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RSRM Ltd. and GPH Ltd. are the pioneers in the engineering industry of Bangladesh and their success
can be traced back over the last century. Their contribution in the engineering industry and overall
economic development of Bangladesh is praiseworthy. After decades of operation and many transitions it
is time to look back into their financial strengths and weaknesses and evaluate their current performance
and future prospects. This report thus provides a deep insight into the companies financial statements,
profitability, growth and earning quality.
In the report, the financial statements of both companies have been reformulated by segregating the
operating activities from the financial activities, then analysis have made on the measure of profitability
by calculating the number of ratios. Their return of common equity as well as the operating activities has
been measured and factors behind the changes have also been expanded and interpreted. In the process
data have been broken down into different levels and each ratio has been leveled into different forms of
disintegration and decomposition to, to make a vivid inference. With the profitability analysis, earnings
have been measured, by decomposing the different components of income statement into core and other
activities and thus the sustainability of the earnings have been tested.
The analysis concluded, with the companies being turned to cash cow with no further growth prospect
with sharp decline in earnings and profitability. Moreover, it was also found that GPH Ltd. has been
managing its earnings highly through financing activities and accrual accounting. Additionally, both the
companies are holding more of net financial assets than net operating assets, which is contributing
towards a higher comprehensive income over the years. The companies are holding unutilized cash that
could have been used for other investment activities and overseas ventures. It is recommended to pay
more in cash dividends to loosen the excess funds to compensate the shareholders.
Particulars
ASSETS:
OA1
OA2
Non-Current Assets:
Property, plant and
equipment
Capital work in-progress
Current Assets:
OA3
OA4
OA5
OA6
Inventories
Accounts Receivable
Due from affiliated
companies
Advances, Deposits and
pre-payments
Cash and cash
equivalents
TOTAL ASSETS
20112012
20122013
20132014
2115.76
2118.02
2064.96
1652.64
2063.01
2064.96
463.12
55.01
20142015
2001.6
0
2001.6
0
1247.61
1613.13
1751.24
361.59
489.95
787.65
2801.
58
1739.8
4
913.39
54.56
80.57
131.88
124.28
19.49
9.03
13.81
24.07
1683.25
3799.01
2192.67
4310.69
2684.57
4749.54
4803.
18
SHAREHOLDERS'
EQUITY AND
LIABILITIES:
FO1
Shareholders' Equity:
Stare Capital
Share Premium
Revenue reserve
Revaluation Reserve
Retained Earnings
1422.58
296.00
1589.32
296.00
1744.28
296.00
943.95
182.63
943.95
349.37
943.95
504.33
Total Liabilities
Non-Current
Liabilities:
Interest Bearing
Borrowings
2376.43
2721.37
3005.26
117.17
247.06
219.19
30.39
87.39
50.60
2989.
56
655.20
750.00
943.95
-640.41
1813.
62
143.0
0
OL1
FO2
FO3
OL2
OL3
OL4
OL5
OL6
114.35
28.66
1670.
62
1382.9
4
201.28
Current Liabilities:
2259.26
2474.31
2786.07
1074.09
1365.71
1323.01
798.37
937.05
1187.43
33.94
11.42
8.77
211.04
104.89
192.60
13.47
10.05
15.33
28.30
21.83
131.76
39.90
45.96
51.09
TOTAL
SHAREHOLDERS'
EQUITY AND
LIABILITIES
3799.01
4310.69
4749.54
Divided by
1000000
1000000
1000000
4803.
