Ratio Analysis of Hr Textiles

RATIO ANALYSISOF

H. R. TEXTILE MILLS LTD.

RATIO ANALYSIS OF HR TEXTILES MILLS LTD.

LETTER OF TRANSMITTAL

26 July 2012

Farzana Huda

Lecturer

Dept. of Business Administration

East West University

Subject: Submission of assignment on ‘Financial Report Analysis of H. R. Textile Mills.’

Madam:

We would like to submit the assignment on ‘financial report analysis of H. R. Textile Mills Ltd. It had been a great experience for us to work with such a real life issue to analyze with. We tried utmost to make & let it look like a professional one. Any shortcomings are expected to have a kind view for our encouragement. We would like to thank you for your sincere & honest try to let us make easy & get familiar with the terms & facts of this analysis to help us make the paper a successful one.

Our efforts will be valued, if this report can serve for what it’s been meant for & our assistance will be there for any queries.

Sincerely,ID: 2010-2-13-053

H R Textile Mills Company Overview

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H R Textile Mills is a vertical public limited company engaged in manufacturing of knitwear products. It is a part of the famous Pride Group, Bangladesh. Pride Group is a vertical textile group engaged in the manufacture and export of knitwear products to the European Union, the USA and Canada. The group is also engaged in production and marketing of saris, kids wear, ladies' wear, home furnishing and other textile products through a chain of 66 retail outlets spread all over Bangladesh. As of date, Pride Group consists of H.R. Textiles Mills Limited, Fashion Knit Garments Limited, Dacca Textiles Limited, Pride Limited, Urban Truth and MODA. It was established in 1958 by Halimur Rahman. H.R. Textiles Mills is a Lycra assured factory. Zara, Bershka, New Look, Stradivarius, and El Corte Ingles are some of their clients. It is one of the pioneering composite knitwear companies in Bangladesh. The facilities have a complete North-American and European state-of-the-art setup, thoroughly engineered, and are capable of manufacturing a whole range of knit fabrics and Garments

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http://en.wikipedia.org/wiki/Textile

http://en.wikipedia.org/wiki/El_Corte_Ingl%C3%A9s

http://en.wikipedia.org/wiki/Stradivarius_(Inditex)

http://en.wikipedia.org/wiki/New_Look_(clothing_retailer)

http://en.wikipedia.org/wiki/Bershka

http://en.wikipedia.org/wiki/Zara_(clothing)

http://en.wikipedia.org/wiki/Lycra

http://en.wikipedia.org/wiki/Bangladesh

http://en.wikipedia.org/wiki/Saris

http://en.wikipedia.org/wiki/Marketing

http://en.wikipedia.org/wiki/Production,_costs,_and_pricing


1. Liquidity Ratio

Liquidity ratios measure your company’s ability to cover its expenses. The two most commonliquidity ratios are the current ratio and the quick ratio

1.1 Current ratio

The current ratio is a reflection of financial strength. It is the number of times a company’scurrent assets exceed its current liabilities, which is an indication of the solvency of the business.

1.2 Quick Ratio

The quick ratio is also called the “acid test” ratio. That’s because the quick ratio looks only ata company’s most liquid assets and compares them to current liabilities. The quick ratio testswhether a business can meet its obligations even if adverse conditions occur.

The formula to compute the current ratio:Current Ratio = Total current assets / Total current liabilities

Here is the formula for the quick ratio:Quick Ratio = (Total Current Assets - Total Inventory) / Total Current Liabilities

YearTotal Current Assests (In

BDT)

Stocks and Stores (In

BDT)

Total Current Liabilities(In

BDT)Current Ratio Quick Ratio

2007 388,713,646 84,427,852 400,706,767 0.97007008 0.759372742008 470,224,622 112,332,201 481,481,896 0.97661953 0.743314392009 557,659,491 107,762,570 594,188,662 0.93852261 0.757161742010 616,722,475 110,913,971 629,256,843 0.98008068 0.803818842011 714,793,046 78,500,199 708522756.00 1.00884981 0.89805563

Interpretation:

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YearCurrent

Ratio(times)Meaning

Quick Ratio

Meaning

2007 0.97007008There is tk. 0.97 of current asset to pay every tk.1.0 of

current liabilities.0.75937274

There is $0.759 in quickCurrent Liabilities assets

(liquid) to payevery $1.00 in current

liabilities.





liabilities.





liabilities.



