Putting Your Eggs in the Right Basket: Analysis of Financial Statement & Earnings Quality

(Textile Industry)

Introduction

Study findings suggest that investors of any organization, tend to focus less on the notes and other interpretations of the financial statements, the point where their perceived importance and degree of thoroughness to read the reports vary.

It was observed that numbers of the statements tend to be the focal point for taking any investment decision in any particular firm. But additional information such as ratio analysis and their accurate interpretation is pivotal for decision making as such ratios inform the investors regarding the past, present and expected future financial health for the company.

Ratios: Why So Vital for Decisions

• Helps to review the performance of any organization over time.• Makes it possible to compare the performance of an organization with its competitors in the same industry.• Makes it possible to compare the performance of an organization with the industry average.• Brings out any problem within the company which can be rectified in the future period.

Ratios: Why So Vital for Decisions

• Makes the financial position of an organization comprehendible to the investors.

• Helps to judge the efficiency of any organization in terms of operations and management.

• Used to establish future trends of financial performance. Hence, ratios help to formulate the future plans for any particular organization.

• Helps to evaluate the performance of different divisions within the same company.

Taking Decisions for Investment

Parameters

Financial Statement Analysis Financial Reporting Quality

Investment Parameters

Financial Statement Analysis:1. Refers to the process of understanding the risk and

profitability of a firm through analysis of reported financial information, by using different accounting tools and techniques such as ratio analysis.

2. A process of reviewing and evaluating financial statements to gain knowledge regarding financial health and to enable more effective decision making.

Investment Parameters

Earnings Quality: Refers to the overall reasonableness of reported earnings. In

other words, it refers to the degree to which earnings reflect underlying financial condition of the company, enabling the current and potential investors to know how much the reported earnings accurately match the income for that

period.

Companies under Study

Company Name

1 Alhaj Textiles Mills Ltd.2 Altex Industries Ltd.3 Anlima Yarn Dyeing Ltd4 Apex spinning & Knitting mills5 Argon Denims Ltd6 Desh Garments Ltd.7 Envoy Textiles Ltd. 8 Family Tex Bangladesh Ltd9 Generation Next Ltd

10 H.R. textile Mills ltd11 Maksons Spinning Mills ltd

Framework of the Study: Ranking & Scoring

• Calculate the ratios1

• Rank the ratios 2

• Add up the ratios to derive the aggregate score

3

Financial Statement Analysis

1. Activity Ratios Measures how efficiently the company manages its

activities especially how well it utilizes it assets . Combines information from the income statement in the

numerator with balance sheet items in the denominator. Average balance sheet data are used for bringing

consistency

Different Activity Ratios

Activity Ratios Numerator Denominator

Inventory turnover COGS or cost of sales Average inventory

Days of inventory on hand Number of days in period Inventory turnover

Receivables turnover Revenue Average receivables

Days of sales outstanding Number of days in period Receivables turnover

Payables turnover Purchases Average trade payables

Number of days of payables

Number of days in period Payables turnover

Working capital turnover Revenue Average working capital

Fixed asset turnover Revenue Average net fixed assets

Total asset turnover Revenue Average total assets

Name of the Company Activity Ratio

Inventory Turnover (Times)

Rank

DOH (Days) Rank Receivable Turnover (Times)

Rank

Alhaj Textile Mills ltd. 1.473 10 300 10 45.497 4

Alltex Industries ltd. 3.118 5 116 5 54.186 3

Anlima Yarn Dyeing ltd. 2.503 9 147 9 3.420 7

Apex Spinning & knitting Mills ltd. 9.359 2 40 2 8.693 5

Aragon Denims ltd.

2.701 7 135 7 2.150 10

Desh Garments ltd 25.811 1 29 1 254.932 1

Envoy Textile ltd. 6.667 4 55 4 2.823 9

FamilyTex (BD) ltd. 3.110 6 117 6 4.925 6

Generation Next Fashion ltd. 2.573 8 141 8 106 2

H.R. Textile mills ltd. 7.563 3 49 3 3.206 8

Maksons Spinning Mills ltd 0.961 11 417 11 1.696 11

Name of the Company Activity Ratio

DSO (Days) RankPayables Turnover

(Times)

Rank Payable Deferral Period (Days)

Rank

Alhaj Textile Mills ltd. 43 4 10.372 8 40 8

Alltex Industries ltd. 38 3 3.596 5 118 5

Anlima Yarn Dyeing ltd. 109 7 17.504 9 31 9

Apex Spinning & knitting Mills ltd. 45 5 2.277 4 161 4

Aragon Denims ltd.

