Ratio Analysis of Square Textile Ltd which is a reputed textile company of Bangladesh. It's prepared on ACT 201 course

1. SQUARE TEXTILE LTD.
Head Quarter: Uttara, Dhaka
Factory in Bangladesh: Saradaganj, Kashimpur, Gazipur, Bangladesh.
Year of Establishment: 1994
Started production commercially: 1997
Type: Manufacturing and marketing Yarn.
Authorized Capital: 3000 million (tk)
Stock Exchange: Dhaka and Chittagong stock exchange.
INTRODUCTION:
Square textile is a subsidiary company of Square group establishing in 1997. The Company was
incorporated as a public limited company in the year of 1994 and started its operational journey
in 1997. The company was enlisted in Dhaka stock exchange and Chittagong stock exchange in
2002. Within a very short time of span the company achieved some significance success.
Company’s authorized capital is tk. 3000 million (According 2013), paid-up capital tk. 1344.20
million with 2,044 employees (as on December, 2013). Mr. Samson H. Chowdhury is the
chairmen of Square Textiles Limited. Other board of directors is Mr. Tapan Chowdhury, Mrs.
Anita Chowdhury, Dr. Kazi Harunar Rashid, Mr. Samuel H. Chowdhury, Mr. Anjan Chowdhury,
Mr. Charles C.R. Patra, Mrs. Ratna Patra, Mr. Kazi Iqbal Harun, and Mr. M. Sekandar Ali as in
Managing Director, Director and Independent Director. Company’s main objective is to strive

2. hard to optimize profit through conduction of transparent business operations within the legal
and social framework with malice to none and justice for all.
A) Liquidity ratio:
Liquidity ratio measures the ability of the firm to meet its obligations. These ratios establish
relation between cash and other current asset and current liabilities. Creditors to evaluate the
credit worthiness of the firm use these ratios. These ratios also provide revels management’s
policy in managing liquidity position of the firm. The Liquidity ratio can satisfy on the three
ratios, those are:
1. Current ratio
2. Quick ratio or acid test
3. Working Capital
1. Current Ratio:
This ratio indicates the ability of a company to achieve its short-term obligations, where short-
term obligations indicate those obligations that are due within a year or within the operating
cycle. Current ratios are extent to which the assets that are expected to cash cover the claims of
short-term creditors.
Current Ratio = Current Assets / Current Liabilities
Year 2009 2010 2011 2012 2013
Current ratio 1.36 1.43 1.57 2.11 2.25

3. Interpretation: The graph above illustrate the current ratio of Square Textile of the year
2009-2013. The ideal ratio for current ratio is 2:1. If we oversee the current ratio of 2009 it’s the
lowest among all, it indicates that the current asset and the current liability of that year was
almost same which is not good for any company. That happened maybe because they were
having high amount of short term borrowings and accounts payable. The company should
decrease these two things or increase their cash or assets. At 2013 the ratio was the highest that is
also a threat to a company. In 2013 they might have had a huge cost on inventory. They should
try to decrease their inventory in order to have ideal ratio. At the year 2011 the ratio 1.57 was
close enough to ideal ratio though it was not good.
2. Quick Ratio / Acid TestRatio:
An indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability
to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes
0
0.5
1
1.5
2
2.5
2009 2010 2011 2012 2013
Current ratio

4. inventories from current asset. The quick ratio measures the dollar amount of liquid assets
available for each dollar of current liabilities.
Quick ratio = (Current assets - Inventory) / Current Liabilities
Year 2009 2010 2011 2012 2013
Quick ratio 0.87 0.83 1.17 1.47 1.25
Interpretation: The graph above shows the Quick/ Acid test ratio of Square Textile of the
year 2009-2013. The ideal ratio tor acid test is 1:1. The year 2010 shows the lowest ratio which
is 0.83 the reason is, their inventory was high, almost 80% compared to the current assets. And
the highest was 1.47 in the year 2012 the amount of short term investment was high. Over all
company’s Quick/Acid test ratio was good.
3. Working capital:
A measure of both a company's efficiency and its short-term financial health. If a company's
current assets do not exceed its current liabilities, then it may run into trouble paying back
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
2009 2010 2011 2012 2013
Quick ratio

