November 04, 2002
RAKIBUR RAHMAN KHAN
(Course instructor)
School of Business,
Independent University,
Baridhara, Dhaka.
Dear Sir,
It is my immense pleasure to submit my class project on BOC Bangladesh Limited, as you asked me to prepare and submit as a requirement of Accounting 305 program. The name of my project is " The analysis of financial performance of BOC Bangladesh Limited "
I have tried my best to compile the pertinent information as comprehensively as possible and if you need any further information, I will be obliged to assist you.
Thanking you,
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ACKNOWLEDGEMENTS
At first I would like to thank my instructor for giving me such an important job like ratio analysis as a class project. I would like to place my gratitude to the Supervisor of BOC Bangladesh Limited to enable me to complete my class project in their esteemed organization. Without his helpful guidance, the completion of this research project was unthinkable. A very special thanks goes to Mr. Waliur Rahman Bhuiyan managing director of BOC Bangladesh ltd. for helping me in all phase of the research process. His overwhelming support for this project gave me the inspiration to do a better report. At last I like to thank Mr. Azizur Rashid for providing valuable advice in the successful completion of this project.
Table of Contents
1. Executive Summary
2. A Brief History of BOC Bangladesh Ltd.
3. Range of Products and Services
4. Source
5. Origin of the report
6. Objective of the Report
7. Research methodology
8. Limitations of the Study
9. Range of data over 5 years
10.Comparative analysis
11. Percentage (Common size) analysis
12. Ratio Analysis
12.1. Liquidity dimension
12.1.a. Current ratio
12.1.b. Quick ratio
12.1.c. Cash ratio
12.2. Activity Dimension
12.2.a. Accounts receivable turnover
12.2.b. Average collection period
12.2.c. Inventory turnover
12.2.d. Accounts Payable turnover
12.2.e. Accounts Payable turnover in days
12.2.f. Fixed asset turnover
12.2.g. Total asset turnover
12.3. Profitability Dimension
12.3.a. Gross profit margin
12.3.b. Operating profit margin
12.3.c. Net profit margin
12.3.d. Return on total asset (ROA)
12.3.e. Return on total equity (ROE)
12.4. Debt Utilization Ratios
12.4.a. Debt Ratio
12.4.b. Time interest earned
12.5. Ownership ratios
12.5.a. Earnings per Share (EPS)
12.5.b. Dividend per share
13. An over view discussion from an investor’s point of view
14. An over view discussion from a creditor’s point of view
15. Conclusion
EXECUTIVE SUMMARY
This report “The analysis of financial performance of BOC Bangladesh Limited ” is prepared to fulfill the partial requirement of Accounting 305 program of Business Administration Program of Independent University, Bangladesh. The topic of dissertation was selected upon consultation with course instructor of respective department.
The main aim of this report is to find out the financial situation and the financial trend of BOC Bangladesh Ltd. And justify the result from investor and creditor’s point of view. From this analysis we find out the financial performance and this analysis from the annual report issued by BOC Bangladesh Ltd. from the year 1997 to 2001, which was the main source of information.
After the analyzing the different ratios of BOC Bangladesh Ltd. we can see that there were a slight decrement in Earning Per Share and in 2001 their EPS was 13.27, which is good for any company. From the analysis we can also say that BOC has failed to use it’s asset efficiently. This position has a bad impact on investor view. As a whole from the analysis we can say that BOC had a bad year in 2001 because maximum ratios in 2001 have decreased from 2000. But according to chairman’s statement the business results for the year were satisfactory. From the sources of information there is no industry average and because of that we can’t compare those ratios. For this we can’t actually say that those ratios were good or bad.
To increase the performance of the company management had taken some new approaches. A second hand but unused Carbon Dioxide plant has been installed at the Tejgaon factory and has been accepted in late November after suitable testing.
A BRIEF HISTORY OF BOC BANGLADESH LIMITED
BOC Bangladesh Limited is both an old and a relatively new company. Old because it has been present in what is now Bangladesh, in one form or the other, since the days of British India. New because it was registered under it’s own identity only in 1973. The Company began, after the independence of Bangladesh, with a modest turnover of a little over Tk.6 million. The turnover in 1999 exceeded Taka 1 billion.
BOC Bangladesh Limited started out as Bangladesh Oxygen Limited with 3 small Oxygen plants and Dissolved Acetylene plants, one of each in Dhaka, Chittagong and Khu1na. In addition, it had an operating contract to run the Oxygen plants of Chittagong Steel Mills (CSM), which is still there today. For the manufacture of Welding Electrodes the Company had only one very small extruder.
From inception, the Company had remained the sole supplier of Medical Oxygen in the Country. In the mid 70's a Nitrous Oxide plant still the only one in Bangladesh, was imported and installed in Dhaka to provide the nation with this vital anaesthetic gas. Later in the decade a Carbon Dioxide plant was bought and installed in Dhaka and this was the first in the Country to produce dry ice. In the early 80's the first liquid gas plant was imported from New Zealand and again installed in Dhaka, where the demand for Oxygen was concentrated.
