2014-

2018
Analysis of Financial Statement

The ACME Laboratories Ltd.

2014-2018
United International University
Financial Statement Analysis
Report on Financial Statement Analysis of
The ACME Laboratories Ltd.

Submitted To
Muhammad Enamul Haque
Assistant Professor
School of Business and Economics

Submitted By
Group No. 03
Section: A

Date of Submission: 20 April, 2019

th

i
Group List
Name ID Class Remarks
Serial
Anik Dey 111 151 130 08
Maina Alam Alin 111 152 122 14
Quazi Md. Ispar Fatha Deep 111 161 138 20
Mirza Bashir 111 161 175
Sriman Mitra 111 161 294 30
Naima Rahman 111 163 022 33

ii
Letter of transmittal

Mr. Muhammad Enamul Haque

Assistant Professor
Department of Business and Economics
United International University

Dear Sir,
Here is the term paper that you assigned us to prepare, on “Financial statement analysis” for our
course. In this report we have basically tried to analyze the financial statement of a listed company.
We chose The ACME Laboratories Ltd. for that purpose. We have covered all the necessary
techniques and analysis that should be included in this report. Besides, we are still students and we
are in a process of developing our skills. So, we hope that you will be kind enough to consider the
limitations of this report.
Thank you for giving us such an opportunity for working on the topic. We will be honored to
provide you any additional information, if necessary.

Sincerely yours –
Quazi Md Ispar Fatha Deep
ID: 111 161 138
Section: A
On behalf of my members of the group

iii
Acknowledgement

It is a great contentment for us to express our deep sense of gratitude to our honorable course
teacher Mr. Muhammad Enamul Haque for giving us an opportunity to prepare a report on
“Financial statement analysis” as part of the course - “Financial statement analysis, ‘FIN- 4218’.
Our honorable course teacher helped us from time to time on different issues regarding the report.
We also took the help of course materials provided by our honorable course teacher, text and
reference books.
We appreciate the unity, spontaneous workability and team spirit of our fellow group members.
Without co-operation and support from each other it would not be possible to make such a
resourceful report.
We also thank them who helped us regarding the collection of any information which was
necessary for accomplishing the report by providing us data & information.
Finally, we want to pay our gratitude to our course teacher for giving the greatest opportunity to
work on such an assignment that will be very helpful in the future.

iv
Executive summary

In this report, we conducted several analysis. First we conducted traditional techniques, which has
three parts- vertical analysis, horizontal analysis and ratio analysis. Next, we did reformulation of
Balance sheet and Income statement of The ACME Laboratories Ltd. From the reformulation, we
calculated several components for the purpose of analysis of profitability. We conducted first and
second level of analysis. And then we determined the growth of shareholder’s profitability. And
finally, we did forecast and valuation.

v
Table of Contents

Acknowledgement.................................................................................................................. iv

Executive summary ..................................................................................................................... v

Chapter 1 ....................................................................................................................................1

Chapter 2 ..................................................................................................................................15

Chapter 3 ..................................................................................................................................29

Interpretation of Ratios .............................................................................................................30

Chapter 4 ..................................................................................................................................49

Analysis .....................................................................................................................................50

1st level analysis: ...................................................................................................................50

2nd level analysis: ...................................................................................................................52

3rd level analysis: ...................................................................................................................53

Chapter 5 ..................................................................................................................................54

Growth......................................................................................................................................55

Chapter 6 ..................................................................................................................................56

Simple Forecasts: Forecasting from Book Values (SF1) ..........................................................57

Appendix ................................................................................................................................... vii

vi
Introduction
The ACME Laboratories Ltd. is a leading company for manufacturing world-class and top-quality
pharmaceutical products in Bangladesh. We are currently producing more than 500 products in
different dosage forms covering broader therapeutic categories which include anti-infective,
cardiovascular, antidiabetics, gastrointestinal, CNS, respiratory disease etc. among many others.
The success in local market prompted us to explore the international market and over the years we
gained a firm presence in South East Asia, Africa and Central America and continuously
discovering new horizons to improve the quality of life for patients, to further the success of our
customers and to help meet global challenges. Through the outstanding knowledge,
professionalism and commitment of more than 7000 employees, we are consistently building upon
our facilities, capabilities and also portfolio to meet the growing health care needs.
We are united, inspired and fueled by our mission to ensure health vigor and happiness for all.
Since our founding in 1954 by Mr. Hamidur Rahman Sinha, an entrepreneur and philanthropist in
this region of then British divided Indian sub-continent, we have been committed to offering
solutions to our most pressing health care needs. More than half a century later, we remain true to
our founder’s vision and values – to produce high quality medicines with integrity, customer focus,
pro-activity, team spirit, excellence and desire to win and responding to social and environmental
needs. Over the past few decades, we have seen an amazing growth and success in pharmaceutical
sector. With more than 60 years of expertise in medicine and science, our company draws upon a
rich legacy of high-quality formulations and a robust pipeline of promising generic medicines at
affordable price to meet the health care needs.
Since 1954 ACME has been stood for quality, business success and responsible entrepreneurship.
Our heritage and our values are the foundation of our mission to ensure health, vigor and happiness
for mankind.

ACME are an ISO 9001:2015 certified company. “Perpetual Quest for Excellence” is our quality
slogan.

vii
Objective of this report
The first objective of the report is to fulfill the partial requirement of the BBA program. Secondly,
to give an overview of The ACME Laboratories Ltd in general based on our work experience. The
objectives of the report are:

❖ Evaluate various aspects of a firm’s operating and financial performance such as its
efficiency, liquidity, profitability and solvency
❖ Analyzing company’s financial position and reformulating the financial statement based
on financial statement and the different sectors of financing.
❖ Also measuring the profitability of the firm, and forecasting the value of CSE.
❖ To identify the evaluation of past performance
❖ To measure the assessment of the current status
❖ To identify future prediction of future potential

viii
Methodology

Sources of Information
We have collected the information/data from secondary sources which have helped us to make this
report. The secondary data sources are annual reports and website of ACME laboratories Ltd. and
different publications of ACME. To identify the implementation, supervision, monitoring on
balance sheet and income statement with the employee and extensive study of the existing files.
And we also take help of course text book and class lecture.

ix
 Chapter- 1

Horizontal analysis
There are some traditional techniques of Financial Statement Analysis, those are-
❖ Horizontal Analysis
❖ Vertical Analysis
❖ Ratio Analysis
Analysis of all three of these techniques are given below-

Horizontal analysis
This technique is also known as comparative analysis. It is to calculate amount changes &
percentage changes from the previous years to current year. Horizontal analysis of ACME
Pharmaceuticals shows the comparison of historical financial information over a series of
reporting periods (2014-2018), to know the overall performance of the firm. For doing the
horizontal analysis current year can’t be the base year so we have selected 2014 as the base
year and then we compared year 2015-2018 with the base year.
Assets

Non current Assets

18.00% 15.79%
16.00%
14.00%
12.00%
10.00%
7.63%
8.00% 5.72%
6.00%
3.32%
4.00%
2.00%
0.00%
2015 2016 2017 2018

Non-current assets:
ACME’s non-current assets have a growing pattern. In year 2014 to 2015 we can see positive
change(increase) in non-current asset of 3.32%, and at 2016 their non-current asset ware
growing continuously to 7.63%. which was more the previous growth rate. At 2017 it decrees
at 5.72% but growth ware positive. And at 2018 there is a significant change in non-current
asset of 15.79%, which was a massive change. We can say this company made investment in
fixed asset every year and at 2018 the company made huge investment in non-current assets.

2
 Property, Plant & Equipment
18.00%
15.84%
16.00%
14.00%
12.00%
10.00%
7.57%
8.00%
5.69%
6.00%
3.32%
4.00%
2.00%
0.00%
2015 2016 2017 2018

Property, plant, equipment: Like non-current asset property, plant and equipment has a
mixed type of growth. In non-current assets from 2014-2015 it changes 3.32% in property
during 2014. And at 2016 their property was increased 7.57%. But at 2017 there is a slight
decree. Finally, at 2018 the firm has positive change of 15.84% in the next year which means
they invested in property in that year.