18
10000
00
OI1
OE1
OE2
OE3
Particulars
Net Sales Revenue
Cost of Goods Sold
GROSS PROFIT
Operating
Expenses:
Administrative
Expenses
Selling, Marketing and
Distribution Expenses
PROFIT FROM
OPERATIONS
20112012
2012-2013
20132014
2014-2015
5936.06
5253.81
4767.00
5503.17
-5352.34
583.72
-4738.54
515.27
-4301.99
465.01
-4953.73
549.44
-58.49
-61.62
-75.88
-80.26
-19.55
-18.80
-18.36
-20.99
-38.93
-42.83
-57.52
-59.27
525.23
453.64
389.13
469.19
OE4
RepTax
0.6454
0.2835
-133.52
-159.68
-169.08
-187.00
0.28
22.96
-22.25
392.36
294.25
220.32
282.89
-19.62
-14.71
-10.49
-13.47
372.74
-216.77
279.54
-112.79
209.83
-54.87
-45.96
269.42
3.16
-51.09
-8.92
54.25
155.97
166.74
154.96
272.58
5.27
5.63
5.24
4.36
29.60
29.60
29.60
65.52
1000000
1000000
1000000
1000000
58.2%
2.5
40.4%
2.5
26.2%
-1.2%
29.60
29.60
29.60
65.52
74
74
38.58
4415.6051
06
2011
2012
2013
2014
2015
4
Current
Assets:
OA4
OA5
OA6
FA3
S
Inventory
Trade & other
receivables
Advances,
Deposits &
Payments
Short term
investments
Cash & cash
equivalents
TOTAL
ASSETS
SHAREHOLD
ERS' EQUITY
AND
LIABILITIES:
Shareholder
s' Equity:
Stated capital
Share Premium
Retained
Earnings
Tax holiday
reserve
Total
Liabilities
Non-Current
Liabilities:
FO1
OL1
Interest Bearing
Borrowings
Defferred Tax
1427.02
1669.53
1696.84
1831.43
1758.28
1110.65
1170.04
1655.87
1653.99
1602.25
0.81
0.72
0.63
176.72
155.40
14.89
27.75
40.17
301.49
471.74
2567.29
3530.11
3210.43
4015.05
4245.59
1591.24
2152.51
1920.27
2488.34
2260.14
462.65
714.89
778.86
1029.05
989.40
449.45
490.33
305.52
255.00
637.63
222
63.95
172.38
205.79
242.65
136.13
3994.31
5199.64
4907.28
5846.48
6003.87
611.74
1657.03
1814.11
1922.97
2045.24
500.00
900.00
388.00
1080.00
388.00
1188.00
380.00
1247.40
388.00
8.02
209.56
233.76
341.41
409.84
103.73
159.47
112.35
13.55
3382.57
3542.61
3093.16
3915.51
3958.63
860.02
1054.23
249.91
280.11
634.36
805.48
983.62
146.80
126.36
502.26
18.71
61.47
103.25
102.93
5
FO2
Liabilities
Obligation
under finance &
operating
leases
Current
Liabilities:
OL2
FO3
FO4
OL3
OL4
FO5
FO6
FO7
TOTAL
SHAREHOLD
ERS' EQUITY
AND
LIABILITIES
Divided by
54.55
51.90
41.64
50.50
29.17
2522.54
2488.38
2843.25
3635.41
3324.27
38.73
149.79
83.59
367.37
223.25
134.19
38.47
53.98
65.18
2115.35
2655.65
17.47
24.50
30.68
200.00
2922.05
19.71
21.73
21.88
45.83
91.47
91.92
33.58
120.31
3,994.31
1,000,000
.00
2,146.32
3,100.85
5,199.64
1,000,000
.00
4,907.28 5,838.48
1,000,000 1,000,000
.00
.00
6,003.87
1,000,000
.00
2011
OI1
Revenue
3,688.52
OE1
Costs of Sales
2,969.49
2012
2013
4,386.3
2
3,502.4
6
5,387.4
3
4,521.1
3
2014
4,687.
22
3,819.
62
2015
5,988.
40
5,086.
54
6
OE2
OE3
OE4
OOI1
FE1
FE2
OFE1
OE5
Rep
Tax
Gross Profit
719.03
883.86
866.30
867.60
901.85
Operating Expenses:
Distribution expenses
Administrative expenses
Depreciation and
amortization
PROFIT FROM
OPERATIONS
Other revenues and
profits
Finance Expenses
Net Finance costs
Other expenses
NET PROFIT BEFORE
WPPF
Allocation for WPPF
NET PROFIT BEFORE TAX
-192.58
-66.40
-46.98
-211.42
-62.78
-70.48
-147.72
-77.30
-70.42
155.93
-77.97
-77.96
170.16
-82.72
-87.45
-79.20
-78.16
731.6
9
526.45
672.44
718.58
711.6
7
3.12
23.30
23.62
50.16
25.03
-307.8
-377.8
-385.2
-329.04
-1.16
-334.13
-21.37
221.79
317.92
357.02
431.64
401.21
-10.56
-15.90
-17.85
-21.58
-20.06
211.23
302.02
339.17
410.05
381.15
-28.32
-44.73
-89.05
-131.20
-88.68
182.91
257.29
250.12
278.8
5
292.4
7
3.66
2.86
2.32
2.35
2.34
50
1000000
90
100000
0
108
100000
0
119
10000
00
125
10000
00
13.4%
14.8%
26.3%
32.0%
23.3%
OA1
OA2
OA3
Reformulated
Balance Sheet
(All figures are in
million BDT)
Operating Assets
Property, plant
and equipment
Capital work inprogress
Inventories
1652.644
41
463.1162
94
1247.611
2013
2014
2015
2063.0083
2064.96
26
2001.6031
55.012367
1613.1256
0
1751.23
0
1739.8426
7
Reformulated
Balance Sheet
Accounts
Receivable
Due from
affiliated
companies
Advances,
Deposits and prepayments
OA4
OA5
OA6
S
Operating Cash
Total Operating
Assets
Operating
Liabilities
OL1
OL2
OL3
OL4
OL5
OL6
489.94682
56
787.647
57
913.38769
80.565391
0.0451748
4301.7037
2013
131.883
77
0.06903
57
4735.79
86
2014
124.27749
0.1203392
4779.2312
2015
Deferred tax
liabilities
Trade & other
payables