Shortly after that came the first boom in ship cutting and demand for Oxygen "went through the roof". The Company invested immediately in additional compressing capacity for the surplus Oxygen at CSM while simultaneously pursuing the Government to permit it to invest in new production capacity. Eventually the Company was permitted to import 400 cubic metres per hour air separation plant from Australia, capable of producing Liquid Oxygen, Nitrogen and, for the first time in Bangladesh, Agron. This was installed in Chittagong, essentially to feed the ship cutting market on the beach. In the early 90's booster was added to this to increase output, pending investment in further capacity.
Meanwhile, the welding business of the Company was also growing fast and in the early 80's a state of the art RAM extruder was added to the production line, dramatically improving output and quality of electrodes. The Company, in another innovative move, invested in a wire drawing machine for the electrode factory. A second RAM was added in the late 80's to keep up with demand.
The Company went "public" in 1985 when the Government renounced its right shares in favor of the public. Today, BOC Bangladesh is one of the premier companies in the Country. Bangladesh Oxygen Limited changed its name to BOC Bangladesh Limited in March 1995 in line with a world wide programme of the BOC Group.
The 90's witnessed another change in the fortunes of the Company with deregulation and liberalisation of the economy. A site was specially purchased at Rupganj, near Dhaka, where the Company installed a 30 tonnes per day air separation plant, the largest in the country. The US made plant produces Oxygen, Nitrogen and Argon and is technologically, as advanced as any in the world. It came on stream in 1995.
At the same time, the Company also invested in a modern integrated welding electrode plant, made by the largest welding electrode manufacturers in the world, which was imported and installed at the new site in Rupganj. A technical collaboration arrangement was also made with the suppliers ESAB AB of Sweden and the plant went into production in 1995. Welding business received ISO 9002 certification in the following year. A distribution agreement has been signed with world class Welding Company, The Lincoln Company of USA.
In March 1998 a second line of production was added to the integrated Welding Electrode Factory at Rupganj, doubling the capacity. Same year, in November 1998 a new site with a 20 TPD liquid plant was acquired in Shitalpur, Chittagong.
The BOC Group, of which BOC Bangladesh Limited is a member, has its headquarters at Windlesham in the UK. It employs in excess of 40,000 people and contributes to the economies of nearly 60 countries world wide, with an annual turnover of E3.3 billion plus.
Range of Products and Services
Special Gases & Gas mixtures
Gas Welding Rod & Flux
Gas Welding and Cutting Equipment
Any other gas on request
Refrigerant Gases (Freon & Suva)
Medical Gases Cylinders
Anaesthesia Ventilators
Anaesthesia Machines
ICU/CCU Monitoring System
ICU/CCU Ventilators
Infusion/Syringe Pump
Physiotherapy equipment
Autoclave/Sterilizer
Gynaecological Tables
Medical Disposables
Medical Equipment on request
Compressed Oxygen
Liquid Nitrogen
Dissolved Acetylene
Carbondioxide
Compressed Helium
Sulphurhexafluoride
Sulphurdioxide
Medical Oxygen
Liquid Oxygen
Compressed Nitrogen
Sterilizing Gases
Pulse Oximeter
Nerve Stimulator
Blood Gas Analyser
Infant Warmer
Infant Incubators
Dry Ice
Argon
Lamp gases
LPG
Liquid Helium
Hydrogen
Entonox
Nitrous Oxide
OT Table
OT Light
Humidifier
Nebulizer
Resuscitators
Hemodialysis
Photo therapy
Other Products (Materials)
Mild Steel & Cast Iron Electrodes
Low Hydrogen/Low Alloy Electrodes
Stainless Steel & Bronze Electrodes
Arc Welding Equipment & Accessories
Spot Welding Machines
MIG Welding Equipment & Accessories
TIG Welding Equipment & Accessories
Plasma Cutting Equipment & Accessories
Welding Services & Training
Welding Equipment Repairs
SOURCE
Origin of the report
This report is prepared to fulfill the partial requirement of ACN 305 of business administration program of Independent University on the ratio analysis of a company. So the business organization BOC Bangladesh Limited is chosen and I am discussing on different ratio of this company over five years from 1997 to 2001. I have based this report from the background information and knowledge that I acquired from BOC Bangladesh Limited and it provides a reliable and effective insight into the ratio analysis of the particular company. I did this report on financial performance because it’s a requirement of Financial Accounting course. I have tried to reflect my experience on my report in terms of financial performance of BOC Bangladesh Limited.
Objective of the Report
The specific objectives aimed for this report is:
1. To fulfill the partial requirement of the course under the guidance of the coordinator.
2. To gain experience and knowledge of analyzing the financial ratios from the real life which will help me in the practical working environment?