There is $0.803 in quickCurrent Liabilities assets (liquid) to pay every $1.0

in currentliabilities.





liabilities.

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Comparisons:HR textiles Mills’ current ratio is clearly way below compared to the industry standard.

With a little fluctuation (less than 0.1), its current ratio is close to 1.0 where the standard is 4.1times. In 2007 and 2008, the ratio was almost same at 0.97 times and in 2009 it slightly declined to 0.94 times and again recovered in 2010 by reaching 0.98times. In 2011 its ratio reached to 1.01 which is best ratio achieved in recent five years.

This is because there is hardly any gape between the current assets and current liabilities. With the increase of current assets in each year the current liabilities also increased.

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So the company continuously suffered in meeting current obligation through 2007 to 2011 with its current assets.

HR textiles Mills’ quick ratio is also much lower than the expected standard. A company should have twice (2.1 times) of itsquick current assets than its current liabilities. But HR textiles Mills’ quick ratio was around 0.75 which minimally rose to .85 in 2010 and .89 in 2011.

The quick ratio has improved slightly in 2010 and 2011 and reached to .89 which was around 0.75 in 2007 to 2009. The quick ratio improved a bit in 2010 and 2011 as the company observed the hightest current assets along with lowest stock available in that period.

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Recommendation:

HR Textiles Mills’ current ratio can be improved by Increasing current assets or by decreasing current liabilities.

• Paying down debt• Acquiring a long-term loan (payable in more than 1 year’s time)• Putting profits back into the business

HR Textiles Mills’ quick ratio can be improved by Increasing current assets or by decreasing current liabilities or increasing sales of

inventory.

2. Asset Management Ratio Asset Management Ratio Asset management ratios measure how effectively the the firm is managing its assets. These ratios are designed to answer the following question: Does the total amount of each type of asset as reported on the balance sheet seem reasonable, too high, or too low in view of current and projected sales levels

2.1 Inventory Turnover Ratio

Inventory turnover ratio calculated by dividing the cost of goods sold by the inventory.Here is the formula of inventory turnover ratio:Formula= Cost of Goods Sold/Inventories

2.2 Fixed Asset Turnover Ratio

Fixed asset turnover ratio measures how effectively the firm uses its plant and equipment to help generate sales. It calculated by dividing the sales by the net fixed assets.In the following the formula of fixed asset turnover is given: Formula= Sales/Net Fixed Asset

2.3. Total Asset Turnover

Total asset turnover ratio measures the turnover of all of the firm’s assets. It is calculated by dividing the sales by the total assets.In the following the formula of total asset turnover is given: Formula = Sales/Total Assets

Year Stocks and Stores Cost of Goods Sold Inventory Turnover ratio2007 388,713,646 662,193,262 1.7035503352008 470,224,622 1,010,972,536 2.149977882009 107,762,570 1,286,814,881 11.94120446

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2010 110,913,971 1,062,651,934 9.5808663642011 78,500,199 1,553,115,036 19.78485476

Comparison:

Year Sales Net Fixed Asset

Current Asset Total Asset Fixed Asset Turnover

Total Asset Turnover

2007 743,815,304 466,649,761 388,713,646 855,363,407 1.59394768 0.8695898122008 1,140,247,661 455,771,362 470,224,622 925,995,984 2.501797515 1.2313743052009 1,256,238,796 482,018,003 557,659,491 1,039,677,494 2.606207213 1.2082966142010 1,192,399,829 485,981,560 616,722,475 1,102,704,035 2.453590686 1.0813416762011 1,787,093,874 439,916,150 714,793,046 1,154,709,196 4.062351141 1.54765709

Interpretation:

Year Inventory turnover ratio(times)

Analysis Fixed asset turnover ratio(times)

Analysis Total asset turnover ratio (times)

Analysis

2007 1.703550335 The inventory is sold for 1.703 times compared to cost of goods sold

1.59394768 The firm used 1.59 times of fixed asset to generate sales.

0.869589812 The firm is earning 0.869 times from investment on total assets.


2.501797515 The firm used 2.50 times of fixed asset to generate sales





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2011 19.78485476 The inventory is sold for 19.78 times compared to cost of goods sold.



