Assignment

On

Ratio Analysis
Course code: FIN-223 Course Title: Introduction To Business Finance Submitted to Md, Redwan Reza Course Instructor Submitted by Group Name: The LEGENDS of BBA Name ID Md. Ahadujjamanrony Faglul Karim Raihan Ashfaqur Rahman Abdul Aziz 1001010131 1001010142 1001010141 1001010127

Sec-C, 24th batch

Department of Business Administration Leading University, Sylhet Date of Submission: June 30, 2011

Acknowledgement
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First of all we pay a special thanks to my almighty God, who made us able to complete this assignment. Then we would like to give thanks to Renowned Philanthropist Mr.Ragib Ali as he established Leading University and we got this opportunity to read here. After wards, we would like to express our heartfelt gratitude to Prof. Dr. Tufayel Ahmed, Head of the Department of Business Administration, Leading University-Sylhet. We would like to thanks our course teacher Md. Ridwan Reza respected lecturer of Leading University for giving us this chance to make a assignment and spending time from his busy schedule to help us in shaping up this assignment. I acknowledge with deep gratitude to our selected companies employees for giving us their valuable time to give many information regarding our topic. Our thanks also goes to our family members and many friends who are co-operated with us at any of the steps of the assignment and continuously support us without any hesitation and make themselves an important part of this job.

Table of Contents

Chapter

Name

Page No.

One

Introduction
1.1: Use Profitability Ratios in Financial Ratio Analysis 1.2: Asset Utilization Ratio 1.3: Liquidity Ratio 1.4: Debt Utilization Ratio

Two

Companies overview
2.1: Khulna Power Company Ltd. (KPCL) 2.2: Summit Power Limited (SPL)
2.2.1

Three Five

Financial Ratio Analysis Appendix

5.1 Appendix 1 5.2 Appendix 2 5.3 Appendix 3 5.3.1 Data table 32-35 36-39 40-41 40

Executive summery
It is difficult to infer organizational performance from one or two simple numbers. Nevertheless, in practice a number of different ratios are often calculated in strategic planning endeavours and, taken as a whole and with some caution, these ratios do provide some information about the relative performance of an organization. In particular, a careful analysis of a combination of these ratios may help you to dis3

tinguish between firms that will eventually fail and those that will continue to survive. Evidence suggests that, as early as five years before a firm fails, one may be able to detect trouble from the value of this financial ratio. In this report, the basic financial ratios are reviewed, and this ratios are applied in some companies. The ratios tend to be most meaningful when they are used to compare organizations within the same broad industry, or when they are used to make inferences about changes in a particular organization's structure over time. We have taken the Khulna Power Company our main company and Dhaka Electricity Supply Ltd and Summit Power Ltd as a competitor. We have analysed thirteen ratios for these companies.

1: Introduction
Financial ratio analysis is a valuable tool for your small business. First, have to learn to calculate the ratios and understand what they mean. They are a comparative tool of analysis for liquidity, profitability, debt, and asset management. These are the major categories of financial ratio analysis.

We need to have industry ratios and/or time series data from own firm for a basis of comparison. Then, we can compare the ratios for your firm to the ratios of other firms in your industry and other quarters or years of data for the firm. If we do an accurate financial ratio analysis using comparative data, you can learn a lot about the financial position of the firm and make necessary financial adjustments to enhance our performance. To complete this assignment we select one company from Fuel & Power and two competitor of this company and we analyse their three year financial condition.

1.1: Use Profitability Ratios in Financial Ratio Analysis

Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company's bottom line. Profitability measures are important to company managers and owners alike. If a small business has outside investors who have put their own money into the company, the primary owner certainly has to show profitability to those equity investors. Profitability ratios show a company's overall efficiency and performance. We can divide profitability ratios into two types: margins and returns. Ratios that show margins represent the firm's ability to translate sales dollars into profits at various stages of measurement. Ratios that show returns represent the firm's ability to measure the overall efficiency of the firm in generating returns for its shareholders.

1.2: Asset Utilization Ratio

Asset utilization, ratios tell a small business how well their assets are working to generate sales. Cash is always the best asset but it doesn't generate any revenue. The other assets on your balance do generate sales revenue. Those other assets are accounts receivable, inventory, and fixed assets. We may also have some other assets on balance sheet but these are the main ones we use to calculate how efficiently assets are working for.

1.3: Liquidity Ratio

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Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio.