Investment in Shares
200.00% 178.79%
180.00%
160.00%
140.00%
120.00%
100.00%
80.00% 63.19%
60.00%
40.00%
16.02%
20.00% 7.68%
0.00%
2015 2016 2017 2018

Investment in Share: In the chart we can see there is mixed growth in investment over this
five year. In year 2015 there is very little change, which is 16.02%. At 2016 there is a huge
change in investment in share. At 2016 the changes were 178.79% increase. After that their
investment ware not growing. At 2017 the change ware 63.19% and at 2018 the change ware
7.68%. So, we find out that, their investment in share is increasing every year but at 2016 their
investment ware significant and at 2018 their investment in share is very little.
So, from the non-current asset part we can see, over the year the change is positive.
Current Assets

3
 Current Assets
70.00% 61.18%
60.00%
50.00%
40.00%
30.00%
20.00%
8.50%
10.00% 0.59%
0.00%
-10.00% 2015 2016 2017 2018
-1.79%

Current asset: Current asset on ACME Company is relatively lower than the other years which
is 8.5%. From the year 2014 to 2015 the current asset growth rate is the highest in the given
period of time. That was good for the company. But in the forwarding period of time the (2015
to 2016) the assets rate decreased very significantly; which is very harmful for the company as
decreasing level of asset creates barriers for conducting regular business activities.

Advance, Deposits & Pre-Payment

50.00%
38.77%
40.00%
30.00%
20.53%
20.00%
10.00% 4.79%
0.00%
-10.00% 2015 2016 2017 2018
-10.12%
-20.00%

Advance, Deposits & Pre-Payment: Growth rate of deposits, pre payments and advance is at
the negative level during 2014 to 2015 of period. As these are elements of current assets so
decline in current assets is visible in 2014 to 2015. From the year 2015 to 2016 the growth rate
increased and became 4.79%; which is higher than the previous one but still not satisfactory.
2016 to 2017 the rate becomes significantly higher and increment in the funds which provides
higher probability of profitability by better business activities. From 2017 to 2018, the rate
again falls but still remains positive.

Therefore, ACME Company shows a mixed type of fluctuations in growth rates of advance,
deposits and payments.

4
 Cash and Cash Equivalents
200.00%
165.60%
150.00%

100.00%

50.00% 20.45%
4.56%
0.00%
2015 2016 2017 2018
-17.92%
-50.00%

Cash and cash equivalents: Cash and cash equivalents are the amounts that reflects the
liquidity of the company. The higher the liquidity higher the capacity to pay the bills or debts.
Like other growth rates, ACME Company has the positive and negative rates of cash & cash
equivalents in the analyzing years. In the beginning period the rate is lower which is showing
the less capacity to pay the bills. From this period to 2016-17 the rate becomes significantly
high, reflecting the higher capacity of the company to pay the bills and debt. In the last period
the rate is lowest and negative that means the 2017-18 period is the time of least growth in cash
and cash equivalents.

Shareholder's Equity
50.00% 43.89%
40.00%
30.00%
20.00%
10.00% 6.36% 3.62% 4.06%
0.00%
2015 2016 2017 2018

Shareholder’s equity: Shareholder’s equity is highest in the period 2015-2016. But fluctuates
with high difference in decreases in the year from 2016 to 2017. From 2017 to 2018 there is a
slighter difference in the rate of growth and it’s increasing. Increase in shareholders means the
increase in company’s capital. From the year 2015 to 2016 ACME Company had the highest
growth rate in shareholders’ equity that shows the higher capital or increasing earnings by the
company. In the period 2017 to 2018, the scenario is opposite.

5
 Retained Earnings
37.98%
40.00%

30.00% 22.81% 22.28%

19.09%
20.00%

10.00%

0.00%
2015 2016 2017 2018

Retained Earnings: ACME Company has the high rate of retained earnings in the period of
2014 to 2015. In the taken years, all the growth rate of retained earnings is positive and
relatively of high rate. This rate is decreasing by the time period continuously from 2014 to
2018. But the rate remains at positive rate. It’s a good sign for the company to retain positive
rate of growth after distributing to the shareholders.

Non Current Liabilities

80.00%
60.41%
60.00%

40.00%
25.56%
20.00%

0.00%
2015 2016 2017 2018
-20.00% -7.14%
-19.30%
-40.00%

Non-Current Liabilities: ACME Company has the highest rate of non-current liability in the
time horizon of 2014 to 2015. That oversees the lower capabilities of meeting with financial
obligations. The rate lowers and reaches at a negative rate in the 2015 to 2016 period. This is
how it becomes less harmful for conducting business activities as it becomes increasing
capacity of the company to satisfy financial obligations. From 2016 to 2017 the scenario is
quite similar, as it also shows a negative rate. In the period of 2017 to 2018, the scenario is can
be complied with the period of 2014 to 2015. But not a very high rate of liability is reflected
here. The growth rate increases in a way that increases the risks for the company to pay
financial obligations, but it doesn’t represent as high rate at the first one.

6
 Long Term Loan-Net off Current
Maturity
80.00%
56.43%
60.00%

40.00%
24.95%
20.00%

0.00%
2015 2016 2017 2018
-20.00%
-16.82%
-22.95%
-40.00%

Long Term Loan-Net off Current Maturity: It Reelects the highest rate in the period 2014
to 2015. From the year 2015 to year 2016, the rate is becoming lower and lower that becomes
negative. Negative rate is reflected in 2016 to 2017 period. In the last period the rate increases
at a high fluctuation and becomes higher (although not higher than the 2014 to 2015).at the
beginning period, long term loan is higher and in the last period also. In the middle two horizons
(2015-16 and 2016-17), the rate is negative. The last period again shows the positive growth
rate in long term liability which is almost 25%.

Current Liabilities
25.00% 22.72%
20.00%
15.00% 11.26%
8.71%
10.00%
5.00%
0.00%
-5.00% 2015 2016 2017 2018
-10.00%
-15.00%
-20.00% -17.17%

Current Liabilities: ACME reflects the negative rate of current liability portion in 2014 to
2015. the rate of funding and purchasing on credit was too late on that period. From 2015 to
2016 the current liability increased in becomes 22.72% which is totally at the opposite direction
of the previous period. this rate decreases and remains positive in the following year, 2016 to
2017. from the year 2017 to 2018 the current liability increases again. the rate of fund sourcing
by day-to-day business activities of ACME is the highest during the period 2015 to 2016. So,
Current assets has the mixed growth rate portion.

7
 Net Asset Value Per Share(NAVPS)
10.00% 8.94%
9.00%
8.00%
7.00% 6.36%
6.00% 4.95%
5.00%
3.66%
4.00%
3.00%
2.00%
1.00%
0.00%
2015 2016 2017 2018

Net Asset Value per Share: It has a well and satisfying growth rate which has increased up to
8.94%.

Revenue
14.00% 12.51%
12.00% 9.99%
10.00% 9.12%
7.37%
8.00%
6.00%
4.00%
2.00%
0.00%
July'14 to July'15 to July'16 to July'17 to
June'15 June'16 June'17 June'18

Revenue: ACME company possesses the highest revenue portion in 2014 to 2015. From the
overall period of 2014 to 2018 ACME Maintains a positive revenue growth rate. from operating
activities, the company makes the highest profit growth rate during the period 2014 to 2015.
Which means the sales of that period was at highest rate. the following periods, the growth rate
decreases slightly and so is in the 2016 to 2017. A slight increment is visible in the period
2017-2018. The lowest rates of sale are in the period of 2016 to 2017. The highest sales revenue
means the company is able to sell its products in higher prices.

8
 Less: Cost and Goods Sold
18.00%
15.35%
16.00%
14.00%
11.23%
12.00%
10.00% 8.00%
8.00%
6.00% 3.46%
4.00%
2.00%
0.00%
July'14 to July'15 to July'16 to July'17 to
June'15 June'16 June'17 June'18

Cost of Goods Sold: Like Revenue, Cost of goods sold of ACME company has a positive
growth structure over the year 2014 to 2018. Although there is a mixed structure, the fluctuating
rates are quite going in a same way with the change of sales Revenue. 2014 to 2015 is the
period which shows the highest growth rate of cost of goods sold. that means the efficiency is
significantly less in that period. The higher the cost of production, the lower the gross profit
earned by the company. the trend shows that the growth rate cost decreases slightly in 2015 to
2016. the rate is lower in 2016 to 2017. during this period, the gross profit is seeming to be
higher as the cost is less. the last period which is 2017-18 shows the increment of this cost of
growth rate which is not too much differentiated from the previous period.

