Executive Summary

RSRM Ltd. and GPH Ltd. are the pioneers in the engineering industry of Bangladesh and their success
can be traced back over the last century. Their contribution in the engineering industry and overall
economic development of Bangladesh is praiseworthy. After decades of operation and many transitions it
is time to look back into their financial strengths and weaknesses and evaluate their current performance
and future prospects. This report thus provides a deep insight into the companies financial statements,
profitability, growth and earning quality.
In the report, the financial statements of both companies have been reformulated by segregating the
operating activities from the financial activities, then analysis have made on the measure of profitability
by calculating the number of ratios. Their return of common equity as well as the operating activities has
been measured and factors behind the changes have also been expanded and interpreted. In the process
data have been broken down into different levels and each ratio has been leveled into different forms of
disintegration and decomposition to, to make a vivid inference. With the profitability analysis, earnings
have been measured, by decomposing the different components of income statement into core and other
activities and thus the sustainability of the earnings have been tested.
The analysis concluded, with the companies being turned to cash cow with no further growth prospect
with sharp decline in earnings and profitability. Moreover, it was also found that GPH Ltd. has been
managing its earnings highly through financing activities and accrual accounting. Additionally, both the
companies are holding more of net financial assets than net operating assets, which is contributing
towards a higher comprehensive income over the years. The companies are holding unutilized cash that
could have been used for other investment activities and overseas ventures. It is recommended to pay
more in cash dividends to loosen the excess funds to compensate the shareholders.

Chapter 1: Balance Sheet & Income Statement of Target & Peer

1

1.1: Balance Sheet of Target Company

Ratanpur Steel Re-rolling Mills Ltd.
BALANCE SHEET

Particulars
ASSETS:

OA1
OA2

Non-Current Assets:
Property, plant and
equipment
Capital work in-progress
Current Assets:

OA3
OA4
OA5
OA6

Inventories
Accounts Receivable
Due from affiliated
companies
Advances, Deposits and
pre-payments
Cash and cash
equivalents
TOTAL ASSETS

20112012

20122013

20132014

2115.76

2118.02

2064.96

1652.64

2063.01

2064.96

463.12

55.01

20142015
2001.6
0
2001.6
0

1247.61

1613.13

1751.24

361.59

489.95

787.65

2801.
58
1739.8
4
913.39

54.56

80.57

131.88

124.28

19.49

9.03

13.81

24.07

1683.25

3799.01

2192.67

4310.69

2684.57

4749.54

4803.
18

SHAREHOLDERS'
EQUITY AND
LIABILITIES:

FO1

Shareholders' Equity:
Stare Capital
Share Premium
Revenue reserve
Revaluation Reserve
Retained Earnings

1422.58
296.00

1589.32
296.00

1744.28
296.00

943.95
182.63

943.95
349.37

943.95
504.33

Total Liabilities
Non-Current
Liabilities:
Interest Bearing
Borrowings

2376.43

2721.37

3005.26

117.17

247.06

219.19

30.39

87.39

50.60

2989.
56
655.20
750.00
943.95
-640.41
1813.
62
143.0
0

OL1
FO2

FO3
OL2
OL3
OL4
OL5
OL6

Ratanpur Steel Re-rolling Mills Ltd.

86.78
159.68
168.59
Deferred tax liabilities
Obligation Under finance
& operating leases

114.35
28.66
1670.
62
1382.9
4
201.28

Current Liabilities:

2259.26

2474.31

2786.07

Short term loans

Trade & other payables
Amount due to related
parties
other current liabilites
Lease rental payable
within one year
Tax payable

1074.09

1365.71

1323.01

798.37

937.05

1187.43

33.94

11.42

8.77

211.04

104.89

192.60

13.47

10.05

15.33

28.30

21.83

131.76

39.90

45.96

51.09

TOTAL
SHAREHOLDERS'
EQUITY AND
LIABILITIES

3799.01

4310.69

4749.54

Divided by

1000000

1000000

1000000

4803.
18
10000
00

1.2: Income Statement of Target Company

Ratanpur Steel Re-rolling Mills Ltd.
INCOME STATEMENT

OI1
OE1

OE2
OE3

Particulars
Net Sales Revenue
Cost of Goods Sold
GROSS PROFIT
Operating
Expenses:
Administrative
Expenses
Selling, Marketing and
Distribution Expenses
PROFIT FROM
OPERATIONS

20112012

2012-2013

20132014

2014-2015

5936.06

5253.81

4767.00

5503.17

-5352.34
583.72

-4738.54
515.27

-4301.99
465.01

-4953.73
549.44

-58.49

-61.62

-75.88

-80.26

-19.55

-18.80

-18.36

-20.99

-38.93

-42.83

-57.52

-59.27

525.23

453.64

389.13

469.19

Ratanpur Steel Re-rolling Mills Ltd.

OOI1
FE1
OFI1
OFE1

OE4

RepTax

Other revenues and

profits
Finance expenses
Other Income (Finance
Income)
Other expenses
NET PROFIT BEFORE
WPPF
Contribution to
Workers' Profit
Participation/ Welfare
Funds @ 5%
NET PROFIT BEFORE
TAX
Income Tax Expense
Current Tax
Deferred Tax
Income(expense)
NET PROFIT AFTER
TAX
Earnings Per Share
(EPS)
Number of Shares
used to compute EPS
Divided by
Effective Tax Rate
DPS
Oustanding Shares
Dividen disbursed
AVERAGE OF 4 YEARS
OUTSTANDING
SHARES
AVERAGE OF 4 YEARS
EQUITY & LIABILITIES

0.6454

0.2835

-133.52

-159.68

-169.08

-187.00

0.28

22.96
-22.25

392.36

294.25

220.32

282.89

-19.62

-14.71

-10.49

-13.47

372.74
-216.77

279.54
-112.79

209.83
-54.87
-45.96

269.42
3.16
-51.09

-8.92

54.25

155.97

166.74

154.96

272.58

5.27

5.63

5.24

4.36

29.60

29.60

29.60

65.52

1000000

1000000

1000000

1000000

58.2%
2.5

40.4%
2.5

26.2%

-1.2%

29.60

29.60

29.60

65.52

74

74

38.58
4415.6051
06

Chapter 1.3: Balance Sheet of Peer

GPH Ispat Ltd.
BALANCE SHEET
Particulars

2011

2012

2013

2014

2015
4

GPH Ispat Ltd.

