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Financial statement analysis of leading leasing industry in Bangladesh
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Super Admin

 
By Super Admin
Published on 7 September 2006
 

Analysis of financial statement of two leading leasing industry for our term paper. The leasing companies are Industrial Development Leasing Company of Bangladesh Limited (IDLC) and United Leasing Company Limited (ULC)


Introduction and origin of the report

Introduction

Lease is contract between a lessor, the owner of the asset, and a lessee, the user of the asset. Under the contract, the owner gives the right to use the asset to the user over an agreed period of time for a consideration called the lease rental. The lessee pays the rental to the lessor as regular fixed payments over a period of time.

Leasing is an important new method of financing. Lease firms play a role analogous to that of banks and other financial institutions, but act by buying and then leasing equipment to their clients rather than loaning money to buy it. There have been two principal reasons which contributed to the development of equipment leasing in the developed countries, namely:

1)  The high rate of technological obsolescence of most of the industrial equipment which made “use of the equipment” through leasing a better proposition than ownership, and
2)  The earning capacity of the equipment has primary importance to the  
      psychological factor of ownership.
      (T. K. Pordder)
     
Leasing is now a growing industry in many developing countries as well as Bangladesh. In spite of sluggish economic activities the growth of the leasing industry is significant. So, we took the two leading leasing company of Bangladesh IDLC & ULC to analyze their financial performance and to find the opportunities and prospects and threats of leasing industries of Bangladesh for our study purpose.

ORIGIN OF THE REPORT:

This report is a pre requisite for “Corporate Finance” course. It  is assigned on us by Dr. Shujit Saha, course Instructor of  Corporate Finance. We have selected two leading leasing industry for our term paper. The leasing companies are Industrial Development Leasing Company of Bangladesh Limited (Called IDLC) and United Leasing Company Limited (Called ULC)
 

PURPOSE OF THE REPORT:         

The specific objectives aimed for this report are:

- To fulfil the partial requirement of the course under the guidance of the    
   instructor Shujit Saha.

- To gain experience and knowledge of analyzing the financial statement      
   technique from the real  life which will help in  practical working   
   environment.

- To find out the prospects of leasing company in Bangladesh as an       
    alternative financier.

- To gain report writing and communication skill.


SCOPE OF THE REPORT:

The proposed report will cover the tools and techniques of corporate finance in the selected leasing industry.

SOURCE OF DATA:

The major source of data for preparing the report will  be based on secondary information, analyzing annual reports.

METHODOLOGY:

The theoretical part of the report is based solely on secondary information. The most important sources for this part are reports and journals.


Leasing in Bangladesh and IDLC

Leasing in Bangladesh:

Bangladesh is a developing country, but the national calamity and political unrest sluggish the industrial growth as well as economic growth of the country. Inspite of all these hindrance the growth of leasing companies is a significant indication of our bright prospects.

The traditional sources of funds of our country in the financial market are – the Commercial Banks, DFIs and the stock exchange. But these sources are not enough to effectively meet the growing demand of capital investments for industrialization of the country. And the backdrop of such scenario, leasing companies came forward in the 80s to serving as an alternative source of financing. At present there are 11 leasing companies operating there business.

The name of the leasing companies:

1. Industrial Development Leasing Company of Bangladesh Ltd. IDLC
2. United Leasing Company
3. Uttara Finance & Investment company Ltd.
4. Phonenix Leasing company Ltd
5. Bay leasing & Investment Ltd.
6. International Leasing & Finance Company Ltd.
7. GSP Finance company (BD) Ltd.
8. Prime Finance & Investment Ltd.
9. Vonike
10. Prime Bank Ltd.

COMPANIES AT A GLANCE

IDLC:
Industrial development leasing Company of Bangladesh limited is established in 1985 as a joint venture public Limited Company with the multinational collaboration of International Development Finance Institution ,Commercial  Banks, Insurance Company and Foreign Leasing Corporation. During the past fourteen  years of its operation, IDLC has played a catalytic role in providing alternative source  of term and capital asset financing to the private sector. IDLC’s  primary focus has been in the area of  3-5 year term financial  leasing with particular  emphasis on balancing, modernization, replacement and expansion( BMRE) of existing units. With its pioneering vision IDLC has not only established lease financing as an efficient  and quality financial service but also laid the foundation for the creation of ten other leasing companies. Today lease financing has grown to be an industry of Taka 3.5 billion per  annum.

IDLC  and its institutional  shareholders have upheld their commitment towards the development of the financial service sector by offering high quality service to local entrepreneurs.To ensure  steady  and long term growth as well as to sharpen its competitive  edge in a changing  and challenging business environment. Shortterm Finance which have broadened its customer  base and are expected to contributed significantly to IDLC’s growth and  profitability.