Amount due to
related parties
other current
liabilites
Lease rental
payable within
one year
Tax payable
Total Operating
Liabilities
1271.95
1268.27
1631.65
402.02
Net Operating
Assets
2507.67
3033.43
3104.15
4377.21
86.78
159.68
168.59
114.35
798.37
937.05
1187.43
201.28
11.42
8.77
0.00
211.04
104.89
192.60
13.47
10.05
131.76
15.33
39.90
28.30
45.96
21.83
51.09
33.94
Financial
Obligations
FO1
FO2
FO3
Interest Bearing
Borrowings
Obligation Under
finance &
operating leases
Short term loans
30.39
87.39
50.60
0.00
0.00
1074.09
0.00
1365.71
28.66
1382.94
Total Financial
Obligations
1104.48
1453.10
0.00
1323.01
1373.6
1
1411.60
19.40
8.99
13.74
23.95
Financial Assets
S
Non-operating
Cash
Reformulated
Balance Sheet
Total Financial
Assets
19.40
8.99
13.74
23.95
(Net Financing
Assets) /Net
Financial
Obligation
1085.09
1444.11
1359.87
1387.65
1589.32
ok
1744.2
8
Ok
2989.56
Ok
Equity
Check
1422.58
ok
The reformulated balance sheet is formed in terms of operating and financial basis. The current assets and
non-current assets in the typical balance sheet are divided into operating assets and financial assets. The
same way the liabilities are divided in operating liabilities and financial obligations.
Cash and Cash Equivalence: Cash and cash equivalents are divided into operating cash and cash
equivalents. Operating cash is taken as 0.05% of sales. This is non-interest bearing, in the form of
cash on hand or in a checking account. However, the interest bearing cash equivalents are
investments of excess cash over that required to meet liquidity demands. So, the cash equivalents
above .05% of sales are kept in as financial assets.
Investment: Since the investment has been done in the shares of different companies, so investment
has been classified as operating asset.
Accounts Receivables/Payables: The whole amount that has been reported has been created out of
trade. There are no notes receivable; which earn interest. So the whole amount has been classified
under operating asset. No split has been done.
Other Assets: PPE, preliminary expenses, unallocated capital expenditures, LC margin, inventories,
advance, deposits and prepayments has been classified under operating asset since these are involved
in business, selling goods and services. On the other hand, issue expense has been classified as
financial asset since it is involved in raising cash for operation.
Workers Profit Participation (WPP) Fund: the Company made the provision @ 5% of net profit
for Workers Profit Participation Fund (WPPF). This amount has to be incurred no matter what and
this is involved in the business, in selling goods and services. So this has been classified as operating
liability.
Unclaimed Dividend: This has been classified as financial liability because once it has been
declared the cash no longer is considered as company's money.
Other Liabilities: Trade and other payables, deferred tax provision and liabilities for expenses have
been classified as operating liabilities. On the other hand, long term loan, current portion of long
term loan and interest payable has been classified as financial liability since these are incurred to
finance the operation of the company.
Capital Work in Progress and Inventory: Work in progress and inventories are the part and parcel
of the operating activities. So we allocate it to operating assets.
Due from Affiliated Companies: The Company has made exchange with its peer company of its
products. As it is fully commercial nature we consider it as an operating activity like both operating
assets and operating liabilities.
Income Tax: Income tax is mainly for operating activities so we consider it as an operating activity.
Supplies and Expense Payables: It is fully due to operating activities so we consider it as operating
liabilities.
The reformulated balance sheet of Ratanpur Steel Re-rolling Mills Ltd.shows that
the Common Stock Equity has risen from 1422 million to 2990 million within the four years. It is
more than twice hold of the initial CSE. The companys financial position is strengthening day by
day. The exploratory part is whether the rising trend is due to operating activities or financing
activities.
