Executive summary:

This report examines the financial performances of DESCO on the basis of analyzing
and calculating their five major types of ratios; Liquidity Ratio, Asset Management
Ratio, Debt Management Ratio, Profitability Ratio and Stock Market Ratio. The paper
also includes the calculations and evaluation of Du Pont Equation.
The company current ratio, quick ratio, inventory turnover ratio and total asset
turnover ratio etc. appears as better than the previous years. However, the average
collection period and average payment period has become unsatisfactory which may
lead to financial crisis as the companys only service offering is electricity supply
which is offered almost in all cases on credit. Fall in fixed asset turnover ratio
signifies that the company should utilize its fixed asset more. In this paper, slight fall
in ROA and ROE is observed. While the former urges more efficient utilization of
assets, the latter calls for an increase in return to the shareholders. The substantial
fall in EPS shows that the company is falling behind in providing return to consumers
which is not a very good sign. The company should try to return more to its
shareholders.
In a nutshell it can be said that in the recent years the company has been somewhat
efficient in utilizing, managing and maintaining resources but isnt giving back
enough to the shareholders which gives out a very grave signal.
Introduction:
Dhaka Electric Supply Co. Ltd. (DESCO) was created as a distribution company in
November 1996 under the Companies Act 1994 as a Public Limited Company with an
Authorized Capital of Tk.5.00 billion. However, the operational activities of DESCO at
the field level commenced on September 24, 1998 with the taking over of the
electric distribution system of Mirpur area (comprising Kallayanpur, Kafrul, Pallabi
Sales & Distribution Division) from the erstwhile Dhaka Electric Supply Authority
(DESA) with a consumer strength of 71,161 and a load demand of 90 MW. In the
subsequent years of successful operation and performance, the operational area of
DESCO was expanded through inclusion of Gulshan Circle in April, 2003 and Tongi
Pourashava Area in March, 2007. Today, the total consumer strength stands at
446,129 as of 30th June, 2010 with a maximum load demand of 622 MW.
The area under service of the Company is about 220 square kilometers which
comprises the areas bounded by the Mirpur Road, Agargaon Road, Rokeya Sarani,
Progati Sarani, New Airport Road, Mymenshing Road, Mohakhali Jheel, Rampura
Jheel connected with the Balu River in the South and East and the Turag River in the

West and areas under Tongi Pourashava in the North. Recently Purbachal Model
Town a Rajuk project, situated on the east side of the Balu River and adjacent to
Dakshinkhan area, has also been included under the operational area of DESCO.
DESCO incorporated under the Companies Act 1994 with its own Memorandum and
Articles of Association. The company as a whole owned by Government of
Bangladesh and DESA representing government by acquiring 100% shares. DESCO
managed by a part time Board of Directors appointed by its shareholders, they are
responsible for policy decisions. The Board of Directors appointed Managing Director
and two full time Directors and they were also members of the Board Directors after
appointment. The Company is run by a management team headed by the Managing
Director under the guidance of the Board of Directors with a view to run it efficiently
and economically with optimum overhead cost and manpower. With the expansion
of operational areas followed by increase in number of consumers and system load,
DESCO reorganized its activities into 9 (nine) Sales & Distribution (S&D) Divisions.
1. Liquidity Ratio: |
1) Liquidity Ratio | | | | | | |
| Formula | 2006 | 2007 | 2008 | 2009 | 2010 |
Current Ratio(times) | Current asset/ current liabilities | 2.64197461 | 2.65395324 |
2.58068946 | 3.23209122 | 3.64474246 |
Quick ratio(times) | (Current assets-inventories)/current liabilities | 2.14844921 |
2.37286724 | 2.39070109 | 2.25752517 | 2.65983794 |
|
* Current Ratio
Graphical representation:
CURRENT RATIO (times)
Year
Interpretation:
In 2010, this companys current assets were 3.6447 times higher than its current
liabilities.
This ratio did not fluctuate that much up to 2008. After that, it increased to a
satisfactory level in 2009 following an upward trend in 2010, which is very favorable
for the Company.
This ratio has increased from 3.23 times to 3.64 times in 2010 because the

companys current assets increased from Tk.16,052,781,843 to Tk.17,288,454,805

and its current liabilities decreased from Tk.4,966,685,880 to Tk.4,743,395,449 in
2010.
* Quick Ratio
Quick ratio (times)
Year
Graphical representation:
Interpretation:
In 2010, this companys current assets excluding inventories were 2.66 times higher
than their current liabilities.
The Companys Quick Ratio has followed a more or less stable trend up to 2009 and
then in 2010, it rose to a satisfactory level, which is very good for the Company.
This ratio has increased because the companys current assets increased from
Tk.16,052,781,843 to Tk.17,288,454,805, inventory decreased from Tk.
4,840,363,451 to Tk.4,671,022,906 and its current liabilities decreased from
Tk.4,966,685,880 to Tk.4,743,395,449 in 2010.
2. Asset Management Ratio:
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| Formula | 2006 | 2007 | 2008 | 2009 | 2010 |
Inventory Turnover Ratio(times) | Sales/ Inventory | 1.30768652 | 1.27652105 |
1.32283821 | 2.02456196 | 2.31447682 |
Total Asset Turnover Ratio(times) | Sales/ Total Assets | 0.46962481 | 0.47186124 |
0.51503472 | 0.4184346 | 0.41431212 |
Fixed Asstet Turnover Ratio(times) | Sales/Fixed asset | 1.05133191 | 1.05636293 |
1.25605045 | 1.33021795 | 1.22777516 |
Average Collection Period(days on avg) | AR/(Sales/365) | 128.058823 | 92.8033617
| 72.6014767 | 79.3369563 | 80.1894682 |
Average Payment Period(days on avg) | AP/( Purchase/365) | 109.287967 |
93.8563447 | 80.2199597 | 83.6509816 | 78.6515379 |
* Inventory Turnover Ratio |
|
Graphical representation:
Year

Inventory turnover ratio (times)