3. To find out the financial situation of BOC Bangladesh Limited.
4. Identify the problem area
5. Giving suggestion to overcome those problems
6. Finally comment on the result from investor and creditor’s point of view.
Research methodology
Information used to prepare this report has been collected from both the Secondary source and the primary survey. The secondary sources of information were collected from BOC Bangladesh Limited, Dhaka Stock Exchange, Annual report of BOC Bangladesh Limited, periodicals and materials from various newspapers and articles. An open discussion method was followed to gather primary information by interviewing the company secretary of the company.
Limitations Of The Study
• Lack of availability of information and data, some time there are some back dated information they provide
• The record system of the annual report is not efficient
• Lack of access in many section of the organization
• Time is not sufficient to complete the study perfectly.
Range of data over 5 years (Tk. ‘000)
(Financial history)
Entry item 2001 2000 1999 1998 1997
Current Asset 342399 312853 300856 287691 276446
Current Liability 460319 412451 433542 372068 345996
Inventory 202514 195955 211047 203028 188974
Sales 1171801 1046682 1021890 842943 754586
Account receivable 50599 37274 34354 30360 23134
Cost of good sold 675751 601178 642553 525753 490151
Account payable 1559 4577 4394 3291 3796
Fixed Asset 1313665 1316266 1100734 1009421 763728
Total Asset 1658959 1632253 1404964 1297112 1040174
Gross Profit 496050 445504 379337 317190 264435
Operating profit 264178 241851 191126 114248 96687
Net profit 202018 203324 146134 118545 73617
Common equity 1094420 959362 816912 731651 670935
Total liability 561644 669757 584678 565461 369239
EBIT 261143 245549 193795 156020 100991
Dividend 66960 60873 60873 57829 45655
NOSO 15218300 15218300 15218300 15218300 115218300
Various devices are used in the analysis of financial statement data to bring out the comparative and relative significance of the financial information presented. These devices include
1. Comparative analysis
2. Percentage (Common size) analysis
3. Ratio analysis
Comparative analysis
In Comparative analysis the same information is presented for two or more different dates or periods so that like items may be compared. In Comparative analysis an investment analyst can concentrate on a given item and determine whether it appears to be growing or diminishing year by year and the proportion of such change to related items.
Percentage (Common size) analysis
Percentage analysis consists of reducing a series of related amounts to a series of percentages of a given vase. All items in an income statement are frequently expressed as a percentage of sales or sometimes as a percentage of cost of good sold. This analysis facilitates comparison and is helpful in evaluating the r4elative size of items or the relative changes in items. It may facilitate comparison between companies of different sizes. Analyst can use this analysis to evaluate and compare companies.
Ratio analysis
Ratio analysis involves methods of calculating and interpreting financial ratios to assess the firm’s performance. Ratio analysis of a firm’s financial statements is of interest to shareholders, creditors and firm’s own management. Ratio analysis is the starting point in developing the information desired by the analyst. Ratio analysis provides only a single snapshot, the analysis being for one given point or period in time. In ratio analysis it is possible to compare the company ratio with a standard one. Ratio analysis can be classified as follows:
1. Liquidity ratio
2. Activity ratio
3. Profitability ratio
4. Debt-coverage ratio
5. Owner’s Ratio
Liquidity dimension
A firm's ability to pay its debts can be measured partly through the use of liquidity ratios. A firm should ensure that it does not suffer from lack of liquidity and also that it is not too much highly liquid. Short term liquidity involves the relationship between current assets and current liabilities. If a firm has sufficient net working capital (the excess of current assets over current liabilities), it is deemed to have sufficient liquidity. There are some ratios that are commonly used to measure liquidity directly, they are:
1. Current ratio
2. Quick ratio or acid test.
3. Cash ratio
Current Ratio
The current ratio is a ratio of the firm's total current assets to its total current liabilities. The current ratio is computed by dividing current assets by current Liabilities. Current asset normally includes cash, sundry debtors, inventory, marketable securities, and current liability consists of Sundry creditors, short-term loans and advance current liabilities and provision for taxes and other accrued expenses. The ratio is generally an acceptable measure of short term creditors are covered by assets that are likely to be converted into cash in a period corresponding to the maturity of the claims.
A low ratio is an indicator that a firm may not be able to pay its future bills on time, particularly if conditions change, causing a slowdown in cash collections. A high ratio may indicate an excessive amount of current assets and management's failure to utilize the firm's resources properly.
Current Ratio = Current assets /Current liabilities
Ratio 2001 2000 1999 1998 1997
Current ratio .74 Times .76 Times .69 Times .77 Times .80 Times
Analysis
BOC Bangladesh Ltd. has formed only in 1975 but still their current asset is lower than current liability. As a result current ratio of this company is very low. We hope they will recover from this situation soon. In this case current ratio has decreased till 1999 from 1997 but in 2000 it has increased because in that year current liability has decreased. But in 2001 current liability has again increased and as a result the current ratio falls.
By going through over the components of current liability in year 2001 we see that short term bank loan and sundry creditors increased at a higher rate compare with year 2000 and other factors are almost same.