5. creditors in the short term. The working capital indicates whether a company has enough short
term assets to cover its short term debt. Also known as "Net Working capital".
Working capital= Current Assets – Current Liabilities = (Current assets - Inventory) / Current
Liabilities
Year 2009 2010 2011 2012 2013
Working
capital
1,001,202,210 1,688,610,906 2,336,279,197 2,866,345,640 2,951,036,939
Interpretation: The graph illustrate the Working Capital of Square Textile from the year
2009 to 2013. According to the graph the working capital of 2009 is the lowest and the highest
was in 2013. And the company’s Working capital increases gradually. The higher the higher the
working capital the better for the company.
0
500,000,000
1,000,000,000
1,500,000,000
2,000,000,000
2,500,000,000
3,000,000,000
3,500,000,000
2009 2010 2011 2012 2013
Working capital

6. B) Asset managementratio:
Asset management ratios are used to evaluate the competence, which the company manages and
utilizes on its asset. This ratio also calls the turnover ratios because they indicate the speed with
which the assets are transformed or turnover into sales. A proper balance between assets and
sales generally reflects on that the assets. The Asset management ratio can satisfy on the three
ratios, those are:
1. Inventory turnover
2. Total assets turnover
3. Fixed asset turnover
4. Average collection period
5. Average payment period
1. Inventory turnover:
A ratio showing how many times a company's inventory is sold and replaced over a
period. The days in the period can then be divided by the inventory turnover formula to
calculate the days it takes to sell the inventory on hand.
Inventory turnover = Sales / inventory
Year 2009 2010 2011 2012 2013
Inventory turnover 3.71 2.61 5.68 5.29 5.01

7. Interpretation: The graph shows Inventory turnover of Square Textile of the year 2009-
2013. In the year 2010 the turnover is the lowest which means that year inventory was low. It is
not good for a company because the lower the inventory the worse it is for a company. On the
other hand 2011 showed the highest inventory turnover, the reason is obvious that the company
had the high amount of inventory among the 5years. The higher the inventory turnover the better
for the company.
2. TotalAssets Turnover:
It shows how efficiently a company uses its assets to generate sales. The amount of sales or
revenues generated per dollar of assets. It also indicates the efficiency with which a company
deploys its assets.
Assets turnover = Sales / Total Assets
Year 2009 2010 2011 2012 2013
Total assets turnover 0.81 0.76 1.06 1.08 0.96
0
1
2
3
4
5
6
2009 2010 2011 2012 2013
Inventory turnover

8. Interpretation: The graph shows the Assets turnover of the company from 2009-2013. It
shows that in 2010 the turnover was the lowest, that year for each tk of asset the sale was 0.76
whereas in 2012 each tk of asset was sold by the amount of 1.08 tk which is definitely good for
the company because the higher the assets turnover the better for the company.
3. Fixed Assetturnover:
A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's
ability to generate net sales from fixed-asset investment. A higher fixed-asset turnover ratio
shows that the company has been more effective in using the investment in fixed assets to
generate revenues.
Fixed Asset Turnover= Sales / Fixed Assets
Year 2009 2010 2011 2012 2013
Fixed assets turnover 2.02 2.51 3.78 3.23 2.55
0
0.2
0.4
0.6
0.8
1
1.2
2009 2010 2011 2012 2013
Total assets turnover

9. Interpretation: The graph shows the Fixed Assets turnover of the company from 2009-2013.
It shows that in 2009 the turnover was 2.02 which was the lowest, that year for each tk of fixed
asset the company earned 2.02tk whereas in 2011 the company earned 3.78tk for each tk of fixed
asset and this is good for the company because the higher the fixed assets turnover the better for
the company.
4. Average CollectionPeriod:
This measures the approximate amount of time that it takes for a business to receive payments
owed, in terms of receivables, from its customers and clients. This shows how much account
receivables are collected on average in terms of days. It’s used to assess the effectiveness of a
company’s credit and collection policies.
Average Collection Period = Accounts Receivable / (Sales / 365)
Year 2009 2010 2011 2012 2013
Average collection period 157.38 167.26 129.46 110.94 112.30
0
0.5
1
1.5
2
2.5
3
3.5
4
2009 2010 2011 2012 2013
Fixed assets turnover

10. Interpretation: according to the graph in 2012 company’s average collection period was
111(approximately) which is the lowest. That year, Square Textile had to wait least days among
5 years to receive money from accounts receivable. On the other hand in 2010 the company had
to wait most to collect money. It’s obviously not good for a company to wait for more time to
collect accounts receivable.
5. Average Payment Period
Years 2009 2010 2011 2012 2013
Avg payment
period
91.36 89.83 85.71 75.05 75.60
0
20
40
60
80
100
120
140
160
180
2009 2010 2011 2012 2013
Average collection period

