EXECUTIVE SUMMARY

The textile industry in Bangladesh accounts for 77% of Bangladeshs total export earnings and contributes to around 5% of Bangladeshs total national income. It is a 19-billion dollar a year industry, employing almost 4 million people, and comes second only to China in the global RMG export market. The sector has grown exponentially throughout the past two decades, and continues to do so at the backdrop of a global economy on a precarious balance of recession and capitalism.

Currently there are more than 5,000 export-oriented garment factories in the country. Together they form the largest employment sector of Bangladesh, and an industry that is predicted to soon become the number one textile exporter in the global market (McKinsey & Company, 2011). As of 2004, the industry has a market share of 3% for textiles and 2% for ready-made clothing in the United States.

This report analyzes the financial performance of Apex Spinning and Knitting Mills, one of the largest textile industries in the country. It is a listed company in the DSE and CSE, and as such it has become an integral part of the economy of Bangladesh.

The analysis has been divided into four parts. First, in the economy analysis the companys performance in relation to the national economy and also with the global political economic perspective has been analyzed. By reflecting on the picture of the entire RMG industry and its contribution on the Bangladesh economy, the report slowly broaches into the performance of the company in the last five years. Then it examines the economic reasons behind the performance and outcomes individually in each of these years.

After the economic analysis, the report presents a historical analysis from four different dimensions. First of all, it uses the horizontal approach by comparing the figures of one year with the previous year. And then for the vertical analysis the term paper uses specific items like turnover, total assets and the total collection from turnover as the base. Against these items, the other figures are compared and analyzed. Next, the report does a traditional ratio analysis using the key financial ratios applicable in this case and then analyzes the net working capital for the company historically. Finally, all the analyses are combined together and the changes in each year are analyzed with the reasons behind each of them.

Third, the report analyzes the six companies in the group and attempts to find out the industry averages. These averages are then compared with the existing industry standards in order to find out whether the industry is actually working up to the mark or not.

For the last part, the report analyzes the future prospect of the company. It forecasts the possible performance of the company in the upcoming five years, and predicts the extent to which Apex Spinning and Knitting Mills Ltd can actually grow and expand.

1.0 Introduction

1.1 Company Background

Apex Spinning and Knitting Mills Limited is a Public Limited Company registered under the Companies Act 1912. It was incorporated in Bangladesh on 25th November, 1990 and shares of the company are listed in the Dhaka Stock Exchange and the Chittagong Stock Exchange Ltd.

The company owns and operates a 100% export-oriented vertically integrated knitting, dyeing and finishing garment factory. It prepares its financial statements under the Historical Cost Principle and Going Concern basis in accordance with the Bangladesh Accounting Standards, the Companies Act 1994, the Listing Regulations of the Stock Exchanges, the Securities and Exchange Rules 1987 and other laws and rules applicable in Bangladesh. The companys fiscal year ends on 31st March every year.

The current market price per share of common stock is taken as 75.3 taka, the price on 27th January, 2014 at 12:01pm.

The number of authorized shares of Apex Spinning and Knitting mills is 30 million, each with a face value of 10 taka thus making up an authorized capital is 300 million. It has a market capital of 641 million BDT and a paid-up capital of 84 million BDT. Currently the company operates with a production capacity of 15 million pieces of garments every year to different export destinations all over the world.

1.2 Why this company

The company has been chosen to analyze in detail the financial performance of the textile industry, which brings in the highest amount of foreign currency into the country each year. As of 2013, it is a $19-billion industry employing around 4 million people directly with widespread relevance indirectly in almost all spheres of Bangladeshi life. It accounts for 45% of all industrial employment in the country and contributes to 5% of Bangladeshs total national income.

The significance of the industry is not the only issue that prompts an in-depth analysis into the workings of this industry. The truth remains, this sector has become the life and soul of Bangladesh in the last two decades. Behind Bangladeshs growth as a modern, industrialist economy is the double-digit expansion and exponential growth of the textile industries that produce high-quality apparels at the cheapest of prices. The global consulting firm McKinsey has predicted that the Bangladeshi RMG industry will become the number one outsourcing destination for apparel retailers all over the world within the next five years. And needless to say, the industrys subsistence and persistent growth is crucial to Bangladeshs ambitions of becoming a middle-income nation by the year 2021.

