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
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:
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.)
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.
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.
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.
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.
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.
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%
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
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.