170 10 1.081 1 338 1

Desh Garments ltd 2 1 4.015 6 94 6

Envoy Textile ltd. 320 9 1.884 3 194 3

FamilyTex (BD) ltd. 73 6 8.141 7 44 7

Generation Next Fashion ltd. 3 2 77.133 10 5 10

H.R. Textile mills ltd. 124 8 1.863 2 195 2

Maksons Spinning Mills ltd 213 11 17.451 11 21 11

Name of the Company Activity Ratio

Working Capital Turnover (Times)

Rank Fixed Asset Turnover (Times)

Rank Total Asset Turnover (Times)

Rank

Alhaj Textile Mills ltd. 3.2925 61.689 4 1.102 4

Alltex Industries ltd. -8.922 91.681 5 0.911 6

Anlima Yarn Dyeing ltd. -19.666 11 0.586 11 0.442 10

Apex Spinning & knitting Mills ltd. 28.270 2 6.189 1 2.863 1

Aragon Denims ltd.

6.620 4 1.221 7 0.460 8

Desh Garments ltd

-4.436 7

2.095 3 1.568 2

Envoy Textile ltd. -13.290 10 0.937 10 0.500 7

FamilyTex (BD) ltd. 3.303 5 1.575 6 1.008 5

Generation Next Fashion ltd. 21.136 3 1.061 8 0.443 9

H.R. Textile mills ltd. 34.389 1 2.919 2 1.184 3

Maksons Spinning Mills ltd-7.124 8

1.027 9 0.381 11

Name of the Company

Activity Ratio

Rank (Inventory Turnover )

Rank (Receivable Turnover )

Rank(Payables Turnover )

Rank (Working Capital

Turnover)

Rank (Total Asset Turnover)

Score Rank of Score

Alhaj Textile Mills ltd.

10 4 8 64

32 6

Alltex Industries ltd.

5 3 5 96

28 3

Anlima Yarn Dyeing ltd. 9 7 9 11 10 46 8

Apex Spinning & knitting Mills ltd. 2 5 4 2 1 14 1

Aragon Denims ltd. 7 10 1 4 8 30 5

Desh Garments ltd 1 1 6 7 2 17 2

Envoy Textile ltd. 4 9 3 10 7 33 7

FamilyTex (BD) ltd. 6 6 7 5 5 29 4

Generation Next Fashion ltd. 8 2 10 3 9 32 6

H.R. Textile mills ltd. 3 8 2 1 3 17 2

Maksons Spinning Mills ltd 11 11 11

811 52 9

2. Liquidity Ratios

Measures a company’s ability to meet its short term obligations.

Liquidity measures how quickly assets are converted into cash and ability to pay off short-term obligations.

Typically achieved through efficient use of assets and managing the structure of liabilities.

Different types of Liquidity Ratios

Liquidity Ratios Numerator Denominator

Current ratio Current assets Current liabilities

Quick ratio Cash+ short term marketable investments+ receivables

Current liabilities

Cash ratio Cash+ short term marketable investments

Current liabilities

Defensive interval ratio Cash+ short term marketable investments+ receivables

Daily cash expenditures

Cash conversion cycle DOH + DSO – number of days of payables

Analysis of LiquidityCompanies Current Ratio Cash Conversion

Cycle (Days)Quick Ratio

Alhaj Textiles Ltd. 2.06 264 0.81

Altex Industries Ltd. 0.77 -11 0.28

Anlima yarn Dyeing 0.66 224 0.32

Apex spinning & dyeing mills

1.13 -78 0.65

Argon Denims Ltd. 1.078 -33 0.90

Desh Garments Ltd. 0.47 -60 0.20

Envoy Textiles Ltd. 1.21 130 0.80

Family Tex Bangladesh Ltd 2.67

145 1.26

Generation Next Ltd 1.08143

0.60

H.R. textile mills ltd 0.97 357 0.67

Maksons Spinning mills ltd

1.90 610 0.91

Ranking and ScoreCompanies Current

RatioCCC Quick Ratio Score Rank of

ScoreAlhaj Textiles Ltd. 2 9 4 15 4Altex Industries Ltd. 9 4 10 23 8

Anlima yarn Dyeing 10 8 9 27 11Apex spinning & dyeing mills

5 1 7 13 3

Argon Denims Ltd. 11 3 11 25 10

Desh Garments Ltd. 4 2 5 11 2

Envoy Textiles Ltd. 1 5 1 7 1

Family Tex Bangladesh Ltd

6 7 8 21 7

Generation Next Ltd 7 6 3 16 5H.R. textile mills ltd 8 10 6 24 9Maksons Spinning mills ltd

3 11 2 16 5

3. Solvency Ratios

Company’s ability to fulfill its long term obligations and includes in-depth analysis of the components of financial structure.