Gross Profit/(Loss)
16.00%
13.32% 13.59%
14.00%
12.00%
10.00% 8.07%
8.00% 6.05%
6.00%
4.00%
2.00%
0.00%
July'14 to July'15 to July'16 to July'17 to
June'15 June'16 June'17 June'18

Gross Profit: ACME shows the positive incremental gross profit over the years. during the
period 2014 to 2015, the growth rate is 8.07%. the positive values indicate that the sales
revenues are greater than cost of goods sold over the years. the periods 2015-16 and 2016-17
shows the comparatively higher value of gross profit. this simply shows that in these periods,
cost of goods sold were lower and sales revenues were higher. increase in the gross profit was
beneficial for ACME company as it provided chances to expand the business. 2017-2018 was
9
the period that shows the significantly lower gross profit rather than the previous period that
shows the fluctuated and increased amount in cost of goods sold.

Less: Financial Expenses

30.00% 26.47%

20.00% 13.55%
8.62%
10.00%

0.00%
July'14 to July'15 to July'16 to July'17 to
-10.00% June'15 June'16 June'17 June'18
-8.98%
-20.00%

Financial Expenses: Financial Expenses in 14 to 15 was 26.47%. It decreases in year 15 to 16

at 13.55% and continuously -8.98% in 16 to 17 year. It slightly increases into 8.62% in 17to
18 fiscal year.

Net Profit before Tax

50.00% 45.18%
40.00%
30.00%
20.00% 12.00%
10.00% 3.90%
0.00%
July'14 to July'15 to July'16 to July'17 to
-10.00% -3.96%
June'15 June'16 June'17 June'18

Net Profit before Tax: Net profit before taxes is simply the net income of a business with
the taxes. It is the sum of all revenues minus all expenses, including cost of goods sold,
depreciation, interest. The before tax profit of ACME Pharmaceuticals Company. In 2014 to
2015 it was 12.00 % after that it decreases at the 3.90% and increases at 45.18% in 2015 to
2016 and 2016 to 2017 financial year. It again decreases at the rate of -3.96%

10
 Net Profit after Tax
30.00% 26.93%
25.00% 19.45%
20.00%
15.00%
10.00%
3.14% 2.05%
5.00%
0.00%
July'14 to July'15 to July'16 to July'17 to
June'15 June'16 June'17 June'18

Net Profit after Tax: Net profit after taxes is simply the net income of a business less all taxes.
It is the sum of all revenues minus all expenses, including cost of goods sold, depreciation,
interest, and taxes. This the actual profit of acme Pharmaceuticals Company. In 2014 to 2015
it was 3.14 % after that it increase continuously at the 19.45% and 26.93% in 2015 to 2016 and
2016 to 2017 financial year. It again decreases at the rate of 2.05%

Total Comprehensive Income

30.00% 27.24%
25.00%
19.37%
20.00%
15.00%
10.00%
5.00% 3.15% 1.94%
0.00%
July'14 to July'15 to July'16 to July'17 to
June'15 June'16 June'17 June'18

Total Comprehensive Income:

Comprehensive income includes unrealized gains and losses on available-for-sale investments.

Comprehensive income also includes cash flow hedges, which can change in value depending
on the securities' market value, and debt securities transferred from available for sale to hold
to maturity, which may also incur unrealized gains or losses. In 2014 to 2015 it was 3.15%. In
2015 7to 2016 financial year it was 19.37% and also continuously increase in 2016 to 2017

11
financial year. after that decrease at the percent of 1.94% in 2017 to 2018 financial year.

Earning Per Share(on the Equity share of

Tk. 10 each)
16.00% 14.91%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00% 1.97%
2.00% 0.88% 0.92%
0.00%
July'14 to July'15 to July'16 to July'17 to
June'15 June'16 June'17 June'18

Earnings per Share: Earnings per share (EPS) is the portion of a company's profit allocated
to each share of common stock. Earnings per share serve as an indicator of a company's
profitability. It is common for a company to report EPS that is adjusted for. In 2014 to 2015
financial year contribute 0.88 % of profit to per share. it increases in 2015 to 2016 fiscal year
and it became 14.91%. again, decrease in 2016 to 2017 at 0.92 %. After that in 2017 to 2018
eps increase at 1.97%.

Net cash generated from operating

activities
132.75%
140.00%
120.00%
100.00%
80.00%
60.00%
40.00% 25.97%
5.56% 13.03%
20.00%
0.00%
July'14 to July'15 to July'16 to July'17 to
June'15 June'16 June'17 June'18

Net cash generated from operating activities: Acme earn 132.75% profit from operating
activities in 2014 to 2016 fiscal year. after that they cannot earn much profit and continuously
it decreases in 2015 to 2016 and 2016 to 2017 and become 25.97% and 5.56%. in 2017 and
2018 little bit increase at 13.03 %

12
 Net cash used in investing activities
600.00% 505.61%
500.00% 435.33%
400.00%
300.00%
200.00%
100.00%
0.00%
-100.00% July'14 to July'15 to July'16 to July'17 to
-76.91%
June'15 June'16 June'17
-90.39% June'18
-200.00%

Net cash used in investing activities: Investment can be for asset purchase or others financing
activities. In 2014 to 2015 it was negative value they did not invest in terms of cash flow.
Again, they invest more and more in 2015 to 2016 financial year that’s mean they invest for
increasing the business. Again, they did not invest but most probably they take loan. again in
2017 to 2018 it again increases at 505%

Total Cash Generated From Financing

Activities
0.00%
July'14
-105.42%to July'15 to July'16
-118.11%to July'17 to
-500.00% June'15 June'16 June'17 -217.17%
June'18

-1000.00%

-1500.00%

-2000.00%

-2500.00%
-2381.18%
-3000.00%

Total Cash Generated from Financing Activities: Cash flow from financing activities is a
section of a company’s cash flow statement, which shows the net flows of cash that are used
to fund the company. Financing activities include transactions involving debt, equity, and
dividends. Negative net cash flow means the business spent more than it generated on those
specific activities. In 2014 to 2015 it was minus 105.42% that’s they cannot gather money from
investment. in 2015 to 2016 if again fall down negative 2381% they are failed in financing
activities. And continuously failed in 2016 to 2017 and 2017 to 2018 financial year. It was both
negative conditions better than previous year 2015 to 2016 financial year.
13
 Cash and Cashh equivalents at the
closing
200.00% 165.60%
150.00%
100.00%
50.00% 20.45%
4.56%
0.00%
July'14 to July'15 to July'16 to July'17 to
-50.00% -17.92%
June'15 June'16 June'17 June'18

Cash and Cash equivalents at the closing: Cash and cash equivalents are a group of assets
owned by a company. Cash equivalents are investments that can readily be converted into cash.
The investment must be short term. Acme’s Cash and Cash equivalents was 4.6% in 2014 to
2015 financial year. In 2015 to 2016 m It’s become 165.60% that’s mean they got high amount
of liquid money. It can be from browning fund or financing activities. Again, it drops down in
2016 t0 2017 fiscal year at 20.45%. After that Cash and Cash equivalents again fall down and
it’s become -17.92%, so from here we can easily understand they basically borrowing fund
from another source in 2015 to 2016.

Net operating cash flow per euity share

140.00% 128.07%
120.00%
100.00%
80.00%
60.00%
40.00%
13.03%
20.00% 5.60%
0.00%
-20.00% July'14 to July'15
-3.85%to July'16 to July'17 to
June'15 June'16 June'17 June'18

Net operating cash flow per equity share: Cash flow per share is the after-tax earnings plus
depreciation on a per-share basis that functions as a measure of a firm's financial strength. In
2014 to 2015 they invest more cash at the rate of 128.07% in terms of other year. after that it
decease in the following years. in 2014 to 2015 it was minus .15% after that it increase at the
rate of 5.60% and 13.03%

14
 Chapter 2

Vertical analysis

15
Vertical Analysis

Vertical analysis also known as common-size analysis, is a popular and traditional method of
financial statement analysis, in which each item of financial statement are listed as percentage
of base figure. Vertical analysis of ACME Pharmaceuticals shows the comparison of historical
financial information over a series of reporting periods (2014-2018) to know the overall
performance of the firm. For doing the vertical analysis we use total asset, sales and total
cashflow as the base figure to do vertical analysis.

Interpretation: A noncurrent asset is an asset that doesn’t turn into cash in a fiscal year
according to the balance sheet. It is also known as the long-term asset. Here, we can see that
non-current assets in 2015 is 2.33%, which was increased into 5.27% in 2016. That means the
investment in non-current assets were increased. Hence, again the non-current assets were
decreased in 2017 into 3.43% due to decrease of investment in non-current assets. And the
investment was increased in 2018 up to 9.64%.