Nevertheless the industry has also been fraught with controversies and scandals involving workplace ethics and treatment of the labor force. Labor unrest in this sector is rampant, and it is quite apparent that external situations are often influencing the performance of the companies. Hence a financial analysis on this sector will prove to be a very rewarding experience both in terms of knowledge about the workings of the industry, and also about the overall picture of the Bangladesh economy where the industry remains an integral part.

1.3 Scope and Limitations of the study

The annual reports for the years 2008-2009 and beyond are not available in the company website. Thus it was impossible to horizontally analyze the fifth year.

2.0 ECONOMY ANALYSIS

For the Bangladesh economy, the last five years have been periods of regular economic growth and sustained business expansion. In this picture, the country has been labeled one of the N-11s, a group of upcoming developing nations with high investment opportunities and positive environment for business, by the global investment giant Goldman Sachs. GDP growth has been steady at around 6.0% as shown below.

And this has been fuelled, both directly and indirectly, by the growth spurts brought about by the manufacturing industries. Companies manufacturing RMG, FMCG, IT etc products are moving up the ladder by catering to a middle-income population of around 30 million people, which is greater than the total population of Norway, Sweden and other Scandinavian countries. And side by side, remittances from Bangladeshi workers abroad, especially in the oil-rich Middle-East, are increasing at an ever increasing rate.

But in the last two decade, no other industry has had as much contribution to the economys rapid growth as the textile industry. The growth of this sector has been nothing short of phenomenal, as illustrated by the chart below.

As of today, the sector accounts for almost 80% of all exports from Bangladesh and employs around 4 million workers.

FIVE YEAR ECONOMY ANALYSIS

Below is a political economy perspective on the performance of the garments industries with the global economy in the background.

FY 2012-2013:

In the year 2012-2013, the global economy grew at a sluggish 3.6%, fuelled mainly by the growth of the BRICS, the Asian Tiger Economies (ASEAN) and the Next Eleven. The EU was still experiencing the effects of world recession. Several major European banks were on the brink of collapse. The entire economies of Iceland, Greece and Cyprus were still rated as bankrupt and unable to get back into economic growth. In short, the West was still crumbling from the effects of the world recession of 2008-09. The US was reeling out of the shock in a very cautious and slow manner, while Germany remained one of the few Western states able to suppress the man-made catastrophe.

Austerity measures and bail-out packages were the most important issue in the West. Bankia, the Spanish banking giant, reported the greatest corporate loss in Spanish history and requested massive bail-out packages. Governments of Greece and Spain cut back massively on their spending. Lay-offs and unemployment reached an all-time high in these nations. Pension funds, retirement plans, safety deposits---nothing remained safe anymore in these regions, and the enraged public often took to the streets of the cities.

When such was the scenario in the Western developed states, for an export-driven sector like the textiles industry, a fall in growth seemed imminent. But even then, the level of exports increased. And the reason behind this is an increase in the labor cost of China. As labor becomes more expensive in China, global textile outsourcing giants like Lee and Fung increasingly began to consider Bangladesh as a safer and more profitable alternative. Besides, as Chinas workforce becomes increasingly literate they are moving away more towards engineering and technical industries rather than textiles.

Due to the events shaping the global landscape, here in Bangladesh growth rate of exports slowed down and imports fell. However, the current account surplus almost doubled due to greater inflow of remittances.

But the overall image of the Bangladeshi textile industry has been negative due to the Rana Plaza collapse and the Tazreen Fashions fire. Following these incidents several Bangladeshi factories have been blacklisted by the major American retailers. This is why the sector needs international branding campaigns to make the consumers of the world aware about the successes and positive effects of the industry.

In the next fiscal year of 2013-2014, two major concerns are reflected by the management of the company:

Political instability due to elections might hamper the normal workings of the company.

Suspension of GSP privileges in the US has been a major drawback. Although the textile industry falls out of the scope of the GSP in the US, the sector does receive preferential treatment in the EU where 60% of exports to the West are received.