Provides information regarding the relative amount of debt in the company’s capital structure and the adequacy of earnings and cash flow to cover interest expenses and other fixed charges as they come due.

Different Types of Solvency Ratios

Solvency Ratios Numerator Denominator

Debt to asset ratio Total debt Total assets

Debt to capital ratio Total debt Total debt + total SE

Debt to equity ratio Total debt Total SE

Financial leverage ratio

Average total assets Average total equity

Interest Coverage EBIT Interest payments

Fixed charge coverage EBIT+ lease payments Interest payments+ lease payments

Analysis of Solvency RatioCompanies Debt to asset Debt to

capitalDebt to equity

Leverage Int. coveragre

ratioAlhaj Textiles Ltd. 0.404 1.507 0.650 2.381 0.131

Altex Industries Ltd. 0.224 1.177 1.11 5.777 1.705

Anlima yarn Dyeing 0.118 0.217 0.288 2.404 0.774

Apex spinning & dyeing mills

0.029 0.032 0.035 1.916 2.405

Argon Denims Ltd. 0.347 0.497 0.988 1.987 2.747

Desh Garments Ltd. 0.121 0.280 0.417 3.696 0.446

Envoy Textiles Ltd. 0.129 0.174 0.213 1.547 0.126

Family Tex Bangladesh Ltd 0.016 0.020 0.021 1.362 7.953

Generation Next Ltd 0.125 0.197 0.537 1.367 1.856

H.R. textile mills ltd 0.123 0.316 0.502 3.860 15.673

Maksons Spinning mills ltd 0.088 0.154 0.198 2.222 0.667

Ranking and Score

Companies Debt to

asset

Debt to

capital

Debt to equity

Leverage

Interest coverage

ratio

Score Rank of Score

Alhaj Textiles Ltd. 11 10 9 4 10 44 11Altex Industries Ltd. 9 11 11 1 6 38 8

Anlima yarn Dyeing 8 4 4 11 11 38 8Apex spinning & dyeing mills

10 9 10 7 3 39 10

Argon Denims Ltd. 7 5 8 9 5 34 7

Desh Garments Ltd. 6 8 7 2 1 24 4

Envoy Textiles Ltd. 3 3 3 5 8 22 3

Family Tex Bangladesh Ltd 4 6 5 6 7 28 5

Generation Next Ltd 2 2 2 8 4 18 2H.R. textile mills ltd 1 1 1 10 2 15 1Maksons Spinning mills ltd

5 7 6 3 9 30 6

4. Profitability Ratios Reflects a company’s competitive position in the market and the quality of its

management. The Income Statement reveals the sources of earnings and the components of

revenues and expenses. Earnings can be distributed to shareholders or reinvested in the company. Reinvestment provides increased solvency and a cushion against short-term

problems.

Different Profitability Ratios

Profitability Ratios Numerator Denominator

Gross profit margin Gross profit Revenue

Operating profit margin Operating income Revenue

Pretax margin EBT Revenue

Net profit margin Net income Revenue

Operating ROA Operating income Average total assets

ROA Net income Average total assets

Return on total capital EBIT Short & long term debt and equity

ROE Net income Average total equity

Return on common equity

Net income-preferred dividend

Average common equity

Analysis of Profitability

Company GP margin

(%)

Ope profit (%)

Pretax margin

(%)

Net profit margin

(%)

Operating . ROA (%)

ROA (%) Return on TC (%)

ROE (%)