16
Interpretation: Property, Plant and Equipment is a type of non-current assets. It is referred to
the plant assets or the fixed assets. We can see that PPE in 2015 was 2.32% that increased into
5.21% in 2016. It refers to increase in investment into PPE. This is also decreased in 2017 into
3.39% and increased into 9.64% in 2018.

Interpretation: Here Investment in Shares is also a non-current asset. It refers to investment

in other company’s share. From the chart, we can tell that Acme use a lower portion of their
non-current assets in investment in other company’s share. We can see that Investment in
Shares in 2015 was 0.00% that increased into 0.05% in 2016. It refers to increase in Investment
in Shares. This is also decreased in 2017 into 0.04% and 0.01% in 2018.

17
Interpretation: Current asset is an asset that turns into cash in a fiscal year period according
to the balance sheet. It is also known as the short-term asset. It is used to conduct the operating
costs. Here, we can see that current assets in 2015 is 2.54%, which was increased into 18.94%
in 2016. That means the investment in current assets were increased. Hence, again the current
assets were decreased in 2017 into 0.24% due to decrease of investment in current assets. And
the investment was further decreased in 2018 into -0.70%.

Interpretation: Here Advance, Deposits & Prepayment is a type of current asset. It refers to
advance payment and payment that occurs but benefits for the payment has not been taken yet.
From the chart, we can tell that Acme use an average portion of their current assets in Advance,
Deposits & Prepayment. We can see that Advance, Deposits & Prepayment in 2015 was -0.50%
that increased into 0.20% in 2016. It refers to increase in Advance, Deposits & Prepayment.
This is also increased in 2017 into 1.39% and 0.98% in 2018.
18
Interpretation: Cash and Cash Equivalent is the most liquid current asset. Cash Equivalent
refers to the cash like asset which is as liquid as cash. For example, short term investment. We
can see that Cash and Cash Equivalent in 2015 was 0.08% that increased into 3.08% and also
decreased in 2017 into 0.81% and -0.83% in 2018.

Interpretation: Acme doesn’t collect borrowing. Hence, they depend on equity financing. A
big portion to shareholders’ equity refers to that. We can see in the chart that Shareholders’
Equity in 2015 was 3.07% that increased into 21.46% and decreased in 2017 into 2.05% and
increased up to 2.30% in 2018.

19
Retained Earnings: Over The year, 2014-2015, retained earnings is the highest in comparison
to the other periods. from 2014 to 2018 the rate of retained is lowering very slightly but it has
a positive value over the years. In the period of 2014-15, the ACME company retains highest
amount after paying to all shareholders. The retention amount becomes lower in the period of
2015-16; which is 2.64%. The rate decreases in a very little difference in the time horizon 2016-
17. and in the last period, the 2017-18 the rate increases a little bit. 2017-18 was the period
when the retention amount for ACME after paying to all of its shareholders was lowest but it
was positive.

20
Non-Current Liabilities: ACME company shows the largest portion of non-current liability
from the year 2014-2015. the liabilities is negative from 2015-2016 & 2016-2017. from the
period 2017-2018 the amount again increases. therefore, the ability to pay financial loans for
ACME was lowest in the period 2014 to 2015, as highest non-current liability means the highest
amount of financial credits. these liabilities were lower in the period s of 2016 to 2017 & 2017
to 2018. Financial debts were positive in the periods of 2014 to 2015 and 2017 to 2018

Long Term Loan-Net off Current Maturity: It has a very high value over 7% in 14 to 15
fiscal year. But it is not satisfying in the rest of the years.

Current Liabilities: ACME reflects the negative rate of current liability portion in 2014 to
2015. the rate of funding and purchasing on credit was too late on that period. From 2015 to
2016 the current liability increased in becomes 6.82% which is totally at the opposite direction
of the previous period. this rate decreases and remains positive in the following year, 2016 to
2017. from the year 2017 to 2018 the current liability increases again. the rate of fund sourcing
by day-to-day business activities of ACME is the highest during the period 2015 to 2016. So,
Current assets has the mixed growth rate portion.

21
Net Asset Value per Share: It has a zero value.

Revenue: ACME company possesses the highest revenue portion in 2014 to 2015. From the
overall period of 2014 to 2018 ACME Maintains a positive revenue growth rate. from operating
activities, the company makes the highest profit growth rate during the period 2014 to 2015.
Which means the sales of that period was at highest rate. the following periods, the growth rate
decreases slightly and so is in the 2016 to 2017. A slight increment is visible in the period
2017-2018. The lowest rates of sale are in the period of 2016 to 2017. The highest sales revenue
means the company is able to sell its products in higher prices.

22
Cost of Goods Sold: Like Revenue, Cost of goods sold of ACME company has a positive
growth structure over the year 2014 to 2018. Although there is a mixed structure, the fluctuating
rates are quite going in a same way with the change of sales Revenue. 2014 to 2015 is the
period which shows the highest growth rate of cost of goods sold. that means the efficiency is
significantly less in that period. The higher the cost of production, the lower the gross profit
earned by the company. the trend shows that the growth rate cost decreases slightly in 2015 to
2016. the rate is lower in 2016 to 2017. during this period, the gross profit is seeming to be
higher as the cost is less. the last period which is 2017-18 shows the increment of this cost of
growth rate which is not too much differentiated from the previous period.

Gross Profit: ACME shows the positive incremental gross profit over the years. during the
period 2014 to 2015, the growth rate is 3.14 %. the positive values indicate that the sales
revenues are greater than cost of goods sold over the years. the periods 2015-16 and 2016-17
shows the comparatively higher value of gross profit. this simply shows that in these periods,

23
cost of goods sold were lower and sales revenues were higher. increase in the gross profit was
beneficial for ACME company as it provided chances to expand the business. 2017-2018 was
the period that shows the significantly lower gross profit rather than the previous period that
shows the fluctuated and increased amount in cost of goods sold.

Financial Expenses: Financial Expenses in 14 to 15 was 2.01%. It decreases in year 15 to 16

at 1.16% and continuously -0.79% in 16 to 17 year. It slightly increases into 0.65% in 17to 18
fiscal year.

Net Profit before Tax: Net profit before taxes is simply the net income of a business with
the taxes. It is the sum of all revenues minus all expenses, including cost of goods sold,
depreciation, interest. The before tax profit of ACME Pharmaceuticals Company. In 2014 to
2015 it was 1.42 % after that it decreases at the 0.46% and increases at 5.01% in 2015 to 2016
and 2016 to 2017 financial year. It again decreases at the rate of -5.49%

24
Net Profit after Tax: Net profit after taxes is simply the net income of a business less all taxes.
It is the sum of all revenues minus all expenses, including cost of goods sold, depreciation,
interest, and taxes. This the actual profit of acme Pharmaceuticals Company. In 2014 to 2015
it was 0.27 % after that it increase continuously at the 1.56% and 2.35% in 2015 to 2016 and
2016 to 2017 financial year. It again decreases at the rate of 0.21%

Total Comprehensive Income:

Comprehensive income includes unrealized gains and losses on available-for-sale investments.

Comprehensive income also includes cash flow hedges, which can change in value depending
on the securities' market value, and debt securities transferred from available for sale to hold
to maturity, which may also incur unrealized gains or losses. In 2014 to 2015 it was 0.28%. In
2015 to 2016 financial year it was 1.56% and also continuously increase in 2016 to 2017
financial year. after that decrease at the percent of 0.20% in 2017 to 2018 financial year.

25
Earnings per Share: Earnings per share (EPS) has 0% increase or decrease in vertical analysis.

Net cash generated from operating activities: Acme earn 144.87% profit from operating
activities in 2014 to 2016 fiscal year. after that they cannot earn less profit and continuously it
decreases in 2015 to 2016 and 2016 to 2017 and become 63.09% and 6.41%. in 2017 and 2018
little bit increase at 13.15%

Net cash used in investing activities: Investment can be for asset purchase or others financing
activities. In 2014 to 2015 it was very high value they invested in terms of cash flow. But they
26
invest less in 2015 to 2016 financial year that’s mean they invest for decreasing the business.
Again, they invested high again in 2017 to 2018 it again decreases into =161.23%

Total Cash Generated from Financing Activities: Cash flow from financing activities is a
section of a company’s cash flow statement, which shows the net flows of cash that are used
to fund the company. Financing activities include transactions involving debt, equity, and
dividends. Negative net cash flow means the business spent more than it generated on those
specific activities. In 2014 to 2015 it was -820.97% that’s they cannot gather money from
investment. in 2015 to 2016 increased into 961.01%. And continuously failed in 2016 to 2017
and increase 2017 to 2018 financial year. Both the conditions were worse than previous year
2015 to 2016 financial year.