FY 2012-2011:

During this financial year, the West has been fraught with economic uncertainty. As monetary policies were shaped in the troubled waters of the EU and as America gained grounds on the fight against unemployment, the year seemed to be getting better in the economic landscape compared to the previous one.

The fact that the textile industry is driven by exports to the West automatically means that the sector has been affected by these external economic factors in the global economy. Change in turnover increased by a much lesser percentage than the preceding one and there has been a massive fall in the amount of dividends paid out to the owners of the company. But the most interesting part is the huge fall in market price per share by almost 95% of the previous year. This was the year when the overvalued stocks of the previous year crashed down and underwent severe downturns in an effort to stabilize as the government intervened. As a result, the combined effect of all these phenomena was a lower EPS.

FY 2011-2010

This fiscal year is the one immediately after the sub-prime crisis of the West in 2009. During these bouts of recession, the most severe of its kind after the Great Depression, around 2.013% of the global economy was completely wiped out. Lehmann Brothers, one of the top international banks of the world, collapsed and filed for bankruptcy. The global insurance giant AIG ran out of cash and requested for massive bailout packages, while Bear Sterns was taken over by JP Morgan in an effort to save the company from absolute collapse.

In such a tensed scenario, thousands of people in the West lost their jobs and filed for unemployment benefits. As a result the people's purchasing power fell and this meant less consumption at the retail stores. Due to all this, it was easily speculated that the industry would suffer from great difficulties.

But this was not the case. As markets in the EU and USA slowed down, new markets and horizons opened up. Russia became another major export destination and so did Turkey and the Middle-East. This is why the industry, along with the Bangladesh economy, still grew at healthy rates. Turnover increased at a much higher percentage than the previous year which also raised the net asset value per share. The net working capital increased significantly thus indicating the positive health of the company.

But the most alarming part is the huge increase in market price per share by more than 157% of the previous year. It is clear that the rise is unnatural, because without increasing production capacity, turnover and net profit sufficiently it is impossible to increase the market price and the basic EPS to such a great degree.

FY 2010-2009

This was the year of the worst global recession since the Great Depression. Consumption in the West fell drastically as more and more people lost their jobs, businesses became bankrupt and people all over the world fell into financial hardships. This has been reflected in the turnover and the net profits earned during the year.

Shortening demand decreased turnover by around 4%. This also resulted in a decrease in Net Profit after Tax by 16.11%.

The negative effects of the recession continued to affect the Bangladesh economy pervasively. Investments and exports both fell, while the growth of the third major growth driver, remittances, also slowed down. Due to a looming crisis of electricity and gas, growth of production capacity was reduced and the capacity utilization increased by around 0.29% only.

3.0 INDUSTRY ANALYSIS

Apex Spinning and Knitting Mills Ltd falls under the category of textile. To find out industry averages and standards the company has been compared with five other companies of the same category. The five companies are:

a) Anlima Yarn Dyeing Ltd.

b) Desh Garments

c) Rahim Textile

d) Square Textile

e) Metro Spinning Mills Ltd.

The average ratios of the six companies are given below:

The current ratio and quick asset ratio are below the standard ratios for the industry. The profitability ratios also are faring below the global industry standards. Especially EPS, the most valid indicator of performance, has had increases and decreases as shown below:

The average EPS of the six companies has decreased continuously. This implies that the overall sector, despite high expansion rates, has been less and less profitable with time. The ROA has decreased as well and even reached a negative value in the year 2011-2012. Therefore we can come to the valid conclusion that the management needs to work in order to make sure that the industry is performing up to the global standards in terms of both liquidity and profitability.

For the fiscal year 2011-2012, the six members of the industry have had different turnovers and net profit. The bar diagram on the next page demonstrates the comparison between the different companies.

Likewise, the net profit after tax has also been significantly different for each of the companies. And due to this, and also other factors like the size of the individual company, capacity utilized etc, the performance of each of them differ on many standards. However, as an entire industry itself, the performance of the textiles sector can and should undergo more improvements financially. This is reflected by the profit margin of each of the companies.