Comparison:HR textiles Mills’ inventory turnover ratio is clearly way below compared to the industry standard.

The average inventory turnover ratio of hr textile is high within the year of 2002 to 2011 of the company standard is 7.4 times. So, overall performance is good for the company.

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The condition of the cost of goods sold is higher than the stocks &stores of HR Textile in which the revenue is increasing day by day.

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The fixed asset turnover ratio of HR Textile is not suitable between the year of 2007 to 2010 of HR Textile with the company standard. But in 2011 the fixed asset turnover ratio is increased with the company standard.

The total asset turnover ratio of HR Textile ltd is good with the company averages. But in one year among 2007 to 2011 is low from the company standard.

Recommendation:

The overall inventory turnover ratio of HR Textile is not so good. The fixed asset turnover ratio is also not suitable for HR Textile ltd. But the total asset turnover ratio is standard for the HR Textile ltd. The HR textile has arises some problem in the overall asset management ratio. They should recover the problem for the betterment of the organization. If we are comparing an old 12 | P a g e


firm that acquired many of its fixed asset years ago at low prices with a new company that acquired its fixed asset only, we probably would find that old firm has a higher fixed asset turnover ratio

3. Debt Management Ratio

3.1Debt Ratio:

Debt Ratio gives you the idea about how many times you can pay off your debts from the total asset you have, or how much debt do you have for each $1 of asset. The Formula to calculate Debt ratio = Total Liabilities/ Total Asset

Year Total AssetsCurrent Liabilities

Non-Current Liabilities

Total Liabilities

Debt-Asset Ratio

2007 855,363,407 400,706,767 208,792,719 609,499,486 0.71256203

2008 925,995,984 481,481,896 195,490,433 676,972,329 0.7310748

2009 1,039,677,494 594,188,662 193,782,580 787,971,242 0.757899682

2010 1,102,704,035 629,256,843 203,034,376 832,291,219 0.754772988

2011 1,154,709,196 708,522,756 119,851,841 828,374,597 0.717388066

Interpretation:

Year Debt-Asset Ratio Interpretation

2007 71.256203%For each tk1 of total asset, the company has $0.71256203 of

Debts.

2008 73.10748%For each tk.1 of total asset, the company has $ 0.7310748 of

Debts.

2009 75.7899682%For each tk. 1 of total asset, the company has $0.757899682 of

Debts

2010 75.4772988%For each tk. 1 of total asset, the company has $0.754772988 of

Debts

2011 71.7388066% For each tk.1 of total asset, the company has $0.717388066 of

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Debts

Comparisons:

HR textiles Mills’ Debt-Asset ratio is clearly way above compared to the industry standard, which is not very good for the company.

Recommendation:

The company needs to use I’s assets more and pay off their debts to bring this debt ratio in a good situation for the company

3.2 Times Interest Earned Ratio:

The TIE ratio measures the extent to which earnings before interest and taxes (EBIT), also called operating income, can decline before the firm is unable to meet its annual costs.

It is calculated with the formula given below,

Times Interest Earned Ratio = EBIT/Interest charged

Year Times Interest Earned Ratio

2007 1.661476056

2008 1.672797877

2009 1.648063705

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2010 1.707013424

2011 2.173492921

Comparison:

It is clearly visible that time interest earned ratio of HR textiles ltd is clearly well under the Industry standard. From 2007 to 2010 it almost stabilized to 1.65 times but in 2011 it reached to 2.1 but still falls way short of the standard.

Recommendation:

The company should try to increase the sales to ultimately increase the EBIT to be able to cover the interest on the debt it has financed.