1.4: Debt Utilization Ratio

Debt Utilization Ratio is one of the key factors to prove their creditworthiness to potential lenders. When someone applies for a mortgage, car loan or other type of installment loans, Debt Utilization Ratio, when used in conjunction with the credit report, presents the financial health of any person whole. Knowing the use of debt ratio is simple and allows consumers to take action if necessary, to reduce the debt of credit card and appear more financially sound to the lender.

2: COMPANIES OVERVIEW
2.1: Khulna Power Company Ltd. (KPCL)
Khulna Power Company Ltd. (KPCL) is the first Independent Power Producer (IPP) of the country established in 1997 under the Private Sector Power Generation Policy. It owns and operates a 110 MW barge mounted power plant that commenced its operation in October 1998. Its paid up capital is BDT 2085.93 million (US$ 44.10 million). When established, KPCL shareholders were Coastal Power Company (later Coastal was merged with El Paso Corporation, USA) through its direct wholly-owned subsidiary El Paso Khulna Power ApS, Summit Industrial & Mercantile Corporation (Pvt.) Ltd. (Bangladesh), United Enterprises & Co Ltd. (Bangladesh) and Wrtsil Development and Financial Services(Asia)Ltd. Now only local shareholders hold 100% ownership of the company. KPCL project was initially financed by the IFC and the sponsors equity with a debtto-equity ratio of 54:46. The total initial project cost was USD 96.07 million. KPCL owns and operates a barge mounted power plants in Khulna and supply electricity to the national grid of Bangladesh. The plant came into operation in October 1998. Nine generator sets are mounted on one barge and ten on
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the other. Each barge is approximately 91 meters long and 24 meters wide. The plant consumes about 600 MT of Heavy Fuel Oil daily to generate 110 MW power by the 19 generators on the two barges located in Khalishpur, Khulna.

2.2: Summit Power Limited (SPL)

Summit Power Limited (SPL), sponsored by Summit Group, is the first Bangladeshi Independent Power Producer (IPP) in Bangladesh in private sector providing power to national grid. SPL was incorporated in Bangladesh on March 30, 1997 as a Private Limited Company. On June 7, 2004 the Company was converted to Public Limited Company under the Companies Act 1994., sponsored by Summit Group, is the first Bangladeshi Independent Power Producer (IPP) in Bangladesh in private sector providing power to national grid. SPL was incorporated in Bangladesh on March 30, 1997 as a Private Limited Company. On June 7, 2004 the Company was converted to Public Limited Company under the Companies Act 1994.

2.3: Dhaka Electric Supply company (DESCO)

The new company (DESCO) is being created as a public sector company, incorporated under the Companies Act 1994 as a subsidiary of DESA. However, in the future, shares of the company will be offered to the private sector, other power sector entities and the general public to make the DESCO's management more responsive to its consumers.

3: FINANCIAL RATIO ANALYSIS

1) P rofit Ma in rg
3 5 3 0 2 5 2 0 % 1 5 1 0 5 0

K .L .P.C S .P.L D .C .E.S .O 20 08 20 09 Y ear 21 00

Profit Margin Ratio Explanation:

Profit Margin Indicates what portion of sales contribute to the income of a company. The larger the profit margin, the better for the company. This ratio tells us something about the business's ability consistently to control its production costs or to manage the margins its makes on products its buys and sells. The operating profit margin tells us something about a company's ability to control its other operating costs or overheads. The profit margin of Summit Power and Dhaka Electricity Supply LTD. are increased over the year and their profit margin is high. But Khulna Power Companys profit margin is too much low. The cause of low profit margin KPCL is its expense is much high rather than sales . And the DESCOs expense is also more but not too much. And SPLs expense and debt is not so much. Thats why its profit margin is good. So KPCL need to decrease their expense otherwise the company will be in a great loss.

2) ReturnonAsset
14 12 10 8 % 6 4 2 0

K .L .P.C S .P.L D .C .E.S .O 200 8 2009

Yea r

2 010

Explanation:
Return on Asset is a measure of how efficiently a company uses its assets. The ratio of ROA also tells how capital intensive a company is. It basically tells how effectively a company uses the shareholders money. In 2008 SPL & DESCOs ROA is average. But KPCLs ROA is too much low. In 2009 the KPCLs ROA is high because the company uses its asset efficiently. But DESCO & SPLs ROA is average and not increases. So Companies will need to find more efficient uses for assets. And in 2010 the three companies ROA is average. And KPCLs ROA is low than competitor. So KPCL is not operating as efficiently as the competitor. The company need to use their asset more efficiently. So Company will need to find more efficient uses for assets.