4.0 HISTORICAL ANALYSIS

4.1 HORIZONTAL ANALYSIS

Horizontal Analysis of Apex Spinning and Knitting Mills demonstrate periodic increases and decreases from one year to the next. All the three financial statements, namely income statement, balance sheet and cash flow statement, have been analyzed horizontally with the preceding year. However, since the financial statements for the years 2009-2008 and before are not available in the companys website, the analysis could not go beyond 2010-2009.

As the table demonstrates, the turnover had decreased by 4% in the year 2010-2009, and then increased very sharply in the year 2011-2010. Then in 2012-2011 the turnover increased slowly at 11.62% while in the year 2013-2012 the turnover again decreased by 3.22%. Likewise the basic EPS also showed ups and downs. It increased by 5.05% in the year 2010-2009 and then decreased by 2.11% in the next year. IN 2011-2012 it again increased by 19.50% and by 9.09% in the next year.

Horizontal analysis of the balance sheet shows that overtime the current assets have increased steadily. And this has come about due to main components: advance, deposits and prepayments, and cash/bank balance. This indicates a liquid environment in the short-term, so the company may be able to meet its short-term debt obligations easily.

The Statement of Cash Flows has been analyzed horizontally as well. The net increase/decrease in cash and cash equivalents has undergone several downturns. In 2010-2009, it increased by 457.79%. In the next year it increased by around 83%. However in the year 2012-2011, the net cash decreased drastically by 7832.60%. In 2013-2012 it increased by 98.44%. The net operating cash flow per share also has a similar trend. In the last four years, it increased by 64.07%, decreased by 388.15%, increased by 37.22% and 157.29% respectively.

4.2 VERTICAL ANALYSIS:

The Income Statement, Balance Sheet and the Statement of Cash Flows have also been analyzed vertically. Unlike the horizontal analysis, vertical analysis of the last five years was possible. For the income statement, turnover has been assumed as the base. The percentages relative to turnover on the income statement have been given below:

The Net Profit after Tax has decreased and increased significantly in the past few years. In 2009-2008, it was 0.8% compared to turnover; in 2010-2009 it increased to 0.87%. In the year 2011-2010, it decreased to 0.61% but increased in 2012-2011 to 0.67%. In the last financial year, 2012-2013, the net profit after tax increased to 0.76% again.

In the balance sheet, the Total Assets have been assumed to be the base at 100%. The rest of the items have been compared in terms of the total assets.

As the table demonstrates, the current liabilities and current assets are at more or less almost similar in terms of percentages. This indicates a healthy balance in the company. The company will be able to pay its debts more easily.

In the Statement of Cash Flows the total collection from turnover has been assumed to be the base at 100%. With this as the standard, it can be easily discerned from the table below that the closing cash and cash equivalents have increased every year at an increasing rate. In the year 2009-2008, the increase was by 1.73% while by the year 2013-2012, the increase was by 12.17%.

4.3 RATIO ANALYSIS

The current ratio is around 1.1 while the quick assets ratio is around 0.70. This implies that the company is average on solvency and liquidity. It is not very liquid and not very less liquid. Rather, it is somewhere in between. Its position is not dangerous but, if the liquidity ratios deteriorate further from the industry standards the companys position will become hazardous.

The profitability ratios have also undergone ups and downs. The basic EPS has decreased from 15.62 to 2.2 in the last five years, while the Return on Equity and Return on Stockholders Equity have increased. This again asserts to the fact that the company is in somewhat of an average financial leverage position. The market tests also demonstrate the exact same issue.

Among the other key indicators of financial position of the company, the cash dividend per share has fallen drastically from Tk 15 to Tk 1.8 in the financial year 2012-2011. Thus this and the drastic changes in the market price of each share indicate the decrease in value of the overvalued stocks of the company in the previous years.

Net Working Capital for Apex: For a textile industry, net working capital remains one of the most important indicators of health.

As the graph for the net working capital demonstrates, the companys health has been increasing for the last five years. However in the year 2012-2013, the net working capital has fallen to some extent, implying that the top management of the company needs to find out and rectify what went wrong this year.

FY 2012-2013 & 2011-2012:

The net working capital ratio and the current ratiohave also fallen, indicating further depressing abilities of paying the debts of the company with the current assets. The market price per share has also fallen, mainly and so has the production capacity utilization. Thissuggests that the management of the company has not been as efficient as possible. The ROA has also fallen, implying that the operating profit achieved from the total assets is decreasing.