4. Profitability Ratio

4.1 Net Profit Margin on Sells : This Ratio shows how much you are earning on basis of your total sales.

Formula for evaluating this ratio= Net Profit/Sales

Year Net Profit or Income SalesNet Profit margin

on Sells

2007 4,464,273 743,815,304 0.006001857

2008 5,135,005 1,140,247,661 0.004503412

2009 5,208,570 1,256,238,796 0.004146162

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2010 6,300,056 1,192,399,829 0.00528351

2011 63,789,810 1787093874 0.035694717

Interpretation :

Year Net Profit margin on Sells Interpretation

20070.6001857%

For each $1 of sales the company earns $0.006001857

20080.4503412%


20090.4146162%


20100.528351%


20113.5694717%


Comparison:

HR textiles Mills’ Net Profit margin is clearly way below compared to the industry standard, which is an indication of upcoming alarming situation.

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So, the profitability ratio is too much below the expected return, only in 2011 it has been able to do a bit good

Recommendation:

The company needs to minimize its costs and get control over the things, so that the ration goes up.

A. Return on Asset: This ratio indicates how well the company is using its assets and how much is getting return from its assets.

Year Net Profit or Income Total AssetsReturn on Asset

2007 4,464,273 855,363,407 0.005219154

2008 5,135,005 925,995,984 0.005545386

2009 5,208,570 1,039,677,494 0.005009794

2010 6,300,056 1,102,704,035 0.005713279

2011 63,789,810 1,154,709,196 0.055243182

Formula to get this ratio= Net Income/Total Asset

Interpretation :

Year Return on Asset Interpretation

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2007

0.5219154%

By using $1 of total asset, the company has been able to generate $0.005219154 of profit

2008

O.5545386%


2009

0.5009794%


2010

0.5713279%


2011

5.5243182%


Comparison:

HR textiles Mills’ Return on asset ratio is clearly way below compared to the industry standard, which is an indication of upcoming alarming situation.

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So, the return on asset ratio is too much below the average return.

Recommendation:

The company seems to be holding too much stock in hand, instead f that they need to increase their sales so the profit goes up.

4.2 Return on Equity: This ratio shows how return we are getting using the owner’s equity we have. The formula to calculate this ratio= Net Income/Equity

Year Net Profit or Income Equity Return on Equity

2007 4,464,273 200,000,000 0.022321365

2008 5,135,005 200,000,000 0.025675025

2009 5,208,570 200,000,000 0.02604285

2010 6,300,056 200,000,000 0.03150028

2011 63,789,810 220,000,000 0.289953682

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Interpretation:

Year Return on Equity Interpretation

2007 2.2321365%

For $1 of owner’s equity the company generates $0.022321365 of revenue

2008 2.5675025%


2009 2.604285%


2010 3.150028%


2011 28.9953682%


Comparison

HR textiles Mills’ Return on equity ratio is clearly way below compared to the industry standard except from 2011, which is an indication of upcoming alarming situation.

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So, the return on equity except from 2011 is too much below the average return.

Recommendation

The company needs to increase sales to increase their profitability and use their equity more efficiently.

4.3 Earnings per Share: This ratio will show us how much revenue we are earning against each share.

Formula for computing this ratio= Net Profit (Earning available to Common Stock Holders)/Number of Common Stocks

Year Net Profit or Income Earnings per Share

2007 4,464,273 10.73

2008 5,135,005 13.57

2009 5,208,570 12.54

2010 6,300,056 15.55

2011 63,789,810 26.13

Interpretation:

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Year Earnings per Share Interpretation

2007 10.73 Against 1 Common Stock, the company earns $10.73





Price Earnings Ratio:

This ratio will show us how much we are earning against $1 of market price per share. The formula to get that ratio= Market Price of Share/ Earnings per Share

Year Earnings per Share Market Price of Shares Price Earnings Ratio

2007 10.73 100 0.1073

2008 13.57 100 0.1357

2009 12.54 100 0.1254

2010 15.55 100 0.1555

2011 26.13 100 0.2613

Interpretation

Year Price Earnings Ratio Interpretation

2007 10.73%

Against $1 of market price of share, company is earning $0.1073

2008 13.57%


2009 12.54% Against $1 of market price of share, company is

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earning $0.1254

2010 15.55%


2011 26.13%


Recommendation:

Net Income to be increased so that it ensures generation of profits internally in the business. HR should keep in mind whether share fluctuate in size. Companies may bring additional shares to the market or actually buy them back depending on their cash needs and expectations for the future.