Interpretation:
In 2010, this company has sold out and restocked its inventory 2.3145 times.
We can see that this ratio was kind of stable throughout 2006, 2007 and 2008 and
then it started to follow an upward trend and continued to increase in 2010, which is
really good.
This ratio has increased from 2.02 times to 2.31 times in 2010 because sales have
increased from Tk.9,799,615,712 to Tk.10,810,974,226 and inventory has decreased
from Tk.4,840,363,451 to Tk.4,671,022,906 in 2010.
* Total Asset Turnover Ratio |
|
|
Graphical representation:
Year
Total asset turnover ratio (times)
Interpretation:
In 2010, every Tk.1.00 worth of total asset was generating Tk.0.4616 worth of sale.
After following an upward trend up to 2008, this ratio fell in 2009 and in 2010
decreased very insignificantly.
This ratio has slightly decreased in 2010 from that of 2009 because along with the
increase of sales from Tk.9,799,615,712 in 2009 to Tk.10,810,974,226 in 2010, their
total assets have also gone up in 2010.
* Fixed Asset Turnover Ratio |
|
Fixed asset turnover ratio (times)
Graphical representation:
Year
Interpretation:
In 2010, every Tk.1 worth of fixed asset is generating Tk.1.2278 worth of sale.
This ratio after remaining stable in 2006 and 2007, followed an upward trend up to
2009. Then in 2010, this ratio has decreased which is not good for the company, so
the company should try to increase its sales using as less fixed asset as possible.

This ratio has decreased from 1.33 times in 2009 to 1.23 times in 2010 because fixed
assets have increased from Tk.7,366,924,871 to Tk.8,805,337,136 in 2010, though
sales have also comparatively increased.
* Average Collection PeriodGraphical representation: |
|
Years
Avg. collection period (days) (((((((days(days(avg.avg.)
Interpretation:
In 2010, on an average, it took 81 days to receive the accounts receivable from the
customers.
This ratio has decreased greatly from 2006 to 2008 and then in 2009 and 2010 this
ratio has increased, which is not good.
The company should collect their dues early, so that they could easily meet their
future short term obligations. This ratio has increased from 80 days in 2009 to 81
days in 2010 because the companys accounts receivable has increased from
Tk.2,130,059,408 to Tk.2,375,140,475 in 2010.
* Average Payment PeriodGraphical representation: |
Avg. payment period (days)
|
Year
Interpretation:
Interpretation: On an average, it took 79 days to make the payment to the creditors
in 2010.
But this is less than their average collection period, which is bad for the company. So
the companys credit policy should be changed.
3. Debt Management Ratio:
| Formula | 2006 | 2007 | 2008 | 2009 | 2010 |
Debt- to- Asset Ratio (%) | (Total Debt/Total asset)* 100 | 75.8692012 | 75.7786083
| 74.9427845 | 68.742533 | 66.4293497 |
Debt- to- Total Equity Ratio (%) | Total Debt/ (Total Debt + Total Equity)*100 |
75.8692012 | 75.7786083 | 74.9427845 | 68.742533 | 66.4293497 |
Times-Interest Earned (%) | EBIT/Interest Expense | 7.38563741 | 4.51824139 |

6.85612121 | 9.76547353 | 6.9361669 |

* Debt-to-Asset Ratio |
|
Graphical representation:
Year
Debt-asset ratio(%)
Interpretation:
In 2010, 66.43% of total assets were financed by debt.
* Debt-to-Equity Ratio |
|
Debt-total equity ratio (%)
Graphical representation:
Year
Interpretation:
In 2010, the companys capital structure consisted of 66.43% loan and the remaining
balance i.e. 33.57% was equity.
* Times Interest Earned |
Graphical representation:
Times-interest-earned (times)
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Year

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Interpretation:
In 2010, the companys EBIT was 6.94 times higher than its interest expense.
After 2006, this ratio fell significantly in 2007 but then it started to rise up and
increased gradually up to 2009 and then again in 2010, this ratio fell badly.
It has decreased from 9.77 times to 6.94 times in 2010 because the EBIT has gone
down from Tk.1,658,122,680 to Tk.1,534,280,431 and the Interest Expense has
increased from Tk.169,794,396 to Tk.221,200,045 in 2010.
4. Profitability Ratio:
In (%) | | 2006 | 2007 | 2008 | 2009 | 2010 |
Gross Profit Margin | (Gross Profit/Sales)* 100 | 23.5290734 | 21.6620832 |
24.4049657 | 21.8890356 | 21.5781971 |
Net Profit Margin | (Net Profit/Sales)* 100 | 9.1495574 | 9.63353785 | 10.8911682 |
16.4020465 | 16.5455083 |
ROA | (Net Income/Total Asset)*100 | 4.29685916 | 4.54569311 | 5.60932977 |
6.86318382 | 6.85500459 |
ROE | (Net income/Total Equity)*100 | 17.8065351 | 18.7672664 | 22.3860858 |
21.9569417 | 20.419636 |
* Gross Profit Margin:
Graphical representation:
Year
Gross profit margin (%)
Interpretation:
In 2010, for every Tk.100 sales, the gross profit of the company was Tk.21.58.
This ratio seems to fluctuate a lot. At first it decreased in 2007 compared to 2006,
then it increased in 2008 and then again decreased in 2009 and continued to
decrease in 2010, which is bad for the Company.
The ratio has decreased in 2010 compared to 2009 because the Sales of the
Company have increased but the Gross Profit has not sufficiently increased to make
the Gross Profit Margin higher. The sales of the company have gone up from

Tk.9,799,615,712 to Tk.10,810,974,226 and the gross profit has also gone up from
Tk.2,145,041,372 in 2009 to Tk.2,332,813,327 in 2010. But in order to improve the
gross profit margin, gross profit should increase more sufficiently.
* Net Profit Margin |
|
Graphical representation:
Year
Net profit margin (%)
Interpretation:
Interpretation:
In 2010, for every Tk.100 sales, the company has made a net profit of Tk.16.55.
This ratio has continuously followed an upward trend from 2006 to 2009 and though
insignificantly but increased in 2010, which is very good for the company.
Compared to 2009, this ratio has increased slightly because, as the sales of the
company increased, the net profit of the company has also sufficiently gone up to
make the ratio higher. So, as the sales rose to Tk.10,810,974,226 in 2010 from
Tk.9,799,615,713 in 2009, the net profit also went up to Tk.1,788,730,635 in 2010
from Tk.1,607,337,522 in 2009.
* ROAGraphical representation:

ROA(%)

|
Year
Interpretation:In 2010, every Tk.100 worth of total asset has generated Tk.6.855
worth of net income. Although compared to 2009, this ratio has very slightly
decreased, it has continued an upward trend throughout 2006, 07, 08 and 09.The
ratio has gone down slightly from 6.8631% to 6.8550% in 2010 because along with
the increase in the companys net income from Tk.1,607,337,522 in 2009 to
Tk.1,788,730,635 in 2010, their total assets increased from Tk.23,419,706,714 to
Tk.26,093,791,941. This means, their assets are a bit less efficient to generate more
net income. It will be better for the Company to handle its Assets at a more optimum
amount. So the company might utilize its assets in a better way in order to make this
ratio more favorable. *
ROE (%)
ROE:Graphical Representation:
Year

|
|
Interpretation:In 2010, the companys shareholders have earned Tk.20.42 for every
Tk.100 investment in the company.This ratio increased from 2006 to 2008 and then
it fell slightly in 2009 and 2010.The ratio fell from 21.96% in 2009 to 20.42% in 2010
because along with the increase in net income the total equity of the company has
subsequently increased from Tk.7,320,407,097 in 2009 to Tk.8,759,855,635 in 2010.
So the company should try to improve this situation in order to attract more
shareholder 5. Stock Market Ratio: | Formula | 2006 | 2007 | 2008 | 2009 | 2010
|
EPS (taka per share) | Net income/ Total no. of share outstanding | 45.5247272 |
55.9378292 | 78.7316149 | 120.422032 | 111.676701 |
DPS**(taka per share) | Total Dividend paid/ Total no. of share outstanding | 0 | 20 |
25 | 23.8095238 | 37.5000009 |
M/B(times) | Market Value Per share/Book Value Per Share | 1.01500792 |
3.20236878 | 4.25079536 | 1.46413609 | 2.55070144 |
P/E | Market Value Per share/EPS | 5.70019891 | 17.0635867 | 18.9885601 |
6.66821502 | 12.4914148 |
(**in the year 2006, company paid no dividend, so dividend paid=0) | |
*
EPS (taka per share)
EPSGraphical representation:
Year
|
|
Interpretation:In 2010, the companys shareholders have earned Tk.111.68 for every
share they hold.The EPS has followed a good upward trend from 2006 to 2009 and
then it fell in 2010. The reason for the fall from Tk.120.42/share in 2009 to
Tk.111.68/share in 2010 is that their number of common stock has increased to a
great extent in 2010. So it will be better for the company if they increase their Net
Income more sufficiently. * DPS
DPS (taka per share)
Graphical representation: |
Year
Interpretation: In 2010, the company has paid dividend of Tk.37.50 to the
shareholders for every share they hold. The company paid both stock dividend and
cash dividend.From the graph we can see that the DPS has gradually increased from
2006 to 2008. In 2009, it fell very slightly and then again in 2010, this ratio has
increased sharply, which is good for the company.The ratio increased from

Tk.23.81/share in 2009 to Tk.37.50/share in 2010 because besides increase in the

number of shares outstanding, the total dividend paid by the company increased to a
great extent from Tk.317,798,500 in 2009 to Tk.600,639,165 in 2010 * M/B
Ratio:Graphical Representation:
Year
M/B ratio (times)
Interpretation: In 2010, the market value per share was 2.55 times higher than the
book value per share which was Tk.546.908383/share.By looking at the graph we can
see that this ratio rose up gradually from 2006 to 2008 and then in 2009 it fell all on
a sudden and then again in 2010, the ratio went up to a great extent.This increase in
the ratio from 2009 to 2010 occurred due to the heavy increase in the market price
per share of the company which rose from Tk.803/share to Tk.1,395/share in 2010
and also the book value per share of the company fell slightly in 2010 compared to
2009, i.e. from Tk.548.4462862/share to Tk.546.908383/share in 2010. * P/E
Ratio:Graphical
Representation:
Year
P/E ratio
Interpretation:In 2010, the companys shareholders were willing to pay Tk.12.49 for
every taka of reported earnings.If we look at the graph, we can see that there was a
gradual increase in the P/E Ratio of the company from 2006 to 2008, then in 2009 it
drastically fell to a very low level and then again in 2010 it rose up to a satisfactory
level.From 2009 to 2010, the huge increase in this ratio took place mainly due to the
great increase in the market price of the shares from Tk.803/share in 2009 to
Tk.1,395/share in 2010, and also because of the decrease in the EPS from
Tk.120.4220316/share in 2009 to Tk.111.6767011/share in 2010. As we know, very
high or very low Price to Earning (P/E) Ratio is never good as it is never sustainable. If
the P/E ratio is too low, then shareholders will not want to invest in that company
considering the companys low performance at the stock market. On the other hand,
if this ratio is too high, the shareholders may want to sell this share and when there
will be more supply at the market the price per share will fall. So this ratio should
always remain close to the Industry Average. Here, as we do not have the industry
average, we can not decisively say whether this ratio is good or bad. * Du-Pont
Equation:ROA= (Net Profit Margin)*(Total Asset Turnover Ratio) (Net income/
Total Assets)= (Net Income /Sales)*(Sales / Total Assets) Year | 2006 | 2007 | 2008 |
2009 | 2010 |
ROA (%) | 4.29685916 | 4.54569311 | 5.60932977 | 6.86318382 | 6.85500459 |
Interpretation: The ROA has continued an upward trend throughout 2006, 07, 08 and