Analyzing current asset we see that all of the components has increased over 5 years. But most of the part of this asset is inventory. This inventory is not a pure liquid that’s why it doesn’t give us actual liquidity position of BOC. To get more pure ratio we will discuss about quick ratio.
Quick ratio
The quick ratio, which is also known as acid-test ratio is a better test of financial strength than the current ratio, as it gives no consideration to inventory, which may be very slow moving. Here merchandise inventory is omitted because merchandise is normally sold on credit and then the receivable must be collected before cash is realized. A comparison of the current ratio with quick ratio would give an indication regarding inventory position. Moreover, in the very short-term the ability to meet requirements of cash can be judged only on the basis of a properly drawn cash budget and not on the basis of the quick ratio.
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Ratio 2001 2000 1999 1998 1997
Quick ratio .30 Times .28 Times .21 Times .23 Times .25 Times
Analysis
Here we see that current ratio in 2001 is 2.46 time higher than quick ratio because in that year current asset consists more than 59% of inventory. For this reason quick ratio has declined compared to current ratio. The quick ratio is increasing from 1999 because the components of current asset except inventory are increasing at higher arte than that of current liability. By analyzing quick ratio we have realized that the company is reserving more inventories, which can’t make any profit. They must follow just in time process to increase quick ratio and as well as their actual liquidity position.
Cash Ratio
The cash ratio is the most traditional assess of analyzing liquidity position. Generally we meet our current liability with our current asset but the use of either the current or quick ratio is not good enough to analyze the liquidity position of the firm because it consists of account receivable and inventory, which takes time to convert with cash. That’s why it is really important to look how much cash the firm has in hand or at bank to meet its current liability and the cash ratio gives a better result.
Cash Ratio = Cash / Current Liabilities
Ratio 2001 2000 1999 1998 1997
Cash ratio .0629 Times .0021 Times .0011 Times .0019 Times .0029Times
Analysis
There is an unparallel cash ratio of BOC Bangladesh Ltd. Some time it is increasing and some time it is decreasing. In 2001 it has increased more than 29 times than the year 2000 because sales have increased more than 11% in that year. But there is a tendency of this firm keeping low cash and more stock.
In this case we can say that management has failed to use cash and it’s a big loss for the company. They must find some way to invest that cash instead of keeping it on hand.
Activity Dimension
Activity ratios reflect the firm’s efficiently in utilizing its assets. The funds of creditors and owners are invested in various kinds of assets to generate sales and profits. The better the management of assets the larger the amount of sales. These ratios are also called Turnover Ratios because they indicate the speed with which assets are being converted or turned over into sales. A proper balance between assets and sales generally reflects that the assets are managed well. There are some ratios under these criteria. They are as follows:
1. Accounts receivable turnover
2. Average collection period
3. Inventory turnover
4. Accounts Payable turnover
5. Accounts Payable turnover in days
6. Fixed asset turnover
7. Total asset turnover
Accounts receivable turnover
The Accounts receivable turnover is a comparison of the size of the firm’s sales and the size of its uncollected bills from customers. If the firm is having difficulty collecting it’s money, it has a large receivables balance and a low ratio. If it has a strict credit policy and aggressive collection procedures, it has a low receivable balance and a high ratio. It measures the effectiveness of the firm's credit policy.
Accounts receivable turnover = Sales / Accounts receivable
Ratio 2001 2000 1999 1998 1997
Accounts receivable turnover 23.16 Times 28.08 Times 29.75 Times 27.76 Times 32.61 Times
Analysis
From this analysis we get that the ratio is continuously decreasing from 1999. It means that Account receivable is increasing day by day which is very bad for the company because it has tied up a lot of cash money, which can be invested by the company in other sector. The turn over in 2001 has declined 1.2 times than that of year 2000. It means the company is following lax credit policy. This ratio indicates that the management has failed to use Account receivable efficiently. So the lower turnover means that the company is inefficient in managing it’s Account receivable.
Average collection period
The average collection period provides a rough approximation of the average time that it takes to collect receivables. It compares the receivables balance with the daily sales required to produce the balance. The ratio reflects the average collection period.
Average collection period = 360 days / Accounts receivable turnover
Ratio 2001 2000 1999 1998 1997
Average collection period 16 Days 14 Days 13 Days 13 Days 11 Days
Analysis
As a result of increasing Account receivable turnover average collection period had decreased from 1999. The ratio has declined sharply on 2001 comparing with other tears. Lower ratio means the bad collection period and it is also a cause of lower cash balance. The goal of any company should be increase sale without increasing receivable because it tied up the cash balance and makes ultimate loss for the company.
Inventory turnover
This relationship expresses the frequency with which average level of inventory investment is turned over through operations. The higher the inventory turnover the larger the amount of profit, the smaller the amount of capital tied up in inventory and the more current the merchandise stock. Moreover, a firm with a high turnover has a great competitive advantage as it can afford to sell its merchandise at a lower price because increased sales volume may yield a larger total profit even though the margin of profit unit is slightly less.