Alhaj 22.3 21.7 -82.32 -104.244 0.2 0.1 13.4 11.8

Altex 14.3 5.2 -1.3 -1.7 4.6 -1.0 -1.1 -1.2

Anlima 19.9 7.5 4.0 5.0 3.3 2.2 2.3 6.1

Apex 8.9 7.4 1.7 1.2 21.6 4.1 97 6.0

Argon 20.4 11.6 10.2 8.5 5.3 3.9 8.3 11.4

Desh 9.2 0.4 0.5 0.5 0.6 0.8 71.8 3.00

Envoy 20.6 17.5 15.7 11.4 9.8 5.6 29 9.8

Familytex 29.5 28.2 25 25 28.4 25.2 10.3 34.4

Generation 25.3 18.6 14.9 12.3 7.7 5.3 20.07 9.6

H.R text 17.9 4.1 4.1 3.1 4.5 3.5 81.4 13.4

Maksons 27.2 16.3 10.8 7.1 7.3 3.0 0.5 7.5

Ranking & ScoringCompany GP

marginOperating

profitPre-tax margin

Net profit

margin

Operating ROA

ROA Return on TC

ROE Score Rank of Score

Alhaj 4 2 11 11 10 10 5 3 56 8

Altex 9 9 10 10 11 11 11 11 82 11

Anlima 7 7 7 6 8 8 9 8 60 9

Apex 11 8 8 8 2 3 1 9 50 6

Argon 5 6 5 4 5 5 8 4 42 4

Desh 10 11 9 9 9 9 3 10 70 10

Envoy 6 5 2 3 3 2 7 5 33 3

Familytex 1 1 1 1 1 1 6 1 13 1

Generation 3 3 3 2 6 4 4 6 31 2

H.R text 8 10 6 7 7 6 2 2 52 7

Maksons 2 4 4 5 4 7 10 7 43 5

5. Valuation Ratios

Mostly been used for investment decision making. Involves evaluating a company’s performance and valuing its

equity in order to assess its relative attractiveness as an investment.

Different Valuation RatiosValuation Ratios Numerator DenominatorP/E Price per share Earnings per shareP/CF Price per share Cash flow per shareP/S Price per share Sales per shareP/BV Price per share Book value per shareBasic EPS Net income-preferred

dividendsWA num of ordinary shares outstanding

Cash flow per share Cash flow from operations WA num of ordinary shares outstanding

EBITDA per share EBITDA WA num of ordinary shares outstanding

Dividends per share Common dividends declared

WA num of ordinary shares outstanding

Dividend payout ratio Common share dividends Net income attributable to common shareholders

Retention rate(b) 1 – dividend payout ratioSustainable growth rate b*ROE

Valuation Ratio

Name of the Company Price earnings ratio

Rank EPS Rank Price to cash flow ratio

Rank Price to book value

ratio

Alhaj Textile Mills ltd. 24.410 5 0.456 10 4.060 8 1

Alltex Industries ltd. 43.800 4 -0.576 11 5.562 7 1

Anlima Yarn Dyeing ltd. 462.708 1 2.342 711.771 2 1

Apex Spinning & knitting Mills ltd. 4.916 8 18.261 1

80.260 1 1

Aragon Denims ltd.2.096 11 4.77 2 3.344 11 1

Desh Garments ltd. 98.742 2 1.366 8 10.400 61

Envoy Textile ltd. 2.636 9 3.863 4 3.429 10 1

FamilyTex (BD) ltd. 2.487 10 4.02 3

3.500 9 1

Generation Next Fashion ltd.6.412 7

2.426 11.003 3 1

H.R. Textile Mills ltd. 96.462 3 2.455 5

10.543 4 1

Maksons Spinning Mills ltd. 13.888 6 0.720 9 10.402 5

1

Valuation Ratio

Name of the Company Dividend payout ratio

Rank Retention ratio Rank Sustainable growth rate

Rank

Alhaj Textile Mills ltd. 1.239 3 -0.239 10 -0.028 11

Alltex Industries ltd. 1.210 1 -0.210 9 -0.012 10

Anlima Yarn Dyeing ltd.0.943 4 0.057 8 0.004 9

Apex Spinning & knitting Mills ltd.

0.761 6 0.239 6 0.015 7

Aragon Denims ltd.0.0007 10 0.999 2 0.114 4

Desh Garments ltd. 0.810 5 0.189 7 0.008 8

Envoy Textile ltd.1.250 2 -0.250 11

0.098 5

FamilyTex (BD) ltd. Nil 11 1.000 1 0.344 2

Generation Next Fashion ltd.0.285 7 0.715 5

3.066 1

H.R. Textile Mills ltd. 0.021

8 0.979 4 0.034 6

Maksons Spinning Mills ltd. 0.005

9 0.995 3 0.117 3

Valuation Ratio

Name of the Company Rank (Price earnings ratio)

Rank (Price to cash flow ratio)

