limited is profitable?
  8. 8. M.I. CEMENT FACTORY LIMITED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2011ASSETS NOTE 30.06.2011 30.06.2010 30.06.2009 30.06.2008 TAKA TAKA TAKA TAKANon-current Assets 2232034926 1147167252 814870265Property, Plant and Equipments 4 1118455992 1069098640 814682054Capital work in progress 5 1113578932 78068612 188211Investment in Associate 6 376367941 192128891 89421413CompaniesCurrent Assets 4752218577 943139748 617067443Inventories 7 587645695 352650104 187204468 196200000Trade Receivables 8 343047480 316068872 251502609Other Receivables 9 303651 4812864 3021163Total Receivables 343351131 320881736 254523772 327900000Advance, deposit & 10 273873313 48673917 51520966prepaymentsAdvance Income Tax 11 323817217 160755959 96295768Cash and bank balance 12 2867368280 60178033 27522469Total Assets 7004458502 2282435892 1521359121 1,607400000Equity and LiabilitiesShareholder’s Equity 5028493703 1335997883 740319869 552600000Share capital 13 1000000000 700000000 200000000Share Premium 2956560000 112794312Retained earnings 803370870 364500643 427525557Revaluation Reserve 268562833 271497240LiabilitiesNon-current liabilities 568853411 64659320 103745980Long term borrowing net off 14 513434222 15805067 70782117current maturityDeferred tax liability 15 55419189 48854253 32963863Current liabilities and provision 1407111388 881778689 677293272Trade payables 16 110537447 359115797 93882602Other payables 17 107980584 31037931 22500083Current portion of long term 18 26076000 12016000 89787675loanShort term loan 19 607876193 162452469 338140786Provision for tax liabilities 20 554641164 316356492 132982127Total liabilities 1975964799 946438009 781039252Total equity and liabilities 7004458502 2282435892 1521359121
  9. 9. M.I. CEMENT FACTORY LIMITED Statement of Comprehensive Income For the year ended 30 June 2011 Note 2010-2011 2009-2010 2008-2009 Taka Taka TakaNet sales 21 4022271063 3127352627 2290358000Cost of goods sold 22 3254014308 2425806260 1893229773Gross profit 768256755 701546367 397128228Other Operating Income 23 62781523 44173662 57804867Administrative expenses 24 68181658 47717350 14742902Selling And distribution expenses 25 152220573 127072672 39345115Operating profit 610636047 570930007 400845078Other non-operating Income 26 196619465 8925801 2663258Financial expenses 27 92430813 48483129 103137448Profit before WPPF & Income tax 714824699 531372679 300370888Worker’s Profit Participation Fund 34039271 - -Net profit before income tax 680785428 531372679 300370888Income tax expenses 28Current tax 238284672 183374365 89337114Deferred tax 6564936 15890390 23301969Net profit after tax for the year 435935820 332107924 187731805Earning per share 29 5.36 4.99 3.00
  10. 10. RATIOS & ANALYSIS:The most significant item in the cash flow under investing and financing itemswere purchase of fixed assets and short term loan received, respectively. Thisreflects M.I. cement factory Limited was focusing on expanding their business byincreasing their output.Evaluations:Liquidity:Ratio Formula 2011 2010 2009Current ratio CA/CL 3.38 1.07 0.91Acid test or quick ratio (CA-inventory)/CL 2.96 0.67 0.63Receivable turnover Sales/Average receivable 12.11 10.87 7.86Inventory turnover COGS/AVG Inventory 6.92 8.99 9.88Analysis: The current ratio of M.I. cement factory Limited has shown steadygrowth over the three-year period, from 0.91 (in 2009) to 3.38 (in 2011). Thisindicates that M.I. cement factory Limited now has more current assets to cover itscurrent liabilities. It can also be inferred that working capital of M.I. cementfactory Limited finally became positive in 2010, possibly allowing the company touse the amount in various long-term asset financing schemes. Again we see thatthe quick ratio of M.I. cement factory Limited has also shown steady growth overthe three-year period, from 0.63 (in 2009) to 2.96 (in 2011). This indicates thatnow the company’s immediate short-term liquidity is at good position.M.I. cement factory Limited has a receivables turnover of 10.28 over the 2009 –2011 periods, with 2011 being the highest. This means the company is able, onaverage, to quickly and efficiently collect its outstanding receivables 10.28 times ayear, which shows good liquidity position.The inventory turnover of M.I. cement factory Limited is gradually increased 6.92to 9.88 which show that the liquidity of the company’s inventory is at goodposition.Liquidity and activity wise, M.I. cement factory Limited is currently in a stable.