Ensure enough return for the shareholders and the Common Equity should be stable rather than fluctuating

5. Market Value Ratio:

The ratios that make a relation between the firm’s stock price to its earnings and book value per share is known as Market Value Ratios. The impact of all the above ratios liquidity, Asset Management, Profitability has direct influence on the Market Value ratios.

It comprises of two significant ratios:a) Earnings per Share: it computes how much the stockholders are receiving from the net income

available to the common stockholders against the number of shares they own of the firm. It is also required for calculating another ratio “Price Earnings Ratio”.

b) Price/Earnings Ratio: it shows the willingness of the investors for investing in the company shares on the basis of profit earned by the firm per dollar. It takes into account market price per share comparing to the Earnings made by the company per share.

The formula for computing the above ratios are:

5.1 Earnings per share: Net Income available to common stockholders/No of common shares outstanding

5.2 Price/Earnings Ratio: Market Price per share/Earnings per share

Interpretation:Year Net Profit or Income Equity Return on Earnings per Market Price of Price Earnings

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Equity Share Shares Ratio

2007 4,464,273 200,000,000 0.022321365 10.73 100 0.1073

2008 5,135,005 200,000,000 0.025675025 13.57 100 0.1357

2009 5,208,570 200,000,000 0.02604285 12.54 100 0.1254

2010 6,300,056 200,000,000 0.03150028 15.55 100 0.1555

2011 63,789,810 220,000,000 0.289953682 26.13 100 0.2613

YearEarnings Per

Share(TK)

AnalysisPrice/Earnings

Ratio(in times)

Analysis

2007 10.73for every share the shareholders

would receive $10.73 as dividend

0.1073

the investor would invest

0.1073 times in $1 earnings



0.1357





0.1254





0.1555





0.2613



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We can observe the net profit or income of the company has been rising from 2007 to 2012. This leaves a hope for the shareholders to receive higher return on their stock. But if carefully analyzed the positive changes have been brought about a little.

Most shareholders are interested in net profit after tax and interest, because this is the sum of money available for distribution.By dividing the profits that are potentially available for distribution (net profit after interest and tax) as dividend by the number of shares, we get a figure of earnings per share.It is also visible that earnings per share have been increased from 2007 to 2011. From 2008 to 2009 it slightly decreased as the rise in profit was only 73565 TK. Again from 2010 to 2011 there has been a sharp rise in earnings per share of10.58 TK (26.13-15.55) indicating an enormous amount of huge profit has been distributed among shareholders. For any company an increase in earnings per share is a good sign of its progress and has the ability to withhold the shareholders for a long time. Hence shareholders are gaining more in each share.

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The market price per share has been remaining constant throughout the years from 2007 to 2011. This indicates there have not been any major changes in the market or share price fluctuations and the prices remained similar every year. As a result the Price/Earnings Ratio seems to maintain a constant structure through 2007 to 2011.

Now if we look into Price/Earnings ratio we see that the standard is 13.0 times. From the data we can see that not much were the price/earnings ratio of these years even closer to the industry standard. There is a huge gap between the standard and actual ratios. In 2007, it was the lowest of 0.1073 times. In 2008 it increased less proportionately and again fell in 2009. Moreover, there has been a slight rise from 2009 to 2011. But this rise is far below the standard. This is not a good sign for the company. This situation is considered as risk for the firm. The investors would be unlikely to invest in this firm. HR would not be able to hold its position in the market and become risky firm. It declines the possibilities of future expected profitability. In addition to that fluctuations in market price of shares are a big concern. In spite of being market price fixed, price/earnings ratio was way below the standard, if there is any fluctuation then that makes it even more risky.

Recommendation:

HR textiles earnings per share from 2007 to 2011 have beenhigher indicating good return for the shareholders from high net income of the company. But the company also has to keep in mind that all the profit cannot be distributed to shareholders but

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save it for future. It is termed as “Retained Profits”. The net income after tax and interest should be reserved for future benefits.