ASSETS:
Non-Current
Assets:
OA1
OA2
FA1
FA2
OA3

Property Plant &

Equipment
Intangible
Assets
Other
Investments
Other long term
investments
Capital Work in
Progress

Current
Assets:
OA4
OA5
OA6
FA3
S

Inventory
Trade & other
receivables
Advances,
Deposits &
Payments
Short term
investments
Cash & cash
equivalents

TOTAL
ASSETS
SHAREHOLD
ERS' EQUITY
AND
LIABILITIES:
Shareholder
s' Equity:
Stated capital
Share Premium
Retained
Earnings
Tax holiday
reserve

Total
Liabilities
Non-Current
Liabilities:
FO1
OL1

Interest Bearing
Borrowings
Defferred Tax

1427.02

1669.53

1696.84

1831.43

1758.28

1110.65

1170.04

1655.87

1653.99

1602.25

0.81

0.72

0.63

176.72

155.40

14.89

27.75
40.17

301.49

471.74

2567.29

3530.11

3210.43

4015.05

4245.59

1591.24

2152.51

1920.27

2488.34

2260.14

462.65

714.89

778.86

1029.05

989.40

449.45

490.33

305.52

255.00

637.63
222

63.95

172.38

205.79

242.65

136.13

3994.31

5199.64

4907.28

5846.48

6003.87

611.74

1657.03

1814.11

1922.97

2045.24

500.00

900.00
388.00

1080.00
388.00

1188.00
380.00

1247.40
388.00

8.02

209.56

233.76

341.41

409.84

103.73

159.47

112.35

13.55

3382.57

3542.61

3093.16

3915.51

3958.63

860.02

1054.23

249.91

280.11

634.36

805.48

983.62

146.80

126.36

502.26

18.71

61.47

103.25

102.93
5

GPH Ispat Ltd.

FO2

Liabilities
Obligation
under finance &
operating
leases

Current
Liabilities:
OL2
FO3
FO4
OL3
OL4
FO5
FO6
FO7

Trade & other

payables
Long term loans
payable within
one year
Short term
loans
Lease rental
payable within
one year
Tax payable
Dividends
payable
Current portion
of interest
bearing
borrowings
Short Term
bank loan

TOTAL
SHAREHOLD
ERS' EQUITY
AND
LIABILITIES
Divided by

54.55

51.90

41.64

50.50

29.17

2522.54

2488.38

2843.25

3635.41

3324.27

38.73

149.79

83.59

367.37

223.25

134.19

38.47

53.98

65.18

2115.35

2655.65

17.47

24.50

30.68
200.00

2922.05

19.71

21.73

21.88

45.83

91.47

91.92

33.58

120.31

3,994.31
1,000,000
.00

2,146.32

3,100.85

5,199.64
1,000,000
.00

4,907.28 5,838.48
1,000,000 1,000,000
.00
.00

6,003.87
1,000,000
.00

Chapter 1.4: Income Statement of Peer

GPH Ispat Ltd.
INCOME STATEMENT
Particulars

2011

OI1

Revenue

3,688.52

OE1

Costs of Sales

2,969.49

2012

2013

4,386.3
2
3,502.4
6

5,387.4
3
4,521.1
3

2014
4,687.
22
3,819.
62

2015
5,988.
40
5,086.
54
6

OE2
OE3
OE4

OOI1

FE1
FE2
OFE1

OE5
Rep
Tax

Gross Profit

719.03

883.86

866.30

867.60

901.85

Operating Expenses:
Distribution expenses
Administrative expenses
Depreciation and
amortization
PROFIT FROM
OPERATIONS
Other revenues and
profits
Finance Expenses
Net Finance costs
Other expenses
NET PROFIT BEFORE
WPPF
Allocation for WPPF
NET PROFIT BEFORE TAX

-192.58
-66.40
-46.98

-211.42
-62.78
-70.48

-147.72
-77.30
-70.42

155.93
-77.97
-77.96

170.16
-82.72
-87.45

-79.20

-78.16

731.6
9

Income Tax Expense

NET PROFIT AFTER
TAX
Earnings Per Share (EPS)
Number of Shares used
to compute EPS
Divided by
Effective Tax Rate

526.45

672.44

718.58

711.6
7

3.12

23.30

23.62

50.16

25.03

-307.8

-377.8

-385.2
-329.04
-1.16

-334.13
-21.37

221.79

317.92

357.02

431.64

401.21

-10.56

-15.90

-17.85

-21.58

-20.06

211.23

302.02

339.17

410.05

381.15

-28.32

-44.73

-89.05

-131.20

-88.68

182.91

257.29

250.12

278.8
5

292.4
7

3.66

2.86

2.32

2.35

2.34

50
1000000

90
100000
0

108
100000
0

119
10000
00

125
10000
00

13.4%

14.8%

26.3%

32.0%

23.3%

Chapter 2: Reformulation of Target & Peer

2.1. Reformulation the Balance Sheets for the Last four years for target company
Classifica
tion

OA1
OA2
OA3

Reformulated
Balance Sheet
(All figures are in
million BDT)
Operating Assets

Property, plant
and equipment
Capital work inprogress
Inventories

Ratanpur Steel Re-rolling Mills Ltd.

2012

1652.644
41
463.1162
94
1247.611

2013

2014

2015

2063.0083

2064.96
26

2001.6031

55.012367
1613.1256

0
1751.23

0
1739.8426
7

Reformulated
Balance Sheet

Accounts
Receivable
Due from
affiliated
companies
Advances,
Deposits and prepayments

OA4
OA5
OA6
S

Operating Cash
Total Operating
Assets
Operating
Liabilities

OL1

OL2
OL3
OL4
OL5
OL6

Ratanpur Steel Re-rolling Mills Ltd.