09. In 2009 and 2010, the ROA of the company was almost same. In 2010, this ratio
fell slightly by 0.01%.At present, the ROA of the Company seems to be at a stable
condition.The very slight fall in 2010 occurred due to the slight fall in the Total Asset
Turnover Ratio from 0.418434604 times in 2009 to 0.414312119 times in 2010. This
small decrease in the Total Asset Turnover Ratio occurred due to the increase in
Total Assets from Tk.23,419,706,714 in 2009 to Tk.26,093,791,941 in 2010. *
Extended/ Modified Du-Pont Equation:Return on equity (ROE) = Net profit
margin*total asset turnover*equity multiplier (EM)(Net profit/total equity) = (net
profit/sales) *(sales/total asset) * (total asset/total Stockholders
equity)
Year | 2006 | 2007 | 2008 | 2009 | 2010 |
ROE (%) | 17.8065351 | 18.7672664 | 22.3860858 | 21.9569417 | 20.419636 |
Interpretation:This ratio increased from 2006 to 2008 and fell slightly in 2009 and
then again fell by a small percentage in 2010. The ROE of the Company though fell by
a small percentage in 2010, does not seem to fluctuate much.The fall in 2010
occurred due to the slight fall in the Total Asset Turnover Ratio, which in turn was a
result of an increase in the amount of Total Assets in 2010 compared to that of 2009.
Moreover, the Equity Multiplier, which is the ratio of Total asset to Total Equity, had
decreased by a significant level in 2010 resulting in the subsequent decrease in the
ROE of 2010. The Equity Multiplier had decreased because of the increase in the
Total Equity from Tk.7,320,407,097 in 2009 to Tk.8,759,855,635 in 2010.The ROE of
the Company though fell by a small percentage in 2010, does not seem to fluctuate
much.Findings:After completing the five major types of ratio analysis for DESCO in
the year 2010, we can now evaluate the companys financial performances in terms
of its strengths and weaknesses. We found out that the Companys Profitability Ratio
was in a moderate condition i.e. neither very good nor very bad. The Sales, Net Profit
went up in 2010, although the Gross Profit went down. The Net Profit margin was
good; compared to the previous years, the ROA has followed an increasing trend up
to 2009 and remained almost unchanged in 2010; the ROE increased in 2008 and fell
vey slightly in 2009 and 2010. So the Company is in a moderate situation in
profitability. By loooking at the Asset Mangement Ratio we can say that the
Company is utilizing its Inventory very well and its Total Asset is also utilized well
though it will be better if the Company increases its Sales using lesser Fixed Assets. In
addition, the Company should also try to collect its Receivables a bit faster, since
itsAverage Payment Period is 2 days less than its Average Collection Period. But it is
good that the Companys Average Payment Period in 2010 has decreased in
comparison to the previous years.We can see that the Companys Liquidity Ratio is

following an upward trend. The Debt Mangement mostly depends on the decision of
the Managerial Body of the Company, but the Times Interest Earned has followed an
upward trend upto 2009 and fell in 2010.When we look at the Stock Market Ratios,
we can see that the Companys DPS, M/B and P/E Ratio after decreasing in 2009, all
went up to significant level in 2010. Though the EPS went down in 2010, it had been
following an upward trend.Recommendations:Finally we can recommend the
company to handle their Fixed Assets efficiently and also to update or use more
modern and productive Assets. Moreover they should reduce their Average
Collection Period. For this they can provide some discounts, which may help to
quicken the collection of receivables and lessen the chance for any bad debt. To
increase their Operating Income, they can try to reduce their Operating & Financial
Expenses. But also, we cannot deny the fact that as net income has improved so
shareholders will be happy, their earnings will increase, and this will positively reflect
the stock market.Conclusion:Analyzing the overall situation, financial performance in
2010 was good enough. Comparing with the past record it is seen that in 2010 the
performance has improvedBased on these assumptions, DESCO seems like a more or
less stable company maintaining somewhat satisfactory growth in sales revenue thus
maintaining predictable growth in their net income. Our recommendation is that
shareholders may invest in the company, but they should not expect a very high level
of return as risk is predictable and low.APPENDIX: |
1) Liquidity Ratio | | | | | | |
| Formula | 2006 | 2007 | 2008 | 2009 | 2010 |
Current Ratio(times) | Current asset/ current liabilities | (7451995528/ 2820615872)
| 8655455937/3261344547 | 10526169665/4078820730 |
16052781843/4966685880 | 17288454805/4743395449 |
Quick ratio(times) | (Current assets-inventories)/current liabilities | (74519955281392045595)/ 2820615872 | (8655455937-916718318)/ 3261344547 |
(10526169665-774928506)/ 4078820730 | (16052781843-4840363451)/
4966685880 | (17288454805-4671022906)/ 4743395449 |
2) Asset management ratio:
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| Formula | 2006 | 2007 | 2008 | 2009 | 2010 |
Inventory Turnover Ratio(times) | Sales/ Inventory | 6324979173/4836770179 |
7381279238/5782340389 | 9189386688/6946720020 | 9799615712/4840363451 |
10810974226/4671022906 |

Total Asset Turnover Ratio(times) | Sales/ Total Assets | 6324979173/13468153796

| 7381279238/15642902244 | 9189386688/17842266477 |
9799615712/23419706714 | 10810974226/23419706714 |
Fixed Asstet Turnover Ratio(times) | Sales/Fixed asset | 6324979173/6016158268 |
7381279238/6987446307 | 9189386688/7316096812 | 9799615712/7366924871 |
10810974226/8805337136 |
Average Collection Period(days on avg) | AR/(Sales/365) |
2219094213/(6324979173/365) | 1876732950/(7381279238/365) |
1827843956/(9189386688/365) | 2130059408/(9799615712/365) |
2375140475/(10810974226/365) |
Average Payment Period(days on avg) | AP/( Purchase/365) |
1,314,567,514/(4,390,393,141/365) | 1271910501/(4946360677/365) |
1351935827/(6151294250/365) | 1631201300/(7117531238/365) |
1865308079/(8656378087/365) |
3) Debt management ratio: | | | | |
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| Formula | 2006 | 2007 | 2008 | 2009 | 2010 |
Debt- to- Asset Ratio(%) | (Total Debt/Total asset)* 100 |
(10218180703/13468153796)*100 | (11853973618/15642902244)* 100 |
(13371491316/17842266477)*
100 | (16099299618/23419706714)*
100 | (17333936306/26093791941)* 100 |
Debt- to- Total Equity Ratio(%) | Total Debt/ (Total Debt + Total Equity)*100 |
(10218180703/ (10218180703+3249973094))*100 | (11853973618/
(11853973618+3788928627))* 100 | (13371491316/
(13371491316+4470775160))*100 | (16099299618/
(16099299618+7320407097)*100 | (17333936306/
(17333936306+8759855635))*100 |
Times-Interest -Earned(times) | EBIT/Interest Expense | 1247283558/168879609 |
1282202314/283783491 | 1752184549/255564990 | 1658122680/169794396 |
1534280431/221200045 |
4) Profitability ratios: | | | | |
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| | 2006 | 2007 | 2008 | 2009 | 2010 |