IDLC established its first branch office in Chittagong in 1990. In January 1993, the company offered its shares to the public. In terms of market capitalization, it is ranked among the top 20 listed companies in both Dhaka and Chittagong Stock Exchange.

Services offered by IDLC:

Lease  Financing

IDLC  provides lease financing for all types of manufacturing and service equipment including vehicle, computer and medical equipment to all the major industrial and service  sector.

Short Term Finance

With an objective to provide solution to working capital problems, STF Unit provide different financial services to clients. Emphasis is given to identifying clients’ actual need and in providing customized  service to cater them.

House Financing

IDLC extends loan facilities to Individuals  for purchase of apartments, Business houses professionals  for purchase of commercial  spaces (office space chamberdisplaycentre etc.)


IDLC vs ULC - Shareholding structures and liquidity

Shareholding Structures
Industrial development leasing Company of Bangladesh limited (IDLC)

Foreign Sponsors                                                      45.0%
Korea Development Leasing Corporation                  20.5%
Korea Long Term Credit Bank                                 10.0%
International Finance Corporation                             10.0%
Aga Khan Fund for Economic Development             02.5%
German Investment and Development Company       02.5%
Total                                                                        100%

Domestic sponser                                                     37.1%
Industrial Promotion &Development
Company of Bangladesh Ltd.                                   16.8%
The City Bank Limited
Sadharan Bima Corporation                                     7.7%
General Public                                                         17.9%
Institution                                                                 6.6%
Individuals                                                               11.3%
Total                                                                       100%

 

Capital
Capital Structure as follows:

 Authorised : Tk.1000,000,000
(10,000,000 ordinary shares of Tk.100 each)

 Paid up : Tk. 150,000,000
(1,500,000 ordinary shares of Tk.100 each)

United Leasing Company(ULC)

Incorporation of the Company April 27, 1989

Shareholding Structure
The shareholding structure of ULC given bellow:

1.     Sponsers :
            Foreign        60.00 %
            Domestic     29.29 %
            Total           89.29 %

 2.     Institutional      :       3.49%
 3.     General  Public :      7.22%

 Capital Structure:

 Capital:

Authorised:                                                      Tk  120  million

Issued ,  Subscribed and  Paid up  :                   Tk   70  million

 

ANALYZING LIQUIDITY

Net Working Capital:

IDLC

                                                                        1997                     1998

  Current asset                                          220,555,925            316,512,305

  Less : Current Liability                            625,436,987            999,906,522

  Net working capital                               (404,881,062)          (683,394,217)

 
ULC

   Current asset                                       284,005,632              214,854,300

   Less: Current Liability                          367,620.005              999,906,522

   Net working capital                             (83,614,373)            (205,598,693)

 
Net Working Capital is a measure of liquidity of a firm. It is not a ratio, it measure a minimum level of net working capital that the firm should maintain.

The net working capital of both the companies (IDLC, ULC) in both the years are negative. That means, they are suffering from liquid asset (cash) to meet the current liabilities. The net working capital have been decreased in 1998 than in both the companies, IDLC and ULC. The reason is that the increased of current liabilities much than increased of current assets.

 In comparison, ULC is better position of net working capital than IDLC in both the years.


IDLC vs ULC - Current ratio and activity ratio

Total Asset Turnover :

Total asset turnover indicates the efficiency with which the firm uses its assets to generate sales. The total asset turnover of IDLC indicates average efficiently of its assets have been used because the higher a firm’s total asset turnover the more efficiently its assets have been used.

The total asset turnover of United Leasing Company is efficient. Because it indicates the ULC has been efficiently using its assets.

                                                                  1997                          1998
IDLC

   Revenue  (Rental)                            760,225,167                801,268,786
   Total Assets                                    2,050,904,961             2,075,899,918
   Total assets turnover                           0.37 times                 0.39 times

 ULC

    Revenue (Rental)                            509,314,689              672,263,098
    Total assets                                    1,324,002,652           1,563,348,607
    Total assets turnover                       0.38 times                   0.43 times

In compared with the IDLC the total asset turnover of ULC is much better because the higher a firm’s total asset turnover the more efficiently its assets have been used.

Lease Operation:    

                                                      1996               1997               1998
IDLC

   Lease contract                     900,700,000      947,000,000      927,100,000

   Growth (%)                                                          5.1                  (2.1)

 
ULC

   Lease contract                      591,000,000       708,000,000     880,000,000

   Growth (%)                                                          20                   24

 
The growth of IDLC was not satisfactory only 5.1% in 1997 and  (2.1%) in 1998. In 1998 the growth was negative i.e. lease contract growth has decreased.

On the other hand, ULC lease contract growth was satisfactory in the year of 1997 & 1998. The lease contract growth of 1998 has increased than 1997.