81
361.5853
94
0
54.56097
9
0.097463
16
3779.616
35
2012

489.94682

56
787.647
57

913.38769

80.565391
0.0451748
4301.7037
2013

131.883
77
0.06903
57
4735.79
86
2014

124.27749
0.1203392
4779.2312
2015

Deferred tax
liabilities
Trade & other
payables
Amount due to
related parties
other current
liabilites
Lease rental
payable within
one year
Tax payable
Total Operating
Liabilities

1271.95

1268.27

1631.65

402.02

Net Operating
Assets

2507.67

3033.43

3104.15

4377.21

86.78

159.68

168.59

114.35

798.37

937.05

1187.43

201.28

11.42

8.77

0.00

211.04

104.89

192.60

13.47

10.05
131.76

15.33
39.90

28.30
45.96

21.83
51.09

33.94

Financial
Obligations

FO1
FO2

FO3

Interest Bearing
Borrowings
Obligation Under
finance &
operating leases
Short term loans

30.39

87.39

50.60

0.00

0.00
1074.09

0.00
1365.71

28.66
1382.94

Total Financial
Obligations

1104.48

1453.10

0.00
1323.01
1373.6
1

1411.60

19.40

8.99

13.74

23.95

Financial Assets
S

Non-operating
Cash

Reformulated
Balance Sheet
Total Financial
Assets

19.40

8.99

13.74

23.95

(Net Financing
Assets) /Net
Financial
Obligation

1085.09

1444.11

1359.87

1387.65

1589.32
ok

1744.2
8
Ok

2989.56
Ok

Equity
Check

Ratanpur Steel Re-rolling Mills Ltd.

1422.58
ok

The reformulated balance sheet is formed in terms of operating and financial basis. The current assets and
non-current assets in the typical balance sheet are divided into operating assets and financial assets. The
same way the liabilities are divided in operating liabilities and financial obligations.

Issues in Reformulating Balance Sheet:

The GAAP balance sheet for Ratanpur Steel Re-rolling Mills Ltd.is reformulated into operating and
financial items in table 2.1. Some issues arise:

Cash and Cash Equivalence: Cash and cash equivalents are divided into operating cash and cash
equivalents. Operating cash is taken as 0.05% of sales. This is non-interest bearing, in the form of
cash on hand or in a checking account. However, the interest bearing cash equivalents are
investments of excess cash over that required to meet liquidity demands. So, the cash equivalents
above .05% of sales are kept in as financial assets.

Investment: Since the investment has been done in the shares of different companies, so investment
has been classified as operating asset.

Accounts Receivables/Payables: The whole amount that has been reported has been created out of
trade. There are no notes receivable; which earn interest. So the whole amount has been classified
under operating asset. No split has been done.

Other Assets: PPE, preliminary expenses, unallocated capital expenditures, LC margin, inventories,
advance, deposits and prepayments has been classified under operating asset since these are involved
in business, selling goods and services. On the other hand, issue expense has been classified as
financial asset since it is involved in raising cash for operation.

Workers Profit Participation (WPP) Fund: the Company made the provision @ 5% of net profit
for Workers Profit Participation Fund (WPPF). This amount has to be incurred no matter what and
this is involved in the business, in selling goods and services. So this has been classified as operating
liability.

Unclaimed Dividend: This has been classified as financial liability because once it has been
declared the cash no longer is considered as company's money.

Other Liabilities: Trade and other payables, deferred tax provision and liabilities for expenses have
been classified as operating liabilities. On the other hand, long term loan, current portion of long
term loan and interest payable has been classified as financial liability since these are incurred to
finance the operation of the company.

Capital Work in Progress and Inventory: Work in progress and inventories are the part and parcel
of the operating activities. So we allocate it to operating assets.

Due from Affiliated Companies: The Company has made exchange with its peer company of its
products. As it is fully commercial nature we consider it as an operating activity like both operating
assets and operating liabilities.

Income Tax: Income tax is mainly for operating activities so we consider it as an operating activity.

Supplies and Expense Payables: It is fully due to operating activities so we consider it as operating
liabilities.

Comments about Reformulated Balance Sheet:

The reformulated balance sheet of Ratanpur Steel Re-rolling Mills Ltd.shows that
the Common Stock Equity has risen from 1422 million to 2990 million within the four years. It is
more than twice hold of the initial CSE. The companys financial position is strengthening day by
day. The exploratory part is whether the rising trend is due to operating activities or financing
activities.

10

CSE
3500.00
3000.00
2500.00
2000.00
1500.00
1000.00
CSE 500.00
0.00

2989.56
1422.58

1589.32

1744.28
RSRM

Year

The reformulation maintains the balance sheet equation: CSE=NOA-NFO. The balances of common
shareholders' equity (CSE) in the typical balance sheet agree with those in the reformulated balance

sheet.
Net Operating asset (NOA) is the difference between operating assets and operating liabilities. In this
case the company has higher operating assets than operating liabilities. And encounter positive

operating assets.
Net Financial Obligation (NFO) is the difference between financial obligations and financial assets. If
these are negative, the firm has a Net Financial Asset position (NFA). The company has a substantial
amount of NFA. The amount is rising continually except 2015. That means in 2015 it may liquidate
some of its financial assets.

2.2 Reformulation the Balance Sheets for the Last five years for peer company
11

OA2
OA3

Reformulated Balance
Sheet
(All figures are in million
BDT)
Operating Assets
Property Plant &
Equipment
Intangible Assets
Capital Work in Progress

OA4

Inventory

Classifica
tion
OA1

OA5
OA6
S

OL1
OL2
OL3
OL4

Trade & other

receivables
Advances, Deposits &
Payments
Operating Cash
Total Operating
Assets
Operating Liabilities
Defferred Tax Liabilities
Trade & other payables
Lease rental payable
within one year
Tax payable
Total Operating
Liabilities

Net Operating Assets

FO1
FO2
FO3

Financial Obligations
Interest Bearing
Borrowings
Obligation under finance
& operating leases
Long term loans payable
within one year

FO4

Short term loans

FO5

Dividends payable
Current portion of
interest bearing
borrowings
Short Term bank loan

FO6
FO7

Total Financial
Obligations

GPH Ispat Ltd.