Cash and Cash equivalents at the closing: Cash and cash equivalents are a group of assets
owned by a company. Cash equivalents are investments that can readily be converted into cash.
The investment must be short term. Acme’s Cash and Cash equivalents was 4.56% in 2014 to
2015 financial year. In 2015 to 2016 m It’s become 165.60% that’s mean they got high amount
of liquid money. It can be from browning fund or financing activities. Again, it drops down in
27
2016 t0 2017 fiscal year at 20.45%. After that Cash and Cash equivalents again fall down and
it’s become -17.92%, so from here we can easily understand they basically borrowing fund
from another source in 2015 to 2016.

Net operating cash flow per equity share: There is no investment in net operating cash flow
per equity.

28
 Chapter 3

Ratio Analysis and Interpretation of

The ACME Laboratories Ltd.

29
Interpretation of Ratios
We computed ratios according to 5 dimensions, which are
❖ Liquidity
❖ Efficiency
❖ Solvency
❖ Profitability
❖ Market value
Liquidity ratios:
Liquidity ratios are a class of financial metrics used to determine a debtor's ability to pay off
current debt obligations without raising external capital. Liquidity ratios measure a company's
ability to pay debt obligations and its margin of safety through the calculation of metrics
including the current ratio, quick ratio and operating cash flow ratio. Some liquidity ratios are
explained below.
1. Current Ratio: The current ratio is a way of measuring liquidity. It shows whether a
business or firm can pay its obligations out of its current assets. After evaluating the balance
sheet of The ACME Laboratories Ltd., we calculated the current ratios from 2014 till 2018.
In 2014, current ratio was 0.7871, which indicates that current assets were 0.7871 times the
value of the company’s current liabilities. That ratio was more 1.0310 in 2015, suggesting a
good improvement in the current ratio. At 2016 it follows the improvement and the ratio was
1.3541. But in 2017, we can see that current ratio decreased to 1.253, which is not a good
indicator. And at 2018 it decreased to 1.106 which is also not a good indicator. And it suggests
that now the business has more cash or assets available to pay its debts then 2014. But after
2016 this ratio is continuously decreasing, so the company need to focus on that. In 2016, the
ratio became lower which was 1.253, that means current assets are 1.253 times the value of
current liabilities. There has been a slight decrease in 2017 but still it was a good ratio. In 2018,
the ratio decreased to 1.106, so the company had current assets available that was 1.106 times
of the liabilities. All the values are shown in the graph below.

30
 Current ratio
1.6000
1.3541
1.4000 1.2530
1.2000 1.1060
1.0310
1.0000
0.7871
0.8000
0.6000
0.4000
0.2000
0.0000
2014 2015 2016 2017 2018

2. Quick ratio: Quick Ratio is an indicator of company's short-term liquidity. It measures

the ability to use its quick assets such as inventories, to pay its current liabilities. So, Quick
ratio determines whether the current assets that can be quickly converted into cash are sufficient
to cover current liabilities. A quick ratio higher than 1:1 indicates that the company can meet
its current obligations with the available quick fund.
From the calculations, we have seen that the firm’s quick ratio at 2014 is 0.4578, which means
its current assets are 0.4578 times current liabilities, indicating that the firm is not in a great
position and can it cannot meet its all obligations with the quick cash and assets. In 2015, the
ratio increased to 0.6151, which is better than previous year. In 2016, the ratio slightly increases
to 0.6161. and at 2017 their quick ratio increased to 0.7203, at the final year 2018, their quick
ratio is slightly decreased to 0.6962. Which shows that the firm never had sufficient quick
assets to fulfill its liabilities. Their quick ratio always under 1. All the values are shown in the
graph below.

Quick ratio
0.8000 0.7203 0.6962
0.7000
0.6151 0.6161
0.6000
0.5000 0.4578

0.4000
0.3000
0.2000
0.1000
0.0000
2014 2015 2016 2017 2018

31
3. Cash ratio: The cash ratio indicates the ratio of a company’s total cash and cash
equivalents to its current liabilities. The metric calculates a company's ability to repay its short-
term debt, so, this is really useful to creditors when deciding how much debt they would be
willing to extend to the asking party.
From our calculation, we have seen that the firm’s cash ratio of 5 subsequent years are 0.1147,
0.1219, 0.5512, 0.369, 0.216 which shows that the firm has less cash and cash equivalents than
its current liabilities, so it can’t meet its all short-term liabilities or repay its accounts payables
immediately.

Cash ratio
0.6000 0.5512
0.5000
0.3690
0.4000
0.3000 0.2160
0.2000 0.1147 0.1219
0.1000
0.0000
2014 2015 2016 2017 2018

4. Liquid asset to current liability: The ratio indicates the ratio of a company’s total liquid
asset to its current liabilities. The metric calculates a company's ability to repay its short-term
debt by its very liquid asset. So, this is also really useful to creditors when deciding how much
debt they would be willing to extend to the asking party.
This ratio is just a reflection of previous cash ratio. From our calculation, we have seen that the
firm’s liquid asset to current liability ratio of 5 subsequent years are 0.2, 0.2323, 0.6561,
0.5152, 0.3628 which shows that the firm has less liquid asset than its current liabilities, so it
can’t meet its all short-term liabilities or repay its accounts payables immediately.

Liquid asset to current liability

0.7000 0.6561
0.6000 0.5152
0.5000
0.4000 0.3628

0.3000 0.2323
0.2000
0.2000
0.1000
0.0000
2014 2015 2016 2017 2018

32
5. Liquid asset to total liability: The ratio indicates the ratio of a company’s total liquid asset
to its total liabilities. The metric calculates a company's ability to repay its all debt by its very
liquid asset.
By this calculation we find out that this company has less liquid asset then its total liability.
And it cannot pay out its total liability by its liquid asset. The firm’s liquid asset to total liability
ratio of 5 subsequent years are 0.1468, 0.1364, 0.4448, 0.3694, 0.2510.

Liquid asset to total liability

0.5000 0.4488
0.4500
0.4000 0.3694
0.3500
0.3000 0.2510
0.2500
0.2000 0.1468 0.1364
0.1500
0.1000
0.0500
0.0000
2014 2015 2016 2017 2018

6. Liquid asset to fixed liability: The ratio indicates the ratio of a company’s total liquid asset
to its total fixed liabilities. The metric calculates a company's ability to repay its fixed debt by
its liquid asset.
From our calculation found a mixed result. We have seen that the firm’s liquid asset to fixed
liability ratio of 5 subsequent years are 0.5514, 0.3306, 1.4203, 1.3056, 0.8145. We saw that
at year 2016 and 2017 their liquid asset to fixed liability ratio was above 1 which was a good
indicator. And finally, at 2018 this ratio is decreased which mean their debt maybe increased.

Liquid asset to fixed liability

1.6000
1.4203
1.4000 1.3056

1.2000
1.0000
0.8145
0.8000
0.5514
0.6000
0.4000 0.3306

0.2000
0.0000
2014 2015 2016 2017 2018

33
7. Cash to dividend payable: The ratio indicates the ratio of a company’s cash to its dividend
payable. The metric calculates a company's ability to pay its dividend payable by its liquid
asset.
From our calculation we found a vey good result. we have seen that the firm’s cash to its
dividend payable ratio of 5 years are 0.6814, 2.8494, 17.8856, 530.4849, 297.9739. Accept
2014 company was very much able to repay their dividend payable with cash.

Cash to dividend payable

600.0000 530.4849
500.0000

400.0000
297.9739
300.0000

200.0000

100.0000
0.6814 2.8494 17.8856
0.0000
2014 2015 2016 2017 2018

8. Liquid asset to provision of income tax: The ratio indicates the ratio of a company’s liquid
asset to provision of income tax. The metric calculates a company's ability to pay its provision
of income tax by its liquid asset.
we have seen that the firm’s company’s liquid asset to provision of income tax ratio of 5
subsequent years are 1.35, 1.04, 3.64, 2.66, 1.88. From this finding we can say this company
can pay its income tax provision by its liquid asset without having any problem.