Gross Profit Margin(%) | (Gross Profit/Sales)* 100 | (1488208994/6324979173)*100
| (1598938849/7381279238)*100 | (2242666668/9189386688)*100 |
(2145041372/9799615712)*100 | (2332813327/10810974226)*100 |
Net Profit Margin | (Net Profit/Sales)* 100 | (578707600/6324979173)*100 |
(711078329/7381279238)*100 | (1000831565/9189386688)*100 |
(1607337522/9799615712)*100 | (1788730635/10810974226)*100 |
ROA(%) | (Net Income/Total Asset)*100 | (578707600/13468153796)*100 |
(711078329/15642902244)*100 | (1000831565/17842266477)*100 |
(1607337522/23419706714)*100 | (1788730635/23419706714)*100 |
ROE(%) | (Net income/Total Equity)*100 | (578707600/3249973094)*100 |
(711078329/3788928627)*100 | (1000831565/4470775160)*100 |
(1607337522/7320407097)*100 | (1788730635/8759855635)*100 |
5) stock market ratios: | | | | |
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| Formula | 2006 | 2007 | 2008 | 2009 | 2010 |
EPS(taka per share) | Net income/ Total no. of share outstanding |
578707600/12711940 | 711078329/12711940 | 1000831565/12711940 | 120.42 |
1788730635/16017044 |
DPS**(taka per share) | Total Dividend paid/ Total no. of share outstanding | 0 |
254238800/12711940 | 317798500/12711940 | 317798500/1334753700 |
600639165/16017044 |
M/B(times) | Market Value Per share/Book Value Per Share |
259.5/(3249973094/12711940) | 954.5/(3788928627/12711940) |
1495/(4470775160/12711940) | 803/457.0385832 | 1395/546.908383 |
P/E(times) | Market Value Per share/EPS | 259.5/45.52472715 | 954.5/55.93782924
| 1495/78.73161492 | 804/120.42 | 1395/111.6767011 |
Reference:
1. Newspaper Archive of NSU Library
2. Books:
* Managerial Finance, Twelfth Edition by Lawrence J. Gitman
* Fundamentals of Financial Management, Tenth Edition by Eugene F. Brigham and
Joel F. Houston.
3. Internet Links:

* Corporate website of DESCO- https://www.desco.org.bd/

* DSE Website (http://www.dsebd.org/) and other websites likehttp://www.bdstockprice.com/dailytrades/desco/
Case Study
Ques. (a): Why are ratios useful? What are the five major categories of ratios?
Ans. (a): Ratios are useful because it helps to judge or evaluate a particular
companys financial performances. By calculating and analyzing these ratios the
progress of a company can be tracked over time and also compare its strength
relative to other firms with whom they are competing. These financial ratios are
designed to help one evaluate a financial statement. For example a companys
perspective and present shareholders would want to judge profitability ratios and
stock market ratio to ensure the level of risk and return with their share purchase.
Five major categories of ratios are:
1) Liquidity Ratio - it measures a firms capability to meet its short term obligations.
2) Asset Management Ratio it measures a companys assets sales generating
power as well the speed at which different accounts are converted to sales.
3) Debt Management Ratio this ratio measures how much of the companys total
assets were financed by debt.
4) Profitability Ratio it measures how much of the companys income are
generated from sales, assets and equity.
5) Stock Market Ratio this ratio shows how good or bad the company is
performing in the stock market. This ratio is especially useful for the shareholders of
the company.
Ques. (b): Calculate DLeons 2003 current ratio and quick ratio based on the
projected balance sheet and income statement data. What can you say about the
companys liquidity position in 2001, 2002, and as projected for 2003? We often
think ratios as being useful (1) to managers to help run the business, (2) to bankers
for credit analysis, and (3) to stockholders for stock valuation. Would these different
types of analysts have an equal interest in the liquidity ratios?
Ans. (b): Current Ratio (2003) = (Current Assets) (Current Liabilities)
= $2,680,112 $1,144,800
= 2.34 times

Quick Ratio (2003) = (Current Assets Inventory) (Current Liabilities)

= $(2,680,112 1,716,480) ($1,144,800)
= 0.84times
Ratio | 2003E | 2002 | 2001 | IA |
Current Ratio | 2.34 times | 1.2 times | 2.3 times | 2.7 times |
Quick Ratio | 0.84 times | 0.4 times | 0.85 times | -- |
In the year 2003E, the company is expected to have a better liquidity condition as
both its Current Ratio and Quick Ratio have increased almost twice from the past
year 2002. But it cannot be considered satisfactory because the ratios are still below
the Industry Average. It is important to notice that Quick ratio shows, Current Assets
excluding inventories are 0.84 times below Current liabilities, whereas Current Ratio
shows, Current Assets to be 2.34 times higher than Current liabilities. This difference
could be that the company is holding higher levels of inventories, which is not good,
because that add more costs. Or probably their demands for foods have fall down
which lead to less sell and more inventory.
We know, Liquidity Ratio measures the firms ability to pay the short-term
obligations as they come due. 1) To managers this ratio is very important because
the manger needs to know how much asset the company has in comparison to its
current liabilities. The liquidity ratio shows the manager whether they have a strong
or weak liquidity position to pay off their debts. 2) To bankers this ratio is important
for credit analysis because the bank needs to judge the companys liquidity position
to see whether the company has the capability of paying the interest and their loan
amount on time. 3) Stockholders must be aware of liquidity ratios for this shows the
firms ability to pay their returns, and the level of risk that is associated if the firm
goes bankrupt, then they have to bear the loss.
However not all these three groups will have an equal interest on the Liquidity Ratio.
For a manager all the five major ratios are important to evaluate the companys
financial performance. Stockholders will also pay attention on their Profitability
Ratio. Bankers will look at their other accounts payable to measure the depth of their
debt.
Ques. (c): Calculate the 2003 inventory turnover, day sales outstanding (DSO), fixed
asset turnover, and total assets turnover. How does Deleons utilization of assets
stack up against other firms in its industry?