2014

2015
1602.2
5
0.63
0.00
2260.1
4

305.52

1653.99
36
0.72
0
2488.34
45
1029.04
9
255.000
65

1.03

1.21

5171.89

4662.35

5428.32

0.68
5490.7
4

0.00
38.73

18.71
149.79

61.47
83.59

103.25
367.37

102.93
223.25

17.47
30.68

24.50
0.00

19.71
45.83

21.73
91.47

21.88
91.92

86.88

193.00

210.61

583.83

439.97

3828.9
2

4978.8
9

4451.7
5

4844.4
9

5050.7
7

805.48

983.62

146.80

126.36

502.26

54.55

51.90

41.64

50.50

29.17

0.00

134.19

38.47

53.98

2115.35
0.00
200.00 index(

2655.65

0.00

65.18
2922.0
5

120.31
0.00
3295.6
9

0.00
0.00
2882.5
6

0.00
3100.85
3331.6
8

0.00
0.00
3518.6
6

2011

2012

2013

1110.65
0.00
301.49

1655.87
0.81
0.00

0.32

1170.04
0.00
471.74
2152.51
14
714.892
58
490.326
45
172.380
66

3915.80

1591.24
462.65
449.45

0.00
2146.32
3316.0
2

1920.27
778.86

989.40
637.63

12

Reformulated Balance
Sheet

FA1
FA2
FA3
S

GPH Ispat Ltd.

Financial Assets
Other Investments
Other long term
investments
Short term investments

14.89

27.75

0.00

176.72

155.40

Non-operating Cash
Total Financial Assets

0.00
0.00
63.63
78.51

0.00
0.00
0.00
27.75

40.17
0.00
204.76
244.92

0.00
0.00
241.44
418.16

0.00
222.28
135.45
513.13

(Net Financing
Assets) /Net Financial
Obligation

3217.1
7

3288.2
8

2637.6
3

2913.5
3

3005.5
3

Equity
Check

611.74
ok

1690.6
2
wrong

1814.1
1
Ok

1930.9
7
wrong

2045.2
4
ok

From the above balance sheet we can interpret,

The reformulated balance sheet of GPH Ispat Ltd. shows that the Common Stock Equity has risen
from 1690 million to 2045 million within the five years. The companys financial position is
strengthening day by day though with slow pace. The exploratory part is whether the rising trend is
due to operating activities or financing activities.

CSE (RSRM vs GPH Ispat)

3500.00

2989.56

3000.00
2500.00
2000.00
CSE 1500.00

1930.97 2045.24
1814.111744.28
1690.621589.32
1422.58

RSRM
GPH Ispat

1000.00
500.00
0.00
2012

2013

2014

2015

Year

13

From the above graph we can see that the growth of CSE is consistently rising of GPH Ispat
Limited. The company is going to more stable and strengthen than the RSRM.

The reformulation maintains the balance sheet equation: CSE=NOA-NFO. The balances of common
shareholders' equity (CSE) in the typical balance sheet agree with those in the reformulated balance

sheet.
Net Operating asset (NOA) is the difference between operating assets and operating liabilities. In this
case the company has lesser operating liabilities than operating assets. And encounter positive
operating assets that mean net operatingassets. It indicates the company is very much efficient about
its working capital management. The company has positivenet operating assets.

NOA (RSRM vs GPH Ispat)

6000.00
5000.00

4978.89

4000.00
NOA

3000.00 2507.67

4451.75

4844.49 5050.77
4377.21

3033.43 3104.15

RSRM
GPH Ispat

2000.00
1000.00
0.00
2012

2013

2014

2015

Year

From the above graph we can observe that GPH Ispat has more NOA than RSRM but RSRM is more
efficient than GPH Ispat in terms of efficient working capital management.

Its OA and OL both are growing.

It has heavy investment in FA.

14

2.3. Reformulate the Income Statements for the Last four Years (target company)

Classifica
tion

Reformulated
Balance Sheet
(All figures are in
million BDT)
Operating Assets

Property, plant and

equipment
Capital work inprogress

OA1
OA2
OA3

Inventories
Accounts
Receivable
Due from affiliated
companies
Advances, Deposits
and pre-payments

OA4
OA5
OA6
S

Operating Cash
Total Operating
Assets
Operating
Liabilities

OL1

OL2
OL3
OL4
OL5
OL6

Deferred tax
liabilities
Trade & other
payables
Amount due to
related parties
other current
liabilites
Lease rental
payable within one
year
Tax payable
Total Operating

Ratanpur Steel Re-rolling Mills Ltd.

2012

2013

2014

1652.644
41
463.1162
94
1247.611
81
361.5853
94

2063.00
83
55.0123
67
1613.12
56
489.946
82

2064.962
6

0
54.56097
9
0.097463
16
3779.616
35

0
80.5653
91
0.04517
48
4301.70
37

0
131.8837
7
0.069035
7
4735.798
6

2012

2013

2014

86.78

159.68

168.59

114.35

798.37

937.05

1187.43

201.28

11.42

8.77

0.00

104.89

192.60

13.47

15.33
39.90
1268.27

28.30
45.96
1631.65

21.83
51.09
402.02

33.94
211.04
10.05
131.76
1271.95

0
1751.235
6
787.6475
7

2015

2001.6031
0
1739.8426
913.38769
0
124.27749
0.1203392
4779.2312
2015

15

Reformulated
Balance Sheet

Ratanpur Steel Re-rolling Mills Ltd.

Liabilities
Net Operating
Assets

2507.67

3033.43

3104.15

4377.21

Financial
Obligations

FO1
FO2

FO3

Interest Bearing
Borrowings
Obligation Under
finance & operating
leases
Short term loans

30.39

87.39

50.60

0.00

0.00
1074.09

0.00
1323.01

28.66
1382.94

Total Financial
Obligations

1104.48

0.00
1365.71
1453.1
0

1373.61

1411.60

Non-operating
Cash

19.40

8.99

13.74

23.95

Total Financial
Assets

19.40

8.99

13.74

23.95

(Net Financing
Assets) /Net
Financial
Obligation

1085.09

1444.11

1359.87

1387.65

1422.58
ok

1589.3
2
ok

1744.28
Ok

2989.56
Ok

Financial Assets
S

Equity
Check

Reformulated statement is on a comprehensive basis, so it also includes dirty surplus items reported
within the equity statement.
The effective tax rate is used here

Operating Income
Tax on Operating Income
Effective Tax Rate on Operation=
Salesbefore tax

Four types of income are included here,

Core Operating Income from sales
Core other operating income other than sales
Financial expenses (income)

16

All items are after tax basis. The operating income includes the core operating income from sales; core
other operating income other than sales and unusual items.