Price/Earnings ratio holds a huge gap compared to its standard. This indicates high risk for the firm. The increase in the ratio was lower and maintains a fixed structure. HR also should focus on the market price. Till 2011 the market price of share was constant but this would not last. Also the company is not meeting its standard ratio which may also prove risky for any further future growth prospects. This would fail to attract investors and HR should follow certain strategies to reach its standard ratio. The firm should be enough successful so that there is higher growth possibilities. Therisk-averse investors would be unlikely to invest in these shares.

Conclusion

HR Textiles Mills Company is one of the leading textiles companies in Bangladesh. Its financial position in the market has been very strong throughout the years but from 2007-2011 the detail survey of their financial ratios have sort out many confusions. Many things emerged and a lot of problems were recognized. The performance of the company was more clearly identified. From the five major ratios Profitability, Liquidity, Asset management, Debt and Market Value ratios, more detailed analysis has helped in understanding their weaknesses, strengths, opportunities that they may enjoy and the threats they are likely to face.

To begin with Profitability Ratios, they show how profitable a firm is, they are the measure of the overall performance. It also measures how well the firm is operating or how well the current performance is compared to past performance records. The Net Profit Margin on Sales improved in 2010 and 2011 as it was far above the company standard of 4.7%. Another ratio Return on Asset was not favorable enough and was far below the standard. Moreover, Return on Equity also was not in a good condition as it has a huge gap from the standards and the actual incurred from 2007 to 2011. Overall the profitability situation of the company is not so good. It needs a lot of recovery. It needs to develop its strategies and focus more on improving net profits, high sales and ensure high return on asset and equity.

Secondly Liquidity ratio measures whether a company has sufficient current assets to meet its current liabilities. It evaluates a company’s ability to pay its creditors within due time. The company has enough cash to meet the debts. There are two ratios. Firstly, current ratio that measures current assets to meet current liabilities has a standard of 4.1 times. During the financial years 2007 to 2011, the company was not in a good condition where in any year the standard position was not met. Also we observed that the total current liabilities increased with the total current assets which might be a reason for such a ratio. Another ratio is Quick ratio which measures whether the quick convertible assets are capable of meeting the current liabilities. The standard for quick ratio was 2.1 times but in the years 2007 to 2011 no such ratio even closer to that was obtained. This indicates company had excess liabilities compared to assets

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Overall the company is not in a sound liquid position where it is weak in meeting its current obligations. There is a need for improving the liquid assets if the company has to run debt-free.

Thirdly Asset Management ratio shows how effectively the firm is managing its assets. The first ratio is Inventory turnover ratio which far below the standard of 7.4 times. In all the years from 2007 to 2011 it sustained in a position between 1.5 to 2.5 times. This indicates that the company is holding too many stocks which are not being sold on time and have the risk of being obsolete. Fixed asset turnover also was not favorable to its standard but in 2010 and 2011 it was a little closer to that. This suggests that firm could hardly use its fixed assets to generate sales. The third ratio is Total Asset Turnover which has a standard of 2.1 times. Only in 2008 was the company able to reach closer to the standard otherwise needs a thorough recovery indicating the firm is not generating sufficient volume of business from its investment on total assets. Overall the Asset Management ratio was not in favorable condition indicating firm needs to invest properly on its assets so that it brings positive effects on turnover generation.

Fourth, Debt Management ratio evaluates a firm’s capacity in managing its debts effectively. The first ratio is Debt ratio which has a standard of 45%. HR textiles seem to have a higher debt ratio in the years 2007 to 2011. This is risky for firm as it would be now liable to pay the huge debt to its both short term and long term liabilities.Overall firm should consider in managing debts in such a way that does not put an obligation rather becomes easier through increasing sales, issue of stocks etc.

Finally Market Value that relates firm’s stock price with earnings and book value. Earnings per share have been increasing throughout the years 2007 to 2011. This is a good sign for the company where shareholders receive high on their ownership of shares. Alternatively, market price remaining constant Price/Earnings ratio is not in a favorable condition and far below the standard of 13.0 times indicating a risky firm and less growth prospects in future.

Overall company should try maintaining a good condition so that it attracts more investors from their high returns for shareholders.

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Documents

Ratio Analysis of Hr Textiles