Cost of Goods Sold for the year 2012-2013 to 2011-2012 was Tk. 2,238 million compared to the previous years cost of goods sold of Tk. 2,324 million. This is due to the fact that there has been a decline in the gross turnover during the year. During the year 1,564,095 dozens of garments were produced compared to the preceding years production of 1,204,989 dozens. The increase in production quantity is 359,106 dozens over the previous year. Production capacity utilized during the year was 78.20%. There was an increase in Wages and Salaries upto Tk. 119.97 million.

The company has achieved an export turnover of Tk. 2,445.60 million during the year ended 31st March 2013. Last years turnover was Tk. 2,524.44 million. The decrease in turnover is 3.12% over the last year. Gross profit earned during the year was Tk. 207.91 million as against last years gross profit of Tk. 200.28 million.

Net profit (after tax) earned during the year was Tk. 18.49 million as compared to last years Net Profit (after tax) of Tk.16.83 million. During the year net profit after tax has increased due to the fact that we have been able to reduce the cost of Gas, Fuel and Lubricant.

FY 2012-2011 to 2010-2011:

The face values of shares have been converted from Tk. 10 to Tk. 100 during this financial year.

Cost of Goods Sold for the FY 2011-2012 was Tk. 2,324 million as compared to last years cost of goods sold of Tk. 2,065 million. This is due to the fact that there has been an increase of average production cost per dozen up to Tk. 160. During the year 1,204,989 dozens of garments were produced compared to the previous years production of 1,192,482 dozens. The increase in production quantity is 12,507 dozens over this year. Production capacity utilized during the year was 86.07%. There was an increase in Wages and Salaries to Tk. 21.32 million compared to previous year.

The company has achieved an export turnover of Tk. 2,524.44 million during the FY 2011-2012. The previous years turnover was Tk. 2,231.01 million. The increase in turnover is 13.15% from the previous year. Gross profit earned during the year was Tk. 200.28 million compared to last years gross profit of Tk. 165.84 million, resulting in an increase of 20.8%.

Net profit (after tax) earned also increased by 24.4%. During this fiscal year, net profit after tax has increased due to efficient production capacity utilization along with effective proportionate cost reduction.

FY 2010-2011 TO 2009-2010:

An export turnover of Tk. 2,231.01 million was achieved during the FY 2010-2011. The increase in turnover was 40.66% with a 21.22% increase in net profit (before tax). Net profit (after tax) earned during the year was Tk. 13.53 million compared to the previous years net profit (after tax) of 13.81 million. The increase in turnover is mainly due to the fact that cotton price went up by several folds and most buyers adjusted buying prices to some extent [1].

During the FY 2010-2011, the company achieved an increase in production by 21.8%, producing 14.3 million pieces of apparel. Production capacity utilization increased by 8.77%.

Around Tk. 57 million were invested in Property, Plant and Equipment. Not only did this increase the production capacity, but also raised the annual turnover by 40.7%.

But perhaps the most interesting fact in the FY 2010-2011 is the market price of each share of stock of Apex Knitting. It increased by an unnatural 157.7% from Tk. 790 to Tk. 2,036. This was the time when shares of all the stock in the Dhaka Stock Exchange were increasing alarmingly and rapidly going out of the regulators control.

Net working capital and operating profit also increased steadily thus indicating a positive health of the company.

FY 2009-2010 to 2009-2008:

The company achieved an export turnover of Tk. 1,586.09 million during the FY 2009-2010. The previous years turnover was BDT 1,649.53 million. The decrease in turnover was 3.85% with a 13.9% decrease in profit (before tax). Net profit (after tax) earned during the year was Tk. 13.81 million compared to the preceding years Net Profit (after tax) of 13.12 million. This has come to pass due to the fact that on an average, 20 to 30 percent price has declined depending on the item of export.

There was a 0.30% increase in production of apparel during this year, and the production capacity utilized also increased by 0.29%.