Comprehensive Income of RSRM

300.00

272.58

250.00
200.00
CI

150.00

155.97

166.74

154.96
RSRM

100.00
50.00
0.00
2011-2012 2012-2013 2013-2014 2014-2015
Year

From the above chart it can be observed that for RSRM, the profit has risen smoothly over the past four
years. In 2015 it shows significant rise. Comprehensive income rose from 156 million to 273 million.
The income statement of RSRM above shows the total breakdown of income from operations and
financial activities. It is stated that over the past years operating profit after total tax adjustment for the
year 2012 was 156million, 166 million, 156 million, 273 million.

2.4 Reformulated Income Statement (Peer Company)

GPH
Ispat
Ltd.

Reformulated Income
Statement
Classifica
tion

(All figures are in million BDT)

OI1

Revenue

OE1

Costs of Sales
Gross Profit

OE2
OE3

Distribution expenses
Administrative expenses

2011
3688.5
2
2969.4
9

2012
4386.3
2
3502.4
6

2013
5387.4
3
4521.1
3

719.03
-66.40
-46.98

883.86
-62.78
-70.48

866.30
-77.30
-70.42

2014
4687.
22
3819.
62
867.6
0
-77.97
-77.96

2015
5988.
40
5086.
54
901.8
5
-82.72
-87.45
17

GPH
Ispat
Ltd.

Reformulated Income
Statement
OE4
OE5

Depreciation and
amortization
Allocation for WPPF
Total Operating
Expenses
Core Operating Income
from Sales (before tax)

-79.20
-10.56

-78.16
-15.90

0.00
-17.85

-203.14

227.32

165.57

515.89

656.54

700.73

0.00
-21.58
177.5
1
690.0
8

0.00
-20.06
190.2
3
711.6
3

Tax on Operating Income

from Sales

Rep Tax

Income Tax Expense

Tax benefit from net
financial expenses
Tax on other Operating
Income
Tax on Operating
Income from Sales

Core Operating Income

from Sales (after tax)

-28.32

-44.73

-89.05

-41.27

-55.96

101.12

0.42

3.45

6.20

-69.17

131.2
0
105.2
8

-88.68
-77.74

-97.24

183.97

16.05
220.4
3

5.82
160.5
9

446.72

559.30

516.76

469.6
5

551.0
3

Other operating income /

(expense) before Tax
OOI1

Other revenues and profits

Tax on other
Operating Income

3.12

23.30

23.62

50.16

25.03

-0.42

-3.45

-6.20

-16.05

-5.82

Other Operating Income

(After Tax)

2.70

19.85

17.42

34.11

19.20

449.42

579.15

534.17

503.7
7

570.2
4

-307.78

377.83

385.17

0.00
-307.78

0.00
-

0.00
-

0.00
329.0
4
-

0.00
334.1
3
-

Total Operating Income

(After Tax)
Financial Expenses
(Income)
FE1

Finance expenses

FE2

Net Finance costs

Total Finance expenses

18

GPH
Ispat
Ltd.

Reformulated Income
Statement

Net Financial Expenses

after tax

284.05

77.74
-21.37
256.3
9

250.12
yes

280.0
1
no

313.8
4
no

385.17

41.27
0.00

55.96
0.00

101.12
0.00

-266.51

321.87

Tax benefit from net

financial expenses
Other expenses

OFE1

329.0
4
105.2
8
-1.16
223.7
6

377.83

Net Income after Tax to

Common Shareholders

182.91
yes

257.29
Yes

334.1
3

CI (RSRM vs GPH Ispat)

350.00
300.00
250.00

257.29

200.00 155.22
CI 150.00

250.12
166.51

313.84
280.01 272.58
RSRM

154.96

GPH Ispat

100.00
50.00
0.00
2012

2013

2014

2015

Year

The comprehensive earnings of GPH Ltd. are much higher than RSRM. In 2012, it was BDT 258
million for GPH IspatLimited and BDT 156 million for RSRM Ltd.and in 2015, it was BDT 313
million for GPH and BDT 273 million for RSRM.

Chapter 3: Reformulation of Cash Flow Statement

3.1: Computation of FCF
19

Free cash flow- the difference between cash flow from operations and cash invested in
operations- is the main focus in DCF analysis, liquidity analysis, and financial planning. Free
cash flow is the net cash generated by operations, which determines the ability of the firm to pay
off its debts and equity claims. FCF can be calculated using two methodsMethod 1:

C-I=OI-NOA

Method 2:

C-I=NFE-NFO+d

Here we have calculated FCF using method 1.

Ratanpur Steel Re-rolling Mills Ltd.

OI
NOA
NOA
FCF

2011-2012
211.09
2507.67
211.09

Free Cash Flow

C-I=OI-NOA
2012-2013
2013-2014
261.76
279.55
3033.43
3104.15
525.76
70.72
-264.00
208.83

2014-2015
461.06
4377.21
1273.06
-812.00

In RSRM free cash flow has a negative in 2013 and 2015 and a mixed (positive & negative) trend in
2012 and 2015. That means the company performed in volatile manner during 2012 & 2014 period and
they use their free cash flow to paid dividend and also made no new investment. On the other hand, the
company has a negative cash flow in 2013 and 2015 that means in this year the company paid dividend by
liquidating their financial assets. As far we know the company has no steps to diversification so the
company must pay 100% cash dividend with their financial assets.
C-I=NFE-NFO+D

NFE
NFO
NFO
D
FCF

2011-2012
-55.87
1085.09
74
18.13

2012-2013
-95.25
1444.11
359.02
74
-380.27

2013-2014
-124.59
1359.87
-84.24
0
-40.35

2014-2015
-188.48
1387.65
27.78
0
-216.26

C-I= NFA - NFI+D

2011-2012

2012-2013

2013-2014

2014-2015
20

NFA
NFA
NFI
D
FCF

-1085.09
-55.87
74
-955.22

-1444.11
-359.02
-95.25
74
-1274.86

-1359.87
84.24
-124.59
0
-1235.29

-1387.65
-27.78
-188.48
0
-1199.17

Chapter 4: Analysis of Profitability

Return on common equity is broken into its drivers over three levels of analysis.
The first level identifies the effect of financing and operating liability leverage.
Second level identifies the effect of profit margins and asset turnovers on operating profitability.
Third level identifies the drivers of profit margins, asset turnovers, and the net borrowing costs.