Liquid asset to provision of income tax

4.0000 3.6446
3.5000
3.0000 2.6600
2.5000
1.8871
2.0000
1.3535
1.5000
1.0420
1.0000
0.5000
0.0000
2014 2015 2016 2017 2018

34
Efficiency ratios:
Efficiency ratios measure a company's overall ability to use its assets and manage its liabilities
effectively. Some efficiency ratios include the inventory turnover ratio, asset turnover ratio
and receivables turnover ratio. These ratios measure how efficiently a company uses its assets
to generate revenues and its ability to manage its assets.
1. Inventory Turnover: The inventory turnover ratio shows how effectively inventory is
managed, calculated by dividing cost of goods sold with the average inventory for a period.
This measures how many times a company’s average inventory is turned or sold during a period
or how many times a company sold its total average inventory in dollar amount during the year.
From our calculation, inventory turnover ratio of 5 subsequent years are 2.3089, 2.6632,
2.8763, 2.9759, 3.31 times. So, the inventory in 2014 was sold 2.3089 times which is actually
reasonable. And over the years, the ratio increased and at last in 2018 it became 3.31 which
was a bit higher than first years. The ratio increased because the company could sell more of
their inventories in these years.

Inventory Turnover
3.5000 3.3100
2.8763 2.9759
3.0000 2.6632
2.5000 2.3089

2.0000

1.5000

1.0000

0.5000

0.0000
2014 2015 2016 2017 2018

2. Inventory conversion period: This ratio shows after how many days the inventories are
sold and turned into cash amount.
From our calculation we found in 2014 the period is 158 days, meaning that, inventories are
sold after 158 days in average over the year. In this case, the lesser the ratio, the better. And
we can see that in next 4 years, the period starts to decrease. In next 4 years, the ratios were
137, 126, 122, 110 which is lesser than 2014. It means in these years the inventories were sold
after slightly short period of time and turned into cash quicker than 2014.

35
 Inventory conversion period
180.0000 158.0840
160.0000 137.0529
140.0000 126.9006 122.6513
120.0000 110.2719
100.0000
80.0000
60.0000
40.0000
20.0000
0.0000
2014 2015 2016 2017 2018

3. Receivables turnover: The receivables turnover ratio is used to quantify a firm's

effectiveness in collecting debts on that credit.
For 5 consecutive years, the receivables turnover of the company was calculated as 9.69, 10.9,
11.99, 12.87, 14.05. In 2014, the ratio was 9.69, which means the firm managed to collect its
account receivables 9.69 times during the year. It increased in ratios in the next years, meaning
that, they could collect more amount for their credit sales in each years.

Receivables Turnover
16.0000 14.0499
14.0000 12.8762
11.9928
12.0000 10.9035
9.6910
10.0000
8.0000
6.0000
4.0000
2.0000
0.0000
2014 2015 2016 2017 2018

4. DSO: Days sales outstanding (DSO) is a measure of the average number of days that it takes
for a company to collect payment after a sale has been made.
From 2014 to 2018, the DSO of ACME Pharmaceuticals were 37, 33, 30, 28, 25, which
represents the number of days it takes for the firm to get their payment. In 2014, the ratio was
37, which means, the company managed to collect their payments after 37 days on average
during the year. But in next 4 years the period decreases, meaning that, they collected
receivables after short period of time, which is actually good for a company.

36
 Days sales outstanding (DSO)
40.0000 37.6639
33.4754
35.0000 30.4350
28.3470
30.0000 25.9788
25.0000
20.0000
15.0000
10.0000
5.0000
0.0000
2014 2015 2016 2017 2018

5. Total asset turnover: The asset turnover ratio is another efficiency ratio that indicates a
firm’s ability to generate sales from its assets. So, this ratio shows how efficiently a company
can use its assets to generate sales.
From our evaluation of 5 years data, we have found the asset turnover ratio for 2014 to 2018
were 0.37, 0.41, 0.46, 0.49, 0.54, where in 2014, an asset turnover ratio of 0.37 indicates that
for every TK of assets, this firm only generates 0.37 TK. So, they were not very efficient with
their use of assets. The ratio starts to increase, implying that their ability to generate sales from
assets becomes higher than previous years.

Total asset turnover ratio

0.6000 0.5410
0.4958
0.5000 0.4618
0.4199
0.4000 0.3732

0.3000

0.2000

0.1000

0.0000
2014 2015 2016 2017 2018

6. Fixed asset turnover: The fixed asset turnover ratio is another efficiency ratio that measures
a firm’s return on their investment in fixed assets such as property, plant, and equipment and
long-term investments, by comparing net sales with fixed assets. In other words, it calculates
how efficiently a company is a producing sale with its fixed assets-machines and equipment.

37
Our calculated ratio for 5 years was 0.57, 0.65, 0.71, 0.76, 0.83. So, in 2014, the firm generated
for every TK of fixed assets, this firm only generates 0.57 TK. But in the next 4 years, the ratio
started to fall.

Fixed asset turnover ratio

0.9000 0.8386
0.7685
0.8000 0.7158
0.7000 0.6508
0.5784
0.6000
0.5000
0.4000
0.3000
0.2000
0.1000
0.0000
2014 2015 2016 2017 2018

7. Net profit margin: This ratio reveals the amount of profit that a firm can generate from its
total sales. A high net profit margin indicates that a business is pricing its products correctly
and is exercising good cost control.
Net profit margin of 5 years as computed were- 0.08, 0.08, 0.08, 0.10, 0.09. This means that a
company has 0.08 tk of net income for every BDT of sales. But after 2014, the profit margin
was constant. It is good that the company earning profit from sales is not decreasing, and after
2016 it increased and at 2018 it decreased slightly.

Net Profit Margin

0.1200
0.1033
0.0965
0.1000 0.0876 0.0871
0.0803
0.0800

0.0600

0.0400

0.0200

0.0000
2014 2015 2016 2017 2018

38
8. Operating efficiency: This ratio shows that how much efficient a company in operation.
Our calculated ratio for 5 years was 0.11, 0.11, 0.11, 0.15, 0.13. we can see at 2014 their
operating efficiency was 11% and at 2018 it was 13% which shows thy were more efficient the
2014.

Operating efficiency
0.1600 0.1499
0.1400 0.1320
0.1179 0.1174
0.1200 0.1109
0.1000
0.0800
0.0600
0.0400
0.0200
0.0000
2014 2015 2016 2017 2018

9. Tax management efficiency: This ratio shows that how much efficient at tax management.
Our calculated ratio for 5 years was 0.74, 0.68, 0.78, 0.68, 0.73. at 2014 their efficiency rate
was 74% and at 2015 and 2017 they were less efficient and at 2018 their tax efficiency rate
was 73%. Which mean they were much efficient at tax management and they also can over
come their bad situation.

Tax management efficiency

0.8000 0.7857
0.7800
0.7600
0.7426
0.7400 0.7310

0.7200
0.7000 0.6839 0.6887
0.6800
0.6600
0.6400
0.6200
2014 2015 2016 2017 2018

39
10. Administrative expenses to Sales: It show how much efficient at their administration
expense. Our calculated ratio of 5 years was 0.05, 0.033, 0.039 0.039 0.039. At 2014 their
administrative expense to sales ratio was 0.05 and at 2018 was 0.039 which mean they
improved their situation. Which is a good sign for this company.

Administrative expenses/Sales
0.0600
0.0535

0.0500

0.0390 0.0393 0.0398

0.0400
0.0337

0.0300

0.0200

0.0100

0.0000
2014 2015 2016 2017 2018

Profitability ratios:
Ratios of Profitability dimension measure the overall performance of the firm by determining
the effectiveness of the firm in generating profit, and are calculated by establishing relationship
between profit figures on the one hand, and sales and assets on the other. We computed 7 ratios
according to profitability dimension.
1. ROE: The return on equity ratio or ROE is a profitability ratio that measures the ability of a
firm to generate profits from its shareholders’ investments in the business. In other words,
the return on equity ratio measures how much profit each BDT of common stockholders’
equity generates.

Our computed ROE ratios were 0.08, 0.08, 0.06, 0.08, 0.08, here in 2014, ROE of 0.08 means
that every BDT of common stockholders’ equity generates 0.08 TK of net income. In 2016
the ratio decreases which is not a positive sign because it means that firm’s ability to
generate profit from stockholder’s equity is low.

40
 Return On Equity(ROE)
0.0900 0.0837 0.0812 0.0827 0.0810
0.0800
0.0673
0.0700
0.0600
0.0500
0.0400
0.0300
0.0200
0.0100
0.0000
2014 2015 2016 2017 2018

2. ROA: The return on assets ratio is a profitability ratio that measures the net income produced
by total assets during a period by comparing net income to the average total assets. So, the
return on assets ratio or ROA basically measures how efficiently a company can manage its
assets to produce profits during a period. Our calculated ratios were 0.04, 0.03, 0.03, 0.04,
0.04 .which shows a consistency in efficiency of the firm to produce sales using its assets over
the years, which is a positive sign for the firm.