Ans. (c): Inventory Turnover Ratio = (Sales) (Inventory)

= ($7,035,600) ($1,716,480)
= 4.10times
Day Sales Outstanding (DSO) = (Accounts Receivable) (Sales365)
= ($878,000)
($7,035,600/365)
= 45 days.
Fixed Asset Turnover Ratio = (Sales) (Fixed Asset)
= ($7,035,600) ($817,040)
= 8.61times
Total Asset Turnover Ratio = (Sales) (Total Asset)
= ($7,035,600) ($3,497,152)
= 2.01times
Overall, if we look at all these Asset-Management Ratios we can quite easily
conclude that its utilization of assets has been quite ineffective in comparison to
other firms in the industry. Inventory turnover of 4.10 is low compared to the
industry average of 6.1, DSO is 45 days compared to Industry average (IA) of 32days,
which is a bad sign as it is above the IA and the reason behind it is the Accounts
Receivable is increasing more than the sales, and Fixed Asset Turnover Ratio 8.61 has
shown some improvement as it is higher than the IA 7. Last but not the least; total
asset turnover ratio 2.01 is also lower than the IA 2.6. It has only managed to utilize
its fixed assets better than the other companies in the industry on an average Hence,
we can say that D Leons assets efficiency needs to be made effective in order to
better the asset management position compared to the other firms in the industry.
Probably the assets that D Leon is using are of inefficient; they are also not handling
the assets effectively. That is why the assets are giving poor performances and failed
to generate more sales compared to their competitors. They should never have too
much assets rather try to have an optimum level of assets.
Ques. (d): Calculate the 2003 debt, times-interest earned, and EBITDA coverage
ratios. How does D Leon compare with the industry with respect to financial
leverage? What can you conclude from these ratios?
Ans. (d): Debt Ratio = (Total debt) (Total Assets)

= (Current liabilities + Long-term liabilities) (Total Assets)

= ($1,144,800 + $400,000) ($3,497,152)
= 44.17%
Times-Interest Earned = (Earnings before interest and tax) (Interest expense)
= ($492,648) ($70,008)
= 7.04times
EBITDA Coverage Ratio = (EBITDA + Lease Payments) (Interest + Principal Payments
+ Lease Payments)
= ($609,608 + $40,000) ($70,008 + $0 + $40,000)
= 5.91times
Financial Leverage = [Total Debt / (Total Debt + Total Equity)] 100
= [$1,544,800/ ($1,544,800+$1,952,352)] 100
= 44.17%
With respect to financial leverage, D Leons financial condition after calculating
these ratios were found to be weak when compared to the industry average.
The firms Debt ratio is expected to improve by falling in the year 2003 from 82.8% to
44.17%, which means they are financing less of their assets with other peoples
money now. It is a good sign, 44.17% of total assets are financed by debt and the rest
by owners equity.
TIE has improved a lot than that of their past records and it is above the Industry
Average. It was (-1) times in 2002 whereas it is now 7.04times in 2003. This means
that the firm can now finance their interest expenses more easily from their
operating profits.
EBITDA coverage ratio is also expected to improve from 0.1times in 2002 to
5.91times in 2003. It has improved extensively as TIE Ratio. However, the EBITDA is
still below the IA, again not a good sign for the company. Their competitors are
performing better than them.
Ques. (e): Calculate the 2003 profit margin, basic earning power (BEP), return on
assets (ROA), and return on Equity. What can you say about these ratios?
Ans. (e):

Profit Margin = (Net income) (Sales)

= ($253,584) ($7,035,600)

= 3.604%
Basic Earning Power (BEP) = (EBIT) (Total Assets)
= ($492,648) ($3,497,152)
= 14.09%
Return on Assets (ROA) = (Net Income) (Total Assets)
= ($253,584) ($3,497,152)
= 7.25%
Return on Equity (ROE) = (Net income) (Total Common Equity)
= ($253,584) ($1,952,352)
= 13%
The companys Profit Margin is expected to improve in 2003 than that of 2002, which
is a good sign. Moreover it is also above the Industry Average. Their Net Income is
expected to increase highly which caused the ratio to improve, and the relative
increase in net profit is higher than increase in sales which caused the ratio to rise.
BEP is expected to rise from -4.6% of 2002 to 14.09% in 2003, which is a good as this
would be a large increase but as it is still 5.01% below the industry average it cannot
be comment as satisfactory, they have to improve further. Because of its relative
increase in EBIT more than total assets increase the ratio improved.
ROA is also expected to improve in 2003 than that of 2002, i.e. total assets are
efficiently generating more net income. But this particular ratio is a little below the
Industry Average which leaves them with the scope to improve further, they should
have optimum amount of assets.
ROE has also improved from their past years. This is a good sign for the shareholders,
they are happy with the companys performance, which again help to grow their
confidence over the company. However this ratio is below the Industry Average,
which should be their area of concern to improve more.
Ques. (f): Calculate the 2003 PriceEarnings Ratio, PriceCash Flow Ratio and
MarketBook Ratio. Do the ratios indicate that investors are expected to have high or
low opinion of the company?
Ans. (f): Price to Earnings Ratio = (Price per Share) (Earnings per Share)
= ($12.17) ($1.014)
= 12.0019

Price/Cash flow = (Price per share) (Cash Flow per Share)