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Ratio 2001 2000 1999 1998 1997
Inventory turnover 3.34 Times 3.07 Times 3.04 Times 2.59 Times 2.59 Times
Analysis
Analysis shows a continuous improvement of inventory turnover through five years from 1997 to 2001. Here we found that the level of inventory is increasing day by day as well as the turnover is also increasing. It happens because the increasing rate of sales is higher than the rate of increase in inventory.
Normally when inventory turnover increases we think that the stock of inventory is going to be finished but in this case the level of inventory has not decreased and thus we can guess that the firm will not face any inventory problem. But one thing is important that they are holding much more inventory, which has tied up the cash balance.
Accounts Payable turnover
The accounts payable turnover indicates ratio of accounts payable compare with sales of a firm. This ratio indicates the rapidity of accounts payable to be turned into cash. It measures the tendency of a firm’s policy whether stretch payable or not.
Accounts Payable turnover = Sales / Accounts Payable
Ratio 2001 2000 1999 1998 1997
Accounts Payable turnover 751.64 Times 228.68 Times 232.56 Times 256.13 Times 198.78 Times
Analysis
Analysis shows that there is no consistency in Accounts payable turnover. In 1999 and 2000 it decreases from 1998 but there is a huge increment of this turnover in 2001, it means the firm maintains a low Accounts payable. So we can say that the firm pays their accounts payable immediately. As a result there is a low balance of cash.
One thing is important that a firm can earn money by stretching account payable because they don’t have to pay interest for that. Thus the way they can use cost free fund.
Accounts Payable turnover in days
Accounts Payable turnover in days shows the number of days within which the firm pays their liability to their creditors. The more days means the company is stretching payable and the less days means the company is not holding their liability.
Accounts Payable turnover in days = 360 / Accounts Payable turnover
Ratio 2001 2000 1999 1998 1997
Accounts Payable turnover in days .47 Days 1.57 Days 1.54 Days 1.40 Days 1.81 Days
Analysis
From this analysis we get that there is a continuous increment of this ratio from 1998 to 2000.But in 2001 the ratio falls because in that year the firm pays a huge payable. From this we can say that they have stretched payable till 2000 and in 2001 they have changed their policy and tried to pay the payable as early as possible to decrease current liability.
Fixed asset turnover
A similar measure of usage, but one, which concentrates on the productive capacity, as measured by fixed assets, indicates how successful the company is in generating sales from fixed assets. It measures how efficiently the companies are using fixed asset in generating sales.
Fixed asset turnover = Sales / Net fixed asset
Ratio 2001 2000 1999 1998 1997
Fixed asset turnover .89 Times .78 Times .93 Times .84 Times .99Times
Analysis
From the analysis we see that the turn over is the turnover is sometime increasing and sometime it is decreasing. The ratio has increased in 2001 compare with 2000. This has happened because sales have increased more than 11% on the other hand fixed asset has decreased.
By this analysis we can say that management has able to use fixed asset efficiently. Thus the way they have increased their sales by decreasing the fixed asset.
Total asset turnover
Total assets turnover indicates how well a company has used its fixed and current assets to generate sales. It is the most asset measure ratio. Such ratio is probably most useful as an indication of trends over of years. There is no particular value, which is too high or too low, but a sudden change would prompt the observer to ask questions. In these criteria a high ratio means the company is achieving more profit.
Total asset turnover = Sales / Total asset
Ratio 2001 2000 1999 1998 1997
Total asset turnover .71 Times .64 Times .73 Times .65 Times .73 Times
Analysis
There is an uneven trend of total asset turnover over 5 years from 19997 to 2001. Here we find that the ratio has increased in 2001 compare with the year 2001. This increase has happened because the sales have increased at a higher rate than the rate of increase in total asset.
Profitability Dimension
There are many measures of profitability, which relate the returns of the firm to its sales, assets, or equity. As a group, these measures allow the analyst to evaluate the firm’s earnings with respect to a given level of sales, a certain level of assets, or the owners’ investment. Without profits, a firm could not attract outside capital. Moreover, present owners and creditors would become concerned about the company’s future and attempt to recover their funds. Owners, Creditors, and management pay close attention to boosting profits due to the great importance placed on earnings in the marketplace.
The profitability ratios are:
1. Gross profit margin
2. Operating profit margin
3. Net profit margin
4. Return on total asset (ROA)
5. Return on total equity (ROE)
Gross profit margin
The gross profit margin measures the percentage of each sales amount remaining after the firm has paid for its goods. It may be used as an indicator of the production operation and the relation between production cost and selling price. The gross profit margin is calculated as follows:
Gross Profit Margin = Gross Profit / Sales
Ratio 2001 2000 1999 1998 1997
Gross profit margin 42.33% 42.56% 37.12% 37.63% 35.04%
Analysis
The gross profit margin has slightly decreased in 2001 compare with 2000. In 2001 sales has increased as well as gross profit margin has also increased The decline in gross profit margin has happened because of cost of good sold. It has increased more than 12% in 2001 on the other hand sales has increased just 11.95%.