10
CSE
3500.00
3000.00
2500.00
2000.00
1500.00
1000.00
CSE 500.00
0.00
2989.56
1422.58
1589.32
1744.28
RSRM
Year
The reformulation maintains the balance sheet equation: CSE=NOA-NFO. The balances of common
shareholders' equity (CSE) in the typical balance sheet agree with those in the reformulated balance
sheet.
Net Operating asset (NOA) is the difference between operating assets and operating liabilities. In this
case the company has higher operating assets than operating liabilities. And encounter positive
operating assets.
Net Financial Obligation (NFO) is the difference between financial obligations and financial assets. If
these are negative, the firm has a Net Financial Asset position (NFA). The company has a substantial
amount of NFA. The amount is rising continually except 2015. That means in 2015 it may liquidate
some of its financial assets.
2.2 Reformulation the Balance Sheets for the Last five years for peer company
11
OA2
OA3
Reformulated Balance
Sheet
(All figures are in million
BDT)
Operating Assets
Property Plant &
Equipment
Intangible Assets
Capital Work in Progress
OA4
Inventory
Classifica
tion
OA1
OA5
OA6
S
OL1
OL2
OL3
OL4
FO1
FO2
FO3
Financial Obligations
Interest Bearing
Borrowings
Obligation under finance
& operating leases
Long term loans payable
within one year
FO4
FO5
Dividends payable
Current portion of
interest bearing
borrowings
Short Term bank loan
FO6
FO7
Total Financial
Obligations
2015
1602.2
5
0.63
0.00
2260.1
4
305.52
1653.99
36
0.72
0
2488.34
45
1029.04
9
255.000
65
1.03
1.21
5171.89
4662.35
5428.32
0.68
5490.7
4
0.00
38.73
18.71
149.79
61.47
83.59
103.25
367.37
102.93
223.25
17.47
30.68
24.50
0.00
19.71
45.83
21.73
91.47
21.88
91.92
86.88
193.00
210.61
583.83
439.97
3828.9
2
4978.8
9
4451.7
5
4844.4
9
5050.7
7
805.48
983.62
146.80
126.36
502.26
54.55
51.90
41.64
50.50
29.17
0.00
134.19
38.47
53.98
2115.35
0.00
200.00 index(
2655.65
0.00
65.18
2922.0
5
120.31
0.00
3295.6
9
0.00
0.00
2882.5
6
0.00
3100.85
3331.6
8
0.00
0.00
3518.6
6
2011
2012
2013
1110.65
0.00
301.49
1655.87
0.81
0.00
0.32
1170.04
0.00
471.74
2152.51
14
714.892
58
490.326
45
172.380
66
3915.80
1591.24
462.65
449.45
0.00
2146.32
3316.0
2
1920.27
778.86
989.40
637.63
12
Reformulated Balance
Sheet
FA1
FA2
FA3
S
Financial Assets
Other Investments
Other long term
investments
Short term investments
14.89
27.75
0.00
176.72
155.40
Non-operating Cash
Total Financial Assets
0.00
0.00
63.63
78.51
0.00
0.00
0.00
27.75
40.17
0.00
204.76
244.92
0.00
0.00
241.44
418.16
0.00
222.28
135.45
513.13
(Net Financing
Assets) /Net Financial
Obligation
3217.1
7
3288.2
8
2637.6
3
2913.5
3
3005.5
3
Equity
Check
611.74
ok
1690.6
2
wrong
1814.1
1
Ok
1930.9
7
wrong
2045.2
4
ok
The reformulated balance sheet of GPH Ispat Ltd. shows that the Common Stock Equity has risen
from 1690 million to 2045 million within the five years. The companys financial position is
strengthening day by day though with slow pace. The exploratory part is whether the rising trend is
due to operating activities or financing activities.
2989.56
3000.00
2500.00
2000.00
CSE 1500.00
1930.97 2045.24
1814.111744.28
1690.621589.32
1422.58
RSRM
GPH Ispat
1000.00
500.00
0.00
2012
2013
2014
2015
Year
13
From the above graph we can see that the growth of CSE is consistently rising of GPH Ispat
Limited. The company is going to more stable and strengthen than the RSRM.
The reformulation maintains the balance sheet equation: CSE=NOA-NFO. The balances of common
shareholders' equity (CSE) in the typical balance sheet agree with those in the reformulated balance
sheet.
Net Operating asset (NOA) is the difference between operating assets and operating liabilities. In this
case the company has lesser operating liabilities than operating assets. And encounter positive
operating assets that mean net operatingassets. It indicates the company is very much efficient about
its working capital management. The company has positivenet operating assets.