11. Interpretation: In the year 2009, the company is delaying the payment for 91.36 days. In the
year 2010, the company is delaying the payment for 89.83 days. In the year 2011, the company is
delaying the payment for 85.71 days. In the year 2012, the company is delaying the payment for
75.05 days. In the year 2013, the company is delaying the payment for 75.60 days.
C) Debt. Managementratio:
Debt Management Ratios attempt to measure the firm's use of Financial Leverage and ability to
avoid financial distress in the long run. These ratios are also known as Long-Term Solvency
Ratios. The Debt management ratio can satisfy on the three ratios, those are:
1. Total debt to total assets
2. Total debt to total equity
3. Times interest earned
1. Totaldebt to total assets:
0
10
20
30
40
50
60
70
80
90
100
2009 2010 2011 2012 2013
Avg payment period

12. This ratio measures the percentage of the total assets that creditors provide. This ratio indicates
the company’s degree of leverage. It also provides some indication of the company’s ability to
withstand losses without impairing the interest of the creditors.
Total debt to total assets =Total debts / Total assets collection Period = Accounts Receivable /
(Sales / 365)
Year 2009 2010 2011 2012 2013
Total debt to total
assets
0.44 0.49 0.45 0.32 0.03
Interpretation: Square Textile’s total debt to total assets shows that, the lowest ratio was 0.03
in 2013 and the highest is 0.49 in 2010. In 2010 the ratio was the highest which is very risky
compared to other years. As we know the higher the ratio, the greater the risk that the company
may be unable to meet up its maturing obligations. The company is doing well because in the
recent years the ratio is decreasing.
2. Totaldebt to total equity:
0
0.1
0.2
0.3
0.4
0.5
0.6
2009 2010 2011 2012 2013
Total debt to total assets

13. This is another leverage ratio that compares a company's total debts to its total shareholders'
equity. This is a measurement of how much suppliers, lenders, creditors and obligors have
committed to the company versus what the shareholders have committed.
Total debt to total equity= Total debt / Total equity
Year 2009 2010 2011 2012 2013
Total debt to total equity 0.83 0.99 0.87 0.49 0.40
Interpretation: The graph of total debt to total equity illustrates that the lowest ratio was in
the year of 2013 and in 2010 it was at the peak. The lowest ratio which is 0.40 means that the
company is using less leverage and has a stronger equity position which is good.
3. Times interest earned:
It provides an indication of the company’s ability to meet interest payments as they come due.
We compute it by dividing income before interest expense and income taxes by interest expense.
This represents the amount available to cover interest.
0
0.2
0.4
0.6
0.8
1
1.2
2009 2010 2011 2012 2013
Total debt to total equity

14. Times interest earned = Income before taxes and interest expense / Interest expense
Year 2009 2010 2011 2012 2013
Times interest earned 2.48 8.74 4.02 9.33 20.01
Interpretation: In 2009 EBIT is 2.48 times higher than the interest expense. In 2010, it
increases to 8.74 times but in 2011 it fall down to 4.02 times. Again in 2012 it increases and in
2013 it became 20.01 as their interest expense was low. As their interest expense decreases, their
income will increase and for this they will be able to invest more in the following year.
D) Profitability ratio:
There are many measures of profitability, which relate the returns of the firm to its sales, assets,
or equity. As a group, these measures allow the analyst to evaluate the firm’s earnings with
respect to a given level of sales, a certain level of assets, or the owners’ investment. This ratio
0
5
10
15
20
25
2009 2010 2011 2012 2013
Times interest earned

15. specify the capacity of the company to survive difficult circumstances, which might occur from a
number of basis, such as declining price, increasing cost and declining sale
The Profitability ratio can justify on the six ratios, those are as follows:
1. Gross profit margin.
2. Net profit margin.
3. Operating profit margin.
4. Return on equity
5. Return on assets
6. Earnings per share.
1. Gross profit margin:
It offers information as regards a company’s success from the action of core trade. Ratio gives
you an idea about the success relation to sales on after the cost of goods sold is remove. It’s
could be used as a pointer of the good organization of the manufacture action and relationship
between cost of manufacturing goods and selling price.
Gross profit margin= Gross Profit / Sales
Year 2009 2010 2011 2012 2013
Gross profit margin 15.11 18.60 15.43 15.63 16.20

16. Interpretation: The graph illustrates that in lowest ratio was 15.11 in 2009. They could have
decreased their cost of goods sold or put more effort to increase the sales that year. 2010 had the
highest ratio which means that that year Square Textile had the lowest cost of goods sold or they
increased the sale and the next 2 years after 2010 cost of goods sold might have decreased or the
sale increased.
2. Netprofit margin:
A ratio of profitability 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.
Net profit margin= Net income / Sales
Year 2009 2010 2011 2012 2013
Net Profit Margin 6.95 11.7 8.78 9.48 10.25
0
2
4
6
8
10
12
14
16
18
20
2009 2010 2011 2012 2013
Gross profit margin