3) R eturnonE uity q
2 5 2 0 % 1 5 1 0 5 0 20 08 20 09 Y ear 2 0 01 K .L .P.C S .P.L D .C .E.S .O

Explanation:
By measuring how much earnings a company can generate from assets, ROE offers a gauge of profitgenerating efficiency. Shareholder equity represents the tangible assets that have been produced by the business. Both net income and shareholder equity should cover the same period of time. In 2008 The KPLCs ROE is low than DESCO & SPL. That means the KPCLs debt is not much. In 2009 KPCLs ROA is increased much. But its still under DECOSs ROE. The graph shows that in 2009 the KPCL has much debt thats why its ROE is increased and increasing ROE is a hint that management is giving shareholders more for their money, which is represented by shareholders' equity. In 2010 KPCLs ROE is increased than 2009. But its performance is average than competitor. That means the company not increase the debt.

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4) R eceiva T ble urnover

18 16 14 12 10 8 6 4 2 0

Tim es

K .L .P.C S .P.L D .C .E.S .O 20 08 2009 yeear 2010

Explanation:
Accounts receivable Turnover ratio indicates how many times the accounts receivable have been collected during an accounting period and how successful the firm is in its collections. In 2008 the KPCLs Receivables turnover is good than DESCO & SPL. That means in 2008 its receivables collection is good. In 2009 KPCLs Receivables turnover is very good and strong, that means KPCLs receivables collection is very good. So company indirectly extending interest-free loans to their clients. It also implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient. But in 2010 Its Receivable Turnover is too much low. It implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.

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5) Averag C e ollectionP eriod

8 0 6 0 D ays 4 0 2 0 0 20 08 20 09 Y ear 21 00 K L PC S PL D C ES O

Explanation:
The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash. In 2008 KPCLs collection period is low. This implies prompt payment by debtors. It reduces the chances of bad debts. In 2009 its average collection period is too much low than SPL & DESCO. In 2010 its increased but not better than DESCO. This implies too liberal and inefficient credit collection performance. It is difficult to provide a standard collection period of debtors.

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6) Inventory T urnover
1 4 1 2 1 0 8 D ys a 6 4 2 0

KC PL SL P DS E CO 20 08 20 09 Y r ea 21 00

Explanation:
A ratio showing how many times a company's inventory is sold and replaced over a period. In 2008 KPCLs Inventory turnover is high but not greater than Desco. Its implies either strong sales or ineffective buying. In 2009 its inventory turnover is low. That means poor sales and, therefore, excess inventory. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall. But in 2010 its inventory turnover is increased as 2009 but not much. That means the company sales its inventory more than 2009. So we can assume the company uses efficient inventory-ordering and cost-controls.

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Explanation:
The fixed asset turnover ratio measures the company's effectiveness in generating sales from its investments in plant, property, and equipment. In 2008 the KPCLs Fixed Asset Turnover is average. That means the sales are average or investment in plant and equipment is not too much. In 2009 & 2010 KPCLs Fixed asset turnover is too much low. Thatmeans sales are low or the investment in
plant and equipment is too much. This may not be a serious problem if the company has just made an investment in fixed asset to modernize.

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Explanation:
The total asset turnover ratio measures the ability of a company to use its assets to generate sales. The total asset turnover ratio considers all assets including fixed assets, like plant and equipment, as well as inventory and accounts receivable. In 2008 KPCLs Total asset turnover is low. That means company is failed utilize efficiently its assets to generate new sales. And in 2009 & 2010 its total asset turnover is lower. So company is not able to make money in terms of the total assets. So the company needs to be more efficient to generate new sales.

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Explanation:
Current ratio determines the company ability to pay off its short term liabilities via available current assets. A current ratio of over 1 is good news. This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory and prepaid as assets that can be liquidated. In 2008 KPCLs current ratio is above than 1 means it good but the DESCO & SPLs current ratio is more. So the company needs to increase its paying obligations. In 2009 its rise much but not better than DESCO & SPL. There may is a problem with collecting accounts
receivable or be carrying too much inventory. But in 2010 its current ratio is too much low. That means the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.

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Explanation:
The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. Also known as the "acid-test ratio" or the "quick assets ratio". Over the KPCLs Quick ratio is increased little but it is better than SPL & DESCO. But it is good and its enough for company and the company is considered adequate to cover short-term debts.

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Explanation:
Debt to total asset ratio Indicates what proportion of the company's assets are being financed through debt. The above graph shows that over the year KPCLs total debt to asset is 32-34% which means that 32-33% of company is financed by debt financing and 32-34% of companys assets are financed by investors or by equity financing. But competing with DESCO its debt to total asset is low.