4978.89
4000.00
NOA
3000.00 2507.67
4451.75
4844.49 5050.77
4377.21
3033.43 3104.15
RSRM
GPH Ispat
2000.00
1000.00
0.00
2012
2013
2014
2015
Year
From the above graph we can observe that GPH Ispat has more NOA than RSRM but RSRM is more
efficient than GPH Ispat in terms of efficient working capital management.
14
2.3. Reformulate the Income Statements for the Last four Years (target company)
Classifica
tion
Reformulated
Balance Sheet
(All figures are in
million BDT)
Operating Assets
OA1
OA2
OA3
Inventories
Accounts
Receivable
Due from affiliated
companies
Advances, Deposits
and pre-payments
OA4
OA5
OA6
S
Operating Cash
Total Operating
Assets
Operating
Liabilities
OL1
OL2
OL3
OL4
OL5
OL6
Deferred tax
liabilities
Trade & other
payables
Amount due to
related parties
other current
liabilites
Lease rental
payable within one
year
Tax payable
Total Operating
2013
2014
1652.644
41
463.1162
94
1247.611
81
361.5853
94
2063.00
83
55.0123
67
1613.12
56
489.946
82
2064.962
6
0
54.56097
9
0.097463
16
3779.616
35
0
80.5653
91
0.04517
48
4301.70
37
0
131.8837
7
0.069035
7
4735.798
6
2012
2013
2014
86.78
159.68
168.59
114.35
798.37
937.05
1187.43
201.28
11.42
8.77
0.00
104.89
192.60
13.47
15.33
39.90
1268.27
28.30
45.96
1631.65
21.83
51.09
402.02
33.94
211.04
10.05
131.76
1271.95
0
1751.235
6
787.6475
7
2015
2001.6031
0
1739.8426
913.38769
0
124.27749
0.1203392
4779.2312
2015
15
Reformulated
Balance Sheet
Liabilities
Net Operating
Assets
2507.67
3033.43
3104.15
4377.21
Financial
Obligations
FO1
FO2
FO3
Interest Bearing
Borrowings
Obligation Under
finance & operating
leases
Short term loans
30.39
87.39
50.60
0.00
0.00
1074.09
0.00
1323.01
28.66
1382.94
Total Financial
Obligations
1104.48
0.00
1365.71
1453.1
0
1373.61
1411.60
Non-operating
Cash
19.40
8.99
13.74
23.95
Total Financial
Assets
19.40
8.99
13.74
23.95
(Net Financing
Assets) /Net
Financial
Obligation
1085.09
1444.11
1359.87
1387.65
1422.58
ok
1589.3
2
ok
1744.28
Ok
2989.56
Ok
Financial Assets
S
Equity
Check
Reformulated statement is on a comprehensive basis, so it also includes dirty surplus items reported
within the equity statement.
The effective tax rate is used here
Operating Income
Tax on Operating Income
Effective Tax Rate on Operation=
Salesbefore tax
16
All items are after tax basis. The operating income includes the core operating income from sales; core
other operating income other than sales and unusual items.
272.58
250.00
200.00
CI
150.00
155.97
166.74
154.96
RSRM
100.00
50.00
0.00
2011-2012 2012-2013 2013-2014 2014-2015
Year
From the above chart it can be observed that for RSRM, the profit has risen smoothly over the past four
years. In 2015 it shows significant rise. Comprehensive income rose from 156 million to 273 million.
The income statement of RSRM above shows the total breakdown of income from operations and
financial activities. It is stated that over the past years operating profit after total tax adjustment for the
year 2012 was 156million, 166 million, 156 million, 273 million.
Reformulated Income
Statement
Classifica
tion
OI1
Revenue
OE1
Costs of Sales
Gross Profit
OE2
OE3
Distribution expenses
Administrative expenses
2011
3688.5
2
2969.4
9
2012
4386.3
2
3502.4
6
2013
5387.4
3
4521.1
3
719.03
-66.40
-46.98
883.86
-62.78
-70.48
866.30
-77.30
-70.42
2014
4687.
22
3819.
62
867.6
0
-77.97
-77.96
2015
5988.
40
5086.
54
901.8
5
-82.72
-87.45
17
GPH
Ispat
Ltd.