First Level Breakdown Financial Activities and Leverage:

Analysis of Financial Leverage:

ROCE=RNOA+[ FLEV (RNOANBC )]

The expression of ROCE is broken down into three drivers:

21

 Return on net operating assets (RNOA).

Financial leverage (FLEV).
Operating spread between the return on net operating assets and the net borrowing cost
(RNOA-NBC).
This formula says that the ROCE is levered up over the return from operations if the firm has financial
leverage and the return from operations is greater than the borrowing cost. The firm earns more on its
equity if the net operating assets are financed by net debt, provided those assets earn more than the cost of
debt.
RSRM LTD.
(All figures are in million
BDT)

CI
CSE
OI
NOA
NFO
NFE/
(NFI)
OA
OL
STBR

Net Income after Tax to

Common Shareholders
Equity
Total Operating Income
(After Tax)
Net Operating Assets
(Net Financing Assets)
/Net Financial Obligation
Net Financial Expenses
after tax
Total Operating Assets
Total Operating Liabilities
Short Term Borrowing
Rate After Tax
Implicit Cost on OL

Analysis of Profitability

2011-2012

20122013

20132014

2014-2015

155.22
1422.58

166.51
1589.32

154.96
1744.28

272.58
2989.56

211.09
2507.67

261.76
3033.43

279.55
3104.15

461.06
4377.21

1085.09

1444.11

1359.87

1387.65

-55.87
3779.62
1271.95

-95.25
4301.70
1268.27

-124.59
4735.80
1631.65

-188.48
4779.23
402.02

0.05
63.60

0.05
63.41

0.05
81.58

0.05
20.10

8.42%
131.10%

8.63%
110.06%

9.01%
128.27%

10.53%
215.44%

5.15%
3.27%
4.29%

6.60%
2.03%
2.24%

9.16%
-0.16%
-0.20%

13.58%
-3.05%
-6.57%

12.70%

10.87%

8.81%

3.96%

10.91%

10.48%

8.88%

9.12%

Particulars

First
Level

RNOA = OI/NOA
FLEV=NFO/CSE
NBC=NFE/NFO or
RNFA=NFI/NFA
Spread=(RNOA-NBC)
FLEV*Spread
ROCE=RNOA + (FLEV x
SPREAD)
ROE/ROCE = CI/CSE

22

First
Level

RSRM LTD.
ROOA = OI+Implicit Cost/OA
OPLLEV = OL/NOA
STBR
Opspread
OPLLEV*Opspread
RNOA=ROOA+OPLLEV*Opsp
read

RNOA = OI/NOA
Net Sales Revenue
Net Operating Assets
RNOA
PM
ATO

8.42%
3.56%
236.72%

Analysis of Profitability

7.27%
50.72%
5.00%
2.27%
1.15%

7.56%
41.81%
5.00%
2.56%
1.07%

7.63%
52.56%
5.00%
2.63%
1.38%

10.07%
9.18%
5.00%
5.07%
0.47%

8.42%

8.63%

9.01%

10.53%

8.42%

8.63%

9.01%

10.53%

5936.06
2507.67

5253.81
3033.43

4767.00
3104.15

5503.17
4377.21

8.63%
9.01%
Second Level
4.98%
5.86%
173.20% 153.57%

10.53%
8.38%
125.72%

In this company as NOA is positive we get positive ratio for RNOA.

Companys ROCE was higher in 2012 then started downward trend due to decrease of rate of interest.

23

ROCE OF RSRM
14.00%
12.00%
10.00%
8.00%
6.00%
ROCE 4.00%
2.00%
0.00%

12.70%

10.87%

8.81%
3.96%
RSRM

Year

As a cash cow company RSRM is deleveraging company. It has financial leverage in 2012 & 2013 but
recently it instead shows deleveraging feature. We can also see that SPREAD is negative that means the
leverage effect is unfavorable. In this company if the company is increasing its deleverage or decreasing
its negative leverage its ROCE should be increased. That means the company either declared more
dividends or going to diversify its operation.

ROCE & FLEV FOR RSRM

215.44%

250.00%
200.00%
150.00%

131.10%
128.27%
110.06%

ROCE & FLEV 100.00%

ROCE
FLEV

50.00% 12.70%
10.87%8.81%3.96%
0.00%
2011 2012 2013 2014 2015
Year

24

From the above graph we can see that in 2014 deleverage increased and ROCE decreased. And 2011 and
2012 ROCE increase in proportion with the deleverage of RSRM.

Analysis of Operating Liability Leverage:

Just as financial liabilities can lever up ROCE, so can operating liabilities lever up the return on net
operating assets. Operating liabilities are obligations incurred in the course of operations and are distinct
from financial obligations incurred to finance the operations. Operating liabilities reduce the net operating
assets that are employed and so lever the return on NOA.

RNOA=ROOA + ( OLLEV SPREAD )

RNOA=

OI Implicit Interest after Tax

OL
+
( ROOAShort term borrowing rate) }
Operating assets
NOA

In case of RSRM ROOA>Short Term Borrowing Rate for all period; which indicate favorable operating
liability leverage. We also know if ROOA is greater than short term borrowing rate

the leverage is

favorable. In case of RSRM it has favorable operating liability leverage although its OLLEV is negative,
it has a stable ROOA. That means the company is doing business with others money in the form of
Accounts Payable. For this reason, its operating liability is greater than operating assets. And NOA is
negative.