  11. 11. Profitability:Ratio Formula 2011 2010 2009Profit margin Income/sales 0.11 0.11 0.08Asset turnover Sales/AVG Asset 0.87 1.64 1.46Return on asset Income/AVG Asset 0.09 0.17 0.12Return on Common (Income-Dividend)/AVG Common 0.14 0.32 0.29Stockholders’ equity stockholders’ equityEPS Net Income/Number 5.36 4.99 3.00 of shareAnalysis: Like previous economic indicators, profit margin of M.I. cement factoryLimited has shown steady growth over the years, peaking at 0.11 in 2011 and2010. Profit margin was slightly lower in 2009 at 0.08. This indicates that the netincome by each taka of sales is at better position.Asset turnover has steadily increased from 1.46 in 2009 to 1.64 in 2010. Howeverin 2011 it has shown slightly lower figure that is 0.87, but it not bad. Thus, M.I.cement factory Limited is now more efficiently using its assets to generate sales,breaking even in 2010 and maintaining the one–to–one sales/asset activity rate.Return on assets is an overall of profitability. Here return on assets has increasedfrom 0.12 in 2009 to 0.17 in 2010, but in 2011 it shows the figure 0.09. Now M.I.cement factory Limited is at good position by the overall profitability. But we haveto increase our income to increase overall profitability.The company’s return on equity shows a similar trend, with ROE being highestfrom 2009 to 2011 at average of 25%. It should be noted that historically, the rateof return on total assets has been significantly lower than M.I. cement factory’srate of return on common share holders’ equity. When return on asset exceedsreturn on equity, a company is said to be trading in the equity. Trading on theequity refers to the practice of borrowing funds at fixed interest rates or issuingpreferred stock with constant dividend rates; preferably rates that are lower thanthe rate of return obtained on assets. If this can be done, the money obtained frombond holders (or preferred share holders) earns enough to pay the interest (orpreferred dividends) and to leave some margin for the common share holders,earning them extra revenue. Since M.I. cement factory’s ROE has always beenhigher than its ROA, it is unable to take advantage of trading in the equity. This
  12. 12. also explains why M.I. cement factory has not issued preferred shares, as it wouldprove unprofitable.Earnings per share has also increased over 2009-2011.An earnings was highest in2011 at 5.36.Overall, M.I. cement factory’s profitability position has strengthened over time.All indicators show positive growth, indicating that the company is pursuing theright strategy in term so fusing its assets to create revenue.Solvency:Ratio Formula 2011 2010 2009Debt to total assets ratio Total debt/Total asset 0.28 0.41 0.51Analysis: From 2009 to 2011, M.I. cement factory has gotten better at financing itstotal asset needs with fewer liabilities, as debt to asset ratio has slowly droppedover the 3 year period.Overall, except the cash debt coverage M.I. cement factory seems to be doing agood job of covering its financial obligations with its assets and revenue sources.Conclusion: Since M.I. Cement Factory Limited is currently in a stable in liquidityand activity wise, profitable, and able to cover its financial obligations with itsassets and revenue sources, therefore we can say that M.I. Cement Factory limitednow is at good position.Appendix: financial_state2011 Statement_of_Financial_Position_as_at_30_June_2010 Update company information

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