Reformulated Income
Statement
OE4
OE5
Depreciation and
amortization
Allocation for WPPF
Total Operating
Expenses
Core Operating Income
from Sales (before tax)
-79.20
-10.56
-78.16
-15.90
0.00
-17.85
-203.14
227.32
165.57
515.89
656.54
700.73
0.00
-21.58
177.5
1
690.0
8
0.00
-20.06
190.2
3
711.6
3
Rep Tax
-28.32
-44.73
-89.05
-41.27
-55.96
101.12
0.42
3.45
6.20
-69.17
131.2
0
105.2
8
-88.68
-77.74
-97.24
183.97
16.05
220.4
3
5.82
160.5
9
446.72
559.30
516.76
469.6
5
551.0
3
3.12
23.30
23.62
50.16
25.03
-0.42
-3.45
-6.20
-16.05
-5.82
2.70
19.85
17.42
34.11
19.20
449.42
579.15
534.17
503.7
7
570.2
4
-307.78
377.83
385.17
0.00
-307.78
0.00
-
0.00
-
0.00
329.0
4
-
0.00
334.1
3
-
Finance expenses
FE2
18
GPH
Ispat
Ltd.
Reformulated Income
Statement
284.05
77.74
-21.37
256.3
9
250.12
yes
280.0
1
no
313.8
4
no
385.17
41.27
0.00
55.96
0.00
101.12
0.00
-266.51
321.87
OFE1
329.0
4
105.2
8
-1.16
223.7
6
377.83
182.91
yes
257.29
Yes
334.1
3
257.29
200.00 155.22
CI 150.00
250.12
166.51
313.84
280.01 272.58
RSRM
154.96
GPH Ispat
100.00
50.00
0.00
2012
2013
2014
2015
Year
The comprehensive earnings of GPH Ltd. are much higher than RSRM. In 2012, it was BDT 258
million for GPH IspatLimited and BDT 156 million for RSRM Ltd.and in 2015, it was BDT 313
million for GPH and BDT 273 million for RSRM.
Free cash flow- the difference between cash flow from operations and cash invested in
operations- is the main focus in DCF analysis, liquidity analysis, and financial planning. Free
cash flow is the net cash generated by operations, which determines the ability of the firm to pay
off its debts and equity claims. FCF can be calculated using two methodsMethod 1:
C-I=OI-NOA
Method 2:
C-I=NFE-NFO+d
OI
NOA
NOA
FCF
2011-2012
211.09
2507.67
211.09
2014-2015
461.06
4377.21
1273.06
-812.00
In RSRM free cash flow has a negative in 2013 and 2015 and a mixed (positive & negative) trend in
2012 and 2015. That means the company performed in volatile manner during 2012 & 2014 period and
they use their free cash flow to paid dividend and also made no new investment. On the other hand, the
company has a negative cash flow in 2013 and 2015 that means in this year the company paid dividend by
liquidating their financial assets. As far we know the company has no steps to diversification so the
company must pay 100% cash dividend with their financial assets.
C-I=NFE-NFO+D
NFE
NFO
NFO
D
FCF
2011-2012
-55.87
1085.09
74
18.13
2012-2013
-95.25
1444.11
359.02
74
-380.27
2013-2014
-124.59
1359.87
-84.24
0
-40.35
2014-2015
-188.48
1387.65
27.78
0
-216.26
2012-2013
2013-2014
2014-2015
20
NFA
NFA
NFI
D
FCF
-1085.09
-55.87
74
-955.22
-1444.11
-359.02
-95.25
74
-1274.86
-1359.87
84.24
-124.59
0
-1235.29
-1387.65
-27.78
-188.48
0
-1199.17
Return on common equity is broken into its drivers over three levels of analysis.
The first level identifies the effect of financing and operating liability leverage.
Second level identifies the effect of profit margins and asset turnovers on operating profitability.
Third level identifies the drivers of profit margins, asset turnovers, and the net borrowing costs.
21
CI
CSE
OI
NOA
NFO
NFE/
(NFI)
OA
OL
STBR
Analysis of Profitability
2011-2012
20122013
20132014
2014-2015
155.22
1422.58
166.51
1589.32
154.96
1744.28
272.58
2989.56
211.09
2507.67
261.76
3033.43
279.55
3104.15
461.06
4377.21
1085.09
1444.11
1359.87
1387.65
-55.87
3779.62
1271.95
-95.25
4301.70
1268.27
-124.59
4735.80
1631.65
-188.48
4779.23
402.02
0.05
63.60
0.05
63.41
0.05
81.58
0.05
20.10
8.42%
131.10%
8.63%
110.06%
9.01%
128.27%
10.53%
215.44%
5.15%
3.27%
4.29%
6.60%
2.03%
2.24%
9.16%
-0.16%
-0.20%
13.58%
-3.05%
-6.57%
12.70%
10.87%
8.81%
3.96%
10.91%
10.48%
8.88%
9.12%
Particulars
First
Level
RNOA = OI/NOA
FLEV=NFO/CSE
NBC=NFE/NFO or
RNFA=NFI/NFA
Spread=(RNOA-NBC)
FLEV*Spread
ROCE=RNOA + (FLEV x
SPREAD)
ROE/ROCE = CI/CSE
22
First
Level
RSRM LTD.