17. Interpretation: The graph shows that in2009, net profit was the lowest and in 2010 it was
highest. The company decreased their expenses or did other things that helped to increase the net
profit during 2010 but after 2010 net profit kept decreasing so Square Textiles needs to decrease
their expenses or find other way to increase net profit.
3. Operating profit margin:
A ratio used to measure a company's pricing strategy and operating efficiency. Operating margin
is a measurement of what proportion of a company's revenue is left over after paying for variable
costs of production such as wages, raw materials, etc. A healthy operating margin is required for
a company to be able to pay for its fixed costs, such as interest on debt.
Operating Profit Margin = (Operating profit/Sales) x 100
Year 2009 2010 2011 2012 2013
Operating profit margin 9.02 14.83 10.91 11.84 12.71
0
2
4
6
8
10
12
14
2009 2010 2011 2012 2013
Net Profit Margin

18. Interpretation: The graph shows operating profit margin kept increasing except 2010. That
year the company showed the highest operating profit. Because in 2010 Square Textiles made
least cost. So over all the company is going good at operating profit margin.
4. Return on equity:
The amount of net income returned as a percentage of shareholders equity. Return on equity
measures a corporation's profitability by revealing how much profit a company generates with
the money shareholders have invested.
Return on equity = (Net income / Total stockholder’s equity) x 100
Year 2009 2010 2011 2012 2013
Return on equity 10.55 18.10 17.79 15.62 14.07
0
2
4
6
8
10
12
14
16
2009 2010 2011 2012 2013
Operating profit margin

19. Interpretation: The graph shows that in 2009 the return on equity was the lowest which means
that year the stockholder earns lower from the stock. In the year 2010 stockholder earns 18.10 tk
for every 100 tk of stock. In the following years it continues to moving up and down.
5. Return on assets:
An indicator of how profitable a company is relative to its total assets. This 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, return on assets is displayed as a percentage.
Return on assets = Net income / Total assets
Year 2009 2010 2011 2012 2013
Return on assets 5.6 8.88 9.31 10.26 9.8
0
2
4
6
8
10
12
14
16
18
20
2009 2010 2011 2012 2013
Return on equity

20. Interpretation: The graph above shows the return on net assets of Square Textiles directing that
the company was doing well in this sector except in 2012. The year the company had the highest
return on assets, because that year they might have increased the profit of decreased the assets
most among all year the years.
6. Earnings per share:
The portion of a company's profit allocated to each outstanding share of common stock. Earnings
per share serves as an indicator of a company's profitability. Earnings per share is generally
considered to be the single most important variable in determining a share's price.
Earnings per share = Net income / number of shares outstanding
Year 2009 2010 2011 2012 2013
Earnings per share 5 8.79 8.4 7.09 6.23
0
2
4
6
8
10
12
2009 2010 2011 2012 2013
Return on assets

21. Interpretation: The graph of earning per share shows that till 2011 Square Textiles was
going good they were selling their shares at an increased price. But for last 2 years it’s going
worse. The company should immediately take proper steps to increase net profit only then they
can regain stockholders attention.
E) Stock marketratios:
These ratios give an indication of how investors perceive the company; it’s past performance,
future prospects, etc. The performance of the company's shares in the stock market is crucial
from shareholders’ point of view and management as well. The stock market ratio can justify on
one ratio:
1. Market to book value ratio:
A ratio used to find the value of a company by comparing the market value of a firm to its book
value.
0
1
2
3
4
5
6
7
8
9
10
2009 2010 2011 2012 2013
Earnings per share

22. Market to book value ratio = Market value per share / Book value per share
Year 2009 2010 2011 2012 2013
Market to book value ratio 2.35 4.32 2.39 2.26 2.08
Interpretation: The graph shows the market to book value ratio of Square textile from the
year 2009 to 2013. In 2010 the ratio was at the peak, The market value went to four times more
the value of book value which is good for the business and the shareholders. And from 2011 it’s
decreasing gradually. The company should focus on this thing. They should try to increase profit
and as well as the market value.
Price earnings ratio:
Years 2009 2010 2011 2012 2013
Price earnings
ratio
22.28 23.86 13.42 14.50 14.78
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2009 2010 2011 2012 2013
Market to book value ratio

23. Interpretation: In the year 2010 the market value per share was 23.86 times higher than the
earning per share in 2009. In the year 2011 it falls down to 13.42 and the following years it
gradually increases.
0
5
10
15
20
25
30
2009 2010 2011 2012 2013
Price earnings ratio