Return On total assets(ROA)

0.0500 0.0468
0.0438
0.0450 0.0403 0.0397 0.0381
0.0400
0.0350
0.0300
0.0250
0.0200
0.0150
0.0100
0.0050
0.0000
2014 2015 2016 2017 2018

3. Gross profit margin: The gross profit margin ratio, also called gross margin, is the ratio of
gross margin expressed as a percentage of sales. Gross margin indicates how much profit a
company makes after paying off its Cost of Goods sold.

For our company, at 2014 this ratio was 0.38. Then in 2015 it decreased to 0.37 and it 2018 it
increased to 0.39 meaning that for every BDT generated in sales, the company has 0.39 TK left
over to cover basic operating costs and profit.

41
 Gross profit margin
0.4200
0.4078
0.4100
0.4000 0.3964
0.3895
0.3900 0.3855
0.3800 0.3742
0.3700
0.3600
0.3500
2014 2015 2016 2017 2018

4. Operating profit margin: The operating profit margin ratio indicates how much profit a
business makes after paying its operating expenses. For 5 years, operating profit margin ratios
were 0.19, 0.20, 0.20, 0.23, 0.21.
This means, in 2014 the ratio is 0.19 that shows this company makes 1.19 TK before interest
and taxes for every BDT of sales. But the ratio starts to increase, which is a positive sign.

Operating Profit margin

0.2500
0.2379
0.2400
0.2300
0.2200 0.2130
0.2087
0.2100 0.2047
0.1998
0.2000
0.1900
0.1800
2014 2015 2016 2017 2018

5. EPS: Earnings per share (EPS) ratio measures how many BDT of net income have been
earned by each share of common stock, which is a popular measure of overall profitability of
the company and is usually expressed in dollars.
EPS of this firm for 5 years were 5.6, 5.7, 6.5, 6.6, 6.7, which means that in 2014 every share
of the common stock earned 5.6 TK of net income but in following years it starts to increase.

42
 EPS
7.0000
6.7400
6.8000 6.6100
6.5500
6.6000
6.4000
6.2000
6.0000
5.8000 5.6500 5.7000
5.6000
5.4000
5.2000
5.0000
2014 2015 2016 2017 2018

6. Sales to Total Current assets: This ratio shows each dollar of current asset how much
generating sales. Sales to current assets ratio of 5 years were 1.5, 1.5, 1.08, 1.1, 1.2. At 2014 it
shows by 1 TK of current assets they generate 1.5 sales. It is a good sign. But at 2016 it dropped
to 1.08 and in the end, it moves on to 1.29. It’s a good sign that this company ca overcome its
bad situation.

Sales to Total Current assets

1.8000
1.5400 1.5969
1.6000
1.4000 1.2924
1.1632
1.2000 1.0898
1.0000
0.8000
0.6000
0.4000
0.2000
0.0000
2014 2015 2016 2017 2018

7. Sales to Total Non-Current Assets: This ratio shows each dollar of fixed asset how much
generating sales. Sales to fixed assets ratio of 5 years were 0.65, 0.71, 0.73, 0.74, 0.7 At 2014
it shows by 1 TK of fixed assets they generate 0.65 sales. It continuously growing. Which is a
good sign. But at 2018 it dropped a bit.

43
 Sales/Total Non-Current Assets
0.7600 0.7429
0.7400 0.7315
0.7158
0.7200
0.7000
0.7000
0.6800
0.6573
0.6600
0.6400
0.6200
0.6000
2014 2015 2016 2017 2018

Solvency ratios:
The capacity of a company to discharge its obligations towards long-term lender indicates the
financial strength and ensures its long-term survival. It is important for an analyst to study the
solvency of a company. We determined several ratios according to this dimension.
1. Debt ratio: The debt ratio is a financial leverage ratio that measures the portion of company
resources that is funded by debt. A company with a high debt ratio is known as a “leveraged”
firm. Calculated debt ratios were 0.51, 0.51, 0.43, 0.43, 0.45.
A company that has a debt ratio of more than 0.5 is known as a levered company. We can see
a positive sign here as the debt ratio is in a decreasing manner for the 5 consecutive years,
meaning that in 2014, 51% resources of the firm were funded by debt. But debt financing
decreased in the following years.

Debt ratio
0.5400 0.5179
0.5200 0.5111
0.5000
0.4800 0.4591
0.4600
0.4336 0.4338
0.4400
0.4200
0.4000
0.3800
2014 2015 2016 2017 2018

2. Debt equity ratio: The debt to equity ratio shows the percentage of the firm’s financing that
comes from debtholders and shareholders. A higher debt to equity ratio indicates that more
debt financing is used than equity financing.

44
From 5 years’ data, the calculated debt to equity ratios were 1.07, 1.04, 0.76, 0.76, 0.84, which
indicates that in 2014 the debt financing was 107% relative to equity financing, which is not
good for overall financial position, but the debt to equity ratio decreased over the years, so it’s
a positive sign.

Debt to equity ratio

1.2000 1.0744 1.0452
1.0000 0.8489
0.7655 0.7661
0.8000
0.6000
0.4000
0.2000
0.0000
2014 2015 2016 2017 2018

3. Times interest earned: The times interest earned ratio, also known as the interest coverage
ratio, is a coverage ratio that measures the proportionate amount of income that can be used to
cover interest expenses in the future.
From our calculation, we see a decreasing manner in the ratio over the years. The ratios for 5
years were 1.55, 1.37, 1.25, 2, 1.77. In 2014, the ratio is 1.55 which means that the firm’s
income is 1.55 times greater than its annual interest expense. In the next 2 year ratio decreased,
which mean in these years firm had less income to cover its interest expenses. In the next 2
years the ratio increased, implying an improvement,

Times Interest Earned Ratio

2.5000
2.0045
2.0000 1.7722
1.5508
1.5000 1.3734
1.2567

1.0000

0.5000

0.0000
2014 2015 2016 2017 2018

4. Net profit to total liabilities: in this ratio we find out in terms of net profit how much is
companies’ liabilities is. As our calculation we can see the ratio is increasing which mean our
liability is increased or our NI is decreased.

45
 Net profit/total liabilities
0.1200
0.1079

0.1000 0.0954
0.0879
0.0779 0.0776
0.0800

0.0600

0.0400

0.0200

0.0000
2014 2015 2016 2017 2018

Market value ratios:

Market value ratios are used to evaluate the current share price of a publicly-held company's
stock. These ratios are employed by current and potential investors to determine whether a
company's shares are over-priced or underpriced. The most common market value ratios are as
follows-
1. Equity multiplier: The equity multiplier ratio measures the amount of a firm’s assets that
are financed by its shareholders by comparing total assets with total shareholder’s equity. In
other words, the equity multiplier shows the percentage of total assets that are financed by the
shareholders.
The ratios are- 2.07, 2.04, 1.76, 1.76, 1.84, which shows a positive sign as it starts to decline
over the years.

Equity multiplier
2.1000 2.0744
2.0452

2.0000

1.9000 1.8489

1.8000 1.7654 1.7661

1.7000

1.6000
2014 2015 2016 2017 2018

46
2. DPS: dividend per share or DPS is the amount of dividend paid to the shareholders for each
share of the company. The DPS ratios for 5 years were 1.5, 3.5, 3.5, 3.5 3.5. We can see that
the in 2014, the firm paid 15% dividend. And from 2015-2018 they provide 35% cash dividend.

DPS
4.0000 3.50 3.50 3.50 3.50
3.5000
3.0000
2.5000
2.0000 1.5334
1.5000
1.0000
0.5000
0.0000
2014 2015 2016 2017 2018

3. DPR: The dividend payout ratio measures the percentage of net income that is distributed
to shareholders in the form of dividends during the year. In other words, this ratio shows the
portion of net income that the company decides distribute to its shareholders.
Our calculated DPR ratios were .2, .75, .59, .57, .51. In 2014, we can see that the firm paid out
20 percent of its net income to his shareholders.

DPR
0.8000 0.7557
0.7000
0.5946 0.5708
0.6000 0.5174
0.5000
0.4000
0.3000 0.2049
0.2000
0.1000
0.0000
2014 2015 2016 2017 2018

4. Retention Ratio: Retention ratio is the percentage of a company's earnings retained and
reinvested by the company. So, it is the opposite of dividend payout ratio.
Our calculated Retention ratios for 5 consecutive years were 0.79, 0.24, 0.40,0.42, 0.48. In
2014, the firm kept 73 % of the net income as retained earnings. In 2015, the firm paid highest
amount of dividend, therefore, kept only 24%. In following years, the ratio increased as the
firm paid out less dividend to its shareholders and retained more amount of net profit.