5.0 PROSPECT ANALYSIS

Due to the highly variant nature of the percentage changes of the items on the financial statements from one year to another, it is extremely difficult to predict the future of the company. However, with the standard accounting practices intact, it is possible to predict some of the core items after adjusting for inflation trends in Bangladesh, the foreign currency changes in the global currency markets and average changes from year to year.

5.1 TURNOVER

For the upcoming 5 years, it has been predicted that turnover will increase by 15.8%. This has been based on the average predicted inflation rate of Bangladesh and the average of the percentage changes in the past five years. In this case, it is assumed that the increase in production capacity in these years will be more or less the same as the ones in the last five years.

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

2013-2014

2014-2015

2015-2016

2016-2017

2017-2018

1,649,533

1,586,094

2,231,013

2,524,441

2,445,606

3,279,470

3,797,626

4,397,651

5,092,479

5,897,091

As the bar chart and the table demonstrates, the turnover is predicted to increase in the coming few years. Likewise, it is also assumed that major changes will be brought about eventually in the net operating income due to this increase in the upcoming five years.

5.2 Net Profit After Tax

Using the same assumption as in the prediction of turnover, the net profit after tax is predicted to increase at around 15.4%. If such is the case, the following table demonstrates the predicted figures of net profit after tax in the coming years.

2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

2013-2014

2014-2015

2015-2016

2016-2017

2017-2018

13,118,368

13,814,819

13,528,325

16,827,308

18,487,401

21,334,460

24,619,967

28,411,442.74

32,786,804

37,835,972

As the graph demonstrates in the coming years, Net Profit after tax is expected to increase. And this increase will foster an increase in profitability as well.

5.3 Total Assets

2008-2009

2010-2009

2010-2011

2011-2012

2012-2013

2013-2014

2014-2015

2015-2016

2016-2017

2017-2018

914,795,661

833,305,514

1,070,253,704

1,048,472,626

1,181,591,830

1,334,017,176

1,506,105,392

1,700,392,987

1,919,743,683

2,167,390,618

Total assets have also increased by 12.9% based on the same presumptions. In this case we see the amount of total assets increasing on a constant basis. The graph below demonstrates the increase more appropriately.

As the graph shows, with the increasing growth of the Bangladesh economy and the continuous broadening of the export horizon, the values of Total Assets are predicted to rise in the above manner.

5.4 Earning Per Share

2017-2018

2016-2017

2015-2016

2014-2015

2013-2014

2012-2013

2011-2012

2010-2011

2009-2010

2008-2009

4.50

3.90

3.38

2.93

2.54

2.2

2.00

1.61/16.11

16.45

15.62

The graph and the table show the expected behavior from the EPS as predicted by the percentage changes of +9.09%, +19.50%, -2.11% and +5.05% during the past years.

5.5 Market Price

The most fluctuating item in the financial statements of Apex Knitting and Spinning Mills, the market price of the shares of the company cannot be predicted with any reasonable degree of accuracy. In the last five years the prices were 584, 790, 2036, 103.01 and 56 from the financial years of 2008-2009 to 2012-2013 respectively. In the current financial year, the price has averaged from 70 to 85 so far. The graph below demonstrates the issue more appropriately.

(Source: www.dse.com.bd)

Besides, the market price is also heavily influences by many other internal and external factors over which the management of the company may have but little control. This is why although the performance of the company can be judged and predicted it is impossible to do the same with the market price.

Using the same assumptions a prospect analysis can be drawn to predict the behavior of the items of the income statement, balance sheet and the cash flow statement. It must be noted that the behavior of the stock market is highly unpredictable so market price is impossible to predict. Also, the performance of the company is highly dependent on external circumstances like political issues, labor unrest, world economy etc.

5.6 FORECASTED INCOME STATEMENT:

5.7 FORECASTED BALANCE SHEET:

5.8 FORECASTED STATEMENT OF CASH FLOWS:

6.0 REFERENCES

6.1 BALANCE SHEET:

6.2 INCOME STATEMENT

6.3 STATEMENT OF CASH FLOWS

Turnover2008-20092009-20102010-20112011-20122012-20132013-20142014-20152015-20162016-20172017-20182445606252444122310131586094164953319101592211964256145529661653434819

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