Second Level Breakdown: Drivers of Operating Profitability

The two drivers of RNOA are:

1. Operating profit margin (PM)

2. Asset turnover (ATO)

PM =

ATO=

OI (after tax)
Sales

Sales
NOA

For RSRM the PM is positive. In 2011, it was 3% and increases from 2012 to 2015 and again increases in
2015 to 8%. That means the firm has a tiny percentages of profitability in term of its operation. On the
other and the company shows decreasing trend of ATO that means the companys operating assets are not

25

efficient. We can interpret PM as for Tk.1 sales the operating profits only Tk. 0.03 for the year 2012 and
so on.

PM vs ATO OF RSRM
100%
P
M
&
A
T
O

98.52%

97.20%

96.32%

93.75%

80%
60%

ATO

40%

PM

20%
6.25%
3.68%
2.80%
0% 1.48%
2011-2012
2012-2013
2013-2014
2014-2015
Year

Third Level Break Down:

The profit margin firstly, can be broke into two components:

PM =Sales PM +Other items PM

The two components of profit margin have further components:

Sales PM =Grossmargin ratio Expense ratios

Gross margin Administrative expenses Selling expense RD Operating taxes

Sales
Sales
Sales
Sales
Sales

26

Other Operating Item PM =

Subsidiary Income Other Equity Income Other gainlosses

Sales
Sales
Sales

These component ratios are known as profit margin drivers. Clearly, profit margins are increased by
adding to gross margins (reducing cost of sales), by adding other items income, and by reducing expenses
per taka of sales.

The asset turnover can be broken down into ratios for the individual assets and liabilities:

1
Cash A /R Inventory
PPE
A/ P Other obligation
=
+
+
++
+

ATO Sales Sales

Sales
Sales
Sales
Sales

For RSRM the drivers indicate each level of operations where to control. For PM the main drivers are
GM and then the large expenses. Like the administrative expenses and Contribution for the Workers Fund
have huge (-) impact on PM. For ATO due from affiliated companies, inventories and trade receivable are
major component for RSRMto impact ATO and current tax liability, suppliers and accounts payable, due
from affiliated companies are also has huge effect on ATO inverse factor.

GPH Ispat
(All figures are in million BDT)

CI
CSE
OI
NOA
NFO
NFE/(NFI)
OA
OL
STBR

Net Income after Tax to

Common Shareholders
Equity
Total Operating Income
(After Tax)
Net Operating Assets
(Net Financing Assets)
/Net Financial Obligation
Net Financial Expenses
after tax
Total Operating Assets
Total Operating
Liabilities
Short Term Borrowing Rate

Analysis of Profitability

2011

2012

2013

2014

2015

182.91
611.74

257.29
1690.6
2

250.12
1814.1
1

280.01
313.84
1930.9
7 2045.24

449.42
3828.9
2
3217.1
7

579.15
4978.8
9
3288.2
8

534.17
4451.7
5
2637.6
3

503.77
570.24
4844.4
9 5050.77
2913.5
3 3005.53

266.51
3915.8
0

321.87
5171.8
9

284.05
4662.3
5

223.76
256.39
5428.3
2 5490.74

86.88
0.05

193.00
0.05

210.61
0.05

583.83
0.05

439.97
0.05
27

GPH Ispat

After Tax
Implicit Cost on OL

4.34

9.65

10.53

29.19

22.00

2011
11.74
%
525.90
%

2012

2013

2015

11.63%
194.50
%

12.00%
145.39
%

2014
10.40
%
150.88
%

11.29%
146.95
%

9.79%
1.84%

10.77%
1.23%

7.68%
2.72%

8.53%
2.76%

FLEV*Spread
ROCE=RNOA + (FLEV x
SPREAD)

8.28%
3.45%
18.16
%
29.90
%

3.59%
15.22
%

1.79%
13.79
%

4.10%
14.50
%

4.05%
15.35
%

ROE/ROCE = CI/CSE

29.90
%

15.22
%

13.79
%

14.50
%

15.35
%

11.59
%

11.38%

11.68%

10.79%

OPLLEV = OL/NOA
STBR
Opspread
OPLLEV*Opspread
RNOA=ROOA+OPLLEV*Opspre
ad

2.27%
5.00%
6.59%
0.15%
11.74
%

3.88%
5.00%
6.38%
0.25%
11.63
%

4.73%
5.00%
6.68%
0.32%
12.00
%

9.82%
12.05
%
5.00%
4.82%
0.58%
10.40
%

RNOA = OI/NOA

11.74
%

11.63
%

12.00
%

10.40
%

11.29
%

Particulars
RNOA = OI/NOA

First
Level

FLEV=NFO/CSE
NBC=NFE/NFO or
RNFA=NFI/NFA
Spread=(RNOA-NBC)

ROOA = OI+Implicit Cost/OA

First
Level

Revenue
Net Operating Assets

Second
Level

Analysis of Profitability

RNOA
Profit Margin
Asset Turnover

3688.5 4386.3
2
2
3828.9 4978.8
2
9
RNOA=PM*ATO
11.63
11.74%
%
13.20
12.18%
%
88.10
96.33%
%

5387.4
3
4451.7
5
12.00
%
9.92%
121.02
%

8.71%
5.00%
5.79%
0.50%
11.29
%

4687.2
2 5988.40
4844.4
9 5050.77
10.4
0%
10.75
%
96.75
%

11.29
%
9.52%
118.56
%

28

Analysis of Operating Liability Leverage:

In case of GPH Ispat, ROOA>Short Term Borrowing Rate for all period; which indicate favorable
operating liability leverage. We also know if ROOA is greater than short term borrowing rate

the

leverage is favorable. In case of GPH it has favorable operating liability leverage and it has a stable
ROOA. That means the company is doing business with others money in the form of Accounts Payable.
For this reason, its operating liability is greater than operating assets. And NOA is negative.