Cash Flow Ratio = (Net income + Depreciation) (Shares Outstanding)
= ($253,584 + $116,960) (250,000)
= $1.48/share
Therefore,
Price/Cash flow = ($12.17) ($1.48)
= 8.2times
Market / Book Ratio = (Market Price per Share) (Book Value per Share)
=$12.17/$7.809
=1.558 times
In the year 2003 it is expected that Price Earnings Ratio, Price/Cash Flow and Market
to Book Value Ratio has improved from 2002 and 2001, which is a good sign. But all
the ratios are still below the Industry Average, which is not at all satisfactory.
We should remember that too high or too low Price Earnings Ratio is never good
since it is never sustainable, and thus shareholders may lose confidence. It is
recommended that the ratio should be near IA, and for us it is below that which is a
bad sign.
Thus we can comment that even though the company improved from their past
years still it is performing less than their competitors in the market, which means
their financial performance in the stock market still, have to be improved, and thus
investors will not have a high opinion about the company. However investors should
appreciate their potential improvement in the year 2003.
Ques. (g): Use the extended DU PONT equation to provide a summary and overview
of DLeons financial condition as projected for 2003. What are the firms major
strengths and weaknesses?
Ans. (g): Extended Du- Pont Equation:
ROE = Net Profit Margin Total Assets Turnover Equity Multiplier
* (Net Income Total Equity) = (Net Profit Sales) (Sales Total Assets) (Total
Assets Total Equity)
* ($253,584 $1,952,352) = ($253,584 $7,035,600) ($7,035,600 $3,497,152)
($3,497,152 $1,952,352)

* 13% = 3.604%2.01times 1.79

* 0.13 = 0.036 2.01 1.79
Previously we saw that their ROE has improved from the past years in 2003, but is
below the industry average. And we also know that, the Extended DU-Pont Equation
helps us to pin point their weakness and strengths.
To start with the analysis, we can tell that the company has its strength improved in
their net profit margin which was negative in 2002 and they performed so well in
improving the net profit margin that it is above the Industry Average which is a very
good sign for the company. Their total asset turnover ratio is almost same as 2002
but both their total asset and sales have increased. However their sales relative
increase is less than their asset increase. And their equity has increased. Overall due
to these improvements their ROE increased from 2002 to 2003.
To talk about their weakness, it is that the companys ROE is still way below the
industry average (IA), which is not at all good. Since their total asset turnover ratio
did not improve and still below the industry average, it caused the Roe to be less
than IA. However even though their net profit margin is slightly greater than industry
average, this could not affect the Du-Pont equation much. Again their inventory
turnover ratio has gone up from 2002 and is also below IA. Even though their Cost of
Goods Sold (COGS) in the year 2002 and 2003 varied less, since they are maintaining
high inventories, their ratio fall. This is bad, maintaining high inventories are
associated with high cost, which again can reduce net income and thus hamper
profitability ratio. So it is recommended to decrease some of their assets especially
inventories to perform better in the future.
Ques. (h): Use the following simplified 2003 balance sheet to show, in general terms,
how an improvement in the DSO would tend to affect the stock price. For example,
if the company could improve its collection procedures and thereby lower its DSO
from 45.6 days to the 32-day industry average without affecting sales, how would
that change ripple through the financial statements (shown in thousands below)
and influence the stock price?
Accounts receivable
$ 878 Debt
$1,545
Other current assets
1,802
Equity
1,952
Net fixed assets
817
Liabilities+
Total assets
$3,497
equity
$3,497

Ans. (h): If the DSO has to improve (decrease the average number of days to collect
account receivables from customers) without changing the sales that means the
Numerator of the DSO formula, i.e. Accounts receivables has to decrease. Account
receivables decrease again means that the customers have paid their due and this
brings the same amount of cash (current asset) into the company. Therefore
ultimately there will be no change into the Balance Sheet of the company, i.e. same
amount of number is being reduced and increased within the Current Asset Section,
which thus leaves it unchanged ultimately.
For this change in DSO, there will be No Effect in the stock price.
Calculation shown:
We know, DSO= Account Receivable (Sales360)
Now, new DSO is 32days and keeping sales constant, we get,
New Account Receivables = $625.33(in thousands)
So the A/R will decrease from $878 to $625.33 by (878-625.33) = $252.77(in
thousands) and hence the current asset apart from A/R will increase by $252.67 (in
thousands) and the new total other current asset apart from A/R will be $2054.67 (in
thousands).
Putting these values into the Balance Sheet, we get,
Accounts receivable $625.33
Other current asset
2054.67
Net fixed asset
817.00
Total Asset
$3497.00

Debt
Equity
Total Debt + Equity

$1,545.00
1,952.00
$3497.00

Ques. (i): Does it appear that inventories could be adjusted, and, if so, how should
that adjustment affect D Leons profitability and stock price?
Ans. (i): Previously we saw that the inventory turnover ratio was low from their past
ratios and also below the Industry Average. This means that the company is
maintaining more inventories than required. From the income statement we found
out the company sales have increased, which means they are keeping more
inventories than required.
Keeping too much inventories in hand are associated with their high maintenances
cost, warehouse costs, utility cost can go up. This would increase their expense and
lowers net income after tax which again lowers their Profitability Ratio.

However this will have No Impact on the stock price.