Rank (Sustainable growth rate)

Score Rank of Score

Alhaj Textile Mills ltd. 5 8 11 24 7

Alltex Industries ltd. 47

10 21 6

Anlima Yarn Dyeing ltd. 1 29 12 2

Apex Spinning & knitting Mills ltd. 8 1

7 16 5

Aragon Denims ltd.11 11 4 26 8

Desh Garments ltd. 2 6 8 16 5

Envoy Textile ltd. 9 10 5 24 7

FamilyTex (BD) ltd. 10 9 2 21 6

Generation Next Fashion ltd.7 3 1 11 1

H.R. Textile Mills ltd. 3 46 13 3

Maksons Spinning Mills ltd. 6 5

3 14 4

Financial Reporting Quality(FRQ)

• It relates to the accuracy with which a company’s financial statements reflects its operating performance and to their usefulness for forecasting future cash flows.

• Focal point of FRQ is on the income statements and the discretions in recording various revenues and expenses.

• Evaluating reporting quality is important to know the concept of accrual based accounting and cash based accounting.

Financial Reporting Quality

Companies Accrual Ratio (B/S) Rank

Alhaj Textiles Ltd. -0. 1002 1Altex Industries Ltd. -0.025 6

Anlima yarn Dyeing -0.00248 7

Apex spinning & dyeing mills -0.809 2

Argon Denims Ltd. -0.0456 4

Desh Garments Ltd. -0.04 5

Envoy Textiles Ltd. -0.0655 3

Family Tex Bangladesh Ltd 0.24 11

Generation Next Ltd 0.1660 10H.R. textile mills ltd

0.03066 9Maksons Spinning mills ltd

0.00205 8

Altman’s Z-Score

Here, X1 = Working Capital to Total Asset

X2 = Retained Earnings to Total Assets

X3 = EBIT to Total Assets

X4 = Market Value of Stock to Book Value of Liabilities

X5 = Sales to Total Assets

Z= 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 +1.0 X5

Z-Score

Score Interpretation

> 2.99 Probably in safe financial Condition

2.70- 2.99 Gray Area, difficult condition may arise

1.80- 2.69 Will go bankrupted within 2 years

< 1.80 High risk of going bankrupted

Z-Score

Companies Z-Score Rank

Alhaj Textiles Ltd. 1.393329 9

Altex Industries Ltd. 1.267881 10

Anlima yarn Dyeing0.328247348 11

Apex spinning & dyeing mills2.512770392 4

Argon Denims Ltd. 2.1497 5

Desh Garments Ltd. 1.64 6

Envoy Textiles Ltd. 1.446 7

Family Tex Bangladesh Ltd 3.62 2

Generation Next Ltd 9.7522 1H.R. textile mills ltd

3.20912821 3Maksons Spinning mills ltd

1.40021828 8

Z-Score

Companies Z-Score Rank

Generation Next Ltd 9.7522 1

Family Tex Bangladesh Ltd 3.62 2H.R. textile mills ltd

3.20912821 3Apex spinning & dyeing mills

2.512770392 4

Argon Denims Ltd. 2.1497 5

Desh Garments Ltd. 1.64 6

Envoy Textiles Ltd. 1.446 7Maksons Spinning mills ltd

1.40021828 8

Alhaj Textiles Ltd. 1.393329 9Altex Industries Ltd. 1.267881 10

Anlima yarn Dyeing 0.328247348 11

Combined Score-Rank Table

Activity Liquidity Solvency Profitability Valuation FRQ Z-score

Score Rank

Alhaj Textiles Ltd. 6 4 11 8 7 1 9 46 9

Altex Industries 3 8 8 11 6 6 10 52 10

Anlima Yarn Dyeing 8

11 8 9 2 7 11 56 11

Apex spinning 1

3 10 6 5 2 4 31 3

Argon Denims Ltd. 5

10 7 48

4 5 43 7

Desh Garments 2

2 4 105

5 6 34 4

Envoy Textiles Ltd. 7

1 3 37

3 7 30 2

Family Tex 4

7 5 16

11 2 36 6

Generation Next 6

5 2 21

10 1 27 1

H.R. textile mills 2

9 1 7 3 9 3 34 4

Maksons Spinning 9

5 6 5 4 8 8 45 8

Epilogue

Ranking and scoring method cannot help with ultimate investment decision making. As different investors have different choices , so is their investment decisions. So the ranking method cannot reflect all the investors’ preferences.