To increase gross profit margin they should try to decrease their cost of goods sold. So we can say that they have failed to handle the COGS.
Operating profit margin
The operating profit margin measures the percentage of each sales amount remaining after all costs and expenses other than interest and taxes are deducted. A high operating profit margin is preferred. Operating profit margin is calculated as follows:
Operating Profit Margin = Operating profits / Sales
Ratio 2001 2000 1999 1998 1997
Operating profit margin 22.54% 23.11% 18.70% 13.55% 12.81%
Analysis
From the analysis we find that there is continuous increment of operating profit margin till 2000 but in the year 2001 the turnover has slightly decreased. This has happened for inefficient use of operating expense. During 2001the sales has increased more than 11% but operating expense has increased more than 13%. As a result though operating margin increased but the ratio has failed to increase because of high operating cost.
From this discussion we can say that the firm had failed to control it’s operating cost and each and every components of operating cost has increased during 2001.
Net profit margin
The net profit margin measures the percentage of each sales remaining after all costs and expenses including interest and taxes deducted. The higher firm’s net profit margins the better. The net profit margin is calculated as follows:
Net Profit Margin = Net profit after tax / Sales
Ratio 2001 2000 1999 1998 1997
Net profit margin 17.23% 19.42% 14.30% 14.06% 9.75%
Analysis
In this case also net profit margin has decreased in 2001. Earlier we have said that the increasing rate of cogs and operating cost is higher than increasing rate of sales. But we don’t mention about tax and interest. These have also increased significantly. Though account payable has decreased but short-term bank loan has increased about 1.19 times. As a result interest has increased about 1.56 times and tax has also increased about 1.18 times in 2001 compare with the year 2000. This is the main reason of decreasing net profit margin over last year.
Return on total asset (ROA)
Calculating the return on total assets is another variation on measuring how well the assets of the business are used to generate profit Return on total assets also called return on investment. It measures the overall effectiveness of management to generate profit with its assets. It could be measures as follows:
Return On Total Assets = Net profits after taxes / total assets
Ratio 2001 2000 1999 1998 1997
Return on total asset (ROA) 12.18% 12.46% 10.40% 9.12% 7.07%
Analysis
From 5 years data we see that net income has continuously increased till 2000. But due to some problem in operating sector net income has decreased slightly in 2001. And this decline creates a problem on ROA. As a result it has decreased slightly in the year 2001.
Return on total equity (ROE)
The return on shareholder’s equity is a measure of company performance from the shareholder’s perspective. It measures the return on the owners’ investment in the firm. Return on equity is calculated as follows:
Return On Equity = Net profit after tax / Stock holder equity.
Ratio 2001 2000 1999 1998 1997
Return on total equity (ROE) 18.46% 21.19% 17.89% 16.20% 10.97%
Analysis
For the same problem of net income ROE has decreased in the year 2001 compare with 2000. It means the company is loosing efficiency in production process. And this falls in ROE has a bad affect in common stock holder.
Debt Utilization Ratios
The debt utilization ratios measure the proportion of debt and how efficiently management used the debt capital. The higher the ratio, the greater the amount other peoples money being used in an attempt to generate profits. There are some ratios under these criteria. They are as follows:
1. Debt Ratio
2. Time interest earned
Debt Ratio
The debt ratio measures the proportion of total assets financed by the time’s creditor. The higher the ratio, the greater the amount other peoples money being used in an attempt to generate profits. The ratio is calculated as follows:
Debt Ratio =Total liabilities / Total assets
Ratio 2001 2000 1999 1998 1997
Debt Ratio 33.86% 41.03% 41.62% 43.59% 35.49%
Analysis
Analysis shows that debt ratio has continuously decreased from 1998 though the total liability has decreased only in the year 2001. The ratio has decreased because total asset had increased at a higher rate than total debt. And it’s a good sign for the company. In this case creditor will allow them to sell their product to them on credit. The company is following the policy to pay the debt immediately. Thus the way they can save interest expanse. And as a result their net income will be high within a short period of time.
Time interest earned
A useful measure of profit that does not link return to resources is the times interest earned ratio. It shows whether the company is able to pay it’s annual interest cost. Failure to meet this obligation can bring legal action by they firm’s creditors, possibly resulting in bankruptcy. It is calculated by dividing the firms operating income by the interest that it must pay on it’s debt.
Time interest earned = EBIT / Interest charged
Ratio 2001 2000 1999 1998 1997
Time interest earned 6.52 Times 9.57 Times 6.38 Times 7.00 Times 5.74 Times
Analysis
Higher ratio of time interest earned means firm has higher ability to pay the interest from their opportunity income. In this analysis we see that there is a mass movement of this ratio over 5 years. There is a sharp decline of this ratio in 2001 from 2000 indicated that the firm is paying more interest. In this year EBIT has increased only 6.75% but interest has increased about 56.12%.