Second Level Breakdown: Drivers of Operating Profitability

For JGPH the PM is positive. In2011 it was 12.18% which is higher. That means the firm has a large
percentages of profitability in term of its operation. On the other hand, the company shows positive ATO
that means the companys operating assets are efficient. We can interpret PM as for Tk.1 sale the
operating profits only Tk. 0.1218 for the year 2011 and so on.

Third Level Break Down

For GPH the drivers indicate each level of operations where to control. For PM the main drivers are GM
and then the large expenses. Like the administrative expenses and Contribution for the Workers Fund
have huge (-) impact on PM. For ATO due from affiliated companies, inventories and trade receivable are
major component for GPH to impact ATO and current tax liability, suppliers and accounts payable, due
from affiliated companies are also has huge effect on ATO inverse factor.

1.

In 2011 GPH has higher Gross Margin Ratio that means lower production cost. And its
administrative and selling expenses is also high indicate a higher return. On the other hand,
RSRM Limited has a lower Gross margin ratio which indicates higher production cost. It has no
significant administrative and selling expense comparing to theGPH. As a result, its gross margin

2.

is lower.
In RSRM performance from year to year in 2015 gross margin has increased slightly because

3.

their expense in administrative and selling has been increased slightly.

In GPH performance from year to year in 2015 gross margin has increased slightly because their
expense in administrative and selling has been increased slightly also.

Chapter 5: Analyzing Growth in Residual Earning and Abnormal Earning Growth

A simple formula calculates the change in residual earnings (RE) from its two drivers29

The change in ROCE and cost of capital

Change in the common shareholder's investments (CSE)

ROCECost of capital
ROCECost of capital

1=[ ( 1 CSE 0 ] + [ CSE 1 ( 1 ]

Ratanpur Steel Re-rolling Mills Ltd.
Forecast, Dec 2015
Assuming EPS & DPS of 2015 will grow @ 11% in the next 5 years & required rate of
return @ 12%
Particulars
2015
2016
2017
2018
2019
2020
5.6887
7.0091 7.7801 8.635923
EPS
5.125
5 6.314513
09
11
045
3.4190 3.7951 4.212645
DPS (constant DPR)
2.5
2.775 3.08025
78
76
388
114.45 117.36
124.19 128.17 132.5994
BPS
32
7 120.6012
13
62
732
Reinvested dividends @
0.3696 0.4102 0.455421
12%
0.3
0.333
3
89
123
5.9887
7.3787
9.091344
Cum Dividend Earning
5 6.647513
39 8.1904
168
7.0722 7.8502 8.713724
Normal Earning
5.74
6.3714
54
02
153
0.2487
0.3064 0.3401 0.377620
AEG
5 0.276113
85
98
014
8.0456
7.4630 7.1228 6.745220
RE = (ROEt-RR)BVt-1
4 -7.76952
4
4
42
0.0497
0.0581 0.0626 0.067375
ROEt = EPSt/BVt-1
04 0.053801
18
46
405
Change in Residual
0.3064 0.3401 0.377620
Earning
0.276113
85
98
014
1.4049 1.5735 1.762341
Discount Rate
1.12
1.2544
28
19
683
5.3120 4.5266 3.827419
Present Value of RE
7.1836 -6.19382
4
9
214
Total Present Value of
27.043
RE
6
87.40
Value of equity
964
Assuming RE growth @ 5.5% after 2020 & Capitalization rate @ 9%
30

Ratanpur Steel Re-rolling Mills Ltd.

Forecast, Dec 2015
Assuming EPS & DPS of 2015 will grow @ 11% in the next 5 years & required rate of
return @ 12%
79.1239
727

CV=RE1/r-g
PV of CV
Value per Share

P/B
Normal P/B
P/E
Normal Forward
P/E=1/RR
Forward P/E=P0/E1
Normal Trailing
P/E=(1+RR)/RR
Trailing P/E=(P0+D0)/E0

44.897
1
42.512
57
0.3714
41
1
8.2951
36
354.27
14
7.4730
96
9.3333
33
8.7829
41

In 2020, for the changes in residual earning of Tk. 0.377million, is also the abnormal earning growth
(AEG) for 2013. Applying the simple formula,

For RSRM the growth in RE is growing though its negative but the changes of RE that means
the AEG is positive. The company is a growth firm.

31

Chapter 6: Implications for Strategy and Conclusion

For RSRM:
A change in ROCE is analyzed by distinguishing changes that are due to operating profitability (change in
RNOA) and change in the financing of operations. In both cases, core or sustainable components that are
likely to drive profitability in the future are distinguished from transitory or unusual components that are
nonrecurring. So finding out what will drive profitability in future.
The changes in RE heavily depend on change in ROCE, change in ROCE is heavily depend on change in
change in RNOA, changes in RNOA is heavily depend on core sales RNOA. In this case the unusual item
carries very negligible portion in the ROCE. So based on Residual Earning model this firm generates
changes in negative RE, so it is non-growing firm.
From the above study we can easily conclude the RSRM is a cash cow company and its abnormal
earnings growth is increasing on a positive pace that means the firm is in growth phase. At this crucial
time for the RSRM the company declared 100% cash dividend to attract the investors but until the
company will not go to further diversification the companys actual position will not be improved and the
share price will not increase in future.

Recommendations:
The company should take steps to increase its Profit Margin.
The company should increase its Asset Turn Over.
The company should go for diversification and reduce financial assets.
For GPH Ispat:
On the other hand, the GPH has a significant PM and it can maintain somewhat its operation with its
operations earnings. The company has less financial assets than RSRM but it is also depending on the
Financial Income. So same comments are appropriate for the GPH as like RSRM.

32

REFERENCES

Penman, Stephen H., Financial Statement Analysis and Valuation, 3nd ed., New Delhi: McGraw Hill

Education (India) Private Ltd., 2013.

Class lecture of Honorable Course Teacher: Dr. Mahmood Osman Imam.
Annual Reports of POCL from 2011 to 2015.
Annual Reports of JOCL from 2011 to 2015.
Official Website of Dhaka Stock Exchange Ltd.
www.tradingeconomics.com
www.stockbangladesh.com
www.bb.org.bd
www.lankabd.com

33