Per above calculation, ULC”s lease contract growth 292% & 1243% more than IDLC for the year 1997 & 1998 respectively.


IDLC vs ULC - Total asset turnover and lease operation

Total Asset Turnover:

Total asset turnover indicates the efficiency with which the firm uses its assets to generate sales. The total asset turnover of IDLC indicates average efficiently of its assets have been used because the higher a firm’s total asset turnover the more efficiently its assets have been used.

The total asset turnover of United Leasing Company is efficient. Because it indicates the ULC has been efficiently using its assets.

                                                                  1997                          1998
IDLC
   Revenue  (Rental)                            760,225,167                801,268,786
   Total Assets                                    2,050,904,961             2,075,899,918
   Total assets turnover                           0.37 times                 0.39 times

 

ULC
    Revenue (Rental)                            509,314,689              672,263,098
    Total assets                                    1,324,002,652           1,563,348,607
    Total assets turnover                       0.38 times                   0.43 times

 In compared with the IDLC the total asset turnover of ULC is much better because the higher a firm’s total asset turnover the more efficiently its assets have been used.

Lease Operation:    

                                                      1996               1997               1998
IDLC
   Lease contract                     900,700,000      947,000,000      927,100,000
   Growth (%)                                                          5.1                  (2.1)

 ULC
   Lease contract                      591,000,000       708,000,000     880,000,000
   Growth (%)                                                          20                   24

The growth of IDLC was not satisfactory only 5.1% in 1997 and  (2.1%) in 1998. In 1998 the growth was negative i.e. lease contract growth has decreased.

On the other hand, ULC lease contract growth was satisfactory in the year of 1997 & 1998. The lease contract growth of 1998 has increased than 1997.

Per above calculation, ULC”s lease contract growth 292% & 1243% more than IDLC for the year 1997 & 1998 respectively.


IDLC vs ULC - debt ratio and times interest earned ratio

ANALYZING DEBT                                           

Debt ratio measure the proportion of total assets financed by firm’s creditors. The debt ratio of IDLC indicates the more than 84% & 69% of the total asset of IDLC has been financed by creditors in 1997 & 1998 respectively. The higher this ratio, the greater the firms degree of indebtedness and the more financial levarage  it has. Moreover the debt ratio has been decreased in 1998, this could be a signal to increased the creditors as or reduced  the firm’s total assets.

The debt  ratio of ULC indicates  the more than around 75% of his assets has been financed by creditors and a little bit increased in 1998 to 1997.

Debt Ratio:

IDLC                                                      1997                        1998  
   Total  liabilities                             1,725,056,116           1,425,467,974
   Total  assets                                 2,050,904,961           2,075,899,918
   Debt ratio                                             0.84                           0.69

ULC           
   Total liabilities                               48,925,4707                 563,090,300
   Total assets                                  1,324,002,652               563,348,607
   Debts ratio                                         0.36                                0.37

 Though  it is lower than IDLC. But also higher financial levarage it has.

 Times Interest Earned Ratio:

IDLC:                                                            1997                      1998

  Earning before int. and taxes                   112,662,821         100,719220
  Interest                                                   103,045,930         116,527,546
  Time interest earned                                      1.09                      0.86

ULC

   Earning before int. and taxes                 78,864,232           104,146,107
   Interest                                                 70,343,163           80,575,713
   Time interest earned                                 1.12                       1.29

Time int. earned ratio measures the firm’s ability to make interest  payment. The ratio of IDLC indicates the poor ability to make interest payment. Lower the IDLC’s ratio, the greater the risk to both lenders  and owners.

This ratio of ULC indicates the poor ability to make int. payment as a rule, a value of at least 3.0 preferably closer to 5.0 is suggested. So lower the ULC’s  ratio, the greater  the risk to both lenders and owners.

To compare with the ULC’s the ratio of IDLC is lower.


IDLC vs ULC - Gross Operating Profit Margin and Net Profit Margin

ANALYZING PROFITABILITY

Gross Operating Profit Margin:

Gross operating profit margin measure the percentage of each revenue amount remaining after the firm has paid for its service. The operating profit of ULC is little bit higher than IDLC. Year to year comparison in both companies was same for the year ended 1997 & 1998.