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Explanation:
Times interest earned ratio is a metric used to measure a company's ability to meet its debt obligations. It is usually quoted as a ratio and indicates how many times a company can cover its interest charges on a pretax basis. Failing to meet these obligations could force a company into bankruptcy. In 2008, 2009 & 2010 KPCLs time interest earned ratio is low. But not too much. That means there is no lack of debt or paying down not too much debt with earnings.

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Explanation:
The fixed charge coverage ratio is a broader measure of how well a firm covers their fixed costs than the times interest earned ratio. In 2008, 2009 & 2010 the KPCLs fixed charge coverage ratio was good but not too much. But DESCOs fixed charge coverage is high. The graph shows that the companys debt position is good and the company can cover its fixed charge.

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Appendix -1
FORMULA
1)

Profit Margin

2)

Return on Asset

3)

Return on Equity

4)

Receivables Turnover

5)

Average collection period

6)

Inventory Turnover

7)

Fixed Asset Turnover

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8)

Total Asset Turnover

9)

Current Ratio

10)Quick

Ratio

11)Debt

on Total Asset

12)Times

Interest Earned

13)Fixed

Charge Coverage

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Appendix -2
DATA TABLE:
1)

Profit Margin
2008
3.34% 27.75 10.90

Name of company
K.P.C.L S.P.L D.E.S.C.O

2009
10.88% 27.71% 16.07

2010
7% 32.61% 16.28

2)

Return On Asset
2008
5.22% 8.51% 7.25

Name of company
K.P.C.L S.P.L D.E.S.C.O

2009
12.91% 8.42% 8.69

2010
6% 7.96% 8.36

3)

Return On Equity
2008
7.64% 13.89% 22.39

Name of company
K.P.C.L S.P.L D.E.S.C.O

2009
18% 11.94% 21.96

2010
17.9% 13.84% 20.42

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4)

Receivable Turnover
2008
9.21% 8.59% 5.03

Name of company
K.P.C.L S.P.L D.E.S.C.O
5)

2009
16.48% 12.20% 4.70

2010
6.70% 7.94 4.63

Average collection Period

2008
39.62 42.48% 72.60 days

Name of company
K.P.C.L S.P.L D.E.S.C.O

2009
22.15 44.23 77.10

2010
54.45 45.95 78.89

6)

Inventory Turnover
2008
10.7% 10.09% 11.86

Name of company
K.P.C.L S.P.L D.E.S.C.O

2009
6.51 9.96% 2.07

2010
9.76 12.86 2.35

7)

Fixed Asset Turnover

2008
2.36% 4.21% 1.27

Name of company
K.P.C.L S.P.L D.E.S.C.O

2009
1.93 4.06 1.37

2010
1.14 3.93% 1.30

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8)

Total Asset Turnover

2008
1.56% 3.04% 6.66

Name of company
K.P.C.L S.P.L D.E.S.C.O

2009
1.19 3.38% 5.41

2010
0.86 0.244 5.14

9)

Current Ratio
2008
1.06% 1.85 1.58

Name of company
K.P.C.L S.P.L D.E.S.C.O

2009
1.37% 1.97 2.23

2010
0.41 1.52 2.65

10)

Quick Ratio
2008
2.31 1.61 1.30

Name of company
K.P.C.L S.P.L D.E.S.C.O

2009
2.11 1.42 1.14

2010
2.24 1.56 1.54

11)

Debt To Total Asset

2008
33.35 38.72% 75.17

Name of company
K.P.C.L S.P.L D.E.S.C.O

2009
33.26 29.49% 69.52

2010
32.67 26.42 66.43

12)

Time Interest Earned

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Name of company
K.P.C.L S.P.L D.E.S.C.O

2008
6.06 2.5 9.11

2009
5.28 3.11 13.61

2010
5.47 3.27 10.77

13)

Fixed Charge Coverage

2008
5.68 3.35 9.11

Name of company
K.P.C.L S.P.L D.E.S.C.O

2009
5.50 3.28 13.61

2010
5.30 3.25 10.77

FINDINGS
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The growth rate of KPCL is increased over the year continuously. And this is a positive side for the company. But if we compare with the competitor the growth rate of KPCL is not satisfactory. Their profit margin is too much low. The cause of low profit margin KPCL is its expense is much high . So they need to decrease their expense otherwise the company will be in a great loss near future.

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