Ques. (j): In 2002, the company paid its suppliers much later than the due dates,
and it was not maintaining financial ratios at levels called for in its bank loan
agreements. Therefore, suppliers could cut the company off, and its bank could
refuse to renew the loan when it comes due in 90 days. On the basis of data
provided, would you, as a credit manager, continue to sell to D Leons on
credit? (you could demand cash on delivery, that is, sell on terms of COD, but that
might cause D Leons to stop buying from your company.) Similarly, if you were
the bank loan officer, would you recommend renewing the loan or demand its
repayment. Would your actions be influenced if, in early 2003, D Leons showed you
its 2003 projections plus proof that it was going to raise over $1.2 million of new
equity capital?
Ans. (j): Although, D Leons financial ratios seem to be improving compared to
previous years, the firms current ratio is still poor when compared with the industry
average.
As a credit manager, I would not like to involve into risk if continue to extend credit
to the firm considering its current poor liquidity position compared to other firms in
the industry. I should make a strict analysis on the amount of their Accounts Payable
before giving any credit. It is highly possible that under its existing current ratio
structure the company will not be able to make the payments on time for the credit
sales. The terms of Cash on Delivery can be a good call.
As a Bank Loan Officer, before renewing their loan, I should look over their
Profitability Ratio, Debt Management Ratio, Times Interest Earned, to ensure their
capability to repay the loan when date finishes. If they are financing more of their
assets from Owners Equity or their Net Income has increased then those will be good
sign. But for now, considering their current ratio situation the bank manager should
not renew the loan.
The projected data for the financial ratios for 2003 has shown improvements than
from the year 2002 and the proof of 1.2 million new equity capital would definitely
create a positive influence on any creditors actions.
Ques. (k): In hindsight, what should D Leons have done back in 2001?
Ans. (k): There were many important financial ratios that turned negative and hence
worse in 2002 which were better in 2001. Like their Profit Margin, TIE, BEP, ROA,
ROE, Price Earnings Ratio turned negative. Altogether in the year 2002 they

experienced a downfall in their Liquidity Ratio, Profitability Ratio, Stock Market

Ratio, Debt Management Ratio and Asset Management Ratio. However not all ratios
under these headings were found to be bad.
Before the company took any of its new plans in 2001 it should have calculated their
expected ratio outcomes of 2002. They should have contacted all their department
managers, like the marketing department for sales, purchasing department for asset
purchase, and finance department for deciding where to invest and how to finance
their assets.
They should not have financed most of their assets by debt, which increased their
interest expense in the year 2002 and also caused their net profit to fall. They should
have collected their account receivables before so that they could easily finance their
future obligations.
Altogether a proper planning and management system, analyzing the five major
ratios and proper coordination in team, back in the year 2001 could have saved them
from facing downfall in 2002.

Ques. (l): What are some potential problems and limitations of financial ratio
analysis?
Ans. (l): Some potential problems of ratio analysis are:
1) Ratios that reveal deviations from the norm merely indicate symptoms of a
problem. Additional analysis is typically needed to isolate the causes of the problem.
2) A single ratio does not generally provide sufficient information from which to
judge the overall performance.
3) The ratio being compared should be calculated using financial statements dated at
the same point in time during the year. If they are not, the effects of seasonality may
produce erroneous conclusions and decisions.
4) Using audited financial statements is preferred for ratio analysis. If they are not
audited, the data in them may not reflect the firms true financial condition.
5) Results can be distorted by inflation, which can cause the book values of inventory
and depreciable assets to differ greatly from their replacement values.
Ques. (m): What are some qualitative factors analysts should consider when
evaluating a companys likely future financial performance?
Ans. (m):

The qualitative factors are:

I. Is the companys revenue generated through sales to one key customer? If this is
the case then the companys performance might be at risk if the customer stops
buying from that company. This will cause overall sales and hence profit to witness
dramatic fall.
II. Is the companys revenue generated through sales of one product? If this is the
scenario then this might hurt the financial performance of the business if the sales or
demand of this product falls. This can be avoided through diversification of products.
III. Is the company relying on a single supplier for its supply? Depending on a single
supplier may not be wise and may lead to unanticipated shortages in supply which
are important matters to be taken into account by a company.
IV. The degree of competition: The presence of intense competition in an industry
reduces process and profits for companies as well. Hence, a company should
consider the nature of competition it will face in order to judge its likely future
financial performance.
V. Future Prospects: The financial performance of a company also depends upon its
future prospects. The financial performance will depend upon the innovation of
products. For example, in a technology based industry, firms will have to bring
technological changes in its products to outwit rival firms.
VI. Regulatory environment: The regulatory environment under which the company
operates is a crucial determinant of financial performance. If too many regulations
such as carbon emission reduction, stringent labor laws are imposed on companies
then this will hurt companys profitability and hence financial performance.
APPENDIX:
Answer B
Ratio | Formula | 2003E |
Current Ratio | Current assets/Current liabilities | $2,680,112/$1,144,800 |
Quick Ratio | (Current assets Inventory)/Current liabilities | (2,680,1121,716,480)/1,144,800 |
Answer- C
Ratio | Formula | 2003E |
Days sales outstanding | A/R/(sales/360) | 878,000/(7,035,600/360) |
Fixed asset Turnover ratio | Sales/Fixed asset | 7,035,600/817,040 |
Total asset turn-over ratio | Sales/Total asset | 7,035,600/3,497,152 |
Inventory Turnover ratio | Sales/Inventories | 7,035,600/1,716,480 |

Answer- D
Ratio | Formula | Year 2003E |
Debt Ratio | (Total Debt/Total Assets) 100 | (1,544,800/3,497,152)100 |
TIE Ratio | (EBIT/Interest Expense) | $492,648/$70,008 |
EBITDA Coverage Ratio | (EBITDA + Lease Payments)/(Interest + Principal Payments +
Lease Payments) | ($609,608 + $40,000) ($70,008 + $0 + $40,000) |
Financial Leverage | [Total Debt / (Total Debt + Total Equity)] 100 | [$1,544,800/
($1,544,800+$1,952,352)] 100 |
Answer- E
Ratio | Formula | Year 2003E |
Net Profit Margin | (Net Profit after Tax /Sales) 100 | ($253,584) ($7,035,600) |
Basic Earning Power (BEP) | (EBIT/Total Assets) 100 | ($492,648) ($3,497,152) |
Return on Assets (ROA) | (Net Income after Tax /Total Assets) 100 | ($253,584)
($3,497,152) |
Return on Equity (ROE) | (Net Income after Tax /Total Equity) 100 | ($253,584)
($1,952,352) |
Answer-F
Ratio | Formula | Calculation |
P/E Ratio | Market price per share/Earnings per share | ($12.17) ($1.014) |
Price /cash flow | Price per share/cash flow per share | ($12.17) ($1.48) |
Cash flow per share | (Net Income +Depreciation + Amortization)/(Total Common
Share Out Standing) | ($253,584 + $116,960 + $0) (250,000) |
Market/ Book ratio | Market price per share/Book value per share | $12.17/$7.809
|