DLC                                                           1997                        1998

   Gross  Operating Profit                       114,396,230              115,628,454
   Revenue                                              768,548,576              816,628,100
   Gross profit margin                               14.88%                      14.16%

ULC                                                 

    Gross Profit Margin                            78,864,232               104,146,107
    Revenue                                              523,398,602             687,137,586
    Gross Profit Margin                                15.48%                    15.16%


Net Profit Margin:

                                                                         1997                       1998
IDLC

    Net  Profit  after tax                                 89,396,230               47,628,454
    Revenue                                                  768,548,576             816,628,100
    Net profit margin                                        11.63%                       5.83%

ULC

    Net profit after tax                                     63,864,232            44,146,107
    Revenue                                                    523,398,602           687,137,586
    Net profit margin                                         12.20%                     6.42%

The net profit margin measure the percentage of each sales amount remaining after all costs and expenses, including interest and taxes, have been deducted. Per above calculation ULC’s net profit margin is better than IDLC. On the other hand year 1997 net profit margin was much better than 1998 in both companies due to net profit after tax much reduced then increased revenue.


IDLC vs ULC - Return on Total Assets and Return on Equity

Return on Total Assets:

The return on investment measures the overall effectiveness of management in generating profits with its available assets. In comparison, year 1998 was less than year 1997 in both companies because both companies reduced “net profit after tax” than increased “total assets”.  ULC’s return on total assets was little bit better than IDLC.                    

                                                                           1997                          1998
IDLC

   Net  Profit  after  tax                                      89,396,230             47,628,454                               
   Total  Assets                                              1,425,467,974         1,412,017,378
   Return on total assets                                      6.27%                       3.37%

 
ULC                                    

    Net Profit After Tax                                    63,864,232              44,146,107
    Total Assets                                                 956,382,647          1,142,895,614
    Return on total assets                                       6.67%                    3.86%

Return on Equity:

The return on equity measures the return earned on the owners’ investment in the company. The return on equity of ULC is better than IDLC because the equity is of ULC is smaller than IDLC though net profit of ULC is smaller than IDLC. 

                                                                            1997                       1998
IDLC
   Net  Profit  after  tax                                    89,396,230             47,628,454                              
   Total  Equity                                               325,848,845           336,023,982
   Return on equity                                            27.43%                    14.17%

 ULC
   Net  Profit  after  tax                                    63,864,232              44,146,107    
   Total  equity                                                 249,837,687          282,039,720
   Return on equity                                             25.56%                   15.65%


IDLC vs ULC - Earning per share and dividend per share

ANALYZING INVESTMENT

Earning per share:

Both IDLC and ULC, in 1998 decreased earning per share than 1997 due to net profit after tax increased in 1997 than 1998. Comparatively ULC’s earning per share is higher than IDLC though net IDLC’s net profit after tax is higher than ULC. So main reason ULC’s earning per shares is higher that IDLC’s outstanding shares is more (double) than ULC. So In the context of  “earning per share” , investment in ULC will be better then IDLC because earning per share of ULC is more.

                                                                          1997                   1998
IDLC

   Net profit after tax                                      89,396,230             47,628,454
   Outstanding Shares                                      1,500,000               1,500,000
    Earning per share                                            59.60                      31.75

ULC

   Net profit after tax                                      63,864,232             44,146,107
   Outstanding Shares                                       700,000                  700,000
   Earning per share                                            91.23                      63.06

Dividend per share:

Dividend per share of IDLC decreased in 1998 than 1997, On the other hand dividend per share of ULC is increased in 1998 than 1997.  In 1997 dividend per share of IDLC was higher than ULC whereas in 1997 the dividend per share was equal between IDL and ULC.

                                                                         1997                         1998
IDLC

   Dividend payable                                      45,000,000               37,5000,000
   Outstanding shares                                     1,500,000                  1,500,000
   Dividend per shares                                       30                                25

ULC

   Dividend payable                                      16,800,000               17,500,000
   Outstanding shares                                      700,000                     700,000
   Dividend per shares                                        24                              25


Overview of the analysis and conclusion

An Overview of the Analysis:

By analyzing the two leading leasing companies of Bangladesh-IDLC & ULC, we found that they are performing a significant role as an alternative source of financing. Their net profit situation are satisfactory level in terms of  industrial growth rate. The percentage of the net profit of the two companies are very closed though ULC ensuring more earning per share than IDLC.

The overall leasing growth in the country during the 1998 & 1997 were about 15% and 24% respectively.  Whereas the growth of IDLC were pessimistic as 5.1% & (2.1%) in the year 1997 & 1998 respectively. On the other hand, the growth rate of ULC were very much satisfactory as 20% & 24% for the year 1997 & 1998 respectively.

There is a massive decline in overall financial performance of the two companies in 1998 because of an unprecedented flood which lasted for more than two month when most economic activities virtually came to a standstill.    

Conclusion:

The leasing market is becoming more competitive because of the new leasing companies are entering the market. However, There are still leasing companies are doing well. The political stability and overall economic development is an essential preconditions of the smooth growth of this sector. If we can ensure this two preconditions, the leasing sector of Bangladesh would be able to perform a strong role in our industrial development.