ROOA = OI+Implicit Cost/OA
OPLLEV = OL/NOA
STBR
Opspread
OPLLEV*Opspread
RNOA=ROOA+OPLLEV*Opsp
read
RNOA = OI/NOA
Net Sales Revenue
Net Operating Assets
RNOA
PM
ATO
8.42%
3.56%
236.72%
Analysis of Profitability
7.27%
50.72%
5.00%
2.27%
1.15%
7.56%
41.81%
5.00%
2.56%
1.07%
7.63%
52.56%
5.00%
2.63%
1.38%
10.07%
9.18%
5.00%
5.07%
0.47%
8.42%
8.63%
9.01%
10.53%
8.42%
8.63%
9.01%
10.53%
5936.06
2507.67
5253.81
3033.43
4767.00
3104.15
5503.17
4377.21
8.63%
9.01%
Second Level
4.98%
5.86%
173.20% 153.57%
10.53%
8.38%
125.72%
23
ROCE OF RSRM
14.00%
12.00%
10.00%
8.00%
6.00%
ROCE 4.00%
2.00%
0.00%
12.70%
10.87%
8.81%
3.96%
RSRM
Year
As a cash cow company RSRM is deleveraging company. It has financial leverage in 2012 & 2013 but
recently it instead shows deleveraging feature. We can also see that SPREAD is negative that means the
leverage effect is unfavorable. In this company if the company is increasing its deleverage or decreasing
its negative leverage its ROCE should be increased. That means the company either declared more
dividends or going to diversify its operation.
250.00%
200.00%
150.00%
131.10%
128.27%
110.06%
ROCE
FLEV
50.00% 12.70%
10.87%8.81%3.96%
0.00%
2011 2012 2013 2014 2015
Year
24
From the above graph we can see that in 2014 deleverage increased and ROCE decreased. And 2011 and
2012 ROCE increase in proportion with the deleverage of RSRM.
RNOA=
In case of RSRM ROOA>Short Term Borrowing Rate for all period; which indicate favorable operating
liability leverage. We also know if ROOA is greater than short term borrowing rate
the leverage is
favorable. In case of RSRM it has favorable operating liability leverage although its OLLEV is negative,
it has a stable ROOA. That means the company is doing business with others money in the form of
Accounts Payable. For this reason, its operating liability is greater than operating assets. And NOA is
negative.
PM =
ATO=
OI (after tax)
Sales
Sales
NOA
For RSRM the PM is positive. In 2011, it was 3% and increases from 2012 to 2015 and again increases in
2015 to 8%. That means the firm has a tiny percentages of profitability in term of its operation. On the
other and the company shows decreasing trend of ATO that means the companys operating assets are not
25
efficient. We can interpret PM as for Tk.1 sales the operating profits only Tk. 0.03 for the year 2012 and
so on.
PM vs ATO OF RSRM
100%
P
M
&
A
T
O
98.52%
97.20%
96.32%
93.75%
80%
60%
ATO
40%
PM
20%
6.25%
3.68%
2.80%
0% 1.48%
2011-2012
2012-2013
2013-2014
2014-2015
Year
Sales
Sales
Sales
Sales
Sales
26
Sales
Sales
Sales
These component ratios are known as profit margin drivers. Clearly, profit margins are increased by
adding to gross margins (reducing cost of sales), by adding other items income, and by reducing expenses
per taka of sales.
The asset turnover can be broken down into ratios for the individual assets and liabilities:
1
Cash A /R Inventory
PPE
A/ P Other obligation
=
+
+
++
+
For RSRM the drivers indicate each level of operations where to control. For PM the main drivers are
GM and then the large expenses. Like the administrative expenses and Contribution for the Workers Fund
have huge (-) impact on PM. For ATO due from affiliated companies, inventories and trade receivable are
major component for RSRMto impact ATO and current tax liability, suppliers and accounts payable, due
from affiliated companies are also has huge effect on ATO inverse factor.