47
 Retention ratio
0.9000
0.7951
0.8000
0.7000
0.6000
0.4826
0.5000 0.4292
0.4054
0.4000
0.3000 0.2443
0.2000
0.1000
0.0000
2014 2015 2016 2017 2018

48
 Chapter 4

The Analysis of Profitability

49
Analysis
In this part, we are breaking down the Return on Common Equity (ROCE) into its drivers based
on three level of analysis.
❖ The first level analysis helps us identify the effect of financial and operating liability
leverage on ROCE.
❖ The Second level analysis helps us to identify the effect of profit margin (PM) and
asset turnover ratio (ATO) on operating profitability (RNOA)
❖ The third level analysis identifies the drivers of PM, ATO and NBC (net borrowing
cost).

1st level analysis:

A. Financial leverage
Here we can see we have return generated from operating part. From the operating part we
have positive return but there is some negative return from the financing part. This is good for
the company as the company is generating return from the operating part.
Given the financial leverage if we have more spread that will contribute to the return on
common equity.
And given the spread if we have more financial leverage that will also contribute to the return
on common equity.
B. Operating Liability leverage
Here we can see that return on net operating asset is coming from the return on operating asset.
From the ROOA we have positive return and from the operating leverage we have positive
contribution to RNOA. Which is not good for the company as the company is generating return
from the operating leverage. Though the most of the return is coming from operation.
Given the OLLEV if the company increase OLSPREAD then it will contribute to the RNOA.
And given the OLSPREAD if the company increase OLLEV it will also contribute to the
RNOA.

Particulars 2014 2015 2016 2017 2018

OLLEV 13.64% 12.13% 11.25% 11.93% 11.80%

ROOA 11.15% 8.70% 9.31% 9.37% 8.51%
OLSPREAD 0.11152 0.08704 0.09314 0.09373 0.08512
OLLEV*OLSPREAD 0.01521 0.01056 0.01048 0.01118 0.01004
RNOA 12.67% 9.76% 10.36% 10.49% 9.52%
Operating liability leverage 1.52% 1.06% 1.05% 1.12% 1.00%

50
 C. Analysis of financial leverage:
ROCE=RNOA+ [FLEV*(RNOA-NBC)]

This equation breaks down ROCE into 3 drivers. The first part is return on operating asset
(RNOA). Second part is financial leverage (FLEV). And the last part is the Operating spread
between the return on net operating assets and the net borrowing cost (NOA-NBC).

Conducting the first level analysis, we have found these particulars.

Particulars 2014 2015 2016 2017 2018

RNOA=OI/NOA 12.67% 9.76% 10.36% 10.49% 9.52%

FLEV=NFO/CSE 0.76981315 0.780614733 0.350396518 0.418281112 0.567138963
NBC=NFE/NFO 0.068329689 0.08012829 0.145871931 0.106823718 0.082423359
SPREAD=(RNOA-NBC) 0.058399611 0.017473199 -0.042253235 -0.001909728 0.012737245
FLEV*SPREAD 0.044956789 0.013639837 -0.014805386 -0.000798803 0.007223788
ROCE=RNOA+ [FLEV*SPREAD] 17.17% 11.12% 8.88% 10.41% 10.24%
Financial leverage 4.50% 1.36% -1.48% -0.08% 0.72%

ROCE
20.00%
18.00% 17.17%
16.00%
14.00%
12.00% 11.12%
10.41% 10.24%
10.00% 8.88%
8.00%
6.00%
4.00%
2.00%
0.00%
2014 2015 2016 2017 2018

Summing the financial leverage and operating liability leverage effects on shareholder’s
profitability, we can determine the ROCE as,
ROCE=ROOA+ (RNOA-ROOA) + (ROCE-RNOA)
Or,
ROCE=ROOA+ Operating leverage + Financial leverage

51
 ROCE 2018
Financial leverage
7%

Operating liability
leverage
10%

ROOA
83%

2nd level analysis:

We always prefer the majority of contribution coming from the RNOA as it is the base
contribution of ROCE. There are two drivers of RNOA, one is profit margin and another one
is asset turnover ratio.
In the 2nd level we find out from where RNOA contribution is coming from, whether it is from
PM or ATO or from both.
PM shows profitability of each dollar of sales and ATO shows revenue per dollar of operating
assets.
In the 2nd level analysis we can see there is positive profit margin and positive asset turnover
ratio, which indicates that there is positive contribution to RNOA. And both were very constant.
And as we know RNOA is the base contribution of ROCE, it obviously contributes to ROCE.
This indicates that the company is doing well and the company will do well in the future.
The two drivers of RNOA are-
❖ profit margin (PM) = OI after tax/ sales
❖ Asset Turnover ratio (ATO) = sales/ NOA
From the 2nd level analysis, we have computed following particulars.
Particulars 2014 2015 2016 2017 2018

Profit margin 23.47% 17.19% 18.11% 18.58% 17.76%

ATO 54.00% 56.77% 57.23% 56.45% 53.57%
RNOA=PM*ATO 12.67% 9.76% 10.36% 10.49% 9.52%

52
 RNOA
14.00%
12.67%
12.00%
10.36% 10.49%
9.76% 9.52%
10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2014 2015 2016 2017 2018

3rd level analysis:

In the 3rd level we break down profit margin and asset turnover ratio and we interpret from
where the contribution is coming from. Either it is from the core part or from the other part.
So, we can see that the contribution is coming from the core part in our analysis. As the
contribution is coming from the core part it is good for the company as it will then contribute
to RNOA and ultimately it will contribute to ROCE. That is why the company has positive
Return on Common Equity.

53
 Chapter 5

Analysis of growth and Sustainable

earnings

54
Growth
Firms having growth in residual earing is growth firm Change in residual earing is the growth
in firm and this change is Abnormal Earning Growth RE change depends on change in ROCE
and change on CSE. Thus, the change in ROCE is measured by the change in profitability and
the change in CSE depends on the change in NOA and change in NFE.

particulars 2014-2015 2015-2016 2016-2017 2017-2018

Growth in RNOA -2.913% 0.602% 0.130% -0.975%

Growth in SPREAD -4.093% -5.973% 4.034% 1.465%
Growth in FLEV 1.080% -43.022% 6.788% 14.886%
Growth in financing part 0.019% 1.818% -0.013% 0.190%
Total growth in ROCE 0.219% 3.446% -1.271% -1.778%
Growth in CSE -0.843% 44.532% -14.867% -26.112%

Here we can identify the source from which majority of the growth is occurring. We can easily
find out whether it is coming from operating part, or the financing part. From above calculated
value, we can see that from 2014-2015 and 2015-2016, the majority of the growth is coming
from financing part.
From 2016 to 2017 and from 2017 to 2018, we see a negative growth in ROCE.

55
 Chapter 6

Simple Forecasting & Simple

Valuation

56
Simple Forecasts: Forecasting with growth

YEAR 2015 2016 2017 2018

Forecasted Operating
Income ৳1,846,712,543 ৳2,097,655,468 ৳2,315,520,028 ৳2,286,116,996
Forecasted RoOI
(43,211,153) 75,185,643 108,727,934 (115,722,704)

We forecasted operating income and residual operating income from book values. We
forecasted that in 2015 our operating income will be 1,846,712,543 BDT, in 2016 it will be
2,097,655,468 BDT, in 2017 it will be 2,315,520,028 and in 2018 it will be 2,286,116,996.
We also forecasted residual operating income will be (43,211,153) BDT, in 2016 it will be
75,185,643 BDT, in 2017 it will be 108,727,934 and in 2018 it will be (115,722,704).

Simple valuation: Valuation with growth

YEAR 2015 2016 2017 2018

Value of CSE
10,735,376,315 11,297,443,949 16,253,744,047 17,071,999,830
Value of NOA
2,504,406,973 2,419,801,739 10,520,390,846 9,979,509,386

Finally, we find out the value of CSE and NOA. In 2015 ACME’s value of CSE will be
10,735,376,315 BDT, in 2016 it will be 11,297,443,949 BDT, in 2017 it will be 16,253,744,047
BDT and in 2018 it will be 17,071,999,830 BDT.
In 2015 ACME’s value of NOA will be 2,504,406,973 BDT, in 2016 it will be 2,419,801,739
BDT, in 2017 it will be 10,520,390,846 BDT and in 2018 it will be 9,979,509,386 BDT.

57
Appendix