By analyzing this ratio we must say that the company must decrease their short-term bank loan and if they continue to take loan this way, they will fall in big problem and it might be cause of bankruptcy.
Ownership ratios
Ownership ratios assist the stockholder in analyzing present and future investment in a company. Stockholders are interested in the way certain variables affect the value of their holdings. The ratios compare the value of the investment with factors such as debt, dividends, earnings, and the market price of the stock. By understanding the profitability and liquidity ratios, the owner gains insights into the soundness of the firm's business activities. By investigating ownership ratios, the stockholder is able to analyze the likely future market value of the stock. There are some ratios under this norm. They are as follows:
1. Earnings per Share (EPS)
2. Dividend ratio
Earnings per Share (EPS)
Stockholders are concerned about the earnings that will eventually be available to pay them dividends or that are used to expand their interest in the firm because the firm retains the earnings. These earnings may be expressed on a per share basis. Earnings per share are calculated by dividing net income by the number of shares outstanding. Shares authorized but not issued, or authorized, issued and repurchased (treasury stock), are omitted from the calculation.
Earnings per Share (EPS) = Net income / NOSO
Ratio 2001 2000 1999 1998 1997
Earnings per Share (EPS) 13.27 Taka 13.36 Taka 9.60 Taka 7.79 Taka 4.84 Taka
Analysis
Due to the decrease in net income in the year 2001 EPS has decreased. But in previous we see that there was a continuous increment of EPS till 2000. If company can control all sorts of expense it will be high again.
Dividend Ratios
The common stockholder is very concerned about the position taken by firm with respect to the payment of cash dividends. If the firm is paying insufficient dividends, the stock is not attractive to investors desiring some current income their investment. If it pays excessive dividends, it may not be retaining adequate funds to finance future growth. To pay consistent and adequate dividends, the firm must be liquid and profitable. Without liquidity, the firm cannot locate the cash needed to pay the dividends. Without profits, the firm does not have sufficient retained earnings to in dividend declarations.
Dividend per share = Dividend / NOSO
Ratio 2001 2000 1999 1998 1997
Dividend per share 4.40 Taka 3.99 Taka 3.99 Taka 3.80 Taka 3.00 Taka
Analysis
The company is following to pay more dividends to attract investor to invest in their company. But this strategy is not good because for the company for all time. In 2001 their EPS decreased but Dividend per share has increased and it will be a reason for decrease in cash balance. Instead of paying more dividends they should pay more attention in earning per share.
An over view discussion from an investor’s point of view
Investors who buy shares in a company want to be able to compare the benefit from the investment with the amount they have paid, or intend to pay, for their shares. There are two measures of benefit to the investors. One is the profit of the period. The other is the dividend which is an amount actually paid to the shareholders. Profit indicates wealth created by the business. That wealth may accumulate in the business or else part of it may be paid out in the form of dividend. There are some ratios, which may consider by the investor. They are as follows:
1. Net profit margin
2. Return on asset
3. Return on equity
4. Earning per share
5. Dividend per share
6. Asset per share
All of these ratios are related to profitability dimension. An investor wants to invest his money on those organizations, which are profitable for him. So he might give more emphasize on profitability dimension rather than other ratios. So that above ratio might give him a clear view of the company whether it is profitable or not. By the following ratio we will justify BOC Bangladesh Ltd. from an investor’s point of view.
Ratio 2001 2000 1999 1998 1997
Net profit margin 17.23% 19.42% 14.30% 14.06% 9.75%
Return on total asset (ROA) 12.18% 12.46% 10.40% 9.12% 7.07%
Return on total equity (ROE) 18.46% 21.19% 17.89% 16.20% 10.97%
Earnings per Share (EPS) 13.27 Taka 13.36 Taka 9.60 Taka 7.79 Taka 4.84 Taka
Dividend per share 4.40 Taka 3.99 Taka 3.99 Taka 3.80 Taka 3.00 Taka
Asset per share 71.91 Taka 63.04 Taka 53.68 Taka 48.08 Taka 44.09 Taka
From the above ratio we see that except Dividend per share and Asset per share all of profitability ratios have gone down in the year 2001 from the year 2000. In 2001 sales has not increased in it’s average rate. On the other hand all of expenses have increased at a higher rate. As a result all of ratio has decreased and it has created a bad impact on investors. Here we also see that the cash and bank has increased about 33.58 times than 2000. It means the company is holding idle cash. And the investors never like this types of situation. In 2001 account receivable has also increased significantly. From this we can say that management has failed to manage all sorts of expenses as well as it’s assets. Here one thing is important that every type of ratios under profitability dimension has continuously increased till the year 2000. So definitely a question arises. What is the problem for decreasing the ratio in 2001?