GPH Ispat
(All figures are in million BDT)
CI
CSE
OI
NOA
NFO
NFE/(NFI)
OA
OL
STBR
Analysis of Profitability
2011
2012
2013
2014
2015
182.91
611.74
257.29
1690.6
2
250.12
1814.1
1
280.01
313.84
1930.9
7 2045.24
449.42
3828.9
2
3217.1
7
579.15
4978.8
9
3288.2
8
534.17
4451.7
5
2637.6
3
503.77
570.24
4844.4
9 5050.77
2913.5
3 3005.53
266.51
3915.8
0
321.87
5171.8
9
284.05
4662.3
5
223.76
256.39
5428.3
2 5490.74
86.88
0.05
193.00
0.05
210.61
0.05
583.83
0.05
439.97
0.05
27
GPH Ispat
After Tax
Implicit Cost on OL
4.34
9.65
10.53
29.19
22.00
2011
11.74
%
525.90
%
2012
2013
2015
11.63%
194.50
%
12.00%
145.39
%
2014
10.40
%
150.88
%
11.29%
146.95
%
9.79%
1.84%
10.77%
1.23%
7.68%
2.72%
8.53%
2.76%
FLEV*Spread
ROCE=RNOA + (FLEV x
SPREAD)
8.28%
3.45%
18.16
%
29.90
%
3.59%
15.22
%
1.79%
13.79
%
4.10%
14.50
%
4.05%
15.35
%
ROE/ROCE = CI/CSE
29.90
%
15.22
%
13.79
%
14.50
%
15.35
%
11.59
%
11.38%
11.68%
10.79%
OPLLEV = OL/NOA
STBR
Opspread
OPLLEV*Opspread
RNOA=ROOA+OPLLEV*Opspre
ad
2.27%
5.00%
6.59%
0.15%
11.74
%
3.88%
5.00%
6.38%
0.25%
11.63
%
4.73%
5.00%
6.68%
0.32%
12.00
%
9.82%
12.05
%
5.00%
4.82%
0.58%
10.40
%
RNOA = OI/NOA
11.74
%
11.63
%
12.00
%
10.40
%
11.29
%
Particulars
RNOA = OI/NOA
First
Level
FLEV=NFO/CSE
NBC=NFE/NFO or
RNFA=NFI/NFA
Spread=(RNOA-NBC)
First
Level
Revenue
Net Operating Assets
Second
Level
Analysis of Profitability
RNOA
Profit Margin
Asset Turnover
3688.5 4386.3
2
2
3828.9 4978.8
2
9
RNOA=PM*ATO
11.63
11.74%
%
13.20
12.18%
%
88.10
96.33%
%
5387.4
3
4451.7
5
12.00
%
9.92%
121.02
%
8.71%
5.00%
5.79%
0.50%
11.29
%
4687.2
2 5988.40
4844.4
9 5050.77
10.4
0%
10.75
%
96.75
%
11.29
%
9.52%
118.56
%
28
the
leverage is favorable. In case of GPH it has favorable operating liability leverage and it has a stable
ROOA. That means the company is doing business with others money in the form of Accounts Payable.
For this reason, its operating liability is greater than operating assets. And NOA is negative.
1.
In 2011 GPH has higher Gross Margin Ratio that means lower production cost. And its
administrative and selling expenses is also high indicate a higher return. On the other hand,
RSRM Limited has a lower Gross margin ratio which indicates higher production cost. It has no
significant administrative and selling expense comparing to theGPH. As a result, its gross margin
2.
is lower.
In RSRM performance from year to year in 2015 gross margin has increased slightly because
3.
ROCECost of capital
ROCECost of capital
CV=RE1/r-g
PV of CV
Value per Share
P/B
Normal P/B
P/E
Normal Forward
P/E=1/RR
Forward P/E=P0/E1
Normal Trailing
P/E=(1+RR)/RR
Trailing P/E=(P0+D0)/E0
44.897
1
42.512
57
0.3714
41
1
8.2951
36
354.27
14
7.4730
96
9.3333
33
8.7829
41
In 2020, for the changes in residual earning of Tk. 0.377million, is also the abnormal earning growth
(AEG) for 2013. Applying the simple formula,
For RSRM the growth in RE is growing though its negative but the changes of RE that means
the AEG is positive. The company is a growth firm.
31
Recommendations:
The company should take steps to increase its Profit Margin.
The company should increase its Asset Turn Over.
The company should go for diversification and reduce financial assets.
For GPH Ispat:
On the other hand, the GPH has a significant PM and it can maintain somewhat its operation with its
operations earnings. The company has less financial assets than RSRM but it is also depending on the
Financial Income. So same comments are appropriate for the GPH as like RSRM.
32
REFERENCES
Penman, Stephen H., Financial Statement Analysis and Valuation, 3nd ed., New Delhi: McGraw Hill
33