According to chairman’s statement the company has faced some sorts of problem during 2001. Difficulties were faced at almost every level of activity from clearing of goods at ports, movement of goods and personnel, and to marketing of products due to frequent closures caused by hartals and other political activities. The activities of the Company had also to face deterioration in the law and order situation. And finally due to the event of September 11 last year in the United States of America, the company has faced a big problem because it has mostly destroyed the world economy. Despite all these, the Company had been able to keep up its progress.
In spite of all the above-mentioned factors a decent growth in the business of this Company was achieved last year. Profits available for distribution did not reflect this growth because of higher incidence of interest and tax, as expected. Moderate capital expenditure and good working capital management were able to bring down the level of borrowing. The turnover of the company increased over the previous year by about 12%. Though there was virtually no increase in the profits available for appropriation in the year, the directors recommends a dividend of Taka 4.40 per each share of Taka 10 that is 44%. Asset per share is also increasing day by day. In the year 2001 tax has also increased about 3,000,000 Taka. It shows a greater profit before tax. Ultimately the company is helping the government by giving more tax. We must concentrate on shareholders equity to understand the current position of the company in the market. The equity was 642,973,000 Taka in 1996 and it has increased to 1,094,420,000 Taka in 2001. To make a clear view of shareholders equity we can show a graph with 5 years data.
From this graph we can realize that how rapidly equity is increasing. An investor could be interested by seeing this graph because it shows a healthy position of the company in the competitive market. And finally we must give a close eye to the development strategy of BOC Bangladesh Ltd. In March 1998 a second line of production was added to the integrated Welding Electrode Factory at Rupganj, doubling the capacity. Same year, in November 1998 a new site with a 20 TPD liquid plant was acquired in Shitalpur, Chittagong. In November 2000 a second hand but unused carbon dioxide plant has been installed at the Tejgaon factory and has been accepted after suitable testing.
By analyzing all sorts of discussion an investor might be interested to invest his money in this organization. Though the company has suffered some problem in the year 2001 but they have a continuous growth in market. And we hope that the company will overcome those problems and will be back with it’s own position.
An over view discussion from a creditor’s point of view
Creditors are those people who lend money to the organization for better running in the competitive market. Their money is used in the company as a capital. They are not the owner of the company because they don’t get any dividend but they are the creditor of the company and they get interest against to their loan. The people from whom the company purchases material on credit are also the creditor of the company. Creditors mainly gave emphasize on Liquidity dimension and Debt utilization. Some time they also observe activity dimension. The ratios that creditor pay attention to lend money is as follows:
1. Current ratio
2. Quick ratio
3. Cash ratio
4. Account payable turnover
5. Turnover in days
6. Debt ratio
7. Time interest earned
All of these ratios mainly give result that whether the company is able to pay their liability or not, how they are performing in the market and what is their liability position related with their total asset.
Here the current ratio is only .74 times, which means that current asset is less than current liability and this is the worst situation for any company from creditor’s point of view. The company has started in 1973 but it has a low current asset than current liability. The quick ratio and cash ratio bears the same result. In 2001 quick ratio is only .30 times and cash ratio is .0629 times. The liquidity position of this company is very bad. In this position no one will be interested to invest money in this organization. This company should pay attention to increase liquidity ratio as soon as possible because this situation is very much risky. In this condition there is a good chance for any company to become bankrupt.
Higher ratio of time interest earned means firm has higher ability to pay the interest from their opportunity income. There is a sharp decline of this ratio in 2001 from 2000 indicated that the firm is paying more interest because in that year their short-term bank loan became double. By analyzing this ratio we must say that the company must decrease their short-term bank loan and if they continue to take loan this way, they will fall in big problem and it might be cause of bankruptcy. So that in this case also any firm will not be interested to give them loan.
But there is still some good news for creditors. That is Debt Ratio and Accounts Payable turnover in days. In debt ratio we see that there is a continuous decrease of debt ratio from the year 1999. In 2001 the debt ratio is only 33.86%. It means that 33.86% of total asset is financed by creditor which is good for any company. The situation is still good because the company is in less riskier position. In 2001 Accounts Payable turnover in days is only .47 days. It means that the firm pays it’s debt very quickly. As a result account payable turnover has increased during 2001.
Now we must give a look on cash flow statement. From cash flow statement we see that the firm has not taken any loan in the year 2001. Moreover they have paid a large volume of it’s previous loan. As a result the current asset has decreased significantly. Now the decision is the firm must pay more attention in increasing it’s current asset.
By analyzing all sorts of these things we can say that the company’s overall situation is not good from a creditor’s point of view. Though the company is doing well from an investor’s point of view but it has to be careful about its liquidity and liability to build a good image from creditor’s point of view.
Conclusion
In this report we have discussed about different ratio of BOC Bangladesh Ltd. Our main job was to determine the financial position of this company whether it is running good or not. As we are very new in finance course, we face some problem while doing this assignment. But we have tried hard to complete this assignment successfully. From the over view of five years data we find that the company face some problem in different sector in 2001. Other wise everything is tolerable but they must try hard to increase their net income again to create a good impact on investor.